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Navigating Market Volatility: A Guide to Futures Trading

Stock market graph

Market volatility is inevitable, and with the Fed keeping interest rates higher for longer, potential economic shifts are expected.

While volatility is a natural part of the investment landscape, it can pose potential risks to your portfolios. However, with a bit of strategy, you’ll be able to brave the market storm to preserve your long-term goals. In this article, we’ll explore the basics of futures trading along with some practical tips for you to get started. 

What are Futures?

According to Investopedia, futures are “financial agreements that obligate parties to buy or sell an asset at a predetermined date and price.” But what does this mean? 

Imagine futures as having confidence in the future price movement of an asset. Let’s use Gold as an example. If you’re confident that the price of gold will go up, you might look at a gold futures contract to purchase it at today’s price. Then, as the gold price increases over time, you can sell it at a higher price when the contract expires. 

On the other hand, if you think the price of gold will go down, you might look at a gold futures contract that agrees to sell it at today’s price in the future. You can then buy it back at a lower price, therefore making a profit. 

If you’re still confused, don’t worry. Let’s take a look at these simple scenarios:

Scenario 1: Prediction of Price increase in Gold value

Suppose a jewelry manufacturing company needs gold six months from now. The manager is uncertain about future gold prices but is satisfied with the current price. To avoid risk, the manager enters into a futures contract with another risk-averse supplier, agreeing to trade a specified amount of gold at the current price in six months.

After three months, the price of gold rises. The seller can now sell the futures contract (not the actual gold) at the higher current price, thus gaining from the price difference. Financial markets provide enough liquidity for traders to trade these contracts at any time.

Scenario 2: Incorrect Prediction where Price of Gold falls

The same jewelry company and supplier agree to trade gold in six months at the current price. However, after three months, the price of gold falls. The buyer must still purchase the gold at the original higher price, resulting in a loss as they could have bought the gold cheaper at the new market price.

Benefit: Accurate prediction results in acquiring more valuable gold.

Risk: An incorrect prediction results in a loss due to trading gold at a higher price than the market value.

Experienced investors use futures for hedging to manage risk, while many retail investors use them for short-term speculation to profit from price changes.

Strategic Futures Trading

Bear in mind that navigating the futures market requires more than just predicting market trends; it requires a strategic approach to risk management. 

So, here’s what you can do to skillfully approach futures trading: 

1. Get acquainted with market dynamics

You’ll have to take a very holistic approach to comprehending the market dynamics of your chosen asset. This includes supply and demand factors, geopolitical influences, and economic indicators. Awareness of what causes volatility in the futures markets of interest is very important. 

2. Create a trading plan

Think of this as a much higher level of the SMART goals, except instead of Specific, Measurable, Achievable, Relevant, Time-bound, it’s going to be a comprehensive trading plan that helps with your trading decisions in a methodical and disciplined manner. 

It would consist of investment objectives, risk tolerance, criteria for trade entry and exit, and money management strategies (What does that spell out? IRCM?). It not only helps you to stay disciplined and focused but also provides a framework for continuous improvement and learning. 

3. Stay informed

Financial markets are influenced by various factors, from economic data releases to geopolitical events. Staying aware of these developments and understanding their possible effects on the markets is crucial for making informed decisions.

4. Keep learning

The futures trading landscape is complex and constantly changing. Staying educated about market trends, trading strategies, and financial instruments can improve your ability to skillfully navigate market volatility.

Who is it for?

With that being said, futures trading isn’t for everyone. It requires a nuanced approach, especially considering the complexity of it all. Of course, it still offers great opportunities for hedging and speculation, but it also comes with a higher level of risk compared to more straightforward investment vehicles like stocks or mutual funds.

So, if you’re someone who is already trading in stocks or ETFs and looking to diversify your portfolios or hedge against market risks, this is for you. 

Open your Futures Account Today

Speaking of, did you know that you can do futures trading with RHB? Not only that, but if you open a futures account with RHB right now, you’ll get: 

Zero Brokerage Fees: Enjoy zero brokerage fees up to RM500 on all online buys for the first 60 calendar days after opening your account. This offer runs till August 31, 2024.

Exciting Prizes: By logging in and trading, you earn entries into a grand giveaway where you could be the lucky winner to drive home a brand new Perodua Ativa SUV or win amazing vouchers worth more than RM200,000 in total. This offer runs till 31 December 2024.

Futures trading with RHB right now would mean no excess fees at the start and potential rewards just for participating. Click here to sign up: 

*This promotion is subject to terms and conditions.

The Bottom line

If you're curious about futures trading and ready to put in the work to understand it, there's potential to make it work in your favour and RHB has just the right tools to get you started. Just remember, it's all about staying informed, sticking to your plan, and keeping a cool head. And with offers like RHB's, getting started might just be a bit sweeter.

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