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Forex
And Commodities Futures And Options. What To Know Before You Trade.
The popularity
of trading futures and options has been growly rapidly for several
years. The ease of accessing constantly updated data online has
prompted an increased fever by day traders to attempt to be successful
and make money in this risky investment area. Individuals can now
trade these markets with the same ease and speed as large companies.
Trading forex
( foreign exchange ) and commodity futures and options is not for
everyone. It is a complex and risky business that experiences volatile
price and value swings. Before you invest any money in forex, commodities
futures or option contracts, you should:
• Consider
your financial trading experience, goals, and financial resources
and know how much you can afford to lose above and beyond your initial
payment.
• Understand
commodity futures and option contracts and your obligations before
commiting your finances into trade contracts.
• Understand
your risk exposure and aspects of trading by thoroughly reviewing
the risk disclosure documents your broker is required to give you.
• Know
who to contact if you have a problem or question.
• Ask more
questions and gather more information before you open an account.
Commodity futures
and option contracts:
A futures contract
is a legally binding agreement between two parties to buy or sell
a specific financial product or commodity in the future, on a designated
exchange, for a specific quantity of a commodity at a specific price.
The buyer and seller of a futures contract will agree now on a price
for a product to be delivered, or paid, for at a specifically set
date and time in the future, which is known as the "settlement
date." Actual delivery of the commodity can take place in fulfillment
of the contract, but most futures contracts are actually closed
out or "offset" prior to delivery.
An option on
a commodity futures contract is a legally binding agreement between
two parties that gives the buyer, who pays a market determined price
known as a "premium," the right (but not the obligation),
within a specific time period, to exercise his option. Exercise
of the option will result in the person being deemed to have entered
into a futures contract at a specified price known as the "strike
price." In some cases, an option may confer the right to buy
or sell the underlying asset directly, and these options are known
as options on the physical asset.
In the United
States, an individual, cannot trade futures contracts and options
on futures contracts directly on an exchange. A person or firm must
trade on your behalf. People and firms who trade on your behalf
as a customer generally must be registered with the Commodity Futures
Trading Commission.
Two general
categories of trading accounts:
• Individual
Account. In an individual account, trading is done only for you.
An individual account may be setup as either a "non-discretionary"
or a "discretionary" account. A "non-discretionary"
account, means that you will make all of the trading decisions and
the broker may not execute any transactions without your prior approval
and consent. A "discretionary" individual account, means
that you give permission to the broker firm carrying your account
or some third party to make trading decisions on your behalf.
You may open
an individual account with a registered Futures Commission Merchant
or through an Introducing Broker. An Introducing Broker may accept
your orders and transmit them for execution to a Futures Commission
Merchant with which the Introducing Broker has a relationship. You
deposit funds directly with the Futures Commission Merchant. In
an individual discretionary account, you grant power-of-attorney
to a Futures Commission Merchant, an Introducing Broker, one of
their Associated Persons, or a Commodity Trading Advisor to make
trading decisions on your behalf.
Commodity Pool.
You may also trade commodities through a "commodity pool."
This means you are purchasing a share or interest in the pool, and
trades are executed for the pool as a whole, rather than for the
individuals who have interests in the pool. Pool participants share
in any gains or losses.
If you have
a dispute or a problem arises out of your commodity futures or option
account, first try to resolve the problem with your broker. If that
is not successful, then you have options for resolving disputes:
(1) the CFTC Reparations program; (2) industry sponsored arbitration;
or (3) court litigation. In selecting a particular approach, you
may want to consider the cost, length of time involved and whether
or not the assistance of an attorney is required. More information
on dispute resolution is available from the CFTC's Office of Proceedings
(202-418-5250).
A Checklist
"Before You Trade":
Make sure you
have:
• Clearly
identified your financial goals, including the amount of risk and
loss you can handle?
• Determined how much assistance and help you may want from
a trading advisor in making trading decisions?
• Checked the registration status and disciplinary history
of the advisor or pool you select with the National Futures Association?
• Received and thoroughly reviewed the disclosure document
-- before you open an account?
• Clearly understood the disclosure document, including the
statement of fees, the potential for loss, your right to withdraw
your funds and the "break-even analysis?"
Make sure you
ask questions for anything that you do not understand. Remember,
it is your money, make sure you know where it is going.
Call the CFTC
or the NFA with any questions you may have?
http://www.cftc.gov
http://www.nfa.futures.org
About the Author:
Article is courtesy
of http://www.forex-trading-i.com/ . Visit for more information
on Forex, Commodities and Futures Trading. This article may be freely
reprinted as long as the author's resource box and url links remain
intact.
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