How to understand futures contracts? Basic knowledge that traders must know.

Futures contracts may seem complex, but in reality, they are a “commitment to trade in the future.” Simply put, it is a protocol signed by both parties agreeing to exchange a specific asset at a predetermined price at some point in the future. This type of derivation tool is widely used for two main purposes: hedging risk and seeking profit.

How do futures contracts work?

After opening a futures contract, traders need to clarify three key points: the quantity of the trading asset, the transaction price, and the delivery deadline. When the contract reaches its expiration date, traders must complete the delivery of assets or funds as agreed. However, there's a catch—most traders do not wait for the contract to actually expire. They usually operate in the opposite direction in the market, closing their positions to avoid the obligation of physical delivery.

Three Options for Futures Trading

After obtaining a futures position, traders face three options:

Route One: Hedging Close — This is the most common practice. Create a transaction of equal value and in the opposite direction to offset the original position and close it quickly.

Route Two: Roll Over Operation — If you are still optimistic about the market, you can first close the current contract and then open a contract for the next period. This way, you can “extend” the original position into a more distant future.

Route Three: Direct Settlement — Hold until the contract matures and complete the final exchange of assets or funds on the settlement date.

What is the difference between futures and other derivations?

Futures are often compared with options, forward contracts:

• Options only give you the right to choose (you can buy or not buy), while futures are a mandatory obligation.
• Forward contracts are more flexible, usually being private agreements with customizable terms; futures, on the other hand, are highly standardized, conducted on formal exchanges with stricter rules.

What assets are covered in the futures market?

The underlying assets of futures contracts are diverse: fiat currencies, stocks, indices, government bonds, cryptocurrencies (including Bitcoin), and even oil, precious metals, and agricultural products can all be traded through futures.

Distinguish Between Two Settlement Methods

Physical Delivery — The actual delivery of the physical asset to the buyer upon expiration.

Cash Settlement — Involves no physical transfer, only the exchange of corresponding cash. For example, CME's Bitcoin futures are in a cash settlement model, trading contracts based on the market price of Bitcoin, rather than actual Bitcoins.

How do traders analyze futures trends?

To profit in the futures market, traders usually take a dual approach: using technical analysis to look at charts, indicators, and historical trends; and combining it with fundamental analysis to pay attention to market news, policy changes, and supply-demand relationships. Combining both can improve the win rate.