Futures Predictions

Written by Jacey Harmon
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The futures market is a risky market. A futures contract is a legally binding contract that carries specific obligations. In many cases, upon expiration, these obligations require a contract holder to deliver $100,000 in cash per contract. One can easily buy a contract with a $100,000 obligation for just a few thousand. High leverage and large financial obligations combine to make for a trading instrument that not only carries a high potential for risk, but for reward as well.

Reducing Futures Risk

Traders use analysis techniques and trading models to reduce the risk involved with futures trading. The simple reason why people analyze futures contracts is to try and predict what direction the market will go. The most common form of analysis for this purpose is technical analysis. Technical analysis is the study of price movements of a specific contract.

Charts are the most widespread tool used in technical analysis. Charts are visual representations of the actual price history of a contract. Using charts, traders can identify if a contract is trending higher or lower. Traders can recognize certain chart patterns that have historically signaled a change in price direction. There is no guarantee, however, that a specific chart pattern or trend will create a winning trade. Traders simply use these patterns as a way to put the odds in their favor by following historical patterns.

Spreads are a common way traders reduce risk in the futures market. A spread is when you buy one contract and sell a similar contract at the same time. There are several variations of spreads but there are two common types: bull and bear spreads. A bull spread is when you buy the near contract--one with a close expiration--and sell the far contract--one with a longer expiration. A bear spread is just the opposite of a bull: you sell the near contract and buy the far. In theory, since you have a long and short contract, your trade will make money regardless of market direction.

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