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Futures Trading

Trade Index, Futures Online. View our Futures Trading Guide Below then Proceed to our Futures Trading Strategies

>>> PROCEED TO FUTURES STRATEGIES
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READ ABOUT FUTURES BELOW THEN PROCEED TO FUTURES STRATEGIES

Introduction to Futures Trading

Navigate down the page using the buttons below to learn more about Futures and Futures Options.

1. What is Futures Trading

2. Key Features of Futures Trading

3. Day Trading and Swing Trading

4. Suitability of Futures Trading

5. Futures Trading Examples

6. Key Benefits of Futures

7. Margin Obligations

8. Risks of Futures Trading

9. Styles of Futures Trading

1. What is Futures Trading?

A Futures Contract is an agreement traded on a Futures Exchange by which you either buy or sell a specific quantity of a specific product (Underlying Instrument) for settlement on a specified date. Settlement can be via physical delivery or cash settlement. The Underlying Instrument may be, but is not limited to, a security (such as a share), index, commodity, currency or other financial product.

A Futures Option Contract gives the buyer the right, but not the obligation, to acquire an Underlying Instrument at the prescribed Exercise Price in return for payment of a Premium (being the price of the Futures Option Contract). The seller has no right other than the right to the Premium.

The Underlying Instrument may be a Futures Contract, where the seller will be under an obligation to enter into a Futures Contract at the Exercise Price if the Futures Option Contract is validly exercised by the buyer. If the Futures Option Contract is exercised, it results in the establishment of a Futures Contract.

There are two main types of Futures Contracts:

Deliverable Futures Contracts: The seller agrees to deliver to the buyer and the buyer agrees to take delivery of, the quantity of the Underlying Instrument (such as a commodity) at the time the Futures Contract expires.

Cash settled Futures Contracts: Two parties’ make a cash adjustment between themselves at the time the Futures Contract expires according to whether the price of the Underlying Instrument (such as a commodity, financial instrument or index) has risen or fallen since the time the arrangement was made.

Reasons to Trade Futures

Hedge Price Changes

Employ Leverage

Go Long and Short Easily

Trade a 24-Hour Market

The terms of Futures Contracts are generally set out in the operating rules of the relevant Futures Exchange on which the contract was made. Accordingly, there may be differences in the procedures and regulations of markets from one country to another and one Futures Exchange to another.

2. Key Points of Futures Contracts

Trading Futures Contracts and Futures Option Contracts allows you to ‘leverage’ your positions to take a much greater exposure to the price of the Underlying Instrument than if you were to buy and sell the Underlying Instrument directly. This has the capacity to significantly increase the potential losses or returns. It therefore involves significant risk. Transactions should only be entered into by traders and investors who understand the nature and extent of their rights, obligations and risks.

FUTURES TRANSACTIONS KEY POINTS:

1

THE DURATION AND STANDARDISED NATURE OF FUTURES CONTRACTS

Futures Contracts may be made for periods of up to several years in the future. One part of the standardisation of Futures Contracts is that the contract’s Expiry Dates follow a predetermined cycle. For example, the SPI 200® Futures Contract traded on the ASX 24, can be made for settlement only in March, June, September or December, and only up to 18 months from the time of the trade.

Futures Contracts are standardised and interchangeable, meaning that they are of a particular class are perfect substitutes for each other. A consequence of contract standardisation is that the price is the only factor that remains to be determined in the marketplace (outside of the contract month and volume). On the ASX 24, Futures Contracts are quoted and traded on an electronic trading platform (SYCOM®), which provides a system of continuous price discovery. This means that the price at which trades take place may continually change throughout a trading session. These features are common through most international Futures Exchanges.

Since all Futures Contracts for a given month in the same market are interchangeable, they can be Closed Out by entering an opposite position in the same contract. The net result is that the trader no longer holds a position in the Futures Contract. Similarly, a client who has sold a given Futures Contract can cancel the position or Close Out by buying the same contract.

2

THE ROLE OF THE CLEARING HOUSE

Futures Exchanges generally have a Clearing House. Clearing Houses clear and settle Futures Contracts executed on the Futures Exchange. The primary role of the Clearing House is to guarantee the settlement of obligations arising under the Futures Contracts registered with it. This means that when your Futures Broker buys or sells a Futures Contract on your behalf, neither you nor your broker needs to be concerned with the credit worthiness of the other side of the contract. The Clearing House will never deal directly with you, rather the Clearing House will only ever deal with its Clearing Participants – that is your broker (where your broker is a Clearing Participant), or where your broker is not a Clearing Participant, your Futures Broker’s Clearing Participant.

