What is a CFD?

A CFD or Contract for Difference is an agreement between two parties to exchange, at the close of the contract, the difference between the opening price and the closing price, multiplied by the number of reference shares specified within the contract. The 'reference shares' are the underlying shares specified in the CFD. The economic performance of a CFD is determined by the performance of the underlying reference shares. Although CFDs replicate the price movement of the underlying reference shares, they convey no right or requirement to acquire or deliver the physical shares. The contract value of a CFD is defined as the number of reference shares specified in the contract, multiplied by the price of the underlying reference share. If you take a long position, you will make a profit if the contract value increases. Conversely, if you take a short position, you will benefit if the contract value falls. You can therefore, profit from both rising and falling share prices. It is important to note that CFDs are a margined product and as such are not suitable for all investors. Due to the leveraged nature of the product, you may loose far in excess of your initial investment. Many traders prefer trading CFDs (contracts for difference) on shares on margin, i.e. buying shares and only lodging a security deposit that is typically between 5% - 20%. In simple terms CFD is an agreement between two parties agreeing to settle at the close of the contract the difference between the opening price and closing price of the contract, multiplied by the number of shares specified in the contract. A simple example: In February, you might agree to buy 5000 Halifax shares at £6.00 (total value of £30,000). You lodge a 10% margin deposit of £3,000. In April the price of Halifax shares moves to £8.00 say, and you agree to sell at this level. You receive a gross profit of £10,000 (i.e. £40,000 less £30,000) and your deposit is returned. (Note: this is a simplistic example designed to explain the concept only. If the position were to move against you then you would incur a loss which could be in excess of the funds deposited. The full costs and risks of trading are explained below).

What is DMA CFD’s?

Direct Market Access (DMA) CFD prices and liquidity are identical to the underlying equity markets. Investors enter into CFDs at the underlying market price. The CFD market has developed various models. Many suppliers have market – makers who quote two-way prices to their clients. These prices are generally based around the underlying market price, but there is no obligation to match the exchange bid and offer. Obviously, in this instance, the CFD supplier controls the participant's/ Clients point of entry and exit from the market, and as the supplier's position is not automatically hedged, this results in a substantial and often expensive conflict of interest. Renesource Capital has adopted the Direct Market Access model thereby providing transparent pricing structures to Clients. Thus, Clients are trading at the market prices and Renesource Capital commission and financing rates are completely transparent and negotiable.

Does Renesource Capital make a profit from Client trading losses?

At Renesource Capital, we allow our clients to execute the underlying equity trade in the market themselves, simultaneously receiving the matching CFD, which will exactly replicate the underlying share. Renesource Capital does not make a profit or loss as a result of the Clients CFD position. Now also consider the fact that when you deal through a provider that spreads the market price, that broker is acting as a market maker. They are under no obligation to guarantee you the best execution and they are under no obligation to quote you the best spreads. In fact, it is in their best interest for you to lose money. At Renesource Capital, we 100% hedge or have a back to back deal every one of our client positions.
We do not make money from our Client trading losses. The only way that we make profit is through commissions and financing charges, so our interests are absolutely aligned. If Clients make money and increase trading activity, we make more commissions from Clients and Clients continue to make more money from trading.

What are the benefits of trading CFD’s?

Increased leverage.
By using CFD’s you are able to control up to 10 times the stock compared with an outright purchase. This higher gearing creates greater profits if you correctly anticipate movements in the stock price, however the risk of loss also increases proportionately if the stock moves against you.
No stamp duty.
In some jurisdictions share trading attracts stamp duty however because no physical stock transaction takes place there is no stamp duty payable on CFD transactions under the current legislation. This creates opportunities to day trade stocks without the need to cover the cost of stamp duty.
Easy to sell short.
In many jurisdictions it is a complex and difficult process to go short in an individual share. CFD’s create the ability to sell quoted shares and the potential to benefit from share price declines.
Risk Management.
You have the ability to protect a multi – national portfolio against short – term market falls by selling sufficient CFD’s to cover your exposure. If the CFD’s are bought back after a decline then the profit achieved should offset the loss incurred on your portfolio.

What are the commission charges trading CFD’s?

Commission. The commission varies by market, size and frequency of trading. Individual rate card available for active day traders. Funding.
Whilst holding a purchased CFD on equities, your account will be charged (debited) daily interest on the amount of the initial contract value. A holder of a long CFD pays interest on the value of the contract, because counterparty of Renesource Capital has effectively financed the value of the trade. The interest rate charged fluctuates. Latest financing rates are available on our website in the section Pricing & Rates. Dividends.
If you are holding a purchased CFD on a stock then 90% of any dividend payment due on the underlying share will be credited to your account. If you hold sold / short CFDs on stocks you will be debited 100% of any dividend payments. Margin requirements.
The margin charged for CFD trading, varies from 5% and depends upon both the volatility of the market and volatility of the individual stock. Positions are marked to market, daily and the initial margin has to be maintained. In cases of adverse market movement Clients are liable to pay additional margin. This high leverage means that only experienced traders are able to open CFD accounts.

How do some brokers offer commission free dealing?

They take something out of the dealing spread when executing the trade. They offer "commission free" by making their own spread around the underlying price.

How long can I hold the position?

Positon can be held for as long as required, however in certain circumstances such as a takeover you could be forced to close out a position.

What is Pair Trading?

It is a market neutral position which is established by shorting one stock while simultaneously buying another. Spreads are usually traded between two stocks in the same business sector or where there is a significant cross holding or correlation. For example you might be more confident about Citigroup performance compared to Barclays and bearish about the market generally. If you purchase Citigroup and sell Barclays as long as Citigroup outperforms Barclays you should make profit.

What are Stocks?

Stocks are securities that represent ownership in a company and a claim to the company's assets and earnings. Stocks are also referred to as 'shares' or 'equities.' Buying the stock of a particular company means you are investing in that company's future results. If the company is successful, your investment may gain in value over time. If the company performs poorly, however, your investment may lose value.

The value of an individual stock is set by markets, where buying and selling causes a stock's price to fluctuate throughout the trading day and over time. An investment in stocks can make money in two main ways:

  • Dividends—are periodic payouts to shareholders from a company's earnings, if management chooses to. Dividends can be paid with more stock, or given in cash, which can be used to reinvest and buy more shares of the company. Dividends can change over time, but regular dividend-paying stocks, referred to as 'income stocks,' are common as an incentive for investors to buy a company's shares.
  • Capital gains—if you buy shares of stock and the price increases, you can sell at a higher price, earning a 'capital gain.' If the price of the stock declines in value and you sell for less than you paid, it's called a 'capital loss.'

Why is it important?

Stocks are a major component of most investors' portfolios because they provide the opportunity to gain from a company's future growth and profitability. As an asset class, stocks generally offer greater upside potential to investors when compared to fixed income investments, like bonds and money market accounts, which carry a fixed interest rate of return. That's because successful companies can grow significantly over time, sending their stock prices higher, exceeding the fixed rates of return on bonds. Of course, companies can also struggle and their share prices may decline. For this reason, stocks as an asset class are considered riskier than bonds, for instance. Over the long-term (10+ years and more), though, stock investments tend to outperform other asset classes due to the higher growth potential of individual companies and overall economies.

What do I do with it?

Depending on your risk tolerance and investment time horizon, stocks may be an attractive investment option. In general, the longer your investment timeframe, the better the chances that short-term market declines will be overcome by longer-term gains. Medium- (4-10 years) and long-term (10+ years) investment horizons are best suited to stock investing, while shorter time frames (less than 3 years) may be less appropriate.

Choosing to invest in stocks as part of your asset allocation decision is just the beginning. Diversification in a portfolio of stocks is critical to managing your market risk, regardless of your investment time horizon. If you don't want to spend the time and money assembling a diverse set of individual stocks, ETFs offer a ready-made solution. Stock ETFs typically contain hundreds of individual stocks spanning all industries, as well as narrower ETFs focused on company size (large, medium, and small capitalization companies) or industry sector (like healthcare or technology). Still other ETFs offer country-specific opportunities for investors seeking international exposure, such as German or Japanese stocks, and even emerging market stocks (e.g. China/India/Brazil/etc.).

How to Avoid Zombie Stocks

Some companies may be dead already, even though investors haven't yet realized it. Individual investors need to protect themselves from such undead companies before they eat away all the invested capital. Among the early warning signs, one stands out above the rest: a drop in earnings growth.

Investors are attracted to growth in a company--even irrationally so in some cases--and they are sometimes willing to pay a premium price when they believe a company's earnings will grow. If an investor thinks a company's earnings will grow, then they assume the stock price will also move higher over time as well.

Not too long ago both Facebook (FB) and Twitter (TWTR) began publicly trading company stock. Before the first share was officially traded on the major exchanges, analysts estimated the value of these company stocks to be below $30 a share. Both of these stocks started off much higher than that because investors assumed that both companies would increase their earnings and the stock price would be worth more over time. But when earnings didn't grow as hoped, both stock prices tumbled.

Investors like to believe that the company they have invested in will continue to increase its stock price. As long as earnings continue to grow, they can put up with the fluctuation of prices because they are willing to hope that prices simply trend higher over the years. But if a company actually loses money for the first time, the share price will drop substantially as some investors change their mind about patiently waiting for the stock price to go up.

That's why it is important to keep an eye on a change in the rate of earnings growth. If a company's earnings have slowed, for two quarters in a row, this may lead to the stock price changing its trend. If the company can't fix whatever seems to be going wrong, then investors will become quite nervous and the problems may only get worse until the company seeks bankruptcy protection. Keeping an eye on earning growth rates can help avoid companies that are merely dead but still walking.

What is an ETF?

What is it?

An ETF is an 'exchange traded fund,' a security that typically tracks an index of a particular asset class. (Index refers to a composite value of a group of securities, such as the 'S&P 500 Index' for US stocks, or the 'Barclays 7-10 Year Treasury Bond Index' for US Government bonds.) ETFs issue shares that trade on major exchanges like stocks of individual companies, offering high liquidity and transparent pricing. There are ETFs spanning all asset classes, such as stocks, bonds, commodities and real estate.

Some ETFs cover broad-based indexes, and others focus on specific sectors of an asset class, like US technology stocks or long-term US government bonds. ETFs usually contain dozens or hundreds of individual securities in their holdings, giving investors access to a diverse set of investments with the ease (and lower cost) of transacting in a single security. For example, a large-cap (capitalization) US stock ETF may contain the stocks of over 600 large-cap US companies, spanning all major sectors of the US economy.

Why is it important?

ETFs offer a number of advantages for investors. Since most are passively managed, ETFs typically have lower costs than other fund-type investments, like mutual funds, leaving you with more to invest. ETFs provide built-in diversification, allowing you to construct a well-diversified portfolio with just a few ETF investments. ETFs are also more tax efficient than other types of investments, potentially saving you more money at tax time, too. ETFs fluctuate in value on a daily basis, up as well as down, just like stocks. ETFs can increase in value through price appreciation (the value of the fund goes up) and in some cases by distributing gains through dividends.

What do I do with it?

Use ETFs to build a diversified investment portfolio that fits your investment goals, risk tolerance and investment time horizon. Start by settling on an asset allocation strategy, deciding how much to invest in various asset classes. Aim for further diversification within each asset class by selecting ETFs that have low correlations. Be sure to spend some time researching the ETFs you are considering by looking at the fact sheets provided on the issuers' web sites. Make sure you fully understand what the ETF is investing in, what its benchmark index is, and how its expenses compare to other investment options. To learn more, see what to look for in an ETF.

Forex for Beginners

What is Forex?

A simple way to understand the forex market is to think of it as changing money when you travel abroad. When you change money, you sell one currency and buy another at the current exchange rate. This is because the value of your own currency is not equal to the value of the currency you wish to buy. In effect, you have traded currency and this is very similar to forex trading. One of the largest financial markets in the world Currencies constantly need to be exchanged in order to conduct business and for there to be trade between countries. This makes the forex market one of the largest, most liquid financial markets in the world. To put this into context, the daily volume of trades on the London Stock Exchange is USD 7 billion, whereas the daily volume on the forex market is USD 5.3 trillion. Unlike other financial markets, such as stocks or commodities, the forex market has no central location or exchange marketplace. The market is so large that it’s unlikely to be affected by one person or one company – it takes much bigger processes to influence the direction of the market.

What is forex trading?

In simple terms, it’s the simultaneous buying of one currency and the selling of another. When you trade forex, you can trade with a broker through a trading platform.
Currencies are always traded in pairs, for example GBPUSD (trading the British pound against the US dollar). The first currency in the pair is known as the “base” currency, the second one is the “quote” currency. They are also often referred to as “buy” and “sell” or "offer" and "bid". A GBPUSD price of 1.5531 means that GBP1 buys you USD1.5531.
The most traded currency pairs are EURUSD, GBPUSD, USDCHF, USDJPY, AUDUSD, NZDUSD, USDCAD, EURGBP, EURJPY.

Forex facts

  • Over 50% of forex transactions are conducted in the UK and US.
  • The most commonly traded currency pair in the world is EURUSD – the euro against the US dollar.

 

How to trade forex?

You trade currencies in pairs. All currencies are traded in pairs and each currency has an official abbreviation, for example GBP for British pound, USD for US dollar and EUR for the euro.
The “base currency” is the first currency in the pair and the “quote currency” is the second currency. These are commonly referred to as the bid and ask price.
Price differences create trading opportunities. You can trade currencies because the values of currencies change. The exchange rate tells you how much of one currency you need to pay to buy one unit of another. In forex trading, exchange rates are displayed as the bid and ask price for a currency pair.
The difference between the bid and the ask price is known as the spread and it's how your broker generates much of its revenue. Spreads can vary from broker to broker, so look out for tight spreads in order to minimise your trading costs and maximise your profits.

