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Hedging vs Speculation While Day Trading Futures
- Hedging & Price Protection when day trading futures-
The art of Hedging, while day trading futures, is a technique that entails canceling out or reducing the risk in a particular investment that serves as insurance. For example, let's take a hedge fund manager who has a portfolio that has mirrored the Emini S&P or any other index of stocks, there may be and can be information that is to be released that will move the market in a given direction, for instance news announcements. The day trading futures fund manager may not want to trade the news, but may rather be more interested in protecting his year to date portfolio profit, so the portfolio manager shorts the Emini futures for a contract value that equals the current value of the portfolio.
When the news is released, if the price falls after the negative news, the stock portfolio will lose money because the stock is headed down, however the Emini futures position will profit. On the contrary, if prices rise, gains in the stock position will be cancelled by losses taken in the futures position. Doing this allows the fund manager to successfully protect is portfolio from, what could be, a very bad trading situation. This is a common day trading system fund managers use when day trading futures.
This approach of hedging is additionally used by large manufacturers, farmers, miners, and any, businesses that depends on futures and a large quantity of a commodity, were a futures contract could be used to protect the price of the current stocks, depending on the ups and downs of the current market.
Another great example and technique of hedging is companies that participate in international business, or use raw materials which must be acquired from foreign currencies. Watching the consistent fall in the US dollar, these businesses which are day trading futures can secure the currency price today for funding money that will used in a later date to purchase the necessary raw materials needed. An example of this may be Kraft foods that need sugar for their noodles. They may purchase a given amount of sugar futures to lock-in price before they rise to high.
-The Speculation in day trading futures-
In the belief of making short-term profits or scalp trades, speculators assume the risk of price movements that hedge fund portfolio managers try to avoid. Speculators strive for these price fluctuations in hope to profit by buying and selling day trading futures contracts.
Day trading futures is not difficult, and online day trading does not involve a vast amount of capital. For this reason, speculators trade based on their perception the market will travel and if the market moves in their direction they profit from the price difference. In the same light these speculators can take loses if their perceived market direction is incorrect. For this reason brokers require and hold an amount of cash known as margin if the day trader takes such loses. If the price of the future contract falls, the broker could request a margin call, which is a need for additional funds to be added to the day trader's account, this protects the broker. If the trader does not honor the margin call, the broker will liquidate the position at market price.
For example, a day trading futures speculator has heard word and rumors that Japan is looking to purchase a good quantity of wheat. There is a USDA supply and demand news report announcement that will be released, a speculator may do a technical analysis of the market via charting software and position a limit order in expectation of the reports news. If the analysis report is released and suggests that stocks are low and the demand for wheat is greater than the amount of supply, the price of wheat will rise, confirming the speculator technical analysis and making the day trading futures trader a lot of money. It's a simple economics of basic Supply and Demand. Understanding how to capitalize on this trade is very valuable.
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Tags: cash, market, stocks, stock, Day Trading Course