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I recommend you first read the article below:
words ‘futures’ and ‘commodities’ are
often used together and describe the financial, physical and
more exotic instruments which are traded throughout the world.
Commodities are items like wheat, corn, gold and silver and
Cattle and Pork Bellies and Crude Oil.
a simplistic level when farmers take their crop to "market",
they are selling commodities. To understand how you, a speculator
fits into the picture, let's look at a commodity from start to finish.
Let’s look at a wheat farmer who planted his crop about three
months ago and in two months it will be ready to harvest.
After careful analysis, the farmer calculated that it had cost about
$2.50 a bushel to grow it including overheads. Anything he can sell
it for over $2.50 is profit.
now, wheat is selling for $3.00 a bushel but the price has been
going down a little every week for the last few weeks. Since it's
going to be three months before the crop is ready for harvest, what
can the farmer do? He is concerned that if the price continues to
drop over the next three months, the price may be lower than $2.50
a bushel, which is what it cost to grow it.
So what should he do? Using future system trading, he could sell
the future crop at today's price of $3.00 a bushel by calling a
Broker and selling a futures contract at today's price of $3.00
a bushel to be delivered three months from now.
risk in doing this is that if the price of wheat goes up to $3.50
a bushel during the next three months he will still only get $3.00
a bushel for it because it was pre-sold today for $3.00 a bushel.
But on the other hand, if the price of wheat drops by then, he will
have locked in at a price of $3.00 a bushel. This seems like a good
way to go since the price of wheat has been going down, not up,
in the last few weeks. This forms the basis of future system
the Broker gave a price to "sell" a contract, he acted
as a middleman to find someone who would "buy" the contract.
Now who would want to buy the wheat contract at $3.00 a bushel?
Of course it's someone who is buying wheat and is concerned that
the price of wheat will go up, not down, three months from now and
they want to protect themselves in case of a price increase.
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So how do you make money with
As a speculator
you would carefully analyse the charts on wheat and say yes indeed
the price has been dropping and it looks like that the price is going
to stop dropping and start to go back up again. The speculator thinks
that in three months it's going to be $3.50 a bushel, not $3.00 a
bushel that it's selling for today.
Future System Trading?
senses an opportunity to be able to buy a contract at today's price
of $3.00 a bushel and hold it. If he is correct and the price goes
up, he makes a profit on the commodities contract.
This is basic future system trading.
When he buys the contract at today's price of $3.00 the person who
sold the contract guarantees him that price. They must honour their
end of the bargain and sell it to the speculator at $3.00 a bushel,
even it the price goes up.
the other hand, if the price goes down, the speculator loses money.
How would he lose money? Because if the price of wheat three months
from now is $2.50 a bushel, that means he can only sell it for $2.50
a bushel yet he agreed to buy it for $3.00 a bushel because he bought
a futures contract.
major difference in making money in stocks vs. commodities is leverage.
For example: a contract in wheat is for 5,000 bushels.
You don't actually buy or sell 5,000 bushels you just control 5,000
bushels. You would put up a "deposit" with a Broker for
the right to do this. In the case of wheat, that "deposit"
which is also called your "margin" is only $650. So, $650
controls one contract for 5,000 bushels of wheat. Now that's leverage!
all this sound fine and dandy,
but what are the risks of Future System Trading?
you have the potential to make a profit you also incur the potential
of taking a loss. Keep in mind too that the potential loss is also
So, before you even consider Future System Trading read our recommended
Future System Trading By
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