A future is a financial contract which requires the buyer to purchase an asset at a previously determined date and price. The asset may by an actual commodity or a financial instrument. All the details are defined within the contract, including the quality and quantity of the assets, making the transaction standardized and simpler to understand. How the contract is settled depends upon the agreement and may involve a physical asset or cash.

The key difference between options and futures is that in an option the buyer has the choice, or right, to make the purchase but isn’t required to do so. With a futures contract, the holder is obligated to fulfill the terms of the contract.

The futures market is characterized by individuals who want to hedge or speculate on the price movement of the underlying asset. The goal of the contract is to minimize the risk to both buyer and seller. To minimize credit risk, traders must post a margin – an initial amount of cash, typically 5%-15% of the contract’s value – and the trades are regulated by a clearing house.

It is actually rare for the goods mentioned in a futures contract to actually change hands between the members of the contract. This is the case since hedging and speculation benefits can be enjoyed without holding on to a contract until it expires. Take for example a case where you are long in a futures contract, or in the buying position, you could also go short in a similar contract to balance your position.

The Commodity Futures Trading Commission (CFTC) is a Federal agency which was established by the Commodity Futures Trading Commission Act of 1974. The Commission replaced the Commodity Exchange Authority. Its role is to ensure the open and efficient operation of the futures and options markets.

Futures have been traded for over 150 years and have functioned under the auspices of the U.S. Government since the 1920s. Only recently have futures expanded beyond their agricultural roots, moving into government securities and stock indices as well as foreign currency.

Five market commissioners are appointed by the president and are subject to Senate approval. The commissioners serve a five year term, and are elected in a staggered manner. No more than three commissioners may be of one political party at a time. Their role is to protect investors from unscrupulous parties which would manipulate the market and/or engage in abusive trade practices and fraud.

The CFTC has undergone many changes since 1974, the latest of which took place when Congress passed the Commodity Futures Modernization Act of 2000. This Act instructed the SEC and CFTC to put together a joint regulatory body for single-stock futures – those where only one stock was the underlying asset. Unfortunately, the CFTC has been challenged by the SEC many times in an attempt to usurp regulatory jurisdiction.

Part of the role of the CFTC is to encourage competition and efficiency as well as integrity. Effective supervision allows the CFTC to ensure that future markets will continue to provide a means for price discovery while offsetting price risk.

In order to understand what a trigger line is you have to understand what the moving average convergence divergence (MACD) theory is. The theory is a popular index used in the technical analysis of short term market momentum. It allows investors to quickly spot increasing short term momentum. Traders watch to see the short term moving average surpass the long term movement average as a signal of upward movement.

The trigger line is also called the signal line. When the trigger line goes above the established MACD line, traders buy, and when the line falls below the MACD line investors sell.
Different formulations are used to determine the value of long and short term averages. The most common default settings are 12 and 26 days. The centerline is calculated by evaluating the difference between a short term moving average and a long term moving average.

The advantage is that this kind of analysis can give traders data which is easy to interpret. Investors can use the information to see if short term trends are moving in their favor. On the down side, the delay between reading the data and making a purchase or sale can mean that the trader is buying when prices are surging and selling when they are dropping. This experience is called ‘whipsawing’ and can occur several times before a trader hits the timing properly.

Even with the potential risks the MCAD is considered a good tool for short term traders. Learning how to read this instrument correctly is an important skill for any investor.

The process of technical analysis doesn’t attempt to predict intrinsic value of a stock; rather it is used to potentially figure out how the stock will move in the future. These calculations are based upon charts, market activity, past price and the volume of sales.

Analysts believe that past performance of a stock or market is a good indicator of how the future will unfold. Unlike a fundamental analyst, who would evaluate each product available for sale before making a decision, the technical analyst is directed by the patterns and activity she sees in the broader scope.

A fundamental analyst searching for clues as to which stock to purchase would look at earnings, dividends, advances and research. A technical analyst would be more interested in how investors feel about the same developments and if the investors had the ability to back up their opinions. Technical analysts are more likely to use tools, such as charts, to identify trends in order to profit by them.

Technical analysts believe that the market moves in trends. Since, they argue, history consistently repeats itself, if you understand the trends you can plan your purchases and sales to maximize profits based upon those trends.

Different markets are more inclined to use one sort of analysis versus another. For example, in the Forex market technical analysis is more popular. Whether these methods work for interpreting and anticipating market movement is debatable. While investors claim to do well employing this kind of analysis, studies only show about 50% of these strategies offer a positive result. However, since investors are notoriously reluctant to share their data, the studies may not present an accurate picture.