When a Futures Contract is registered with the Clearing House, it is novated. This means that the Futures Contract between the two brokers who made the trade is replaced by one contract between the buying broker (or its Clearing Participant) and the Clearing House as seller and one contract between the selling broker (or its Clearing Participant) and the Clearing House as buyer.

In simple terms, the Clearing House becomes the buyer to the selling broker, and the seller to the buying broker.

You, as the client, are not party to either of those Futures Contracts. Although your Futures Broker may act on your instructions or for your benefit, the rules of the Clearing House provides that any contract arising from an order submitted to the market is regarded as having been entered into by the executing broker as principal. Upon registration of the contract with the Clearing House in the relevant Clearing Participant’s name, that Clearing Participant will incur obligations to the Clearing House as principal, even though the trade was entered into on your instructions.

The Clearing House ensures that it is able to meet its obligation to Clearing Participants by calling a margin to cover any unrealised losses in the market.

3

YOU CAN TAKE BOTH LONG AND SHORT POSITIONS

You can take both “long” and “short” positions. If you take a long position (i.e. you “purchase” a Futures Contract), you may profit from a rise in the price of the Underlying Instrument, and you will make a loss if the price of the Underlying Instrument falls. Conversely, if you take a short position (i.e. you “sell” a Futures Contract), you may profit from a fall in the price of the Underlying Instrument, and you will make a loss if the Underlying Instrument’s price rises.

4

CALCULATING PROFITS AND/OR LOSSES

If you Close Out a Futures Transaction before the Expiry Date or the First Notice Day (as will usually be the case), the amount of any gross profit or loss made on a Futures Transaction (i.e. before fees, commissions and other costs) will be equal to the difference between the price the Futures Contract was opened and the price the Futures Contract was Closed Out, multiplied by the number of the Futures Contracts held. The indicative price for a Futures Contract at which you can enter into or Close Out is available on your Trading Platform.

These examples are included for illustrative purposes only, and are not indicative of actual exchange rates or values.

EXAMPLE 1:

Assume you purchase 1 SPI200® Futures Contract (i.e. you enter into a “long” Futures Contract) where the Underlying Instrument is the ASX200® Index and the level at which you enter into the Futures Contract is 5450. Your later Closed Out the Futures Contract by “selling” (or exiting the “long” Futures Contract) at a higher level of 5475. The resulting gross profit on the transaction would be $625 being sale level (5475) less buy level (5450) x 1 x 25 (the dollar amount per point of the Futures Contract). The net profit is determined after deducting your Futures Brokers commissions (charged on both opening and Closing Out the transaction) and any other charges as set out by your Futures Broker.

EXAMPLE 2:

Assume you purchase 1 SPI200® Futures Contract (i.e. you enter into a “long” Futures Contract) where the Underlying Instrument is the ASX200® Index and the level at which you enter into the Futures Contract is 5450. You later Closed Out the Futures Contract by “selling” (or exiting the “long” Futures Contract) at a lower level of 5440. The resulting gross loss would be $250 being sale level (5440) less buy level (5450) x 1 x 25 (the dollar amount per point of Futures Contract). The net loss is determined after adding commissions and any other charges.

5

CLOSING OUT

Closing Out can be achieved without going back to the original party with whom the Futures Contract was traded. This is a significant benefit of exchange traded products compared to OTC products. When an existing buyer sells to Close Out their open position, the sale transaction is registered with the Clearing House in the manner described above.

FOR EXAMPLE:

This example is included for illustrative purposes only, and is not indicative of actual exchange rates or values.

If Trader A was to sell to Trader B at $100 per unit, the Clearing House would become the buyer to A and the seller to Trader B. If Trader B sells to Trader C for $120 per unit, the Clearing House is now novated as the buyer to Trader B and the seller to Trader C. Trader A would therefore have an open sold position and Trader C would have an open bought position. Trader B no longer has a position and has therefore realised a profit of $20 per unit (ignoring for the purposes of this example any transaction fees that may apply).

The Futures Contracts which Trader B held (one to buy and one to sell) have been settled in cash between B and the Clearing House. Trader B simply receives the net profit. Any profit due to Trader B is paid out by the Clearing House in cash, even though the original seller (Trader A) remains in the market.

Your Futures Broker, the Futures Exchange, or the Clearing House also has the ability to amend or cancel a trade as stated in your Futures Brokers Client Services Agreement. This could cause a loss or increased loss to be suffered.

Any unilateral Close Out directive from or by a Clearing House, Futures Exchange or the regulator in accordance with the rules, regulations, customs and usages of the market will be accepted by you and settled based on that Close Out and you will accept any costs involved in the re-establishment of a position if you re-open the position.

