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Trading Derivatives

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Trading Derivatives

http://profitabletradingtips.com/forex-trading/trading-derivatives

Trading derivatives instead of the underlying equity provides a range of benefits and carries a number of risks. Derivative contracts can be used to

Gain leverage
Hedge Risk
Speculate in various markets
Trade markets where there is, in fact, no underlying equity
Provide options for purchase or sale in uncertain market situations
Profit from providing a kind of insurance for other traders

Options and More

Trading options, futures contracts, credit derivatives, forwards, foreign exchange derivatives or interest rate derivatives are all ways to reduce risk. In each case traders learn to use both fundamental and technical analysis to obtain their objective and avoid problems. Because of the high degree of leverage often used in trading derivatives it is possible to earn a large amount of money with a single trade. It is also possible to lose substantial amount of money in poorly thought out trades or over leveraged trades in which the trader does not accept and cut his losses in a timely manner. The Barings Bank disaster in 1995 is a prime example of an options trader trying to cover his losses and waiting for a market turnaround to save him from badly set up sales of options contracts. By the time the trader was picked up by police in Singapore the British bank that had been an institution for hundreds of years was bankrupt! However, if in trading options you remain on the side of the buyer you will commonly limit your risk and still be able to gain handsome profits for your work of analysis and timing of trades.

Interest Rate Derivatives

The biggest market for trading derivatives is interest rate derivatives. An interest rate derivative is the right to receive a given amount of money at a given interest rate. There are interest rate swaps totaling hundreds of trillions of dollars each year. Primarily this market is used by large companies to control their cash flows. Just as the small trader uses technical analysis to anticipate market prices large companies use technical analysis indicators to anticipate interest rate changes.

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Trading Derivatives

  1. 1. www.CandlestickForums.com Trading Derivatives
  2. 2. www.CandlestickForums.com Trading derivatives instead of the underlying equity provides a range of benefits and entails a number of cautions.
  3. 3. www.CandlestickForums.com Derivative contracts can be used to gain leverage, engage in hedging or risk reduction, speculate, trade markets where there is, in fact, no underlying equity, to provide options for purchase or sale in uncertain market situations, and to profit from providing a kind of insurance for other traders.
  4. 4. Before We Continue… Click the links below to get your FREE training materials. Free Weekly Investing Webinars Don’t miss these free training events! http://www.profitableinvestingtips.com/free-webinar Forex Conspiracy Report Read every word of this report! http://www.forexconspiracyreport.com
  5. 5. www.CandlestickForums.com Options training with Stephen Bigelow will provide excellent insight into options trading and trading of other derivatives for the beginner.
  6. 6. www.CandlestickForums.com Traders engage in both fundamental and technical analysis of the underlying in order to profit in trading derivatives.
  7. 7. www.CandlestickForums.com Trading in options contracts, futures contracts, forwards, credit derivatives, foreign exchange derivates, and, the largest market, interest rate derivatives, can be done to reduce investment risk.
  8. 8. www.CandlestickForums.com However, the extensive leverage involved in some derivative trading can result in huge trading losses leading to such disasters as the $1.3 Billion in trading losses that bankrupted Barings Bank in 1995.
  9. 9. www.CandlestickForums.com Derivatives are financial instruments whose value is based on the value, usually the anticipated future value, of underlying stocks, commodities, futures, or things like the weather or energy credits.
  10. 10. www.CandlestickForums.com Derivatives can be reasonably simple and they can be very complicated.
  11. 11. www.CandlestickForums.com Derivative markets are set up to help mitigate risk in trading but in doing so they provide the opportunity for the speculator to make money on market fluctuations.
  12. 12. www.CandlestickForums.com Using fundamental analysis of the underlying equity as well as technical analysis of market movement traders can profit handsomely.
  13. 13. www.CandlestickForums.com The largest market for trading derivatives is interest rate derivatives.
  14. 14. www.CandlestickForums.com An interest rate derivative is the right to receive a given amount of money at a given interest rate.
  15. 15. www.CandlestickForums.com In mid 2009 there were $437 trillion in over the counter interest rate contracts and $342 trillion in interest rate swaps.
  16. 16. www.CandlestickForums.com Primarily this market is used by large companies to control their cash flows.
  17. 17. www.CandlestickForums.com Just as the small trader uses technical analysis to anticipate market prices large companies use technical analysis indicators to anticipate interest rate changes.
  18. 18. www.CandlestickForums.com Trading derivatives also occurs in the Forex market.
  19. 19. www.CandlestickForums.com However, derivative trading is not buying and selling in a given currency pair but, rather, the use of Foreign exchange options, Forex swaps, currency futures, currency swaps, foreign exchange hedges, and binary options.
  20. 20. www.CandlestickForums.com The first and primary use of trading derivatives is hedging business risk.
  21. 21. www.CandlestickForums.com For example, a gold mining operation will sell gold futures, promising to deliver a given quantity of refined gold a year hence at an agreed upon price.
  22. 22. www.CandlestickForums.com In this way the company mitigates the risk of a market reversal in the price of gold.
  23. 23. www.CandlestickForums.com Likewise agricultural producers will sell corn futures, soybean futures, engage in live cattle commodity trading and the like to obtain a guaranteed price on all or part of their anticipated production.
  24. 24. www.CandlestickForums.com Buyers of a commodity will, likewise, purchase options futures contracts in order to guarantee the cost of a product.
  25. 25. www.CandlestickForums.com In trading derivatives the trader can use time honored tools such as Candlestick chart analysis to identify Candlestick pattern formations which will in turn predict changes in derivative prices.

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