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When Is Buying Futures Contracts a Good Idea?

September 2, 2021 by Daniels Trading| Futures 101

If you’ve ever purchased a car, house, or other big-ticket item, then you’re aware of the commitment such an action entails. Buying futures contracts is no different — it is a serious business that requires you to secure financing, actively budget, and apply leverage. If done competently, however, “going long” a futures market can pay big dividends.

Read on to learn more about buying a futures contract and how doing so may be a potentially lucrative approach to the market.

The Ins and Outs Of ‘Going Long’ the Market

At any given time, a futures trader can do two things in the market: buy or sell a contract(s). According to industry nomenclature, when you buy a contract, you’re “going long” the market, and when you sell a contract, you’re “shorting” the market. Each is a vastly different function and has unique strategic applications.

In the realm of active trading, going long is the most traditional means of pursuing capital gains. Under this scenario, you buy an asset in the hopes that its value will appreciate over time. Accordingly, anticipating rising asset prices over the short, intermediate, or long term is referred to as having a “bullish bias.”

To cash in on a bullish bias, you secure market share by buying futures contracts, stocks, cryptocurrencies, or other attractive assets. In the case of futures, when you buy a contract(s), the following measures are taken:

  • Margin is posted: When opening a new long position, you must post a per contract margin. For instance, if buying 1 contract of CME gold, a $10,000 maintenance margin applies for overnight positions; for short-term traders, an intraday margin of $5,500 is necessary. Remember, your trading account balance must satisfy margin requirements at all times.
  • Unrealized P&L: Upon buying a futures contract, your applied leverage dictates your tick-by-tick liability. So, when buying 1 lot of CME gold (GC), your trading account is debited or credited $10.00 per tick movement. If GC’s price goes up, the account is credited $10.00 per tick, and if the price falls, the account is debited $10.00 per tick. This is known as unrealized profit and loss (P&L).
  • Realized P&L: When a long position hits its profit target or stop loss, the trade is closed out at a profit or loss. If the price has risen from entry, a profit is realized, but if the price has fallen beneath entry, a loss is sustained.

It’s important to understand that futures contracts are derivative products. When you purchase them, margin money is required, your trading account balance is impacted on a tick-by-tick basis, and P&L is magnified due to the application of leverage.

When Is Buying Futures Contracts a Good Idea?

When is it appropriate to buy a futures contract? Although the strategic parameters for buying futures contracts vary, there are two basic reasons for doing so:

  • Speculation: If you maintain a bullish bias toward an asset, then going long may be a good idea. Given a viable trading plan, “buying low and selling high” can be a very productive strategy.
  • Hedging risk: You can mitigate risk exposure by buying select futures contracts. For instance, hedging the impact of USD inflation may be accomplished through purchasing commodity futures or foreign currency futures contracts. Also, systematic risk can be reduced by buying safe-haven products, such as gold or the U.S. 10-year note.

Capitalizing on a bullish bias and managing risk exposure are the two primary strategic reasons for purchasing futures. If you’re going to be active in the marketplace, then grasping these facets of buying futures contracts is imperative to your success!

Learn How to Buy Futures From the Pros

As in all things in life, understanding the ins and outs of buying futures contracts takes time and effort. Fortunately, StoneX’s Basic Training for Futures Traders guide can flatten any trader’s learning curve.

Featuring input from more than 1,000 market pros, Basic Training for Futures Traders is an all-in-one tutorial designed for the modern trader. For valuable insights into discipline, goal-setting, and futures contract functionality, sign up for your free copy today.

Download Basic Training For Futures Traders Ebook

Filed Under: Futures 101

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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