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Forex And Commodities Futures And Options. What To Know Before You Trade.
By: Greg Smith
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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