6

VALUATION OF FUTURES CONTRACTS

The calculation for determining the value of a Futures Contract is set out in the operating rules of the Futures Exchange. The operating rules of a Futures Exchange can be found on the website of the Futures Exchange.

7

SETTLEMENT

It is your responsibility to monitor your open positions and to Close Out any open position before the Settlement Date or the First Expiry Date (whichever comes first). Your Futures Broker reserves the right, in their absolute discretion, to Close Out any open position you hold in a Deliverable Futures Contract if you have not Closed Out that Futures Contract prior to the earlier of the Settlement Date and the First Notice Day. Most electronic brokers don’t allow delivery so you generally don’t need to worry about that and your contracts will be cash settled before the first notice day.

8

DELIVERABLE FUTURES CONTRACTS

If you have bought a Deliverable Futures Contract that is still open at the close of trading on the Settlement Date or First Notice Day (whichever comes first), you will be under an obligation to take delivery of, and pay the contract price in full for, the Underlying Instrument described in the Futures Contract.

If you have sold a Deliverable Futures Contract that is still open at the close of trading on the Settlement Date or the First Notice Day (whichever comes first), you will be under an obligation to deliver the Underlying Instrument described in that Futures Contract.

Most online futures brokers do not permit its clients to make or take delivery under a Deliverable Futures Contract. Exceptions to this policy may be granted in certain instances with your Futures Broker in advance.

Your Futures Broker reserves the right, in its absolute discretion, to Close Out any open position you hold in a Deliverable Futures Contract if you have not Closed Out that Futures Contract price to the First Notice Day.

9

CASH SETTLED FUTURES CONTRACTS

Profits made from trading in shares are treated as income and are typically subject to income tax and depending on the jurisdictions, may also be subject to stamp duty and GST. Investing is typically more tax effective and less fee intensive than trading so carefully consider your options before taking the plunge.

FUTURES OPTIONS KEY POINTS:

Options traded over Futures Contracts are commonly known as Futures Option Contracts. A Futures Option Contract that is a “Call Option” gives the buyer the right, but not the obligation, to buy a Futures Contract at the prescribed Exercise Price in return for payment of a Premium. A Futures Option Contract that is a “Put Option” gives the buyer the right, but not the obligation, to sell a Futures Contract at the prescribed Exercise Price in return for payment of a Premium.

The seller will be under an obligation to sell a Futures Contract (in the case of a Call Option) or to buy a Futures Contract (in the case of a Put Option) at the Exercise Price of the Futures Option Contract if the Futures Option Contract is validly exercised by the buyer. If an Futures Option Contract is exercised, it results in the establishment of a Futures Contract.

1

STYLES OF FUTURES OPTIONS CONTRACTS

There are two types of option styles; American style options (American Options) and European style options (European Options).

European Options can only be exercised on the Expiry Date and not before. American Options can be exercised at any time up until, and including, the Expiry Date. Futures Option Contracts traded on most Futures Exchanges are American Options. The seller of a Futures Option Contract that is an American Option must be prepared for that Futures Option Contract to be exercised at any time before the Expiry Date.

You should clarify whether the Futures Option Contract you intend to trade is an American Option or a European Option prior to entering into the Transaction, as the operating rules of the Futures Exchange may vary depending on the type of Futures Option Contract you are dealing with.

2

EXERCISING CALL OR PUT OPTIONS

The diagram below sets out the results from the buyer’s and seller’s viewpoint when the buyer exercises a Call Option or Put Option:

BUYER SELLER
Bought Call Option Bought Underlying Contract (at the Exercise Price of the Futures Option Contract) Sold Call Option Sold Underlying Contract (at the Exercise Price of the Futures Option Contract)
Bought Put Option Sold Underlying Contract (at the Exercise Price of the Futures Option Contract) Sold Put Option Bought Underlying Contract (at the Exercise Price of the Futures Option Contract)

1

“IN THE MONEY”, “AT THE MONEY” AND “OUT OF THE MONEY”

A Futures Option Contract is always either “in the money”, “out of the money” or “at the money”.

“IN THE MONEY”

An “in the money” Futures Option Contract is, in relation to a bought Call Option, if the Exercise Price is lower than the current market price of the Underlying Instrument and, in relation to a bought Put Option, if the Exercise Price is above the market price of the Underlying Instrument. An “in the money” option is, in relation to a sold Call Option, if the Exercise Price is higher than the current market price of the Underlying Instrument and, in relation to a sold Put Option, if the Exercise Price is below the market price of the Underlying Instrument.