Know what’s behind the spread

It’s important for you to understand how spreads are measured. For example, if GBPUSD has a bid price of 1.5280 and an ask price of 1.5281, the spread is one point. Although in forex trading, most people call them pips. A point or pip is the smallest movement up or down in the price of a currency.

You can trade in bullish and bearish markets

When you trade forex, you’re buying one currency and selling another at the same time which means you can speculate on rising and falling markets. This is one of the major advantages of forex trading.
You are likely to hear forex traders talk about bullish and bearish markets. When a market is rising or believed to be about to rise we call it “bullish”; when it’s falling or believed to be about to fall it’s called “bearish”.

How you can place your first trade

First of all, consider whether the currency you wish to trade is likely to rise or fall. This forms the basis of your trading strategy.
In a buy position, you believe that the value of the base currency, in our example the euro, will rise against the quote currency, the US dollar.
Let’s assume the price of the EURUSD is 1.3038 on the bid price and 1.3040 on the ask price. Therefore, the spread is two pips. When you buy, your trade is entered at the ask price of 1.3040.
Later you decide to close your trade and the bid price of the EURUSD pair is 1.3072 and the ask price is 1.3074. Your trade has gained 32 pips. If each pip was worth one US dollar, you would have made a USD 32 profit.
Now let's see what happens with a sell position. You believe that the value of the base currency will fall against the quote currency. Using the same example, this means you believe the price of the euro will weaken against the US dollar.
The current value of the EURUSD pair is 1.3038 on the bid price and 1.3040 on the ask price. As you’re selling, your trade is entered at the bid price of 1.3038.
Later in the day, you look at the position and the EURUSD is now at 1.3072 on the bid price and 1.3074 on the ask price. Your trade has lost 36 pips. You decide to close your position at the current price of 1.3074 and accept your losses. If each pip was worth USD1, you would have lost USD36.

How you can place your first trade

The forex market is one of the largest financial markets in the world. It’s also the most liquid market with a daily volume of $4 trillion. Liquidity is one of the main reasons why people trade forex. You can trade 24 hours a day, five days a week.
The forex market runs 24 hours a day, five days a week, because at any given time of the day or night the market is open somewhere in the world. That means you can trade whenever you want, from anywhere in the world. You can trade both rising and falling markets.
One of the reasons to trade forex is that you can find opportunities in both rising and falling markets – you can trade when you believe the price of the currency pair is going up, or when you think it’s going down. If you think the price is going up, you buy, and if you think it’s going down, you sell.

Leverage up to 1:100

One of the most powerful tools in forex trading is leverage. Using leverage means that if, for example, you want to make a $100,000 deal, with a 1:100 leverage you would need a deposit of only $1000. High leverage can make the forex market highly profitable, but at the same time very risky.

You can find opportunities in high volatility periods

Sometimes you can observe periods of volatility when a market opens or closes. That means that the prices can change very quickly and unexpectedly. High volatility can create trading opportunities, but it also increases risks.

Ask yourself, why not?

If you’re asking yourself, why trade forex, then the answer is simple – you can find great opportunities in the forex markets. If you’re interested in the world of business and you keep up with the latest news, then forex could be your ideal market to make your moves.

Trading on leverage and margin

Your ability to borrow money from your broker to trade currencies is what leverage and margin are all about in forex. With leverage you can increase your “trading power” – giving you more money to trade with than your deposit. Before you enter a leverage or margin trade, make sure you understand how it works so you can make the most of your trading while calculating your risk.

You can make and lose more money

Essentially, the aim of trading on margin is to magnify profits by being able to take out larger positions than you would be able to with your money alone. However, this also increases your risk. It’s important to remember that you can lose more than your initial stake.

It’s similar to buying a property

To show you how it works, let's look at the process of buying a house. You have a deposit of EUR 50,000 and the property costs EUR 250,000, five times your deposit. You need to use your bank as leverage to be able to buy the house, so you apply for a mortgage that covers the remaining EUR 200,000. The ratio – or your leverage – is 50,000:250,000. This is more commonly expressed as 1:5.

Here’s how it works in forex trading

Before you start trading, you are required to put up a percentage of the money that you borrow “in good faith”. Let’s say you want to trade the EURUSD currency pair and the amount you want to invest in that position out of your own pocket is EUR 2,000.
Your broker requires you to make a minimum deposit to hold this position. This initial deposit is your margin requirement. The value of your trade is much higher than this. When you trade with Renesource Capital AS IBS the value can be as much as 100 times your initial deposit. If you choose 1:10 leverage, your EUR 2,000 would let you place trades up to the value of EUR 20,000.
Now let’s say you want to trade 1 lot of EURUSD with a leverage of 1:100. The equivalent of 1 lot is 100,000 units of the base currency (EUR). So in this example, the calculation is 100,000 units divided by the leverage of 100. This gives you the margin required for your trade, which is EUR 1,000.

Ensure you understand the risks It’s important to remember that you should be careful and not over – leverage your position based on the equity in your account. Trading on margin and leverage can greatly magnify your profits, but it can also magnify your losses very quickly if the markets move against you.

Your leverage check – list

  • Your margin requirement is the initial deposit you need to make with your broker to enter a trade;
  • Your leverage is the ratio of the total value of your positions compared to your margin requirement;
  • Leverage enables you to magnify both profits and losses;
  • If you over – leverage your position and the markets move against you, there is the risk that your broker will liquidate your positions;

What is rollover?

If you trade forex on a "spot" basis, all trades settle two business days from inception, as per market convention. The settlement date is referred to as the value date.
Renesource Capital AS IBS offers "rolling spot" forex. This means we don't arrange physical delivery of currencies and therefore, all positions left open till 21:59:59 (GMT Time) will be rolled over to a new value date. As a result, positions are subject to a swap charge or credit.
The rollover cost is based on the interest rate differentials of the two currencies. Let’s assume that the interest rates in the EU and USA are 1.25% and 0.5% per annum respectively. Every currency trade involves borrowing one currency to buy another. If you have a buy position of 1.0 lot in EURUSD, then you earn 1.25% on your euros and borrow US dollars at a rate of 0.5% per year.
In other words:

  • If you have a long position (buy) and the first currency in the currency pair has a higher overnight interest rate than the second currency, then you receive a gain;
  • If you have a short position (sell) and the first currency in the currency pair has a higher overnight interest rate than the second currency, then you lose the difference;
  • If you have a long position and the first currency in the currency pair has a lower overnight interest rate than the second currency, then you lose the difference;
  • If you have a short position and the first currency in the currency pair has a lower overnight interest rate than the second currency, then you receive a gain.
Notes:
  • If you open and close a position before 21:59:59 (GMT Time) you will not be subject to a rollover;
  • The act of rolling the currency pair over is known as tom – next, which stands for tomorrow and the next day;
  • When you roll an open position from Wednesday to Thursday, then Monday next week becomes the value date, not Saturday; therefore the rollover charge on a Wednesday evening will be three times the value indicated on the rollover/interest policy page.

 

Tips for Forex Traders

You shouldn’t want to get rich quickly

Novice traders sometimes make the mistake of seeing forex as a simple way to become rich in a short period of time. In these top tips for traders we explain why you should consider the risks and effort that must be put in to achieve such a goal.

Placing very large trades in proportion to your account balance in an attempt to make a huge profit is unlikely to be successful in the long term because eventually a trade is likely to go against you and that can lead to severe losses.

You shouldn’t make decisions randomly

You should know where you intend to open and close a position before entering any market, based on a particular system you are following. Setting this ahead of time helps you focus on your system and eliminate second-guessing.

You can also reduce losses by having stop loss orders in place. It's important to know that the market may not always agree with where you place an order.

Be careful not to use too much leverage

One aspect of the forex market that attracts many traders is the opportunity to trade on margin, in other words, leveraged trading. Trading with a small initial deposit can still make it possible for you to open relatively large positions, so it is important not to overdo it when selecting a trade size.

Forex is usually traded with a high degree of leverage, which means you are able to provide just a small percentage of the actual amount you are investing while sustaining profit/losses as if you had invested the whole nominal amount yourself. This can work for you as well as against you.

There is a possibility that you could sustain a loss equalling to some or even all of your initial investment. It is also possible to lose more than you initially invested in your trading account.

We do offer you risk management systems that are designed to help prevent unmanageable losses. But please know that these measures still require a responsible approach to trading.

You should use stop loss orders

Some traders hold on to losing positions far too long thinking, or hoping, that the market will turn around. They also tend to get out of winning positions far too quickly to lock in an immediate profit, which eliminates the chance for greater gains.

Although it may be tempting for you to have this mind frame, you must have the patience to enter only those trades which you think are opportunistic and follow this up with the discipline to either cut this trade quickly if it turns against you or run with it because you believe in the trade.

When you open a trade, you can set a stop loss order – this is a point where the trade will automatically close if the market moves to that position.

You should take emotion out of your trading

Keeping calm and maintaining a balanced state of mind is crucial when trading in order to remain focused on relevant events. You should always remember that the market's actions are not personal.

We realise it’s quite easy to say but very difficult to do, especially in the heat of the moment when you have to make a split second decision. Try not to trade with emotions and remember all the things that you've learnt.

Discipline helps you make the most of trading

If you’re disciplined and stick with a tested trading plan consistently, you will, more often than not, profit over those who trade inconsistently. Constant second-guessing can ruin the profitability and may eliminate the benefits of having a trading plan in the first place.

You should plan your trades and trade your plan rather than randomly pick out trades on a whim. The latter is no more than punting with only the hope of winning as opposed to having an edge in the markets through the use of a solid, consistent trading system.

You should maintain consistency with your trading system and follow it up with good analysis of your own processes in order to have a better idea of where you are going wrong.

You should manage your money

The main difference between an amateur and an experienced trader is their approach to money management.

Experienced traders recommend risking a set percentage of capital and never altering that percentage. Risking a set percentage of your total capital on each trade is an advantage in times of repeated losses because it reduces their impact.

Amateur traders often disregard this and increase their stakes as they begin to lose more. This type of scenario inevitably leads to loss after loss.

You should learn your market

Some novice FOREX and/or CFD traders begin trading without having sufficient knowledge of their chosen currency pair(s) and how currencies are influenced by global events. You should learn as much as you can about how different financial markets impact each other and how they intercorrelate, i.e. stocks, bonds, commodities and forex.

This knowledge will help you to make better-informed trading decisions when various economic figures are released. It is also important to identify the type of market that is prevailing to allow you to adjust your strategy accordingly and thus avoid entering into losing trades.

The more informed you are, the better your chances of trading successfully. Please know that some market participants have different intentions from the ones you have; for example, hedgers will sell into a market that is rising because hedgers often look for good average prices on large orders in order to risk manage their portfolios. This is in contrast to individual traders who seek to maximise profit on each trade.

You should monitor your positions

It is crucial that you monitor any exposure you have in the forex market. Having a close eye on how your trades are doing will help you maintain control and follow market movements as they happen.

You should stay up to date with market developments. It is a good way to maintain and expand your level of knowledge and understanding of the forex market. You should be aware that the forex market trades 24 hours a day, so making use of pending orders will be crucial if you want to leave your PC.

You should develop a trading strategy

You should spend a significant amount of time on deciding on your strategy before you place your first trade. This will make it easier for you to concentrate on market events.

Some novice forex traders begin trading without having sufficient knowledge of their chosen currency pair(s), how currencies are influenced by global events and how they plan to take advantage of price movements. It is crucial that you observe the market price action and try to identify trading patterns before risking your capital, with your observations helping you formulate a trading plan and a trading style.

Your trading strategy should take the following into account
  • Planned frequency of trading
  • Time of day when you plan to trade
  • Technical indicators you plan to use
  • Buy/sell signals you plan to use
  • Estimated risk and reward for each trade
  • A daily stop limit to protect your total capital base

Your motivation to trade is a key aspect in your forex trading system. The most successful traders do not have profit in mind when trading because thinking about the potential future profit or potential future losses will cloud your decisions in the present. Instead, experienced traders focus on the process of trading rather than worrying about the amount they could win or lose in a trade.

Your trading strategy should take the following into account

  • Planned frequency of trading
  • Time of day when you plan to trade
  • Technical indicators you plan to use
  • Buy/sell signals you plan to use
  • Estimated risk and reward for each trade
  • A daily stop limit to protect your total capital base

Your motivation to trade is a key aspect in your forex trading system. The most successful traders do not have profit in mind when trading because thinking about the potential future profit or potential future losses will cloud your decisions in the present. Instead, experienced traders focus on the process of trading rather than worrying about the amount they could win or lose in a trade.

Foreign Exchange MT4 Traiding Tips

What is forex trading?

Foreign exchange, also known as forex or FX, is the simultaneous buying of one currency while selling another. The forex market is available 24 hours a day, five days a week, and it’s one of the largest, most liquid financial markets in the world. You can learn more about what forex trading is in our education section.

What is the spread?

The spread is the difference between the bid and the ask price. The bid price is the rate at which you can sell a currency pair, and the ask price the rate at which you can buy a currency pair. With us, you can trade a large range of instruments with flexible spreads. That gives you a greater degree of price transparency on your trades.

What are base and quote/term currencies?

The base currency is the first currency in a currency pair. The quote or term currency is the second currency in a currency pair. For example, in the EURUSD currency pair, EUR is the base currency and USD is the quote currency.

How do I calculate the profit and loss value per pip?

The profit or loss per pip is always calculated based on the quote currency. The quote currency is the second currency in the pair – eg USD in the EURUSD currency pair.

If your Renesource Capital account is in the same currency as the quote currency, any profit or loss made does not need to be converted. If not however, your profit or loss will be converted into your account currency at the spot rate at the time the position is closed.

