Futures Trading & Terminology Explained
Trading futures is not for beginners and should only be attempted by experienced traders with a strong understanding of the market as a whole and especially a strong understanding of Risk Management & Trading Psychology.
Below I have explained some of the Risks involved in Trading Futures:
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Liquidation
When liquidation occurs your position is forcibly closed due to not having sufficient balance to keep your borrowed positions afloat. When trading futures on high leverage, your losses can quickly reach double digit percentages and if they exceed the remaining balance in your account you can be liquidated.
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Leverage
Leverage, or to be leverage refers to the act of borrowing money off the exchange to trade. When a trader has insufficient balances to cover their leveraged position left in the account a liquidation call can occur. Keep track of your margin ratio and keep it low to prevent liquidations, and use risk management techniques.
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Volatility
Market volatility can be high in emerging markets, and many traders love volatility for its big swings to profit, but in futures trading considering losses are potentially heightened by leverage volatility can become a dangerous thing to a trader. In volatile markets market stop losses can often trigger much further than the triggered price adding to losses, or even resulting in liquidation.
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Stop Hunting
Stop hunting occurs when large entities such as corporations, or “Whales” purposefully target the stop loss orders of traders, knowing that at these areas when a large amount of orders is triggered a contrarian position can be acquired by these entities by buying or selling into a large stop trigger event, by doing this they can easily buy or sell a large amount of an asset when also having very little affect on the price in the short term.
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Exchange Downtime
During extreme market movements sometimes exchanges can crash and traders are unable to login, close or open positions on the exchange, Liquidation events, Market Crashes, Manipulation, Volatility, Stop Hunting may all come into play when Exchange Downtime occurs and it is a risky endeavor to be positioned in borrowed money when a exchange is offline.
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Market Crashes
Market Crashes, Black Swan Events etc. can occur frequently in emerging markets, infrequently in traditional markets. During Market Crashes huge cascades of liquidations can occur taking out over leveraged long traders.
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Manipulation
Stop Hunting is also a form of Market Manipulation. Sometimes vested interests work together to hold down the price of an asset or push up the price to trigger orders, and shake out retail players.
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Overtrading
Due to the heightened losses applicable from borrowed money, overtrading on futures/leverage can quickly wipe out your balance, it is key that you understand how to size your trades correctly as well as managing your risk and mental state to avoid this occurring.
Below I have explained some of the Risks involved in Trading Futures:
-------------------------
Liquidation
When liquidation occurs your position is forcibly closed due to not having sufficient balance to keep your borrowed positions afloat. When trading futures on high leverage, your losses can quickly reach double digit percentages and if they exceed the remaining balance in your account you can be liquidated.
-------------------------
Leverage
Leverage, or to be leverage refers to the act of borrowing money off the exchange to trade. When a trader has insufficient balances to cover their leveraged position left in the account a liquidation call can occur. Keep track of your margin ratio and keep it low to prevent liquidations, and use risk management techniques.
-------------------------
Volatility
Market volatility can be high in emerging markets, and many traders love volatility for its big swings to profit, but in futures trading considering losses are potentially heightened by leverage volatility can become a dangerous thing to a trader. In volatile markets market stop losses can often trigger much further than the triggered price adding to losses, or even resulting in liquidation.
-------------------------
Stop Hunting
Stop hunting occurs when large entities such as corporations, or “Whales” purposefully target the stop loss orders of traders, knowing that at these areas when a large amount of orders is triggered a contrarian position can be acquired by these entities by buying or selling into a large stop trigger event, by doing this they can easily buy or sell a large amount of an asset when also having very little affect on the price in the short term.
-------------------------
Exchange Downtime
During extreme market movements sometimes exchanges can crash and traders are unable to login, close or open positions on the exchange, Liquidation events, Market Crashes, Manipulation, Volatility, Stop Hunting may all come into play when Exchange Downtime occurs and it is a risky endeavor to be positioned in borrowed money when a exchange is offline.
-------------------------
Market Crashes
Market Crashes, Black Swan Events etc. can occur frequently in emerging markets, infrequently in traditional markets. During Market Crashes huge cascades of liquidations can occur taking out over leveraged long traders.
-------------------------
Manipulation
Stop Hunting is also a form of Market Manipulation. Sometimes vested interests work together to hold down the price of an asset or push up the price to trigger orders, and shake out retail players.
-------------------------
Overtrading
Due to the heightened losses applicable from borrowed money, overtrading on futures/leverage can quickly wipe out your balance, it is key that you understand how to size your trades correctly as well as managing your risk and mental state to avoid this occurring.
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