“AT THE MONEY”

An “at the money” option is, in relation to both Put Options and Call Options, if the Exercise Price is equal to the current market price of the Underlying Instrument.

For the most part, at expiry all “in the money” or “at the money” options are automatically exercised by the Clearing House, however not all Future Exchanges automatically exercise “in the money” or “at the money” options at expiry. Accordingly, you should contact your Options Broker representative before the Expiry Date or the option may lapse worthless.

“OUT OF THE MONEY”

An “out of the money” option is, in relation to a bought Call Option is, if the Exercise Price is higher than the current market price of the Underlying Instrument and, in relation to a bought Put Option, if the Exercise Price is below the market price of the Underlying Instrument. An “out of the money” option is, in relation to a sold Call Option, if the Exercise Price is lower than the current market price of the Underlying Instrument and, in relation to a sold Put Option, if the Exercise Price is above the market price of the Underlying Instrument.

If a Futures Option Contract is “out of the money” at a particular point in time, it does not mean it does not have value. That is, it may still have time value i.e. time until the Expiry Date in which the price of the Underlying Instrument may move in your favour.

2

HOW IS THE PREMIUM DETERMINED?

The price to be paid or received in relation to a Futures Option Contract is the Premium. It is negotiated between the buyer and seller of the Futures Option Contract via the market, and is payable by the buyer to the seller (through the Clearing House) at the time the Futures Option Contract is entered into. The Premium is the compensation for the seller accepting the risk involved in selling the Futures Option Contract. The full value of the Premium is payable immediately upon executing the Futures Option Contract. This means that there must be sufficient Net Free Equity in your Trading Account before you can commence trading.

Paying the Premium will allow you to keep or hold the Futures Option Contract until its Expiry Date (when it can either be exercised or it will lapse) or to sell it at any given point of time prior to its Expiry Date i.e. Close Out the open Futures Option Contract. The value of an Futures Option Contract will fluctuate during the life of the Futures Option Contract depending on a number of factors, including:

  1. the price of the Underlying Instrument;
  2. the nominated Expiry Date and the time remaining to expiry;
  3. the nominated Exercise Price;
  4. the volatility of the Underlying Instrument; and
  5. interest rates, dividends and other distributions paid or payable in respect of the Underlying Instrument and general risks applicable to markets.

3

SETTLEMENT

The settlement of Futures Option Contracts is more complex than the settlement of Futures Contracts. Futures Option Contracts which are “in the money” or “at the money” are in most instances automatically exercised by the Clearing House. In the case of Futures Option Contracts, the resulting position is settled as a Futures Contract or in some cases another type of settlement method, for example cash if the Futures Option Contract is cash settled on the Expiry Date. You should check this position before the Expiry Date.

3. Day Trading and Swing Trading

In stocks, the lack of leverage and fees can be prohibitive for short term trading styles like Day Trading and Swing Trading. In Futures, due to the high leverage and very lost costs, Day Trading and Swing Trading can be profitable endeavors.

Day Trading involves buying and selling (or selling then buying back) a futures contract on the same day. Swing trading, on the other hand, involves buying and then selling (or selling and then buying) after a short period of time like a few days or a couple of weeks. There are a number of sub-categories for both day trading and swing trading for example:
  • HIGH-FREQUENCY TRADING – A Day Trading strategy that involves Buying and selling in microseconds for tiny profits. High-Frequency Traders typically use arbitrage as their main edge.
  • SCALPING – Buying and selling in seconds for small profits. These types of traders generally use Course of Sales data, Order Books and Depth of Market and Technical Analysis as the basis for their strategies.
  • SYSTEM TRADERS – Systems traders use quantitative analysis of either technical or fundamental data to trade automatically in the market. They can be Day Traders or Swing Traders.
  • TECHNICAL TRADERS – Day Traders and Swing Traders who base their trading decisions on technical analysis.
  • DOZENS MORE – We’ve touched on a few of the main types of Trader and we include more details further down the page.

At MyTradingAdvisor we focus more on Swing Trading approaches to the markets though we do cover Systems Trading in detail and that includes systems that may buy and sell in the same day.

