How Speculators Trading The Futures Market Takes All The Risk

ups and downs of speculatorsSpeculators trade the markets because of the perception of an easy living, becoming seduced that trading futures or the Forex are great opportunities to earn fast money, but if they’re not trading to their strengths, they’re at a disadvantage and likely to lose.

What needs to be distinguished is, are you playing to your advantage, or just being an opportunity seeker. A divide exists between the two. If you’re just looking for an easy way to make a quick buck in your spare time, then you’re leaving yourself exposed to losing.

There are parallels when it comes to trading the markets and gambling, and your ultimate long-term success will be determined by how you approach it. Trading to your strengths becomes critical.

In any pursuit, there’s competition, so you always need to make sure that you’re playing to your favor and not your weaknesses. The objective is winning profit as it’s a zero-sum game, so you need every advantage.

Beware Opportunity Seekers
The fault of opportunity seekers is that they’ll chase after the luck of probability, solely because they sense there’s profit to be made, and once they learn a system, that they’ll succeed.

In business, long term success is built with an end goal in mind, a vision based of what the business will look like once it’s mature.

This becomes critical since the company needs to stay on course that’s consistent with its mission statement while it is growing. Distractions only serves to slow it down or even halt the progress.

Working To Strengths
Successful businesses know when to pursue an opportunity, and know when to say no. Saying “no” keeps them focused where competitive advantage sets in.

When gambling, a poker player will remain playing at the poker table, and won’t jump to the roulette table once they start losing or hear someone just won big. They may do so for entertainment, but not to win money.

A real estate investor won’t necessarily do well in trading the markets as they’re completely different industries. Just because they know how to flip properties for profit, doesn’t mean they have the aptitude to trade the Futures market.

Experienced traders should be hesitating jumping from one trading system to another. A buy-and-hold position trader should be wary of jumping into day-trading, or trading a different market.

Different Markets Different Strategies
Each strategy or industry has different skills associated with it, along with different emotional requirements.

So if you’re new to market speculation or not yet proficient, still learning the skills to trade, then you need to seek out help.

The learning curve can be costly, and if you don’t have the time or a system, you can’t expect to be profitable, this because you lack the proper mindset that’s needed to be a winning trader.

The Basics Of Speculation
Speculators get a bad rap. Most find there’s no value in “gambling” on commodity or currency prices. What it comes down to is understanding the critical role that they play in the investment cycle.

A farmer plants his corn, and then sees the price of corn drop so low by the time he harvests, that he can lose all his profits, or at times go bankrupt, so he needs to protect himself by hedging.

Assume that in June the farmer expects to harvest at least 100,000 bushels of corn in September. By hedging, he can lock in a secured price for his corn in June for the September harvest, protecting himself against the possibility of falling prices.

The speculator, who’s on the other side of the contract, will profit by selling the contract if the price goes up, or will lose money if the price goes down. The farmer is protected regardless of which way the price goes.

The More Speculators The Better
The Futures market can benefit from as many speculators buying and selling contracts as possible, this to stabilize the price of commodities.

For instance, a gas station could then theoretically guarantee you the consumer, a set price for a gallon of gas for the entire year. Every industry would love this type of certainty.

You buy a “contract” so you can get your next 1000 gallons of gas at a set guaranteed price of $2.50 per gallon, this regardless of what happens in the commodity markets.

So you put down a small deposit, and then pay as you go. All you know for certain is that your next 1000 gallons will be at $2.50, guaranteed.

The Role Of The Speculator
A speculators role is backing the other side of this contract on the Futures market. Their role is to sell the contract.

If the price of gas happens to fall to $1.80, you’ll still be required to pay $2.50. The speculator then sells his contract for $1,800, realizing a loss of $700 on the contract.

If the price rises to $3.30 however, the speculator then sells the contract for $3,300, while you still paid $2,500, so the trader profits $800. There’s no risk on you, as all the risk is on the speculator.

The Risk Of The Speculator
A company that makes cereal needs stable commodity prices, this in order to plan for future production. They can’t proceed if the price of wheat suddenly triples, making their consumers unwilling to buy expensive wheaties.

So they buy “contracts” for future delivery, this at a set price, so they can manufacture within that price point, while the speculators takes all the risk.

Every industry that’s based on commodities can go through extreme swings in profit, and it’s the speculators who burdens the risk on their behalf.

Without speculators, there would be dramatic price swings in consumer goods. What the speculators provide is the flexibility, so industry could plan ahead.

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