In the table below, you can find our pip values. We calculate the pip value to the fourth decimal place, ie 0.00010, for all pairs except the Japanese yen (JPY) pairs where it’s calculated to the second decimal, ie 0.010.

Lot size

Units of base currency (first currency in a pair)

Profit and loss per pip in the quote currency (second currency in a pair) / for JPY pairs

1

100,000

10 term currency / JPY1,000

0.1

10,000

1 term currency / 100 JPY

0.01

1,000

0.1 term currency / 10 JPY

Calculation:

P&L per pip = trade volume x pip size
e.g. for EURUSD 1 lot trade:
P&L per pip = 100,000 x 0.0001 = USD10

What are the trading hours for the forex market?

You can trade forex from 22:00 Sunday time (0:00 Monday EET) until 22:00 Friday time (0:00 Saturday EET).

What’s “order volume” in a forex trade?

The term “order volume” refers to the number of standard lots you want to trade.
One standard lot equals 100,000 units of the first currency in the pair, ie the base currency.
A volume of 0.1 lot equals 10,000 units of the base currency.

What does ECN mean?

ECN means “Electronic Communication Network”. An ECN account gives you direct market access so that you can deal with other market counterparties, using Renesource Capital ’s name as a “stand-in” for reasons of credit. You can take advantage of non-dealing desk (NDD) execution where spreads on forex start from 0 pips.

Do you offer ECN/STP accounts?

Yes, we do. We offer you ECN trading via MT4 platform for any Renesource Capital account.

What’s the difference between instant execution and market execution?

An instant execution order is one that’s executed at the price on the screen. When you place an instant execution order, the terminal sends the request to buy or sell at the current price on the screen. If the price is still available in the market, we execute the trade. If not, there will be a 'requote' where we return a new two-way price at which you can resubmit the order or have the option to cancel it. A market execution order is one that’s executed at the best price available in the market. There are no requotes, but the price will not necessary be the one you saw on the screen when you placed the order. The price the order is filled at may sometimes differ from the price seen on the platform because:
  • the price may have moved from the last market snapshot, or
  • the trade volume you requested may be larger than the volume available in the market at the best tradable bid/offer (ask) price shown on the screen

What are buy/sell limit and buy/sell stop orders?

A buy/sell limit order is an instruction to deal if the price moves to a more favourable level than where it’s in the market now. That’s why these orders are sometimes called improvement orders. A limit order is a request to buy at a price lower than the current price or request to sell at a price higher than the current price. If the current offer in GBPUSD is 1.61086, you might leave a limit order to buy at 1.61070. If the current bid in GBPUSD is 1.61086, you might leave a limit order to sell at 1.61099. A buy/sell stop order is an instruction to deal if the price moves to a less favourable level than where it’s in the market now (remember: it’s less favourable to buy at higher prices and to sell at lower prices). A stop order is a request to buy at a price higher than the current price or a request to sell at a price lower than the current price. If the current price of spot EURUSD is 1.38985, you might leave a stop order to buy at 1.38998. If the current price of spot EURUSD is 1.38985, you might leave a stop order to sell at 1.38975.

How do I calculate my margin?

Your margin requirement equals the units of the base currency divided by your leverage. Example 1: trade of 1 lot on GBPUSD with leverage of 1:100 1 lot = 100,000 units of base currency, in this case GBP100,000 100,000 / 100 = GBP 1,000 margin requirement. Example 2: A trade of 1 lot on GBPUSD with leverage of 1:500 1 lot = 100,000 units of base currency, in this case GBP100,000 100,000 / 500 = GBP200 margin requirement.

What are CFDs?

Contracts for difference (CFDs) are derivative products which enable you to trade on the price movement of underlying financial assets (such as indices and commodities).

Which account do I need to trade CFDs?

CFDs can be traded on our CFD account.

Which CFDs do you offer?

We offer a range of CFD products and instruments. Please check our product specifications for more details.

What does order volume mean for CFDs?

The order volume for CFDs refers to how many contracts you trade – eg a volume of 0.1 would be a tenth of a contract.

What’s the minimum volume I can trade for a CFD product?

The minimum volume that you can trade on CFDs is 0.1 of a contract.

Can I specify the leverage for my CFD trades?

The margin requirement for CFD products is fixed for each particular CFD instrument you’d like to trade. Please refer to the contract specifications for commodities and indices.

How do I calculate my profit and loss for index and commodity CFDs?

To calculate the profit and loss for an index CFD, please follow the example below: Market movement = (closing price – opening price) / minimum increment Profit and loss = market movement x increment value x volume
Example:

Instrument: US 500

Volume: 0.1

Open price: 1,250.00

Close price: 1,251.00

Increment: 0.25

Increment value: USD12.50

Market movement = (closing price – opening price) / minimum increment

Market movement = (1,251.00-1,250.00) / 0.25

Market movement = 4 increments

Profit and loss = market movement x increment value x volume

Profit and loss = 4 increments x USD12.50 x 0.1

Profit and loss = USD5.00

What are the trading hours for CFDs?

The trading hours depend on the individual CFD product. Please refer to the contract specifications for commodities and indices.

Are there any swap charges for CFDs?

Yes, there are SWAP charges for contracts whose underlying asset is cash contract or Index (e.g. SP500 or Gold Spot)

Why can’t I place a CFD trade on my MT4 platform?

Check the last trade date for the symbol that you’re trying to trade.

How do I calculate my position value for gold and silver?

You can work out the position value using this formula:
Volume (lots) x troy oz (gold: 100; silver: 5,000) x price = position value (USD)

How do I calculate my profit and loss for gold and silver?

You can use the below formula to calculate the profit/loss of a position in precious metals:
 
1. Calculate the market movement in pips
Buy: (closing price - open price) / tick size = market movement (pips)
Sell: (open price - close price) / tick size = market movement (pips)
2. Calculate the profit/loss
Profit/loss (USD) = volume (lots) x pip value (USD) x market movement (pips)
Alternatively, the following formulae can be used:
Buy: 
Profit/loss = position value at close (USD) - position value at open (USD)
Sell: 
Profit/loss = position value at open (USD) - position value at close (USD)
Example 1
Buy 1.3 lots XAUUSD at USD1,583.05 and sell at USD1,601.10
USD1,601.10 - USD1,583.05 = USD18.05/troy oz gain
USD18.05 x 130 (1.3 lots at 100oz/lot) = USD2,346.50 profit
Example 2 
Sell 1.3 lots XAUUSD at USD1,583.05 and buy at USD1,601.10
USD1,601.10 - USD1583.05 = USD18.05/troy oz loss
USD18.05 x 130 (1.3 lots at 100 troy oz/lot) = USD2,346.50 loss
Example 3
Buy 1.3 lots XAGUSD at USD28.15 and sell at USD30.10
USD30.10 - USD28.15 = USD1.95/troy oz gain
USD1.95 x 6,500 (1.3 lots at 5,000 troy oz/lot) = USD12,675.00 profit
Example 4
Sell 1.3 lots XAGUSD at USD28.15 and buy at USD30.10
USD30.10 - USD28.15 = USD1.95/troy oz loss
USD1.95 x 6,500 (1.3 lots at 5,000 troy oz/lot) = USD12,675.00 loss

ECN

What is an ECN?

The term ECN stands for Electronic Communication Network and describes software, which provides clients of broker’s direct access to liquidity providers. This means these liquidity providers have to compete anonymously for your business. ECN technology gives you access to deep liquidity and because there are no fixed spreads, you get rates that more accurately reflect the true market conditions.

What is Renesource Capital ECN?

Renesource Capital ECN is our non-dealing desk (NDD) ECN technology. This integrates clients directly with the top liquidity providers giving you access to increased liquidity with lower spreads and faster trade executions.

Are you a non-dealing desk (NDD) broker?

Yes, we are a non-dealing desk broker. NDD brokers do not pass their clients trades through a dealing desk which means they are a link between two parties, the trader and the liquidity provider. All client trades are hedged back to back directly with the market.

What are the spreads likely to be on a Micro, Classic and Pro account?

As we offer floating spreads, we reflect the actual market conditions. View our typical spreads on the MetaTrader 4 (MT4) platform.

What’s the minimum deposit for Renesource Capital FXPro accounts?

The minimum initial deposit for Renesource Capital FXPro accounts is USD 1 000

Which currency pairs can I trade on Renesource Capital FXPro accounts?

On your Renesource Capital FXPro and accounts, you can trade up to 68 currency pairs. Please check our currency pairs page for the list of all available pairs.

Can I trade gold or silver on my Renesource Capital FXPro account?

Yes. Both spot gold and silver are available for trading on Renesource Capital FXPro accounts.

What’s the minimum order size for Renesource Capital FXPro accounts?

The minimum order size for Renesource Capital FXPro accounts is 0.01 lot, or 1,000 units of the base currency.

What’s the maximum order size for Renesource Capital FXPrime accounts?

On Renesource Capital FXPrime and , there’s no maximum order size. Your order will be filled as long as there’s enough liquidity in the market at the price you specified.

Is hedging allowed on Renesource Capital FXPrime accounts?

Unfortunately, hedging (having a long and short position on the same instrument) is not possible on or Renesource Capital FXPro accounts. If you buy and then sell the same volume in a currency pair, you’ll effectively net off (close) your position.

What’s the maximum leverage on Renesource Capital FXPro accounts?

The maximum leverage we offer you on Renesource Capital FXPro accounts is 1:100.

How do I close a position on Renesource Capital FXPrime?

An open position is closed by “netting it off”. So, if you have a buy order, you need to place a sell order for the same volume, on the same pair, to close it and vice versa.

How does market liquidity affect the execution on Renesource Capital FX Accounts ?

Market execution depends entirely on the liquidity in the underlying market. For example, before an important news announcement or when New York trading closes at 17:00 EST, many market participants suddenly withdraw their quotes. As a result, a market order sent at that time may experience slippage.
In a volatile market, when market prices move rapidly or gap, your order will be filled at the next best price, which can be a considerable number of pips away from your specified level.
So-called “slippage” occurs when an order is filled at a price other than the expected price.

Can I access my Renesource Capital accounts simultaneously from two different computers or a computer and a mobile device?

Yes. However, you can't use two devices with the same login at the same time.

Please contact our Client Services team to request additional login details.

Can I log in to multiple Renesource Capital accounts from one computer?

Yes, you can log in to more than one account from one computer.
However, you’ll need to open or install an additional platform in order to access multiple accounts simultaneously

Can I trade on an Renesource Capital FXPro account using FIX API?

Yes. It’s possible to connect your proprietary trading system directly to Currenex® servers using FIX API.

FIX API access is offered on a case-by-case basis, based on your experience with the FIX protocol and the expected type and volume of trading. 

Please contact our Client Services team for more information.

Which order expiry types are available on Renesource Capital Integral?

You can take advantage of the following expiry types on Renesource Capital FXPro platforms:

  • Good till cancelled (GTC): order remains open and active until either executed or explicitly cancelled.
  • Instant or cancel (IOC): orders or remaining portions not immediately filled are cancelled.
  • Good till date/time: you specify the date and time at which orders are to be expired if not already executed
  • Day: orders that have not been executed will be expired by the system at the end of the system day on which they were entered.
  • Good for seconds: orders are valid for a specific number of seconds after the time they’re received by our server, and are expired if the orders have not been executed.

iPhone

How do I download the MetaTrader 4 (MT4) iPhone app?

You can download the MetaTrader 4 (MT4) iPhone app provided by MetaQuotes Software Corp from the iTunes store. 

How do I log in to my MT4 account using the iPhone app?

Please tap on the MT4 icon on your iPhone and select “Settings”.To log in to your Renesource Capital trading account, please select “Login with existing account”:

In the search box, please type in “Renesource Capital” to bring up the list of available Renesource Capital servers:

From the list of available servers, you can select the one that corresponds to your account.This will direct you to the login page:

Now please enter your MT4 account login number, your master password and press “Done”.

How do I place a trade using my MT4 iPhone app?

Please navigate to the “Quotes” tab and tap on the instrument you’d like to trade.

Tap on “Trade”.
You’ll then be prompted to specify the volume and type of execution you’d like, and tap on “Next”.

If you wish, you can add a stop loss or take profit and then select “Buy” or “Sell” accordingly.

How do I modify or close a trade using my MT4 iPhone app?

Please navigate to the “Trade” tab to view your open positions and then press the open position to expand and show its details.

 Once the box appears underneath the order, press within that space (box) for a few seconds until a menu appears (see image).

Then please tap the “Modify” button, to alter the stop loss (S/L) or take profit (T/P) levels.

 Now please enter or change the S/L or T/P levels and then tap the “Modify” button.

How do I switch current account on the MT4 iPhone app?

Please Navigate to the “Settings” tab.Then tap on “Accounts”. 

Now choose the account you want to sign in.


How do I add currency pairs to the quotes list on my MT4 iPhone app?

Please navigate to the “Quotes” tab. To add a symbol, please press “+” at the top right-hand corner to open the screen below. Available instrument groups will be shown here.

Select the group you’d like to view the instruments for. Now please tap on the symbol you’d like to add to your quotes list.

How do I remove currency pairs form the quotes list on my MT4 iPhone app?

Please navigate to the “Quotes” tab. To delete instruments, press “Edit” at the top left-hand corner to open a new window. Select the instrument you’d like to remove from the list and a red tick will appear on the left hand side. To confirm this deletion please press the red ‘bin’ button. To return to the main quotes screen, press “Done”.

How do I open charts on the MT4 iPhone app?

Please navigate to the “Quotes” tab and tap on the symbol you’d like to open a chart for. This will automatically redirect you to the relevant chart.

How do I see my open and pending positions on my MT4 iPhone app?

