what are the risks associated with trading futures?

Answer 1

if the prices drop, you loose money

Answer 2

rading futures and spot foreign currencies is a challenging and potentially profitable opportunity for disciplined and experienced investors. However, before deciding to participate in the futures and FX markets, you should carefully consider your investment objectives, level of experience, and risk appetite. Most importantly, do not invest money you cannot afford to lose. Futures and forex trading via the Internet entails substantial risk, including, but not limited to, system failures, market volatility and illiquidity, and the possibility of changing political and/or economic conditions that may substantially affect the price or liquidity of a currency.

An enticing aspect of trading futures and currencies is the high degree of leverage available. The leveraged nature of futures and forex trading means that any market movement will have a disproportional effect on your deposited funds. This may work against you as well as for you. The possibility exists that you could sustain a total loss of initial margin funds and be required to deposit additional funds to maintain your position. I

Answer 3

Simon is kinda on the right track, but I don't think he really answered your question fully. And Dredude is talking about the FX market. You're question is about the futures market.

The biggest risk in futures trading is that you can lose more than you have. For instance, if you buy $10,000 worth of a stock and the company goes belly up, the most you can lose is the $10,000 (unless you're trading on 2:1 margin, then you can lose $20,000). But in futures trading, the contracts are highly leveraged, meaning that a little money controls a lot of the underlying asset.

Let's take an example. Let's say you have a $10,000 account and you trade 1 wheat contract. The margin on wheat is $945 (margin in futures is different than margin in stocks. In futures, a margin is a good faith deposit. What happens is that the margin is set aside to cover the trade. It stays in your account, but it's just earmarked for the trade), and the Dec '06 wheat contract settled yesterday at $1.395.

So, what's happening is that of you're $10,000 - $945 is set aside to cover your wheat trade. Now, remember, the $945 covers 1 wheat contract. That contract controls $6,975 worth of wheat, leverage of 7:1 (1 wheat contract controls 5,000 bushels and at $1.395 per bushel, you get $6,975). Let's say that you believe wheat prices are going to go down further, so you short wheat at $1.395. But, let's say there is a freak weather pattern that destroys a lot of the wheat crop and the market really starts to rally and wheat shoots up. The situation was so bad that wheat went lock limit up say 5 days in a row (in futures trading, contracts have maximum daily price moves called a limit, if the limit is hit, then trading is suspended - futures can actually open at a limit position. Example, the daily limit on wheat is 30 cents, so if wheat is trading at $1.395 the previous day and opens at $1.695 the next day, it is already locked limit up, so trading is suspended right away. There is not limit on the spot month, only the back months). So, the Dec. 06 wheat contract opens limit up 5 days in a row. You shorted wheat at $1.395 and if it's went limit up 5 days in a row that would give wheat a price of $2.895 on the 6th day ($0.30 x 5 plus $1.395 beginning price). That translates into a $1.50 loss. Now remember, 1 contract is 5000 bushels, so that's $1.50 loss per bushel for a total loss of $7,500. Now only did you lose the initial margin of $945, but you lost an additional $6,555. Subtract the $7500 loss from your account equity of $10,000 and now your account is down to $2,500, a 75% loss of account equity.

To sum it up, with futures contracts there is the potential for unlimited losses whether you are long or short.

Anothe risk is liquidity. Some contracts have high liquidity like the Eurodollar and the S&P 500. But other contracts like lumber are thinly traded. You want to stick to high liquidity contract because if you need to get out of a trade, you want someone on the other end to take the opposite position.

Those are the two biggest issues that come to my mind, but the primary one is potential for unlimited losses.

Hope this helps.

Answer 4

You can buy $100,000 worth of currency with $1,000 margin in a standard account. This would be the purchase of one standard lot, at 100:1 leverage. Or you can get 200:1 leverage in a mini account. Wo, how much trouble can we get into now?

Just because you "can" doesn't mean you "should" trade with this kind of leverage. Trading stocks with 2:1 leverage is considered risky.

What most people don't seem to realize, is that you don't have to trade with leverage at all. Just put $100,00 in your account, buy one lot, and you have zero leverage. Or put $10,000 into a mini account and buy one mini-lot, or $1000 and buy one micro-lot.

You can see that by controlling leverage, trading the Forex doesn't have to be any more risky than trading stocks or any other investment.

The same holds true with all or any futures contract. You decide how much leverage to use, and how much risk to accept.

You can accept the maximum leverage like most people looking to "get rich quick," and blow out like 80%-90% of all traders, or you can play it smart and ease into it slowly, starting with a simulator while you're learning, probably for at least six months.

Answer 5

Generally speaking, what makes trading future different is borrowing. The portion of funds (say 90%) you borrow for trading can really hurt you in case the market moves against you.

Answer 6

It is like this. If you know how much you have, you are not rich. If you have to ask that question, you are over your head thinking about trading futures. Play the slots instead.