Basic trading: Why you should know this ( even if it seems complicated )

Quick Translation – What You Really Need to Know

Basic trading is not just something for professionals. Whether you are a farmer looking to manage future grain prices or a crypto enthusiast searching for arbitrage, this is for you. Essentially, it is about predicting how the distance will change between what something sells for today (spot price) and what it will be in the future (futures price).

— The difference between the spot price and the futures price is called basis – that is precisely the playing field for traders. — Some try to make a profit, while others protect themselves from losses. Both groups use the same logic. — It works for farmers, bondholders, and also for bitcoin traders. — But beware: basic trading has its pitfalls and it's not a game for those who do not understand the market.

Without Theoretical Fuzz: How Basic Trading Really Works

Imagine a real-life situation. You are in a store, apples cost 1.50 USD each. However, your friend tells you: “You know, in a month I will send you apples for 1.30 USD each.” The difference? 20 cents. This is exactly what traders call the spread.

In financial markets, it is the same, just more inquisitive. You have a spot price ( that you pay immediately and now) and a futures price ( that is reserved for later). These often differ. Why? Because the world is not simple – storage, interest rates, people's expectations, all of it influences how prices move.

For example, corn today: 5 USD per bushel. Corn in three months according to the futures market: 5.50 USD. The basis is –0.50 USD (futures is more expensive). Now you might ask yourself: “Will it be the same in a month?” If you think the spot price will jump higher than the futures price, you go long on the basis. If you think it will change in the opposite direction, you go short on it.

Two Ways to Play the Basic Trading Game

Longing the Basis: A bet that the spot price will hold or rise more than the futures. Typically, when you expect increased demand or supply issues.

Shorting the Basis: Opposite round – you believe that futures prices will rise faster than spot prices, or that the spot price is falling. More risk, greater potential profit.

What do traders pay attention to? Market trends, historical data, and macroeconomic signals. It's not about rolling dice, although sometimes it feels that way.

Why is basic trading even discussed?

For those who manufacture or sell (providers)

Imagine a farmer with wheat. In three months, he will harvest 10,000 bushels. However, he knows that prices may fall. The solution? He sells a futures contract now – locks in his price. The bakery similarly – knows that it will need wheat next month, so it secures it through futures. Both sleep more peacefully, knowing what their costs will be.

For those who want to get rich (speculators)

Speculators are a different breed. They don't want to produce wheat – they want to profit from its price movements. They study, analyze, and when they feel that the right moment has arrived, they jump in. If their strategy proves correct, they earn money. If they're wrong, they lose.

Where is this all happening?

Commodities – classic game board

Farmers, miners, energy workers. Basic trading in oil, grain, gold – everywhere there is a current price and a future price. Here it is the most popular and understandable.

Bonds – for people with a cool head

In bond markets, traders observe the differences between spot bonds and financial derivatives – for example, Credit Default Swaps (CDS). If the CDS spread is smaller than the bond spread, arbitrage arises. Excitement for bankers, boredom for laymen.

Cryptocurrencies – a new player on the field

Bitcoin, Ethereum - all have a spot price and futures contract. And when the spot Bitcoin ETF launched in 2024, traders began to massively examine the difference between how BTC is sold immediately ( on the spot market ) and how it is negotiated for the future ( CME futures ).

How to practically: example with Bitcoin

Let's say Bitcoin is priced at 80,000 USD on the spot market. But the futures contract for delivery in three months? It's more expensive – 82,000 USD. The difference: 2,000 USD.

Trader Jozef sees this. What is he doing?

Strategy: Buy BTC for 80,000 USD on the spot market. At the same time, sell a futures contract at 82,000 USD. This locks in a profit of 2,000 USD (minus fees and costs).

Logic: Jozef believes that this $2,000 difference will gradually decrease – either because the spot price will go up or because the futures price will fall. When the prices converge, Jozef will take the BTC he bought and fulfill his futures obligations. Done.

Result: If everything goes according to plan, Jozef will effectively Lock In a profit of 2,000 USD without having to wait or worry about whether BTC jumps to 100,000 or falls to 50,000. Arbitrage – pure profit.

What should traders prepare for? The risks are as real as the profits.

Basic risk – when things do not go according to plan

The farmer decides to insure his corn. However, the weather changes – drought causes a lot of grain to fall. Prices are rising in an unexpected way. The farmer's futures contract may end up underwater because the spot price is rising faster than anyone expected.

Liquidity – when you cannot enter or exit

In the described market, there are moments when few people are interested in buying or selling. Prices go all over the place. Traders find themselves in a trap – they want out, but not at the prices they want. This is especially painful during market crises or with certain exotic commodities.

Complexity – it is not a game for amateurs

Understanding the basics of trading: spot price, futures, basis, trend analysis, risk management. For a beginner, this can all be too much. People make mistakes, and mistakes cost money.

The Final Word: what to take from this

Basic trading sounds like something for professionals, but it's not. It's simply logic: the difference between the price now and the price in a moment. Whether you're a grower wanting to know what the costs will be, an investor looking for an opportunity, or a speculator seeking profit.

If you understand basic trading, you will understand more about the markets. You will know how professionals protect themselves, and you may learn how to take advantage of it.

But beware: basic trading without knowledge is not a path to wealth. It is a path to losses. Learn the basics first – only then should you play.