Futures trading can be a high-risk investment, and traders need to be aware of the dangers before investing. Let’s explore some of the risks when you trade futures in the UK and provide some tips for mitigating these risks. So, if you’re considering getting started in futures trading, read this article first.
Volatility risk
The first risk is that of market volatility. Futures markets are highly volatile, and prices can move up and down very quickly. It means that you risk losing money if you don’t know what you’re doing. To mitigate the risk of volatility, you need to understand the market before you start trading. You should also use stop-loss orders, which will automatically sell your position if the price falls below a certain level.
Leverage risk
When you trade futures, you’re usually required to put down a deposit called a margin, and this deposit is usually a tiny percentage of the contract’s total value. However, because futures contracts are leveraged, this small deposit can expose you to much more significant sums of money. Your losses can also be much more significant than your initial deposit.
To mitigate this risk, you need to be aware of the risks of leverage and only trade with capital you can afford to lose.
Counterparty risk
When you trade futures, you enter into a contract with another party. This other party is called the counterparty, and there is a risk that they will not be able to fulfil their obligations under the contract. This risk can be mitigated by only trading with well-established and reputable counterparties. You should make sure that you understand the terms of the contract before you enter into it.
Liquidity risk
Another risk associated with futures trading is liquidity risk. It is the risk that you will not be able to find a buyer for your contract when you want to sell it. It can happen if the market is not liquid enough or has too much volatility. To mitigate this risk, you should only trade in well-established markets with high liquidity.
Settlement risk
When you trade futures, the contract will have a specified date on which it will expire. It is called the delivery or settlement date. If you still hold the contract when it expires, you will be required to take delivery of the underlying asset. However, there is a risk that the underlying asset’s price will move against you before the delivery date. When this happens, you may be required to make a loss on the contract.
To mitigate this risk, you should close your position before the delivery date if you think the underlying asset’s price will move against you.
Interest rate risk
Another risk we will discuss is interest rate risk. The risk is that the market’s interest rates will move against you. It can happen if you hold a long position in a futures contract and the interest rates go up. It will increase the cost of holding your position, and you may be required to make a loss on the contract.
To mitigate this risk, keep an eye on interest rates and close your position if they start to move against you.
Political risk
Another risk to consider is political risk, the risk that a change in government policy will affect the market you are trading in. For example, if you are trading commodities, a change in government policy could cause the commodity’s price to rise or fall. To mitigate this risk, you should keep up to date with political developments and only tradeproducts and markets you understand.
Economic risk
The final risk we will discuss is economical. It is the risk that an economic event will affect the market you are trading in. For example, if you are trading currencies, an economic event such as a change in interest rates could cause the currency’s value to rise or fall. To mitigate this risk, you should keep up to date with economic developments and only trade in markets you understand.
In conclusion, several risks are associated with trading futures in the UK. However, these risks can be mitigated by taking some simple precautions. If you’re thinking about getting started in futures trading, ensure you understand these risks before starting.