4. Suitability of Futures Trading

Futures Trading offers a very low-cost way to trade different types of markets. The interest factor is built into the price of the futures contract, along with other holding costs (if applicable) so you get a great deal in terms of fees. Perhaps the biggest downside of futures trading is that individual contract sizes are quite large, meaning you typically need a decent amount of capital to trade even one contract. The minimum account size, which needs to be big enough to handle your initial margin plus drawdowns varies per market so quite often you need around $25,000 or more per contract to start trading. This can be a lot of money to risk on speculative endeavors like trading, especially if you’ve never traded before. That makes futures trading the realm of professional traders and institutions that use futures for hedging because they have deep pockets. If you do happen to become an expert trader, and we certainly think we can get you there, we would suggest switching to futures, as opposed to CFDs once you have enough trading capital available. However, if you do not have enough funds for futures trading, as we’ve alluded to, there are CFDs on futures that require a lot less capital and have contract sizes as little as $1 per unit. We’d suggest if your starting capital is limited you start trading with CFDs on futures.

INDEX FUTURES

Index Futures involves buying and selling futures contracts on popular stock market indices including the SPI200 Index in Australia, the S&P500 Index in the USA, the Dax30 in Germany and the FTSE 100 in England and more.

COMMODITY FUTURES

Futures Trading Contracts are available on commodities such as Crude Oil, Natural Gas, Unleaded Petrol, Gold, Silver, Copper, Platinum, Soybeans, Soymeal, Corn, Wheat and so on.

FINANCIAL FUTURES

You can also trade futures on financials such as interest rate products like bonds and bank bills. Currency Futures are also very liquid and provide an alternative to Forex covering many of the major Forex crosses.

5. Futures Trading Examples

We have described how Futures Transactions work and the basic points of Futures.

The key advantage Futures Trading has over other forms of trading is the low fee structure, 24 hour markets and diversified nature of the Asset Classes covered. Because the additional trading costs such as interest rates and other holding cost’s like storage, insurance, and freight (if applicable) are factored into the price of a Futures Contract you always get the contracts priced at the best available rates. The interest component of a futures contract typically uses the risk-free interest rate as its basis whereas Forex and CFD Brokers Mark-Up this component. Futures, like FX and many CFDs often have after hours trading available. Finally given Futures Contracts cover a wide range of asset classes they are great for diversification as you can trade many different uncorrelated asset classes.

6. Key Benefits of Futures Products

Futures Trading provides a number of benefits which must be weighed against the risks of using them. The benefits of Futures Trading are as follows:

HEDGING

You can use Futures Contracts to hedge your exposure to the Underlying Instruments.

SPECULATING:

You may take a view on a particular Underlying Instrument and invest in Futures according to this belief.

LIMITED COUNTERPARTY RISK

There is limited counterparty risk when trading Futures Contracts and Futures Option Contracts as the Clearing House for the relevant Futures Exchange stands behind the contract guaranteeing the performance of the Transaction

PROFIT POTENTIAL IN BOTH RISING AND FALLING MARKETS:

Since Futures Markets are constantly moving, there are always trading opportunities, whether a particular currency, index, or precious metal is increasing or decreasing you can trade your view using Futures. There is the potential for profit (and loss) in both rising and falling markets depending on the strategy you employ.

LEVERAGE

Futures Transactions involve a high degree of leverage. These products enable you to outlay a relatively small amount (in the form of the Initial Margin) to secure an exposure to the movements in the value of the Underlying Instrument without having to pay the full price of actually acquiring the Underlying Instrument.

AUTOMATED TRADING

Another big advantage of Futures Trading is that modern technology allows the automation of most tasks, from system development to copying other peoples trades, to order execution. With a little nouse, you can use powerful software programs to help you gain an edge in the market, and at the same time save huge amounts of time!

TRADE FROM ANYWHERE

Literally, trade from anywhere! One of the greatest advantages of trading futures is the ability to trade from anywhere that has an internet connection. If you are one of the lucky few with the skills to make profitable trading decisions you can trade from home, work, a resort, the beach, a golf course, a resort, on the move… you get the idea.

CLOSE OUT

Due to the system of registration and novation, Closing Out can be achieved without going back to the original party with whom the Futures Contract or Futures Option Contract was traded. This is a major difference from OTC derivatives products.

FLEXIBILITY

There is also some flexibility in entering and exiting the market prior to the Expiry Date. This enables you to take a view on market movements and trade accordingly.

STANDARDISATION

Futures Contracts are standardised and interchangeable, meaning that Futures Contracts of a particular class are perfect substitutes for each other. This means that a trader who has bought a Futures Contract can cancel the position by selling the same contract. The net result is that the trader no longer holds a position. Similarly, a trader who has sold a given Futures Contract can cancel the position by buying the same contract. The principle of standardisation also applies to trading in Futures Option Contracts (i.e. Futures Option Contracts of a particular class are perfect substitutes for each other). A trader who has bought (or sold) an Futures Option Contract can Close Out their position by selling (or buying) the same contract.