Please navigate to the “Trade” tab to view your open and pending positions. 


How do I see my account history on my MT4 iPhone app?

Please navigate to the “History” tab, which will show the account history for the chosen time period.


Can I use the app for multiple accounts on my MT4 iPhone app?

You’re only able to log in to one account at one time on the application. However, you can switch between accounts if you wish to do so.

What happens if I lose connection on my iPhone when using the MT4 iPhone app?

If you lose connection on your iPhone, you’ll be automatically logged out of the account. However, any open or pending positions will still remain active on the account.

Can I use indicators on the MT4 iPhone app?

You can use the indicators that are available for the app by default.
To view these navigate to the “Chart” tab.
Tap on “f” button above the chart.

In the next window, please tap on the “+” button next to “Main window” or “Indicator window”, to view the list of indicators.

Tap on the indicator you want.

Adjust the indicator properties as required, then please tap “Done”.

Can I add custom indicators to the MT4 iPhone app?

Unfortunately, you're only able to add indicators to your chart from the default list. You can't add your own custom indicators.

Can I use EAs on the MT4 iPhone app?

Unfortunately, you can't use Expert Advisors on the iPhone app.

Can I place a trailing stop on the MT4 iPhone app?

No, unfortunately you can't place a trailing stop using the iPhone app.

How can I zoom in/out of the chart on my MT4 iPhone app?

You can zoom in and out of your chart by expanding the screen using your fingers or pinching them together across the screen to zoom back in.

What types of orders can I place on my MT4 iPhone app?

You can place instant execution and pending orders on your iPhone app.

Android

How do I download the Android app for MetaTrader 4 (MT4)?

You can download the MT4 Android app provided by MetaQuotes Software Corp from Google Play.

How do I log in to my account using the Android app for MT4?

To log in to your Renesource Capital trading account, please select "Login with existing account":

In the search box, please type in “Renesource Capital ” to bring up the list of available Renesource Capital servers: from the list of available servers, you can select the one that corresponds to your account.

This will direct you to the login page: Now please enter your MT4 account login number, your master password and press “Done”.

How do I place a trade with the Android apps for MT4 and ?

Please navigate to the “Quotes” tab and tap on the instrument you’d like to trade.

Then tap on “New Order”. 

You’ll then be prompted to specify the volume and type of execution you’d like, and tap on “Next”

.If you wish, you can add a stop loss or take profit and then select “Buy” or “Sell” accordingly.

How do I modify a trade on the Android apps for MT4 and ?

Please navigate to the “Trade” tab to view your open positions and then press the open position to expand and show its details. Once the box appears underneath the order, press within that space (box) for a few seconds until a menu appears (see image)

.Then please tap the “Modify” button, to alter the stop loss (S/L)or take profit (T/P) levels. Now please enter or change the S/L or T/P levels and then tap the “Modify” button. 

How do I close a trade on the Android apps for MT4?

Please navigate to the “Trade” tab.

Tap and hold the open position.

A new pop up window will appear, select “close order”.

You’ll then be prompted to confirm the closing of the trade.
Tap “Close”.

How do I switch current account on the MT4 app for Android?

Press the menu button on your phone.

A pop up window will appear. From there, please select “Accounts”.

 Then please choose the account you wish to sign in.

How do I add currency pairs to the quotes list on my MT4 Android app?

Navigate to the “Quotes” tab.

Then please press the menu button on your phone and select “Symbols”.

To add a symbol, please press “+” at the top right-hand corner to open the screen below.

 Available instrument groups will be shown here. 

Now please select the group you’d like to view the instruments for. Tap on the symbol you’d like to add to your quotes list.

How do I remove currency pairs from the quotes list on my MT4 Android app?

Please navigate to the “Quotes” tab.

Then please tap the menu button and select “Symbols”

. Tap on the “bin” icon on the top right-hand corner.

Select the instruments you’d like to remove from the list and a tick will appear on the right-hand side. Then please tap “Delete” to confirm.

How do I open charts on the MT4 Android app?

Please navigate to the “Quotes” tab.

Tap on the instrument and a new pop-up window will appear.

Select “Chart” and your requested chart will be opened.

How do I see my open and pending positions on my MT4 Android app?

Please navigate to the “Trade” tab and you’ll be able to view any open positions under the “Positions” heading and pending positions under the “orders” heading.

How do I see my account history on my MT4 Android app?

Please navigate to the “History” tab.

Tap on the clock symbol, a new window will appear.

Then please select the timeframe you’d like.

The order history will then appear.

Can I use the app for multiple accounts on my MT4 Android app?

You can only log in to one account at one time on the application. However, you can switch between accounts if you wish to do so.

What happens if I lose my connection on my MT4 Android app?

If you lose the connection on your Android device, you'll be automatically logged out of the account. However, any open or pending positions will still remain active on the account.

Can I add custom indicators to the MT4 Android app?

You can use the indicators that are available on the app by default. To view these, please navigate to the "Chart" tab. Please tap on this screen and a pop-up window will appear.

Can I use EAs on the MT4 Android app?

Unfortunately, you can't use Expert Advisors on the Android app.

Can I place a trailing stop on the MT4 Android app?

Unfortunately, you can't place a trailing stop using the Android app.

How can I zoom in/out of the chart on my MT4 Android app?

You can zoom in and out of your chart by expanding the screen by pinching your fingers together across the screen to zoom back in.

What types of orders can I place on my MT4 Android app?

You can place instant execution and pending orders on your MT4 Android app.

You are able to place market execution and pending orders on your Android app.

Demo Accounts

How can I fund my demo account?

Please remember that you trade with virtual money on a demo account, so you can deposit virtual funds without risking your money. To top up your demo account, simply contact our Client Services team quoting your account number and the amount you’d like added to the account.

Does my demo account expire?

Demo accounts on MT4 (except MT4 Pro) don’t expire if you keep trading. Your MT4 demo accounts will remain open indefinitely, unless you’ve not logged in to your account for a period of 30 days. However, please be aware that if the personal information you provide is inaccurate or incomplete, your demo account may be deleted.
Demo accounts on MT4 Pro and Renesource Capital FXPro expire after 30 days. If you’d like to extend your Pro demo accounts, please contact us before the expiry date.

Can I see my full trading history on my demo account?

On MT4  demo accounts you’re able to view up to 200 entries. This includes all trading activity on your account.

How do I change my demo account currency?

Unfortunately, you can’t change the base currency of a demo account once you’ve opened it. If you need a demo account in a different account currency, please open a new demo account.

How do I know which demo account to apply for?

If you’d like help choosing the type of demo account that’s right for you, why not take a look at our account comparison table.
If you’re still not sure, please contact our Sales team who’ll be happy to help you.

What are the spreads on my demo account?

Spreads on our Live and demo accounts start from 0 pips. See our MT4 forex contract specs for a full list of spreads and currency pairs.

Can I use my demo account to backtest?

Yes, you can use your MT4 and demo accounts to backtest your strategies.

How much does it cost to open a demo account?

It’s free to open a demo account with us.

Why has my demo account been disabled?

Your demo account will be disabled if there’s been no trading activity on the account for 30 days, or if the personal information you provide to open the account is inaccurate or incomplete.

Can I delete trades from my demo account history?

No, you’re not able to delete any past trading activity from your demo accounts.

Can I open a demo account and a live account at the same time?

Sometimes it’s helpful to use your demo account for testing different strategies before applying them on yourlive account. That’s why you can hold both a live and a demo account at the same time.

Is trading different on MetaTrader demo and live accounts?

Our MetaTrader 4 (MT4) demo accounts reflect the same environment as their respective live counterparts in terms of price feed, functionality and features.
If you’d like a general overview of the MT4 platform, please select the Pro demo account type.
The MT4 Pro demo account is only available upon request and will show specific Pro features such as commission.
Please be aware that all of our demo account servers can be used for testing purposes and may show differences from the live environment from time to time.

Access and Password

What is a telephone password?

Keeping your account details safe is really important for us. We ask for a telephone password to confirm it’s you who we are talking with when you contact us with any account queries or if you wish to trade by telephone.Your telephone password can consist of a word or a number or combination of both. Please be aware that we will never ask you for your master password that you use to log in to your account. We recommend that you never reveal your master or telephone password to anyone.

I have applied for an account but haven’t received my login details. When will I receive them?

We’re sorry you haven’t yet received your login details. Normally we send these details once you have provided us with the correct documentation outlined when you applied for the account.
If you are yet to send in your documents, you can do this by sending them offline by email to newaccount@renesource.com.
Once we are happy with the information and documentation you have provided us with, you will receive your login details via email. However, if you have already sent us your documents and haven’t heard back from us, please call our Account Opening team between 08:00 and 18:00 time (Monday to Friday).

What do I do if I don’t receive my MT4 account login details?

We send your MT4 account login and password to the email address you provided on your application form. If you don’t receive the email after you’ve completed the registration form, please check your spam (junk mail) folder. If you can’t find it in your spam folder either, please don't hesitate to contact us.

How do I change my password on the MT4 platform?

You can change the master password on your MT4 platform by following these steps: Step 1: Navigate to Tools->Options.

Step 2: Select the server tab and click on “Change”

Step 3: Confirm your master password in the “Current password” field then tick the “Change master password”.
Step 4: Enter the new password in the “New password” and “confirm” fields.

What’s an investor password and how do I create one on the MT4 platform?

The investor password gives you limited access to look through charts, perform technical analysis and test Expert Advisors. You can’t trade with an investor password.
It can easily be created on your platform by following these steps:
Step 1: Navigate to Tools->Options

Step 2: Select the server tab and click on “Change”

Step 3: Confirm your master password in the “Current password” field. Then select “Change investor (read only) password”.
Step 4: Enter the new password in the “New password” and “Confirm” fields.

I forgot my trading account password. What should I do?

If you need to reset your trading account password please contact our Client Services team with your:
  • Login number
  • Telephone password
  • Full residential address
  • Date of birth

What should I do if I’ve lost my login details?

If you need to retrieve the login details for your account(s), please contact our Client Services team with your:
  • Account type
  • Registered email address
  • Full address (including postcode)
  • Date of birth

I don’t know my telephone password. Can I have it resent to me?

The telephone password is the memorable alphanumeric combination that you chose when you applied for your live account to be used for identification. If you don’t remember your telephone password, you can find it in the email we sent you when you opened your first account. If you don’t have it, please contact our Client Service team.

How can I retrieve my trading account login details?

If you have lost your login details, please contact the Client Services team with the following details:
  • Account type
  • Registered email address
  • Telephone password
  • Full residential address
  • Date of birth

MetaTrader 4

How do I place a pending order?

Step 1: If you want to place a pending order, please open the "Order"" window in one of the following ways:
  • right click on the Market Watch window or on the ""Trade"" tab of the terminal window and select “New order” from the context menu; or
  • press the F9 button; or
  • use the Tools -> New order menu sequence; or
  • right-click on the chart window and select Trading -> New order from the context menu; or
  • double-click on the currency pair in the Market Watch window.
Step 2: Then you can choose “Pending order” from the dropdown list:

What does “10 points” refer to on the MT4 and platforms?

On the MT4 and platforms, 10 points/pips is the same as one ”standard” pip.
The MT4 and platforms assume that the last decimal place is a point/pip despite the fact that most currency pairs are quoted to four decimal places in the market (or to two decimal places for JPY pairs).
Our prices are quoted at five decimal places (and three for JPY pairs) but the platform continues to assume that points/pips are calculated to the last decimal place, when in reality there is a further subdivision of a point/pip.

How do I access the History Center on the MT4 platform?

In order to download quotes from the History Center, please follow these steps:
Increase the ”Max bars in history” in MetaTrader 4 by clicking on Tools->Options->-Charts entering '9999999999999'.
Be aware that using larger volumes of data will increase the load on your PC.

Go to History Center in MetaTrader 4 by clicking on Tools->History Center.

Then please choose the timeframe for the particular instrument you’re interested in (for example, double-click on EURUSD|1 min), double click on it and press “Download”.

MetaTrader 4 should now download the full history of M1 quotes for the specific instrument selected directly from the History Center and import it into MT4.

How do I generate an account statement on the MT4 platform?

If you want to restore your history, please right-click within the Account History tab and select the option “All History”.

You can then print it by selecting ”Save as Detailed Report”.

Please be aware that these are HTML files and you can paste the contents into Excel using Paste special->Unicode text."

What time does my MT4 or platform show?

Our MT4 and platforms show Eastern European time (EET).
During British Summer Time (BST), however, platform time is Eastern European Summer Time (EEST, GMT+3).

Where can I download the MT4, and platforms?

You can download trading platforms by using the following links:
  • MetaTrader 4

What version of Windows do I need to operate the MT4 platform? What are the system requirements?

For MT4 and , you need to have Microsoft Windows 98SE/ME/2000/XP/Vista/7 or newer.

How can I open a trade on the MT4 platform?

There are several options.
  • Right-click on the Market Watch window or on the ”Trade” tab of the terminal window and select “New order” from the context menu;
  • or press the F9 button;
  • or use the Tools -> New Order menu sequence; or right-click on the chart window and select Trading -> New Order from the context menu;
  • or double-click on the currency pair in the Market Watch window.


Once the ""Buy"" or ""Sell"" button is pressed and Renesource Capital confirms the deal, your long or short position is open.

How can I close my trade on the MT4 platform?

If you have the “One click Trading” box ticked on your Tools menu (Tools -> Options -> Trading tab), you can simply right-click on your open position, select “Close Order” and the order will immediately close.

Also, with “One click Trading” you can always press the close “x” button on your trade below the “Profit” column.
On the other hand, if you have not ticked the box for “One click Trading” this will be a two step process:
First, please right-click on your open position and select “Close Order”. 
Then, press the yellow close order button.

