How Futures Trading Strategies Are Similar To Gambling Strategies
Most gamblers are familiar with the "double your loss" gambling strategy. The philosophy behind this simple approach is that eventually your
luck will change and provided you stick with a plan and have the resources to stay in the game, you will always win. This often over looked
tactic is the basis of many successful futures trading strategies. Let me explain...
Commodity Trading involves the buying and selling of physical stock. To mitigate against the risk of the price of the stock dropping during
the period purchase and sale, Commodity Futures Brokers offer the investor the option to trade in the "future price" (hence the name - futures)
of the underlying stock. The major benefit of this is that the investor can take profits if the price of the asset increases or even decreases.
Futures Trading Strategies are all about taking a view on the movement of the price of the underlying asset over time. Pick the right price (even
if it is lower) and you will be rewarded!
Market movements in terms of price and time are notoriously difficult to predict. The only real certainty is that the common commodity trading
indices rise over 5 year periods. The best of the Futures Trading Strategies therefore encourage the investor to accumulate commodity futures
over at least a 10 year period. This should be done irrespective of any short term movement in the stock's price or on the advice of Commodity
Futures Brokers. By leveraging the position, the investor is essentially using the classic "double your loss" gambling strategy - stay in the
market long enough for it to move in your direction.
But all investors know that Commodity Trading is much more complex that a game of poker. All effective futures trading strategies include
sophisticated financial techniques such as arbitrage.
An attraction of commodity trading arbitrage is that it is less risky than trading in the commodity itself. The reason for this is that the
investor is not simply betting on the market rising of falling. Because arbitrage trading generally takes place in two different but related
markets, the risk is greatly reduced. The two markets is usually the cash market and the futures market of the commodity. For example, the cash
price for a barrel of oil may be $95. Say the futures price for a barrel of oil, as quoted by Commodity Futures Brokers and due to expire in 3
months, is $100. With the cost of cash set at 8%, this difference of 5% is appropriate and there is no opportunity for arbitrage.
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