7. Margin Obligations

Futures Contracts and Futures Option Contracts are subject to margin obligations i.e. you must have sufficient Net Free Equity in your Trading Account for security and margining purposes. You are responsible to meet all margin obligations.

TYPES OF MARGIN

Margins are generally a feature of all exchange-traded derivative products (including Futures Contracts and Futures Option Contracts) and are designed to protect the Clearing House against default. A margin is the amount calculated by the Clearing House as necessary to cover the risk of financial loss on an open exchange traded derivatives contract due to an adverse market movement.

The Clearing House contracts with Clearing Participants. Where a Clearing Participant has an exposure under an open Futures Contract to the Clearing House, the Clearing House will call amounts of money known as margin from the Clearing Participant to cover the risk exposure to the Clearing House. The amount of margin required is determined daily by the Clearing House, following the close of trading each day. In times of extreme volatility an intraday Margin Call may be made by the Clearing House.

There are two components of the Margin Requirements which you may be required to pay in connection with Futures Transactions; Initial Margin and the Variation Margin.

INITIAL MARGIN

In order to enter into a Futures Contracts or Futures Option Contracts you will be required to pay us the Initial Margin or have an amount of Net Free Equity in your Trading Account that is at least equal to the Initial Margin. The Initial Margin represents collateral for your exposure under a Transaction and is used to cover any potentially adverse fluctuations against your initial position.

The Initial Margin required depends on the Futures Exchange on which the Futures Contracts or Futures Option Contract is traded. The Initial Margin will vary from time to time according to the volatility of the market. This means that an Initial Margin may change after a position has been opened, requiring a further payment (or refund, where applicable).

The buyer of a Futures Option Contract (“long”) is generally not subject to margin obligations as the buyer of an Futures Option Contract is required to pay the full value of the Premium at the time the Futures Option Contract is acquired. However in some instances an Initial Margin may be acceptable as opposed to paying the full premium when initiating a long position.

The seller of the Futures Option Contract (“short”) is entitled to receive a portion of the Premium based on the “mark to market” valuation of the Futures Option Contract (i.e. the seller of an Futures Option Contract does not receive the full value of the Premium upfront). A seller would also be required to pay an Initial Margin to open the position.

The Initial Margin will typically be between 2% and 10% of the face value of the Futures Contract or the Options Contract. However, it is possible for Initial Margins to be above this range. The amount may change at any time and at the discretion of the relevant Clearing House (or the relevant Futures Exchange, in some cases). You should refer to the website of the relevant Futures Exchange to confirm the actual requirement for your proposed Transaction at any particular time.

VARIATION MARGIN

As the value of your open positions will constantly change due to changing values of the Underlying Instrument, the Margin Requirement (being the minimum Net Free Equity required in your Trading Account) on the open positions will also constantly change. This is referred to as a Variation Margin. The amount of your Margin Requirements (being the Initial Margin and any adverse Variation Margin) at any one time will be displayed on the open positions report made available through your Trading Platform.

Any adverse price movements in the market must be covered by further payments from you (unless you already have sufficient Net Free Equity in your Trading Account). Your Futures Broker will also credit the Variation Margin to your Trading Account when a position moves in your favour.

Your Futures Broker will determine the Variation Margin for a Transaction by reference to changes in the value of the Underlying Instrument. In other words, each contract is effectively “marked to market” on at least a daily basis. “Marked to market” means that an open position is revalued generally in real time or at least on a daily basis to the current market value. The difference between the real time/current day’s valuation compared to the previous real time/day’s valuation respectively is the amount which is debited (in the case of unrealised losses) or credited (in the case of unrealised profits) to your Trading Account. The valuations are calculated using the closing value (at the close of trading on each day) of the Underlying Instrument as determined by the relevant Pricing Source. Intraday “marked to market” revaluations will be based on the last available value of the Underlying Instrument as determined by your Futures Broker in their sole discretion.

Margin Calls are made on a Net Trading Account basis i.e. should you have several open positions with respect to a particular Trading Platform, then Margin Calls are netted across the group of open positions. In other words, the realised and unrealised profits of one Transaction can be used or applied as Initial Margin or Variation Margin for another Transaction.

MARGIN CALLS

Your Broker will be notified of a margin call using ‘pop-up’ screens or screen alerts on the Trading Platform or via e-mail and in some cases by phone. Your Futures Broker will typically require you to log into the Trading Platform regularly when you have open positions to ensure you receive notification of any Margin Calls.

Your Futures Broker is under no obligation to contact you in the event of any change to the Margin Requirements or any actual or potential shortfalls in your Trading Account.