How can I partially close my trade on the MT4 platform?

If you have the “One click Trading” box ticked on your Tools menu (Tools -> Options -> Trading tab), please double-click on your open position.
Then you can change the order volume to the amount you wish to close. After that, please click on the yellow close order button.

On the other hand, if you have not ticked the box for “One click Trading”, simply right-click on your open position and select “Close order”.

Then you can change the order volume to the amount you wish to close. After that, please click on the yellow close order button.

Will I receive alerts about low margin levels on the MT4 platform?

Unfortunately, there’s no MetaTrader functionality to issue margin warnings on the MT4 platform.
When your margin level falls below 20%, our system will automatically close your open positions until it goes back above 20%.

Can I manage multiple accounts on MT4 and platforms?

You can access several accounts through MT4 and . However, you can only be logged in to one account at any given time on any one platform.
If you’d like to be logged in to more than one account at the same time, you’ll need more than one instance of MT4 or installed on your PC.

Am I able to log in to more than one account simultaneously on one MT4 platform?

MT4 and don’t allow you to log in to more than one account at a time.
If you’d like to log in to more than one account simultaneously, you can download another instance of the platform onto your PC and save this in another directory. You’ll then be able to run two instances of the platform.
We’re here to help, so if you’re experiencing any difficulties with this, please don't hesitate to contact us.

What version of the MT4 platform do I have installed on my PC?

To find out the current version of the platform you have installed, please open your platform, from the top menu navigate to “Help” and choose “About”. This will indicate the version and build of the platform you have installed.

Is it possible to access my MT4 account from different computers?

Yes. You can access your MT4 account from different computers at the same time. This also includes using mobile versions of both platforms.

How do I know which server to select for my MT4 account type?

In the email we send you when you open your account, we also provide you with the information on the trading server you should use.
However, if you have lost the email or no longer have your account details, please contact us and we’ll give you the information.

How do I download historical data on my MT4 platform?

In order to download quotes from the History Center, please follow these steps :
Increase the ”max bars in history” in MetaTrader 4 by clicking on Tools->Options->-Charts and entering ”9999999999999”.
Please be aware that using larger volumes of data will increase the load on your PC.

Then please go to the History Center in MetaTrader 4 by clicking on Tools -> History Center.

You can now choose the timeframe for the particular instrument you’re interested in (for example, double-click on EURUSD|1 min). Double-click on the instrument and press “Download”.

MetaTrader 4 should now download the full history of M1 quotes for the specific instrument selected directly from the History Center and import it into MT4.

Which operating systems are MT4 compatible with?

The MT4 platforms are compatible with the following Windows operating systems: Vista, XP, Version 7 and 8. However, please note that neither platform can be used with Windows NT.

How do I uninstall and reinstall the MT4 platforms?

  1. &If you have any profiles\templates\indicators\EAs that you’d like to maintain, please back up those files first. You should find them stored in C:\Program Files\MetaTrader 4 - Renesource Capital.
  2. It’s also advisable to back up the MT4 logs folder before uninstalling the application so that you keep a copy for your records. The default location is C:\Program Files\MetaTrader 4 - Renesource Capital \logs.
  3. You can uninstall MetaTrader 4 through the Control Panel and delete the MetaTrader 4 - Renesource Capital directory from Program Files.
IMPORTANT: Please be aware that in Windows Vista and Windows 7, when a programme tries to write to a file within Program Files, Windows transparently redirects the operation so that the file actually gets stored within the current user's area.
  1.     IV.            The location is usually C:\users\AppData\Local\VirtualStore. AppData is a hidden directory, so you may need to change your folder settings to make it visible.
Please ensure MT4 is fully removed also from this location.
  1.       V.            To reinstall the platform, please download the MT4 set-up file and go through the installation process.
Once the installation is complete, cut the folders of the profiles\Templates\Indicators\EAs that you backed up (step 1), if applicable, and paste them back in to MetaTrader folder in Program Files.

Which time zone do the MT4 charts follow and how can I change it to my local time?

Chart times follow the server time, which is set at Eastern European Time (EET).
This is normally set to GMT+2. However, during British Summer Time (BST) platform time is GMT+3.
Unfortunately, you can’t change the time zone to your local time as it’s set by the server.

How do I place a trailing stop on the MT4 platform?

Step 1: Right-click on the open position and select “Trailing Stop”.
Step 2: Specify the required level for your trailing stop:

Do you allow hedging on MT4?

On the MT4 platform, hedging is allowed. However, on the platform, hedging is not allowed.

How do I open a chart on MT4?

There are several ways to open a chart on MetaTrader:


  • Right-click on the instrument in the “Market Watch” window and select “Chart Window”.

  • Click on the instrument in the “Market Watch” window and drag it onto an existing chart or blank space on the platform.

  • Click on the ”New Chart” button on the toolbar.

How do I change my chart type on MT4?

Please navigate to Charts and select the type of chart you want.

Alternatively, you can click on one of the buttons on the toolbar.

How do I zoom in/out of my MT4 chart?

Please navigate to Charts and select to zoom in or zoom out.

Alternatively, you can click on one of the buttons on the toolbar.

Why do I see a line chart even though I changed it to candlesticks on my MT4 platform?

When there are many small candlesticks, that chart could appear to be a line chart.
To see the candles clearly, please zoom in to the chart.

Can I adjust the scale of the vertical and horizontal axes on my MT4 charts?

Yes. You can do that by placing your cursor on the vertical or horizontal axis until you see a double-headed arrow.
Then please click and move the cursor upwards/downwards (vertical axis) or sideways (horizontal axis) until the scale is adjusted.
Alternatively, you can fix the vertical between two price levels.
To do so, please right-click on the chart and select “Properties”.

In the “Properties” window, click on the “Common” tab.
Tick ”Scale fix” and enter the minimum and maximum values for the scale, then click OK.

How do I change the colours on my MT4 chart?

Please right-click on the chart and select “Properties”.

Click on the “Colors” tab and change chart colours as required.

Why do I only see one price on my MT4 chart? Is it the bid or the ask price? How can I show the ask price on my MT4 charts?

The charts only show the bid price.
To show the ask price, right-click on the chart and select “Properties”.
In the “Properties” window, click on the “Common” tab.
Tick ”Show Ask line” and then click “OK”.

How do I save my MT4 chart settings?

Chart settings can be saved as templates.
Once the chart is set up as required, please right-click on it and select Template->Save Template.

Name the template and click “Save”.
Please be aware that if you need these chart settings to be your default, name the template ”Default”.

What timeframes are available for my charts? How do I change the timeframe of my chart?

On MT4 the following chart timeframes are available:
  • One minute
  • Five minutes
  • 15 minutes
  • 30 minutes
  • One hour
  • Four hours
  • Daily
  • Weekly
  • Monthly
These are the basic timeframes. However, you can view other timeframes such as two minutes. Please right-click on the chart and select “Periodicity”, then the required timeframe.
Alternatively, you can select the required timeframe from the charts toolbar.

How do I scroll back on my MT4 chart to view historical prices?

First, make sure that you disable the “Auto Scroll” function on your platform, otherwise the chart will continue to revert to the most recent candle.
To do so, navigate to “Charts” and select “Auto Scroll”.

Alternatively, you can click on the “Auto Scroll” button on the charts toolbar.

To move backwards on your chart, you can:
1. Click on the chart, hold and drag it towards the right, or
2. Press the “<-” key on your keyboard, or
3. Use the ”Page Up” or “Page Down” keys on your keyboard

How can I show multiple charts on my MT4 platform? How many MT4 charts can I have open?

Start by opening all the charts you require, as new charts.
To arrange the chart windows so that they are all visible and equal in size, please navigate to “Window” on the toolbar and select either “Tile Horizontally” or “Tile Vertically”.

There’s no limit to the number of charts you can have open. However, the more charts you have open, the more likely your platform will slow down or freeze.

What does the volume on my MT4 chart indicate?

On MT4, the volume on the chart is the tick volumes. This indicates the number of price quotes we have received within a specific timeframe.
The volume on the chart could be either the tick volume or the real traded volume.The tick volume indicates the number of quotes received within a specific timeframe. On the other hand, the real volume represents the sum of a currency traded within a specific timeframe. 

EAs & Indicators

Does Renesource Capital provide Expert Advisors (EAs)?

No, we don’t.

How do I install an Expert Advisor on MT4?

You can install an Expert Advisor on MT4 by following these steps:


  • Save your Expert Advisor in the Experts folder in the MT4 directory on your computer. This you can usually find under C:\Program Files\MetaTrader - Renesource Capital \Experts
  • Restart MT4
  • The Expert Advisor file should appear in the navigator window in MetaTrader
  • Click on it and drag it onto a chart of the currency that you’d like the EA to trade on.
  • In the “Properties” window that comes up, tick “Allow live trading”

  • Navigate to Tools->Options->Expert Advisors tab
  • Tick “Enable Expert Advisors”
  • Tick “Allow live trading”
  • Click OK

You should now be able to see a smiley face in the top right-hand corner of your chart to show that you have activated your EA correctly.

How do I know if my EA is active on MT4?

You should be able to see a smiley face in the top right-hand corner of your chart to show that you’ve activated your EA correctly.

Do I need to be logged in to my account for EAs to trade via MT4?

You’ll need to be connected to your account in order for your EA to open, modify or close trades.

My EA won’t place trades on MT4. Why?

If you’ve added an EA to your MT4 and it’s not trading, first of all check if trading is allowed. To do that, you should go to ”Tools->Options->Experts tab->Allow live trading”. Then make sure that the Expert Advisor button on the main tool bar is pressed.
You should be able to see a smiley face in the top right-hand corner of your chart to show that you’ve activated your EA correctly.
If everything is correct but the EA still doesn’t trade, please contact your EA provider for further assistance.

Where can I find my EA logs on MT4?

You can find the log file by selecting the “Experts” tab in the terminal window of your MT4, then right-click within the “Experts” window and select “Open”.

How do I add indicators to my MT4 chart?

To add indicators to your chart, please navigate to Insert->Indicators and select the indicator you want.

Then confirm the properties on the indicator in the next window and click “OK”.

Troubleshooting

 

Why am I receiving the message “Market is closed” when trying to open a trade on my MT4 platform?

This error message means that you’re trying to trade out of trading hours, and there are no current tradable prices.

Why was my trailing stop not executed on my MT4 platform?

In MetaTrader 4, trailing stops only remain active as long as you’re logged in to the platform.If you set a trailing stop and then log out of MetaTrader before the market moves in your favour by the number of points that you specified, the trailing stop loss order will not be placed.

I lost connection on my MT4 platform. Is my trailing stop still in place?

If you set a trailing stop and lose your server connection before the market moves in your favour by the number of points that you specified, the trailing stop loss order will not be placed.If you set a trailing stop and lose server connection after the market moves in your favour, triggering the trailing stop, the stop loss order will not trail the market. It will work as a hard stop, fixed at the last price where the stop loss was at when you lost the connection.

How do I take a screenshot?

  • Select the window you want to send the screenshot of
  • On the upper right-hand side of your keyboard there should be a button named: print screen (or an abbreviation of it, such as PrtScn):

  • While you have the relevant page open, please press on the print screen button
  • After that please open a Word/plain document and press the buttons Ctrl+V to paste the screenshot into your document (see image below)
  • If your email programme supports it, you’ll also be able to paste the screenshot directly into the email

I can’t see all the currency pairs or instruments available on my MT4 account.

To view all the currency pairs and instruments available on your account, please right-click on the Market Watch window and select “Show All” to display all symbols.
 Alternatively, you can select “Symbols” to choose individual instruments that you’d like to show or hide within your Market Watch window.

I get a “no connection” error message on my MT4 platform. What should I do?

Please left-click on the bottom right-hand corner of your platform. When a pop-up window appears, select “Rescan servers” so that the system can scan the best server available with the strongest connectivity. Then you can choose one of the servers from the list available.
We’re here to help, so if you’re still experiencing problems, please don't hesitate to contact us.

How do I know if I am connected to my MT4 account?

The connection bars in the bottom right-hand corner of your platform will indicate if you’re logged in successfully. Green bars indicate you’re logged in to your account successfully.Red bars indicate you’re not logged in to your account.We're here to help, so if you have any questions, please don't hesitate to contact us.

Why has my MT4 platform not saved my chart settings or profiles?

The connection bars in the bottom right-hand corner of your MT4 platform will indicate if you’re logged in successfully.
Green bars indicate you’re logged in to your account successfully.Red bars indicate you’re not logged in to your account.
If the bars are red, please try to rescan the servers by left-clicking on the bottom right-hand corner of your platform. When a pop-up window appears, select “Rescan servers” so that the system can scan the best server available with the strongest connectivity. Then you can choose one of the servers from the list available.If you get an error message saying ”invalid account” in the bottom right-hand corner of your platform, you’re entering an incorrect password or selecting the wrong server type.We're here to help, so if you have any questions, please don't hesitate to contact us.

Why can’t I find my indicator in the MT4 folder?

This may be because you don’t have the correct user rights to modify the installation folder.Please ensure that you set the platform to run as an administrator as otherwise it will run with a normal user’s privileges.
If you run the application with a normal user’s privileges, you won’t have the permissions to modify the MT4 files and, therefore, to save any changes in the settings.Based on this, please do the following and then try to use the platform again:
  • Right-click on the MetaTrader 4 icon that you have on your desktop
  • Select ”Properties”
  • Select the ”Shortcut” tab
  • Click on ”Advanced”
  • Tick ”Run as an administrator”

Why can’t I find my journal logs for my MT4 platform?

