The risks of futures trading in Hong Kong

Futures trading in Hong Kong is the process of speculating on the future price of an underlying asset, which is done by buying or selling a futures contract, which is an agreement to buy or sell an asset at a specified price date in the future.

Futures contracts in Hong Kong are traded on futures exchanges, and the prices of these contracts are determined by supply and demand. Futures traders can take either a long or short position in a contract, depending on whether they think the underlying asset's price will rise or fall.

 

Futures trading is a popular way to speculate on commodities, such as oil, gold and silver, and financial instruments like currencies and interest rates. It can be a risky form of trading, as prices can move sharply and unexpectedly. However, proper risk management can also be a profitable way to trade the markets.

Risks associated with trading futures in Hong Kong

For these reasons, investors need to be aware of the risks involved in futures trading before entering any trades.

The potential for loss

The first risk to be aware of is the potential for loss. Because futures contracts are traded on margin, investors can quickly lose more money than they invested.

The amount of margin required to trade a futures contract varies depending on the asset being traded and the size of the contract. For example, the margin requirements for trading gold futures contracts are generally around 5-10%, which means that an investor would only need to put down $500-$1,000 to trade a gold futures contract worth $5,000.

While the initial margin requirements may seem relatively small, it is essential to remember that futures contracts are leveraged instruments, which means that a small move in the underlying asset price can result in a significant loss or gain for the investor.

For example, an investor buys a gold futures contract for $5,000 with a 5% margin, which means that the investor only needs to put down $250 to trade the contract. If the price of gold increases by just 1%, the value of the contract will increase to $5,050. The investor's profit would be $250, or a 100% return on investment.

However, if the price of gold decreases by 1%, the value of the contract will decrease to $4,950. The investor would then owe $50 to their broker, known as a margin call.

If the price of gold continued falling and the investor was unable to meet their margin calls, they would eventually be forced to liquidate their position, resulting in a 100% loss on their investment.

The leverage involved in futures trading can amplify both losses and gains. For this reason, it is essential for investors always to use stop-loss orders when entering into any trades.

Using stop-loss orders

Stop-loss orders limit an investor's losses by automatically selling a position when it reaches a specific price. By using stop-loss orders, investors can protect themselves from the full brunt of a market downturn.

However, it is essential to remember that stop-loss orders are not infallible. They can be triggered by temporary price declines that may not indicate the overall trend. For this reason, many investors choose to use trailing stop-loss orders.

A trailing stop-loss order is a dynamic stop-loss order that automatically adjusts as the price of an asset moves. For example, an investor buys a gold futures contract for $5,000 and sets a trailing stop-loss order at $4,750, which means that if the price of gold falls to $4,750, the position will be automatically sold.

The bottom line

Futures trading is a risky business. However, by understanding the risks involved and using stop-loss orders, investors can protect themselves from the potential for significant losses. Before investing money in futures, beginners should contact an online broker such as Saxo Bank and trade on a demo account to hone their skills before placing real trades.

 

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