What futures are and how beginners can trade them in Australia

Futures trading is a form of investing that has become increasingly popular worldwide in recent years. Futures are derivatives – contracts between two or more parties to buy and sell an asset at a pre-determined price to be delivered on a specific date. They allow investors to speculate on the price movements of commodities, indices, stocks, bonds, currencies, and other financial instruments. 

In Australia, futures can be traded through exchanges such as the Australian Securities Exchange (ASX) and Chi-X Australia. This article will introduce futures trading for beginners in Australia, discussing steps they can take to get started.

Understand your investment objectives

Before beginning futures trading, it is crucial to understand what your investment goals are. Are you looking for short-term gains? Or are you planning on investing long-term and taking advantage of the potential leverage futures offer? Do you prefer to trade actively or passively? Knowing your desired outcome can help you decide which type of instrument to focus on and how often you should buy and sell.

It is also essential to understand the associated risks with futures trading. Futures are leveraged instruments, meaning investors only need to put down a fraction of the total cost of the contract to make a trade. It can result in greater profits if the market moves in favour but carries more risk as prices can move against your position and cause more significant losses than the initial investment.

Choose an exchange

Australia has two leading exchanges where futures can be traded – the Australian Securities Exchange (ASX) and Chi-X Australia. Both offer a variety of products for different trading strategies and styles. The ASX offers equity index futures, bond contracts, energy contracts and agricultural commodities such as wheat, wool and cotton. Chi-X Australia has currency futures, interest rate derivatives, gold contracts and other financial instruments.

It is vital to research each exchange before deciding which one to use. Look into the exchanges fees, account minimums, margin requirements and trading platforms. Some brokers may also offer trading tools and resources that can help you understand the markets better.

Open an account

Once you have chosen an exchange, it is time to open a futures trading account. Most brokers will require personal details such as name, address, proof of identity, and financial information such as bank statements and income level. If applicable, you may also need to provide evidence of any prior market experience.

Once the application has been approved, your broker will send you details on how to fund your account. Many exchanges allow traders to use credit cards, direct deposits, or even digital wallets for quick and easy transfers. It is vital to keep track of all transactions made – many brokers offer account statements or trading histories that can be used for tax purposes later.

Research the market

It is necessary to research the market thoroughly before beginning futures trading. Review current market conditions and trends, analyse past data to identify potential opportunities, read industry news and financial reports, and familiarise yourself with standard terms such as margin calls, short selling, stop-loss orders, etc. It will help you develop a sound understanding of the markets and make informed decisions when trading.

Tools such as charts and technical indicators can also be helpful for analysing price action and making predictions about future movements. Utilising demo accounts is an effective way to practice trading without risking real money.

Choose a suitable strategy

Once you have familiarised yourself with the markets, it is time to decide on a trading strategy. Different strategies involve different risk and reward levels, so choosing one that matches your investment goals is crucial.

For example, if you are looking for short-term gains, day trading or scalping may be suitable strategies. Both involve taking more minor positions to capitalise on small price movements within a single day. Alternatively, swing or position trading may be more appropriate to take advantage of longer-term trends. These tactics involve holding onto positions over several days or weeks instead of closing them at the end of each day.

Monitor and adjust

Once you have a trading strategy, monitoring the markets closely and adjusting your positions if needed is essential. It involves regularly checking prices, assessing market conditions and reviewing performance against expectations. Move your stop-loss orders as the markets react to news or overall sentiment changes if necessary.

It is also essential to use risk management techniques such as diversification and position sizing to limit your exposure. While no investment is guaranteed, these steps can help minimise losses and maximise profits.