FAILING TO MEET A MARGIN CALL

Your Futures Broker will generally apply risk limits (referred to as Default Liquidation Thresholds) to ensure that the percentage of your Trading Account balance which you are using at any one time to satisfy Margin Requirements (Margin Utilisation) does not exceed certain pre-defined levels. If your Margin Utilisation exceeds the Default Liquidation Threshold for your Trading Platform, a Margin Call will generally be applied to your Trading Account. If you do not meet a Margin Call immediately, your Futures Broker may Close Out some or all of your open Transactions without notice to you.

The Default Liquidation Threshold is determined by your Futures Broker. It is implemented for risk management purposes, and may be varied by your Futures Broker at any time.

8. Risks of Trading in Futures

PRODUCT RISKS

CHANGES IN THE PRICE, VALUE OR LEVEL OF THE UNDERLYING INSTRUMENT

Trading in the Futures Contracts and Futures Option Contracts involves a high degree of risk. It is important that you carefully consider whether trading Futures Contracts and Futures Option Contracts is appropriate for you in light of your investment objectives, financial situation and needs.

If there is an adverse change in the price of the Underlying Instrument, you will be required to immediately transfer additional funds to your Futures Broker in order to maintain your position if you do not have sufficient Net Free Equity in your Trading Account. Those additional funds may be substantial. If you fail to provide those additional funds immediately, your Futures Broker may Close Out some or all of your open positions. You will also be liable for any shortfall in your Trading Account balance following those closures.

OTHER VARIABLES THAT COULD LEAD TO LOSS

The following is a description of some of the other significant risks associated with trading the Futures Contract and Futures Option Contracts.

1

INCORRECT DETAILS ARE ENTERED:

If you incorrectly place your intended order you are responsible for the result of the incorrectly placed order, including all costs to close out the position and any resulting profit or loss on the outcome.

2

FOREIGN EXCHANGE RISK:

In instances where you trade in a Futures Contract or Futures Option Contract based on an Underlying Instrument priced in a currency other than your Trading Account Currency, your profit or loss will be determined by movements in the price of the Underlying Instrument and also by the impact of movements in the Exchange Rate. Adverse Exchange Rate movements could cause you to incur significant losses.

3

MARKET CONDITIONS:

Under certain market conditions it could become difficult or impossible to manage the risk of open positions by entering into opposite positions in another contract or to Close Out an existing position. Market conditions may also mean that the price of Futures Contract or Options Contract may not maintain their usual relationship with the value of the Underlying Instrument.

4

ORDER ACCEPTANCE RISK:

When you place an order (i.e. request to open or Close Out a position), your Futures Broker will have an absolute discretion whether or not to accept and execute such request. The effect of your Futures Broker’s discretion is that an order you give may not be executed and you may suffer loss (whether it be actual loss or an opportunity loss) as a result. Your Futures Broker is not responsible for such loss.

5

Stop Losses:

Stop loss orders are often used to attempt to limit or minimise the amount which can be lost on an open Transaction. Stop loss orders may not always be filled and, in any event, may not limit your losses to the amounts specified in the order.

6

TRADING ON A FOREIGN FUTURES EXCHANGE:

Participants in Futures Contracts and Futures Option Contracts on a Futures Exchange outside of your home country are subject to the rules of the Futures Exchange and the laws of the country in which that Futures Exchange is domiciled. If you trade on foreign Futures Exchanges you may not have the benefit of protective measures provided by your local laws

7

CO-MINGLING OF CLIENT MONIES:

Funds paid to your Futures Broker by you are first deposited into a Client Trust Account maintained by your Futures Broker. This means that client funds (and property) deposited with your Futures Broker are held in safe keeping and segregated from their own funds (or property). But in the event your Futures Broker uses Trust Monies for personal or company purposes those funds may not be protected.

8

THE CONSEQUENCES OF A FAILURE BY THE INVESTOR TO MAKE A PAYMENT OR DELIVERY:

If the level of the Underlying Instrument moves against your position, you will be required to have sufficient Net Free Equity your Trading Account to meet your Margin Requirement in order to maintain your position. The amount of funds required may be substantial. If you fail to pay us immediately, your position may be Closed Out at a loss and you will be liable for any shortfall.

9

THE CONSEQUENCES OF ALTERING THE TERMS OF A DERIVATIVE OR TERMINATING A DERIVATIVE:

A Futures Exchange or Options Exchange may, in limited circumstances alter the terms of the Futures Contract or Options Contract. An example could include a corporate action in an underlying equity such as a share issue resulting in a change of terms to the Futures Option Contract.

