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The futures market is used to speculate about the direction of the price of a particular asset or commodity.

Take gold, for instance. Currently gold is in the midst of a speculative bubble, with the price of an ounce of gold set at over $1,000. Trading this kind of market means having an iron stomach for risk as well as the ability to withstand extreme volatility.

Futures are derivatives that are traded on specifically dedicated exchanges.

Futures can be derived from any asset class, whether the class is stocks, bonds, commodities, foreign currencies, etc. Futures derived from commodities are the most talked about form of derivatives, since the recently burst bubble in commodities greatly increased speculation in assets such as oil. Oil futures are traded like any other futures contract: opening a long position involves simply buying oil futures contracts and waiting for the price of oil to rise, while opening a short position involves borrowing futures contracts from brokers and selling them, waiting for the price of oil to fall.

Both long and short positions can make or lose large amounts of money due to the fact that derivatives are so highly leveraged. For example, ten oil futures contracts bought when the price of oil was $10 would be actually worth several times that amount, around $10,000 or so. If the price of oil rose to $25, a gain of $15, the trader could sell his contracts for a profit of $150,000! This is because, with a long position, for every dollar the price of an underlying asset rises, the trader’s contracts increase in value by $1,000 multiplied by the number of contracts he has.

Trading oil futures involves either opening a brokerage account or buying a seat on a futures exchange. Usually, the cheapest option is to open a brokerage account. The trader can purchase or borrower as many contracts as his finances allow. This puts him in a great position to open and close as many trades as he wants.