Delta Trading Group: Where Did Futures Trading Come From?

Futures are an odd thing to trade when you really think about it.  You aren’t buying or selling the commodity itself in a big market, but instead you’re essentially trading the value you expect goods to have in the future.  Where did this come from?  Why do people trade futures like this?  As it turns out, the history of futures dates back to the very beginning of civilization.

Beginnings In Babylon | Delta Trading Group

The Code of Hammurabi is famous for being one of the very first set of laws written down in clay and stone.  On these tablets you can find the origins of contract law:  under the Code, a merchant can pay a farmer today and get their harvest later.  If it’s a big harvest the merchant saves money, but if it’s a bad harvest the farmer gets the better deal.

Greek merchants used the same system.  In his Politics, Aristotle describes a philosopher who bought the future use of olive presses at a low price.  The olive harvest turned out great, so the philosopher made a profit by selling his press contracts.

A Formalizing System | Delta Trading Group

As the Age of Sail opened up world markets and commodities to European merchants, these merchants started speculating on the value of these goods based on questions like how good the harvest would be, how much the merchants could get from locals, and how well the goods would do in European markets.  Cafes and markets in England started setting up designated “pits” where merchants could buy and sell futures contracts, and even isolated countries like 18th century Japan had rice exchanges where farmers could hedge against bad harvests by offering and trading future contracts.

The First Futures Markets | Delta Trading Group

With futures trading taking place across London, someone realized that there was an opportunity to create a centralized exchange where merchants, investors, and producers could all come together to create and trade futures contracts.  In 1877, the London Metals and Market Exchange became the first official commodity futures exchange in the United Kingdom.  Just as the name explains, the first futures traded at this market were for copper, lead, and zinc.

In the United States, the Chicago Board of Trade beat the London Metals and Market Exchange by nearly 30 years by opening its doors in 1848.  Chicago was a natural hub for commodity trading thanks to its status as the unofficial capital of the Midwest, the breadbasket of the United States.   As such, the first commodities traded here were corn, soybeans, and wheat, and the three crops still dominate the CBOT today.  The New York Mercantile Exchange opened in 1872, but its cousin the Chicago Mercantile Exchange is the biggest open-interest futures exchange in the world.

Trading the future value of goods is as old as contract law.  Good and bad harvests, strong and weak businesses, all kinds of uncertainty can change future values and futures trading helps protect producers against the future.  Meanwhile, a smart trader can make a bundle by knowing which futures contracts to trade and when.

Delta Trading Group: Why You Should Consider Entering The Futures Market

If you’re an investor who has primarily focused on the securities market, it may be time to diversify your portfolio. One of the best ways to do so is through the futures market. The futures market is flush with opportunity and should serve as a particularly attractive choice for investors looking to take a long position. Below, you’ll find the three primary reasons why long-term investors should want to enter the futures market.

Asset Diversification | Delta Trading Group

The futures market is rather broad, providing investors access to hundreds of asset classes, including:

  • Debt instruments
  • Currencies
  • Commodities
  • Equities indices

Many assets in the futures market adhere to standard economic principles in which supply and demand drive one another. When supply increases, demand tends to decrease, and vice versa. Numerous futures assets are not volatile, and their positions are predictable over time. While predicting futures is not an exact science, the lack of volatility could prove worthwhile in diversifying the riskier assets that you already have in your portfolio.  

Speculative Opportunities | Delta Trading Group

Because futures asset classes adhere to basic economic principles, investors can engage in more speculative behavior. Whereas traders tend to worry about the short-term, trading live based on what they expect to happen in the coming minutes and hours; investors are more worried about long-term results.

For instance, imagine you’re investing in the futures market and are interested in a corn crop. There was recently a pest outbreak that ravaged the corn supply in the United States, driving down the cost of corn. However, you would expect the corn supply to return to its normal levels within five years. There is a buy-low opportunity based on a speculative opportunity.

Similarly, investors find that the futures market is incredibly liquid and provides low transaction costs. This makes it easy for investors to execute the trade on an opportunity. For this reason, many investors find the futures market significantly more appealing than conventional asset acquisitions.

Risk Management | Delta Trading Group

Investors should also consider entering the futures market because it allows them to manage risk, providing even novice investors with the opportunity to preserve risk capital. One of the reasons why the futures market is an attractive risk management tool is because investors don’t hold onto the asset itself. Instead, they keep a contract that enables them to buy or sell the asset at a later date. While holding the agreement, the actual value of the asset could change drastically.

This, for one, allows investors to mitigate financial risk, as it limits the negative impact of inflation. It also allows investors to avoid systemic risk, which occurs when an entire industry takes a nosedive as the United States housing market did in 2008. By having a futures position on a safe-haven, like gold, investors can reduce the chance of a systemic failure wiping out their entire portfolio.

Lastly, the futures market allows investors to avoid production risk. Many producers use futures contracts as a way to ensure profitability on their goods. This helps reduce volatility, making certain commodities quite stable.

Delta Trading Group: Futures Trading – Is It Right For You?

If you’ve been trading in the market for a long period of time, you might be considering the possibility of moving into futures. Not only do futures offer a multitude of benefits that traditional equities can’t match, but they also come with the possibility of quick and significant returns. Delta Trading Group wants you to take a deeper look at these basics to determine your best course of action when it comes to trading futures. 

The Basics Of Trading | Delta Trading Group

Futures trading involves trading contracts to buy or sell an asset at a specific point of time in the future. The contracts typically involve physical commodities, such as gold or oil, or financial instruments. The goal is to accurately predict the direction that the price of the asset will move over a period of time. Futures trading differs greatly from equities trading, as one of the major attractions for traders is the concept of leverage.  

In a futures trade, the investor usually puts in a margin. This is a fraction of the overall value of the contract, typically around 10 percent. The margin covers the investor should the market move against the position taken. Leverage allows investors to increase profits (or losses) much faster as futures contracts offer ten times the exposure to the stock, increasing profits by ten times. The risk comes if the market moves in the wrong direction, but this can be alleviated to a degree by using stop loss orders.

Benefits Of Futures Trading | Delta Trading Group

Aside from leverage, there are other attributes that make futures trading a wise choice for some investors. Futures are taxed differently than traditional stock trades and are covered under a separate section of the IRS code. Futures contracts also allow professional traders and large firms to hedge against future changes, and minimize their exposure to other positions. A futures contract allows traders to lock in lucrative prices and interest rates. 

Futures are traded in large numbers, offering investors extraordinary liquidity. Contracts can be moved with minimal price disruption. Most futures markets are open 24/7, allowing traders to grab opportunities as they open. This is a great advantage over having to wait until the stock market opens each morning.

Are You Ready To Trade Futures? | Delta Trading Group

With so many advantages, it’s no wonder that futures trading continues to grow. Futures are a powerful investment tool, and it’s important that traders are prepared before moving forward. Ask yourself the following questions to gauge your understanding of futures trading, and if it’s the right channel for you:

  • Do I understand both technical and fundamental analysis?
  • Do I follow a well-developed trading plan or process?
  • Do I understand the basic concepts of trading futures?
  • Can I control my emotions when it comes to making suboptimal trading decisions?
  • Do I have sufficient capital?
  • Am I a strong money manager?

Answering yes to the questions shows a strong inclination of readiness to enter the futures market. Negative answers might require re-evaluation. Understanding your level of readiness provides a base for you to begin.