This may be because you don’t have the correct user rights to modify the installation folder.Please ensure that you set the platform to run as an administrator as otherwise it will run with a normal user’s privileges.If you run the application with a normal user’s privileges, you won’t have the permissions to modify the MT4 file and, therefore, to save any changes in the settings.Based on this, please do the following and then try to use the platform again:
  • Right-click on the MetaTrader 4 icon that you have on your desktop
  • Select ”Properties”
  • Select the ”Shortcut” tab
  • Click on ”Advanced”
  • Tick ”Run as an administrator”

Why doesn’t my platform update automatically to the latest version?

This may be because you don’t have the correct user rights to modify the installation folder.Please ensure that you set the platform to run as an administrator as otherwise it will run with a normal user’s privileges.If you run the application with a normal user’s privileges, you won’t have the permissions to modify the MT4 file and, therefore, to save any changes in the settings.Based on this, please do the following and then try to use the platform again:
  • Right click on the MetaTrader 4 icon that you have on your desktop
  • Select ”Properties”
  • Select the ”Shortcut” tab
  • Click on ”Advanced”
  • Tick ”Run as an administrator”

How do I find my journal logs on my MT4 platform?

If you want to open your logs folder, please select your journal tab, right-click with your mouse on any entry in the journal, and select “Open”:

You’ll then find them saved by date:
YouIf you’re a Windows Vista user, you might find the logs saved in your current user’s area.
The location is usually C:\users\\AppData\Local\VirtualStore.AppData is a hidden directory, so you may need to change your folder settings to make it visible.When a programme tries to write to a file within Program Files, Windows Vista redirects the operation so that the file actually gets stored within the current user's area. Therefore, this is an option that should also be explored if the logs can’t be found in the usual location.

My MT4 platform’s frozen. What should I do?

Please try to shut down your platform and restart it. If this does not work, please remove any indicators or Expert Advisors from your platform if you’re using these. Then please try to restart your platform.If your platform is still not functioning correctly, you may need to uninstall and reinstall the platform.Please find instructions below to uninstall and reinstall your platform:
  1.  If you have any profiles\templates\indicators\EAs that you’d like to maintain, please back up those files first. You should find them stored at C:\Program Files\MetaTrader 4 - Renesource Capital .
  2.  It’s also advisable to back up the MT4 logs folder before uninstalling the application so that you keep a copy for your records. The default location is C:\Program Files\MetaTrader 4 - Renesource Capital\logs
  3. Uninstall the MetaTrader 4 through the Control Panel and delete the MetaTrader 4 - Renesource Capital file from Program FilesIMPORTANT: Please be aware that in Windows Vista and Windows 7, when a program tries to write to a file within Program Files, Windows transparently redirects the operation so that the file actually gets stored within the current user's area.
  4. The location is usually C:\users\\AppData\Local\VirtualStore. AppData is a hidden directory, so you may need to change your folder settings to make it visible.Please ensure MT4 is fully removed also from this location.
  5. Then please download the MT4 set-up file and then go through the installation process.Once the installation is complete, cut the folders of the profiles\templates\indicators\EAs that you backed up (step 1), if applicable, and paste them back in to MetaTrader folder in Program Files.

I can’t see the “New Order” window. What do I do?

The “New Order” window is most probably outside of the boundaries of your screen, and therefore it’s not visible to you.
To get access to your “New Order” window, please follow these steps (without using your mouse):


  • Close your MT4 if it’s open
  • Open your MT4 and log in to your account
  • Press the F9 key on your keyboard (this will open the “New Order” window)
  • Press ALT and SPACE at the same time and release them to open the following menu

  • You
  • Use your cursor key ↓ to move and hit “Enter”:

  • You
  • Your mouse pointer will change to following symbol: 
  • Now you have to use the cursors to move your window into the visible area:
  • Use ← when the menu appeared on the right of your screen
  • Use ↑ when the menu appeared on the bottom of your screen
  • Use → when the menu appeared on the left of your screen
  • Use ↓ when the menu appeared on the top of your screen
  • If your window is in the visible area, please press “Enter” to change back to normal mode

Error Messages

What does the “Trade context is busy” error message mean on MT4?

“Trade context is busy” is a problem that arises on your local terminal, not on our servers.
The main culprit of this issue is down to your terminal trying to send more than one signal simultaneously to our servers. This can be caused by multiple mouse clicks or a hyperactive EA. Until the first task has been processed, the second can’t be processed and your terminal displays the “Trade context is busy” message.
Our servers will process your order as soon as they receive it. However, your terminal can only process one order at a time, and it will only process the next order once the first has been completed.

What does the “Off quotes” error message mean on MT4?

If you have a Micro account, the limit on the total size of your open positions is 5.0 lots at any given time. Any order that breaches this limit will be rejected by our server, which can result in an ”Off quotes” message.In other cases, “Off quotes” usually indicates a break in connectivity resulting in no current prices being available.

What does the “No connection” error message mean on MT4?

“No connection” appears when you’re not able to establish a connection with our trading server.

What does the “Invalid S/L or T/P” error message mean on MT4?

The “Invalid S/L or T/P” error message appears if the stop loss or take profit you’re trying to place is not within the correct parameters of the limit and stop levels for that particular instrument.

What does the “Old version” error message mean on MT4?

The “Old version” error indicates that you have an old version of the platform installed on your PC that is no longer compatible with our servers. You’ll need to update your platform by downloading the latest version of the platform.

What does the “Trading disabled” error message mean on MT4?

The “Trading disabled” error indicates that no trading activity can take place on your account.Please contact us for further information.

What does the “Market closed” error message mean on MT4?

The “Market is closed” error indicates that you’re trying to trade out of trading hours, and therefore there are no valid prices you can trade on.

What does the “Not enough money” error mean on MT4?

The “Not enough money” error indicates that you’re trying to place a new trade without having enough money to cover the margin requirement, ie the free margin is less than the required margin for the new trade.

What does the “requote” message mean on MT4?

A requote occurs when you request to execute an order at a specific price that is no longer available. In such cases, you’ll be offered a different quote. This can occur during fast-moving markets.

ABCs of Futures

What Is A Futures Contract?

A futures contract is an obligation to buy or sell a commodity at some time in the future, at a price agreed upon today.

  • The contracts themselves are interchangeable. They are standardized as to terms such as the grade of commodity that is acceptable and when and where it can be delivered.
  • The word commodity is defined very broadly to include physical commodities, financial instruments, forex and stock indexes.
  • The contracts are traded on an organized and regulated futures exchange so that buyers and sellers can easily find each other.
  • The exchange clearinghouse is the counterparty to every trade, which not only reduces credit risk in futures trading but also makes it easy for position holders to exit at any time they wish.
Importantly, a futures contract is an obligation (not a right like an option) and that obligation must be fulfilled. In most cases it's fulfilled by simply making an offsetting trade that takes you out of your original position (sold if one has bought; bought if one has sold). But strictly speaking, you can choose to carry the position all the way to the delivery date, when it's fulfilled either by the exchange of the physical commodity or by a cash settlement.

Futures vs. Options

Newcomers to futures trading often confuse futures trading with equity options trading. But, they definitely are different investing approaches. The only similarity between a futures contract and an options contract is that they both have an expiration date. But a futures contract is not a wasting asset like an option contract.

Futures markets exist for the purposes of price discovery and the transference of risk. They can provide an excellent way to express your own opinion about where prices are heading. So if an option is a four-dimensional instrument, then a futures is simply a two-dimensional instrument. But they are very different from options.

An options contract conveys the right, not the obligation, to assume a position in the underlying instrument at a specific (strike) price any time before the option expires. When you buy (go long) an option, your risk is limited to the premium you pay. The cost of the option is known as a premium (similar to insurance) and is based on time, volatility and the relative value of your strike price to the underlying market.

However, the value of a futures contract is ultimately tied to the underlying product or instrument (e.g., S&P 500 Index, gold, crude oil, U.S. Treasury bonds or notes, soybeans, etc.) via each contract's specifications. You can either buy (go long) or sell (go short) any futures contract and your risk (or potential profit) is virtually unlimited.

However, what you know about option trading may be extremely useful when you enter the futures trading world. That’s because futures exchanges also list options on futures contracts. Just as in equities, you can take an options position that defines your risk on a position that has a futures contract as the underlying instrument.

Initial Margin vs. Maintenance Margin

There are two types of margin requirements in futures:
  • Initial margin is the amount of funds that you must deposit when the positions are initially put on.
  • Maintenance margin is the minimum balance that must be maintained in a trading account to keep positions.

Don't make the common beginner's mistake of trying to add the two numbers together. Rather, think of maintenance margin as a subset of initial margin.

Maintenance margin is usually a smaller number than initial margin and really doesn't come into play unless the account balance is shrinking due to losses. If the value of the account balance falls below maintenance level then you're required to get the account back into compliance (a margin call). You can do this by either sending more money (raising the balance back up to initial margin) or lightening up your position (lowering the initial margin back down to the balance).

Futures Contract Contract Value Initial Margin Maintenance Margin

Notice that maintenance margin is usually a smaller number than initial margin. In the case of the E-Mini S&P futures contract, you'll need at least $5,625 (initial margin) in your account to buy or sell a single contract. To trade 10 contracts you'd need $56,250 (10 x $5,625).

If the value of your account balance falls below $4,500 per contract (maintenance margin), you'll get a margin call requiring that you bring your balance back to at least $5,625 times the number of contracts you hold. Or, you can choose to offset all or part of the position.

What Is Contract Value?

It is very important that you understand the contract specifications before you do any futures trading. Besides defining what you are trading, contract specifications provide the size of the contract as well as the price unit, thus allowing you to calculate the value of any contract. Margin requirements typically are a percentage of the contract value, so that is why initial and maintenance margin requirements can change frequently.

Futures Trading Account Value

All futures contracts are settled daily and assigned a final value price. Based on this settlement price, the value of all positions are "marked-to-the-market" each day after the official close; your account is either debited or credited based on how well your positions fared in that day's trading session. As long as your position(s) remains open, cash will either come into your account or leave your account based on the change in the settlement price from day to day.

This system gives futures trading a rock-solid reputation for credit-worthiness because losses are not allowed to accumulate without some response being required. It is this mechanism that brings integrity to the marketplace.

Or considered another way, every trader can have confidence knowing that the other side of his trade will be made good. Clearing member firms at the clearinghouse, and ultimately the Financial Safeguards by CME Clearing.

Guide to margins & order entry

Margins – A Basic Introduction

Initial margin is the amount of money required to open a derivatives position, whether in FOREX, CFD’s or Futures. It is in effect a security deposit to ensure that traders have sufficient funds to meet any potential loss from a trade. When a position is closed out or settled money deposited by way of margin is returned, plus or minus any resulting profit or loss.

If a position involves an exchange – traded product, the amount or percentage of initial margin is set by the exchange/ clearing concerned. However, bank or brokerage firms often require a larger amount of margin than that set by the exchange. In times of market volatility margin requirements can change quickly.

If a position is making a loss and the value of the initial margin is being eroded, the broker will make a margin call in order to restore the amount of initial margin available. Often referred to as “variation margin”, margin call for this reason is usually done on a daily basis, however, in times of high volatility a broker can make a margin call or calls intra-day.

Calls for margin are usually expected to be paid and received on the same day. If not, the broker has the right to close sufficient positions to meet the amount called by way of margin. After the position is closed-out the client is liable for any resulting deficit in the client’s account.

Exchanges have the term “maintenance margin”, which in effect defines by how much the value of the initial margin can reduce before a margin call is made. However, many European brokers only use the term “initial margin” and “variation margin”.

Consider the example below:

A CME Group traded COMEX Gold futures contract (GC) of 100 troy ounces with an initial margin of $4400 with a maintenance margin of $4000:

Day 1
A client lodges $4400 initial margin and buys an August gold future (GC) at a price of $1200 per ounce. (every $1 movement in the price of gold generates a profit or loss of $100)

Gold closes the day at $1195.00, which means the client is losing $500.

Day 2.
The broker makes a margin call for $500 up to the initial margin level and expects to receive funds on the same day.

Three scenarios:
  • The client pays his margin call and on day 2 gold closes at $1198. In this case the client now has $300 surplus in his futures trading account
  • The client does not pay his margin call and on 3rd day the broker sells out the contract at 1190. The client is debited $1000 and now has a balance of $3400
  • The client does not pay his margin call but promises to meet the call on 3rd day. The broker uses his discretion to give the client an extra day to pay. On day 4 the price drops to $1150 and no margin has been received. The broker closes out the trade creating a loss of $5000. The client is now left with a $600 deficit in his futures trading account (i.e. initial margin $4400 less loss of $5000) for which he is legally liable to pay.

The process of placing Futures orders

Before considering specific types of orders, it is valuable to understand the general procedure:

  • Call the trading desk direct. Renesource Capital brokers are there to deal with Client calls. Your very first step will be to identify yourself using your unique client code, voice trading password, account number and name.
  • Pass your order. This will help ensure that you will be more confident in what you are saying and be able to provide all the correct information in the right order. Renesource Capital broker will then repeat your order back and ask you if this is correct. Although all of our Brokers are professionally trained to deal with novice/ beginners and expert customers there is the chance that they may speak more quickly than you are prepared for. If you are unsure that the details are correct, ask for it to be repeated, more slowly. Only when you are satisfied that the order has been repeated correctly, should you say it is correct.
  • The order is then transmitted to either the floor or an electronic exchange. If it is a market order (i.e. you want to trade NOW), then under normal circumstances, you may hold whilst the Broker places the order in the exchange trading system.
  • You receive the fill price (the best price we have managed to obtain in the market) from your Broker. If however, it is another kind of order (see order definitions) then the conversation finishes after you have confirmed the order with Broker.
  • Your record. It is very important to make a note of all your orders, recording the time, date, and the type of order placed. You should check all fills given to you against your own record and the written confirmation sent to you the next day.

