Does the Futures Market Predict the Future?

students

students

We have gotten a lot of emails from our students asking us what markets and what trading instruments we use to trade. One market we like trading in is the Futures Market and is not suitable for everyone due to the short term and volatile nature of the market. The Futures Market is an auction market that allows buyers and sellers to hedge/speculate on futures contracts. These are financial contracts that give a buyer an obligation to purchase an asset (and the seller an obligation to sell an asset) at a set price at a future point in time. Essentially, the futures market gives a good idea on what could happen price direction wise in the financial markets is and traders look to speculate on the future price direction.

For those who don’t trade the futures market, it lets traders (ie. stock traders) know what the market sentiment (positive or negative) is and they can position themselves properly to profit. Generally, the futures market is quite accurate in predicting the future direction of the market unless something material (ie. news) changes or a market catalyst (ie. new economic data) appears.

Recently, with all the news about the US Federal Reserve looking to possibly raise interest rates, traders are looking to speculate based on when the Fed will raise rates. Traders can get a better idea by looking at how the Fed Funds Futures contracts are trading. The Fed Funds Futures Market is a market that allows traders to speculate on how the US Fed handles US monetary policies, particularly on how they manage interest rates (raise/lower/keep the same). If the market views that there is a high likelihood of the US Fed raising interest rates then the future prices of these contracts could go up in value.

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Other Futures Markets like the US Stock Market Index Futures allows traders to speculate, for example how the US Stock Market will perform once the US Stock Market starts trading at the opening bell and onwards. A falling US Stock Market Index Futures Market will point to the US Stock Market opening lower. If this is the case, then investors and traders could be cautious in buying stocks right at the opening bell. It tells traders and investors the market sentiment (positive/negative).

Whether you decide to trade the Futures Market, it’s important to educate yourself and know that there is risk in trading futures due to its high leverage.

Mike Ser