Futures Trading: The Game of Expectations Between Profit and Loss

What are futures contracts?

A futures contract is simply an agreement between two parties to buy or sell a specific asset at a price determined now, but with execution occurring in the future. The asset could be a commodity such as wheat or oil, a metal such as gold, or even a digital currency. The idea is that the price is agreed upon in advance, while delivery takes place later.

Why did these contracts emerge?

Initially, futures contracts were not created for speculation or quick profit; rather, they were a way to protect companies from price fluctuations. For example, a wheat farmer who fears a drop in the price of his crop at harvest time can sell a futures contract now to guarantee a fixed price. Conversely, airlines might buy oil futures contracts to protect themselves from sudden price increases.

How do traders use them today?

Over time, these contracts are no longer limited to companies. Individual traders have entered the fray, treating them as an investment tool. A trader can profit from rising or falling prices without owning the underlying asset, merely speculating on the market's direction.

Leverage: Opportunity or Trap?

One of the most prominent features of futures contracts is the use of leverage. This feature enables the trader to control large trades with relatively small capital. If the market moves as he expected, he can make significant profits. But if the market goes against him, he can quickly lose his capital. That's why experts describe futures contracts as a double-edged sword.