Trading Futures? Know These Terms Before You Start

Part of your preparation in trading futures should involve learning able to speak and understand the language of the market.

Arbitrage

Some investors benefit from price discrepancies among different commodity futures markets. These investors analyze the prices of similar commodities in different markets and buy from the lower priced market. They then sell the same commodity at the higher priced market. Futures market veterans call this arbitraging.

Associated Person (AP)

This is an individual licensed by the Commodity Futures Trading Commission. They solicit an order or funds from customers on behalf of a registered Commission Merchant, a broker, a Commodity Trading Advisor or a Community Pool Operator.

Broker

A firm that executes a futures trading order on behalf of customers. These include banks, hedge funds, speculators and individual investors. Modern-day trading is performed through online futures brokers. This is unlike the past, where only large investors had to physically meet brokers at the trading floor.

Commodity Trading Advisor (CTA)

An individual paid by traders to advise them on how to value their commodity futures. The CTA is also responsible for advising investors on how to trade futures, analyze, and issue detailed reports on the status of the futures market.

Contract Month

The final month that the contract is valid and can be traded, executed or closed out. Once that month is over, the contract expires worthless. Also called the delivery month, each exchange sets a series of contract months throughout the year in which contracts of that commodity can expire. The exchange relays the information to investors. It’s critical that you remain up to date with the exchange’s news since contract months vary from industry to industry and year to year.

Contract Size

Commodity futures’ trading uses contracts. The exact quantity of a particular commodity represented by each futures contract is the contract size. For example, a sugar futures contract size is 112,000 pounds of the commodity.

Contract Value

This is the amount of money you will pay for one futures contract. It’s calculated by multiplying the contract size and the prevailing market price of that commodity. For example, a standard contract size of gold represents 100 ounces. Assuming the prevailing price of an ounce is $1,200, the contract value is $1,200 x 100 which is $120,000.

Electronic Trading Hours

In the past, trading was confined to a physical platform during specific times of the day. Modern day technology enables investors – whether you’re trading options, penny stocks or futures- to trade from any location over the web. But, this doesn’t mean specific contracts are available for sale all the time. Electronic trading hours are still limited to specific hours of the day

Scalper

An investor who buys and sells commodity futures almost instantly to benefit from the small change in price. Scalpers increase market liquidity since they only hold their stocks for a very short period.

As you dive deeper into the futures trading world, you’ll find that knowing the language of futures trading is half the battle. Understanding the jargon will help you act on the best deals.

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