Order Details

The following outlines the futures order process in more detail.

Client wishes to purchase for $52.00 per barrel, 5 contracts of June NYMEX Crude Oil today. The current price stands at $52.35 per barrel, which is higher than Client is willing to pay.

This is how the order should be passed to Renesource Capital futures trading desk over the telephone, divided into its component parts:

1 2 3 4 5 6 7 8
Robert Middleton
Account FUT123
Buy 5 June 2015 CME Group NYMEX
WTI Crude Oil
$22.00 Limit Day order

1. State your name and account number. Do not assume that the Broker knows who you are.

2. State whether this order is a Buy or Sell. Broker’s order ticket is divided in two halves; one side is for buy orders and one side is for sell orders. Until the Broker knows what side to write your instruction on, he cannot take your order. Renesource Capital recommends that you repeat this part of the order to ensure complete agreement on this point by both of you.

3. State the quantity/ number of contracts.

4. State the delivery month. Many contracts including NYMEX WTI Crude Oil are deliverable this year (near month future) and also next year as well (far month future). Therefore, it is good trading practice to state the month and also the year of the contract that you wish to trade. Renesource Capital recommend that because some months can sound similar on the telephone, such as September and December, you elaborate by saying September Labour Day and December Christmas or July Independence day to avoid any confusion.

5. State the exchange and contract to be traded. Although it can be obvious in many cases, there are many similar or identical contracts that trade on at least two different exchanges. Once again, it is good trading practice to specify the exchange as well as the contract.

6. State the price. Specify the price at which you want your order to be activated. Renesource Capital recommends that for certain numbers that sound similar to others, you clarify these: fifteen would be stated as "fifteen that is one – five" and fifty would be stated as "fifty, that is five – zero".

7. Order action.

Most orders are either:

  • market orders
  • price orders
  • or a combination of the two

It is very important that you state the type of order to ensure correct execution. In the NYMEX WTI Crude Oil order example above, the client stipulated a "Limit Order". In the next section, we describe the various applications for different restrictions you may wish to place on orders.

8. State type of order.

Unless stated differently most brokerage firms will assume the order will remain valid for the day only. However, it is good practice to state whether it is a Day Order or a Good Till Cancelled Order ("GTC"). (Also known as an Open Order).

Let us consider the differences.

Day Order. This is good only for the trading session during which you placed the order. If you place an order between two of the sessions, the order will remain good for the next session only, unless you specify otherwise.

Good Till Cancelled Order („GTC" or Open order). This remains a working order until:

  • it is filled
  • it is cancelled by you
  • or the contract expires

The process of placing Options orders

The procedure for the placement of "Option Orders" is slightly different to a futures order.

For example, consider buying a "Call Option" with a "Strike Price" of $60.00 on the June ’2015 NYMEX WTI Crude Oil futures contract with a "Premium Value" of $7.20:

1 2 3 4 5 6 7 8 9 10
Robert Middleton
Account OPT123
Option
order
BUY 5 June 2015 Strike 60 NYMEX
WTI Crude Oil
Call Open Day order

1. State your name and account number. Do not assume that the Broker knows who you are.

2. State that it is an option order.

6. State the strike price you wish to trade. If the option is exercised, the "Strike Price" identifies the price at which the underlying instrument will be assigned. Even if a Client never intends to exercise its option, it must have a "Strike Price."

7. State whether the option is call or put.

8. State whether this order is to open or to close.

Attention! When trading "Options" it is important to state whether you are opening a new position or closing an existing position.

Order Definitions

Market Order

This is the most straightforward order there is. You do not specify a price but instruct the Broker to get the best available price now. If the Client is not prepared to wait for NYMEX WTI Crude Oil to fall to $52.00/barrel and wants to get in immediately, the order would change to:

Robert Middleton, FUT123, Buy, 5 June @2015 NYMEX WTI Crude Oil, at Market.

Note: Some electronic exchanges do not recognise market orders. To overcome this, many electronic trading systems simulate a market order by placing a limit order well above or below the last trade. In normal market conditions this practise works well, however in fast market conditions some market orders can fail.

Market on Close ("MOC")

An MOC order is an instruction to fill the order, at market, but only in the closing range (the range is determined by the individual exchanges).

Market on Open

It is an order that is to be filled in the official exchange opening range. If any part of the order cannot be filled in this period, it will automatically be cancelled.

Limit Order

This is an order that Client will use if it wants to be filled at a certain price or better. If it is a buy limit, the price of the order is given at or below the current market price. If it is a sell limit, the price of the order is given at or above the current market price. Generally you are guaranteed a fill if the market trades through your price. However, if the market just trades at your price, you are not guaranteed a fill because there may not be enough trades occurring (enough liquidity) at your price to ensure that your particular order will be traded.

Sometimes, you may wish to place a limit order when the market is trading at or through your limit price. This order will be flagged ‘Or Better’. The Broker will then be able to inform the floor broker or input in the trading system of your intention.

Fill or Kill ("FOK")

An FOK order is an instruction to the broker to immediately execute your order at a specific price or cancel it if it is "unable" to be filled. The broker on receipt of your order will immediately "Bid" (if it is a buy order) or "Offer" (if it is a sell order) your price at least three times. If a trade takes place, you will be notified immediately of your fill price. If however no trade takes place, the order will automatically be cancelled, or "killed". The specified price must be close enough to the current market price to make its execution a reasonable possibility. In our example, the market is trading at $52.35 and our specified price is $52.00. This, therefore, would not be a realistic alternative to our normal limit order.

Market if Touched ("MIT")

A MIT order becomes a "Market Order" if and when the market hits a specified price. Just like a "Limit Order", a buy "MIT" is placed below the current market price and a sell "MIT" is placed above the current market price. However, unlike a "Limit Order" the market does not need to trade through your price to guarantee a fill. Additionally, there are no limitations placed to what price the order will be filled. It may be at your price, better, or perhaps worse – it has become a "Market Order."

Stop Order

This is an order that becomes a "Market Order" when trading occurs at or through your specified price. This differs from an "MIT" because a buy "Stop" is placed above the current price and is triggered when the market is bid at or above your "Stop" price. A sell "Stop" is placed below the current market price and is activated when the market is offered at or below your "Stop" price.

Many Clients refer to a "Stop Order" as a Stop Loss, in recognition of its function of closing a trade if the market price moves in the opposite direction to the one Client has anticipated. However, the "Stop Order" can also be used to protect the profit of an existing trade or to open a new position to buy "on strength" and sell "on weakness."

Consider that the market price of Crude Oil has fallen to $51.95 and Client is now in the market. The Client first concern will be to protect himself against a further significant fall in the price. Client will place a "Stop Order" using it as a Stop Loss:

Robert Middleton, FUT123, Sell, 5 June @2015 NYMEX WTI Crude Oil, at 51.50 Stop GTC.

At a later point in time, if the market moves to $52.50, the trader might want to protect the profit that he has already accrued and therefore, places a "Stop Order" to protect most of the profit:

Robert Middleton, FUT123, Sell, 5 June @2015 NYMEX WTI Crude Oil, at 52.40 Stop GTC.

Note: It is at this point that Client must remember to cancel his previous order at $51.50 Stop GTC.

It is also possible to use a stop order to open a new position. When we first looked at the NYMEX WTI Crude Oil example market the price was at $52.35/barrel. If the Client allows the price to fall before buying its 5 contracts it is buying a weak market. If, instead, he is looking for market strength in the anticipated trading direction, it may well consider using a "Stop Order" to enter "at market" if the price moves to or above 52.40.

Robert Middleton, FUT123, Buy, 5 June @2015 NYMEX WTI Crude Oil, at 52.40 Stop Day Order.

Stop Limit Order

This is a variation of a normal "Stop Order" and it instructs the broker that on a "stop" being elected, to fill the order at the price or better. If broker is unable to do this immediately, the order will become a normal "Limit Order."

Stop Close Only Order ("SCO")

An SCO is a "Stop Order" that can only be elected and filled in the closing range of the market and will only be elected if the market has traded at or through the price specified in the "Stop Close Only Order".

Other Order Instructions

Spread Orders

This is an instruction to buy and sell the same or related commodities in an attempt to take advantage of the price differential.

Spread orders are entered using a "Market Order" or at a specified "Premium" instead of a price. A "Premium" is the difference in the two prices of the two contracts with which a Client wants to become involved. When giving an order, Client must always state that it is a "Spread Order". When placing Spread order, the first part that is given is the "buy side". If the order is not a "Market Order", the "Premium" should be stated on the "higher priced side". The broker will treat the "Premium" like a "Limit Order" and almost always the "Premium" is indicated on the higher priced "side" of the "Spread Order".

Let us consider an example using NYMEX WTI Crude Oil future contract. The June contract is currently trading at $52.35/barrel and the July is at $51.45/barrel. The difference between the two contracts is $0.90; that is the "Premium". The Client believes that over a period of time the difference between the two contracts, or "Premium", will reduce in size. Therefore, Client will want to sell the higher priced contract and buy at the lower priced contract. However, Client believes that the "Premium" may increase slightly before Client is able to take advantage of the anticipated decrease. The order that he will give to the broker is following:

Robert Middleton, FUT123, Spread to Buy, 5 July 2015 NYMEX WTI Crude Oil and sell 5 June 2015 NYMEX WTI Crude Oil at a premium of $1.00 or more on the Sell Side Day Order.
It is important to remember certain features of trading with "Spread Orders". Spreads are traded separately from the regular market and the prices quoted may not be identical in the two markets. It is, therefore, very important to ask for a quotation before entering a "Spread Order" especially if the spread that Client is interested to trade is thinly traded.

Note: That many brokers do not accept "Stop Orders" on spreads.

Cancel Replace

This order will be used when a Client wants to change an existing order with respect to the price, action, quantity or duration, or a combination of any of these. With this order a Client cannot change the commodity or the month. Client informs broker what the old order is and that Client wants a "Cancel Replace" and then states the new instruction.

The advantage of this order is that it is impossible to be filled on both the old and the new orders. If the Client is too late in placing the "Cancel Replace" and the old order will be filled, the new one will be automatically cancelled and the Client will be notified of the fill. The disadvantage with the order though is the time in which it takes the order to be placed. Therefore, if it unlikely that the old order will be filled and time is of the essence, it may be worth taking a risk by placing the new order and then placing a "Straight Cancel" on the old one.

One Cancels Other ("OCO")

An OCO order consists of two separate "Buy" or "Sell" instructions. It cannot contain a "Buy" and a "Sell". As soon as the broker executes one portion of the order the second portion is cancelled. This is a very useful instruction for a Client who wants the option of placing a profit target whilst protecting the position with a stop loss. If Client considers that on the original order - Buy 5 June 2015 NYMEX WTI Crude Oil contracts, Client anticipated that the price would rise. If the market rises Client wants to take the profit and if falls Client wants to cut losses. This is an ideal opportunity to use an "OCO". Client wants to take profit using a limit order if the price rises to $53.00 and to place a stop loss if the price falls to $51.50. Both orders are "to Sell":

Robert Middleton, FUT123, OCO to Sell, 5 June 2015 NYMEX WTI Crude Oil at 53.00 Limit OCO 51.50 Stop.

Not Held Orders

Often brokers will take an order on a "Not Held" basis. This often occurs when the exchange does not recognise a particular order and the broker offers to work the order from the desk on a "Not Held" basis. This means that broker is prepared to work the order as long as Client acknowledges that if the order is missed the broker has no liability to provide a fill. In effect a Not Held order means an order is only worked on the basis of best endeavour but no liability is accepted if it is missed.

Commodities Futures

What are Commodities

Commodities are broadly defined as natural resources, chemicals and physical products you can touch, taste, smell, grow, mine, consume or deliver.

From their origins in the 1800s until the 1970s, commodities and futures markets were one in the same; financial futures are a modern-day invention. To confuse things slightly, today the term "commodities" is still often used as a broad industry term describing all futures commodity contracts, including financials. For example, "commodity trading advisor" is used to define an individual or firm who operates a managed futures program, even though many of them trade exclusively in the financial futures markets such as interest rates or stock indexes.

Trading commodities that encompass physical products are the roots of today’s commodity futures industry and still play a valuable role in the global marketplace, even though the most highly traded futures today are financial contracts such as U.S. Treasury notes, Eurodollars, and Standard & Poor's 500®.

The most popular contracts for commodity trading cover several broad categories: metals, energy, grains, livestock, and food and fiber. These are not paper assets, and in general, are produced and consumed at a price based on the forces of supply and demand.

A commodity futures contract represents an agreement to buy or sell a specific type and grade of commodity for delivery at a specific time in the future at an agreed upon place at a market-determined price. In reality, commodity futures rarely lead to the delivery of an actual product, because the contract positions are typically closed out before the delivery date.

Commodity investing also includes commodity options that convey the right to buy or sell the underlying commodities futures contract.

Exchange History

Markets for futures trading were developed initially to help agricultural producers and consumers manage the price risks they faced harvesting, marketing and processing food crops each year. Today, futures exist not only on agricultural products, but also a wide array of financial, stock and forex markets.

The world's oldest established futures exchange, the Chicago Board of Trade, was founded in 1848 by 82 Chicago merchants. The first of what were then called "to arrive" contracts were flour, timothy seed and hay, which came into use in 1849. "Forward" contracts on corn came into use in 1851 and gained popularity among merchants and food processors.

Meanwhile, what is now the nation's largest futures exchange, the Chicago Mercantile Exchange, was founded as the Chicago Butter and Egg Board in 1898. At that time, trading was offered in – you guessed it – butter and eggs.

In 2007, CME and CBOT officially merged, and are now collectively known as CME Group Inc., the world's largest and most diverse derivatives exchange.