ISSUER RISK

There are a number of risks that arise from the processes by which the derivatives are entered into or settled, including risks associated with using internet-based Trading Platforms. Such risks include, but are not limited to:

1

CREDIT WORTHINESS OF YOUR FUTURES BROKER:

As an investor in the derivatives offered under your Futures Broker, you will be exposed to the risk that they become insolvent and are unable to meet their obligations under the derivative.

TECHNOLOGY RISKS

There are a number of risks that arise from the processes by which the derivatives are entered into or settled, including risks associated with using internet-based Trading Platforms. Such risks include, but are not limited to:

1

Risks related to the use of software and/or telecommunications systems such as software errors and bugs;

2

Delays in telecommunications systems;

3

Interrupted service;

4

Data supply errors; and

5

Faults or inaccuracies and security breaches.

A disruption to a Trading Platform could mean you are unable to trade in Futures Contracts and you may suffer a financial loss or an opportunity loss as a result.

9. Styles of Futures Trading

Today Futures Traders have the ability to create income from Futures Trading in a number of ways ranging from active to passive.

DISCRETIONARY TRADING

Discretionary Trading can be an active approach to trading Futures. It involves making your own decision about the direction a Futures Market might take and placing orders via your online platform manually (in general) in an attempt to profit from short term price fluctuations. This is an active approach to trading that is very hands-on and involves monitoring the markets on an intraday, daily or weekly basis. The advantage of Discretionary Trading is that the human brain can assess the impact of variables outside the data made available to a computer program, such as qualitative analysis of fundamental data, external data sources like bank economic forecasts and last, but not least the superior capability of the human brain when it comes to pattern recognition. The disadvantage of discretionary trading is the impact of fear, greed, and ego on the decision-making process, meaning even discretionary traders can benefit from a set of guidelines covering trade setups and risk management.

HYBRID APPROACH

Hybrid approaches to trading can also be utilised, and possibly with more success than each style of trading on its own. This can include making an assessment on a Futures Markets underlying conditions based upon fundamental research, valuations and forecasts from economists, Commitment of Trader (COT) reports, sentiment or other external information and then utilising a suitable type of trading system to enter and exit the market automatically according to your view. For example say you expect the US Stock Market to fall you might choose a trading system that only trades the short side of the market until your view is realised, then you’d switch it off. The other advantage is if your view does not materialise utilising a trading system might result is smaller losses than simply being married to a particular view and holding onto losses in that Futures Market.

SYSTEMS TRADING

Also known as Algorithmic Trading, RoboTrading and Autotrading. Systems Trading involves the use of a computer program, which makes the buy and sell decisions based upon price action, technical indicators or quantitative analysis. The advantage, if you can find a reliable trading system is that you can automate the trading on your account and the computer will monitor the markets placing orders on your behalf, which means you can devote more time to research or other endeavours. The disadvantage of trading systems is that their success rate is not high, and they’re subject to technology risks so require oversight.

COPY TRADING

Perhaps the most passive form of Futures Trading is known as Copy Trading or Mirror Trading. Copy Trading is the process of finding other traders with a track record and following their trades automatically on your account. Essentially you become your own portfolio manager and select a variety of traders to copy on your account. Copy Trading services allow you to view the track record of other traders and if you’d like to follow a trader simply click Copy on the desired strategy, enter your account number and the trades will be automatically copied into your account. You can start and stop copy trading at any time.
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Wealth Magnet Pty Ltd t/a My Trading Advisor (ABN 52 618 868 830) is a Corporate Authorised Representative  (CAR 1255231) of Grange Financial Services Pty Ltd (AFSL 488609). The information contained in this website does not constitute personal financial product advice. The information provided is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you obtain your own independent professional advice before making any decision in relation to your particular requirements or circumstances. The decision to invest or trade and the method selected is a personal decision and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of this product for your circumstances. Please be aware that all trading activity is subject to both profit & loss and may not be suitable for you. Past performance of any product discussed is not indicative of future performance. (We urge that caution should be exercised in assessing past performance. All financial products are subject to market forces and unpredictable events that may adversely affect their future performance). All financial products are subject to market forces and unpredictable events that may adversely affect their future performance).We may at times refer to third parties. Details of these third parties have been provided solely for you to obtain further information about other relevant products and entities in the market. Wealth Magnet has no control over the information third parties have, or the products or services offered, and therefore make no representations regarding the accuracy or suitability of such information, products or services. You are advised to make your own enquiries in relation to third parties. Our inclusion of any third party content is not an endorsement of that content or the third party.

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