Wednesday, October 10, 2007

Trading Futures Contracts - How It Works

Trading is a simple process. Connect to the Internet and log onto your brokers web site. Choose the contract you wish to trade and display its details on your screen.

You are presented with two buttons - Buy and Sell. There are actually different ways to enter Buy/Sell orders, but we keep it simple here.

To bet that the price will go up, press the Buy button to enter a Long trade. The trade is ended by pressing the Sell button.

To bet that the price will go down, press the Sell button first to enter a Short trade. The trade is ended by pressing the Buy button.

As an example, one of the Dow Jones futures contracts trades at $5 per point.

The market is moving up and the trader decides to take a Long trade, pressing the Buy button when the index is at 11,600. 20 minutes later the index is at 11,640. The trader presses the Sell button, making $200 profit - the index went up 40 points at $5 per point.

Suppose that, after 5 minutes, the index has dropped to 11,580. The trader could press the Sell button to close the trade with a $100 loss - the index dropped 20 points losing $5 per point.

In a weak market, the trader might decide to take a Short trade, pressing the Sell button with the index at, say, 11,600. If half an hour later the index has dropped 100 points to 11,500, the trader could press the Buy button to close the trade, and book $500 profit - a 100 point drop at $5 per point.

If the assumption of weakness turns out to be wrong and 20 minutes after the start of the trade the market is up 30 points, the trade might be closed by pressing the Buy button and taking the 30 point loss - $150 - the index gained 30 points losing $5 per point.

In summary, Long trades make money if the price rises and lose money if the price falls. The opposite applies for Short trades.

Before trading, there must be a minimum amount of money deposited in your trading account. This is called the margin. It is not the same for different contracts. For example, the day trading margin for a soybeans contract is currently $675 at my broker, but it is $1,406 for the Dow Jones contract which is perceived as more risky.

If you are losing on a trade you may reach a point where your balance no longer covers the required margin for the position you are in. If this occurs, your broker may either close your position without consulting you, or contact you requesting that you immediately deposit more money to cover the margin. That is a margin call.

The broker charges you a fee every time you press the Buy or Sell button. That is the brokerage fee. My broker charges $2.40.

David Bennett trades US commodity futures from his home on the Gold Coast in Australia. He provides coaching and mentoring services for people wanting to start trading for themselves. Visit to read more futures trading articles.

Moving Averages - Simple Tips On Using Them For Bigger Consistent Profits

Moving averages are popular and if used in the right way can help you make profits however most forex traders make 2 critical errors which sees them lose. Lets look at moving averages and how to use them correctly for bigger profits.

Moving averages (regardless of the period used) all have the same aim:

They identify trends over specific periods and they smooth out the day-to-day price fluctuations that are a consequence of short term volatility to help you see the longer term trend.

The equation is:

The closing price is added up and divided by the period the moving average is calculated over.

Popular Periods

200 Day moving averages are popular ( particularly in the stock market) for tracking longer term trends and 20, 40 and 60 Day moving averages are used to spot and identify the intermediate trends on forex charts. Shorter Periods are used and many forex traders will calculate moving averages within a day.

Moving averages are one of the simplest and most popular used by traders interested in technical analysis and are a great trend identification tool.

The problem most traders have is using them correctly and they normally make to fatal errors.

1. They are NOT a leading Indicator

Many forex traders use moving averages to execute forex trading signals without any other confirming indicator and this is a huge mistake. They fail to understand that:

Moving averages are a lagging NOT a leading indicator.

They are like a trend line and simply give the direction of the trend in the time period that they are calculated over.

Many currency traders like to buy dips to a moving average to initiate a trade that the level holds but this simply leads to loses. If you hope in any investment market you will lose your equity quickly. Moving averages should not be used as a leading indicator and you should time entry with a momentum indicator such as the stochastic or Releative strength Index to Confirm the level should hold and get the odds on your Side

Moving averages are great for showing you layers of support and the trend but cannot be used to enter forex signals they need to be combined with other indicators - If you do not do this you will lose.

2. Short time periods indicate nothing

The shortest moving average we would use would be 18 days, however we have seen traders using moving averages within a day and plotting them hourly!

Volatility in short time frames is random and there is no trend - day traders who use moving averages lose, not becuase moving averages area bad indicator but simply it is impossibkle to calcualte a trend in short time periods.

Moving averages are a great tool for indicating support or resistance in the market and can add a valuable extra tool to your trading armoury, if you use them correctly:

To identify the trend, support and resistance levels and then combine them with a momentum indicator to enter your trade and finally use periods of a least a week and nothing shorter! It's an easy and profitable tool if used in the right way.

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