Other prominent U.S. commodities exchanges were formed before or just after the turn of the century, and also had their roots in agriculture. At one time, you could trade on the National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and the New York Hide Exchange. Small exchanges like these ultimately merged to become the exchanges we have today.

In the 21st century, online commodity trading has become increasingly popular, and commodity brokers offer front-end interfaces to trade these electronic-based markets. A commodities broker may also continue to offer access to the traditional pit-traded, or open-outcry, markets that established the commodity exchanges.

Types of Futures

The most popular physical commodities contracts cover several broad categories: metals, energy, grains, livestock, and food and fiber. There are some modern additions to commodity futures that are unique, such as chemicals and fertilizer futures, but the most popular contracts fit under the broad categories listed here. Commodities are mainly subject to price fluctuations based on supply and demand factors in consuming and producing countries.

Metals

The major metals futures contracts include copper, gold, platinum, palladium and silver. Their uses include industrial purposes, in construction, and for jewelry. Geopolitical and economic factors in the dominant producing and consuming countries affect price action, but each also has its own unique fundamental influences. In the copper market, building construction is the largest demand source. Copper is also used for electrical and electronic products, transportation and industrial machinery manufacturing. The price of copper is therefore sensitive to statistics related to economic growth, particularly reports such as housing starts. For that reason, participants in financial markets often also look to price action in copper futures as a gauge of general economic trends. In another example, gold has long been used as a hedge against political and economic uncertainties, and many central banks back their currency with gold reserves.

In the U.S., the metals listed here trade primarily on the COMEX Exchange, part of CME Group. COMEX contracts trade on its Globex electronic platform.

Energy

The most popular energy futures contracts are crude oil, RBOB gasoline, heating oil and natural gas. These natural resource markets have become one of the most important gauges of world economic and political developments, and are therefore heavily influenced by disruptions in producing nations. The value of the U.S. dollar is significant because much of the world's crude oil is priced in dollars.

U.S. energy prices are quite sensitive to statistical reports detailing production, imports and especially stocks. All energy futures markets are subject to seasonal fluctuations - mild winter weather may lessen the need for heating oil, while summer tends to bring greater gasoline demand for driving season. Hurricane season in the United States impacts the energy markets as the storms can disrupt production and refining operations.

These products trade on the New York Mercantile Exchange (NYMEX), part of CME Group. NYMEX energy contracts are listed on its electronic Globex platform.

Grains/Soy

Grains and soybeans are essential to food and feed supplies, and prices are especially sensitive to weather conditions in growing areas at key times during a crop's development and to economic conditions that affect demand. Because corn is integral to the increasing popularity of ethanol fuel, the grain markets also are affected by the energy markets and outlook for fuel demand.

The major futures contracts in this category are corn, soybeans, soybean oil, soybean meal and wheat. Reports from the U.S. Department of Agriculture are closely watched, and summarize key factors influencing supply and demand including current production and carryover supply from the prior season. Each product has its own unique fundamental factors, depending on their use for human or animal consumption, or for industrial and energy needs.

These products are traded in the United States at the CME Group, Kansas City Board of Trade, and Minneapolis Grain Exchange.

Livestock

Commodity futures on live cattle, feeder cattle, lean hogs and pork bellies are all traded at the CME Group. Their prices are affected by consumer demand, competing protein sources, price of feed, and factors that influence the number of animals born and sent to market, such as disease and weather.

Food and Fiber

The food and fiber category for futures trading includes cocoa, coffee, cotton, frozen concentrated orange juice (FCOJ) and sugar. In addition to global consumer demand, the usual growing factors such as disease, insects and drought affect prices for all of these commodities. FCOJ prices, however, are particularly sensitive to weather conditions. A frost or freeze in Florida or Brazil during the growing season can have a disastrous affect on both the current crop size and long-term production prospects. International exchange rates affect all of these global products, as well as factors like tariffs and geopolitical events in producing nations. In the U.S., these markets are traded at the ICE Futures Exchange.

Market Participants

Who Participates in Commodities Markets?

There are two basic types of participants in commodities markets–hedgers and speculators. Hedgers seek to minimize and manage price risk, while speculators take on risk in the hope of making a profit.

As an example of a hedger, you might be a large corn farmer wanting to sell your product at the highest possible price. However, unpredictable weather may create risk, as well as excess supply that could drive prices down. You could take a short position in corn futures, and if prices fall, you could then buy back the futures at a lower price than you previously had sold them. This would help you offset the loss from your cash crop and help minimize your risk. Of course, if prices rose, you'd lose money on the futures transaction, but the idea is to use futures as a hedge.

A speculator—including individual investors and professionals such as hedge funds or managed futures traders, could take the opposite side of the hedger's futures transaction. That participant would bear the risk that prices are going to rise in hopes of generating a profit on the long futures position. Most likely, this type of speculator has no actual stake in the business, other than futures trading. A commercial food producer in need of the raw product (a breakfast cereal processor, for example) may also take the other side of the short hedger's trade to offset the risk of paying higher prices for the commodity. If the price of corn rises, the commercial food producer could still capture a profit from the futures position, even though he'd be paying more for the actual corn.

An individual trader who commits his or her own capital to act as speculator on a particular exchange provide market liquidity by constantly buying and selling throughout the trading session and are viewed as important participants in the market by shouldering risk. While the term local has been used to designate those trading in the open-outcry markets, this era of electronic trading is making the phrase a little obsolete. However, their function as liquidity providers is equally important in electronic markets. The Commodity Futures Trading Commission defines this new breed of electronic traders "E-locals," but they are often more simply known as independent traders.

Trading Commodities

What Commodities Can I Trade?

A wide variety of physical commodities markets are available to trade around the world, and new commodity futures contracts are continually being introduced.

North American exchanges that offer futures trading in physical commodities and their corresponding contract listings are listed here, although neither list is exhaustive.

Some of these commodities markets have limited liquidity and therefore can be more challenging to trade. Therefore, it is recommended you contact your commodity broker and learn more before decide to trade these markets.

  • CBOT – Chicago Board of Trade (part of CME Group)
  • CME – Chicago Mercantile Exchange
  • KCBT – Kansas City Board of Trade
  • MGEX – Minneapolis Grain Exchange
  • ICE Futures Canada (formerly WCE – Winnipeg Commodity Exchange)
  • ICE Futures U.S. (formerly NYBOT – New York Board of Trade)
  • NYMEX – New York Mercantile Exchange (part of CME Group)
  • NYSE Liffe

Contract Exchanges

Chemicals

Benzene CME/GLOBEX
Mixed Xylenes CME/GLOBEX

Energy

Coal ICE
Crude Oil, Brent NYMEX
Crude Oil, Light Sweet NYMEX
Crude Oil, E-mini NYMEX
Ethanol ICE, CME
Gasoline, Unleaded NYMEX
Heating Oil NYMEX
Natural Gas, Henry Hub NYMEX
Natural Gas, E-mini NYMEX
PJM Electricity NYMEX
Propane NYMEX

Fertilizer

Diammonium Phosphate (DAP) CME/GLOBEX
Urea Ammonium Nitrate (UAN) CME/GLOBEX
Urea CME

Food & Fiber

Butter CME
Cocoa ICE
Coffee "C" ICE
Coffee "C" Mini ICE
Cotton #2 ICE
FCOJ ICE
Milk – Class III CME
Milk – Class IV CME
Milk – Nonfat Dry CME
Sugar, #11 World ICE
Sugar, #14 Domestic ICE

Grains & Oilseeds

Barley, Western ICE
Canola ICE
Corn CBOT
Corn, Mini CBOT
Corn Index, National (NCI) MGEX
Flaxseed MGEX
Oats CBOT
Rough Rice CBOT
Soybeans CBOT
Soybeans, mini CBOT
Soybean Meal CBOT
Soybean Oil CBOT
Soybean Index, National (NSI) MGEX
Wheat CBOT
Wheat, Hard Red Winter KCBT
Wheat, mini CBOT
Wheat, Feed ICE
Wheat Index, National (HWI) MGEX
Wheat, Spring (Hard Red) MGEX

Indexes

Goldman Sachs Commodity Index (GSCI) CME
Reuters CRB Index ICE

Livestock/Meat

Feeder Cattle CME
Live Cattle CME
Lean Hogs CME

Metals

Aluminum COMEX
Copper COMEX
Gold, 100 oz COMEX
Gold, E-Micro COMEX
Gold, 33.2 oz. NYSE Liffe US
Palladium COMEX
Platinum COMEX
Silver 5,000 oz. COMEX
Silver, E-Mini COMEX
Silver, 1,000 oz. NYSE Liffe US

Wood

Random Length Lumber CME

How They Are Traded

How Are Commodities Traded?

In all futures trading, decisions are made in two ways - fundamental or technical, although many traders use a combination of both.

Fundamental Analysis

Fundamental analysis includes all factors that influence supply and demand. For the commodities markets, fundamental factors include weather and geopolitical events in producing countries — outside forces that influence price action. In financial futures trading, factors such as Federal Reserve actions and economic reports are among fundamental forces affecting prices.

Technical Analysis

Technical analysis is based strictly on inside market forces. It involves tracking various price patterns that occurred in the markets in the past. Analysts focus on a variety of time frames, and commodity trading decisions are based on past tendencies with the idea these price patterns tend to repeat themselves. Technical analysis involves a wide range of techniques, and a variety of market indicators are studied including volume, open interest, momentum and tools such as the MACD. Each individual analyst has his favorite approach - technical analysis is just as much art as it is science.

Gold Resource Center

Gold is a timeless asset that has historically served as a store of wealth, a hedge against inflation and a currency alternative. Learn how you can invest in gold, and why many savvy investors and traders choose gold futures.

Gold has been prized throughout the centuries for its beauty and for its investment potential. There are many ways individuals can invest in gold, and each has its pros and cons. Savvy investors can trade gold futures and options to take advantage not only of rising prices, but also to hedge existing gold holdings and speculate on falling prices too. Learn more about how traders and investors can participate in the gold market, and the unique characteristics of futures.

Available Gold Futures Products

Gold futures are available at the COMEX exchange (part of CME Group), as well as the NYSE Liffe U.S. exchange (part of NYSE/Euronext.)

  • CME Group/COMEX 100-oz. gold contract specs
  • CME Group/COMEX E-mini 33-oz. gold contract specs
  • CME Group/COMEX E-Micro Gold 10-oz contract specs
  • NYSE/Liffe U.S. 100-oz. gold contract specs
  • NYSE/Liffe U.S. 33.2-oz. gold contract specs

Fast Track to Futures

Are Futures Right for Me?

Commodity Futures

You might assume commodities are something only the most sophisticated investors can understand, or that you need special information or know advanced technical analysis to gain an edge. But commodities are actually very straightforward investments. They are a pure price play. All you really need is an opinion, and a plan to trade it. Unlike stocks, instead of worrying about marketmoving factors like corporate earnings reports, executive malfeasance, share buybacks or priceearnings ratios, you can focus on tangible issues that affect your daily life. You are buying or selling the things that you see, touch, taste and smell every day, based on your view of how they should be priced and your view of economic conditions. Things like gold, silver, coffee, sugar, oil and wheat—even foreign currencies, bonds and the stock market itself. Commodities are all around you! By definition, a futures contract is a legally binding agreement to buy or sell a commodity or financial instrument sometime in the future. Exchanges facilitate price discovery and standardize the quality, quantity, and delivery time and location for the markets. You can buy (go long) a futures contract if you think prices will rise, or sell (go short) if you think prices will fall, with equal ease. Like any investment, futures are not suitable for everyone. And like all investments, there is risk involved. You should not even consider investing in futures if you are looking for a “get rich quick” scheme, or are just meeting your day-to-day living expenses. Commodities can be powerful diversification tools, and have been proven to be non-correlated to traditional investments like stocks or bonds. But they also require that you do your homework before you invest. The commodity futures markets are quite diverse, and so too are the fundamentals that drive them as well as the monetary requirements to trade them.

What You Get at Renesource Capital
Superior Client Service. Innovative Technology. Global Presence. Specialized Expertise.

As a futures trader, you need the right platform with the right data—tailored for futures trading. You need online resources and ongoing educational support, so you can stay on top of market trends. Wasting time hunting for the information you need means you are missing out on opportunities. At Renesource Capital, we offer several different platforms designed specifically for futures trading, with the functions futures traders require. We also offer quotes, charts and news for major commodity futures markets online anytime—all in one place that’s easy to find. And most important, if you are stuck in a losing position, have a technical problem or an important question about your account, we have live customer support available to you 24 hours during the trading week. Our licensed professionals make your success their utmost priority. We give each and every customer personal attention, no matter your account size. We believe that if you aren’t successful, neither are we.

Capital Requirements

Margin

Have the Proper Funds. Each futures market you trade will require a different level of funding to initiate a position. This is a “good-faith” deposit known as margin, and represents a fraction of the contract’s full value. Typically, these initial margin requirements are 5%-20% of a contract’s full value. For example, the initial margin for the E-mini S&P futures was $5,000 as of June 2011. The margin for a COMEX gold contract was $6,075 as of June 2011. Some markets are even less. For example, the initial margin for CME corn futures was $1,620 and the initial margin for ICE sugar futures was $2,520 in June 2011. Please be aware margin requirements are subjectto change at any time, so contact us for the most up-to-date information. It is highly recommended you deposit more than just the minimum in your Renesource Capital account. If the market moves against you, you may have to immediately add funds to cover the loss and maintain the position.

Options on Futures

Explore Your Options. Options on futures are another popular approach for investors with limited funds who might want a more conservative strategy. With options, you can create bullish or bearish strategies for a particular market, similar to the futures. You also can more easily define your risk with certain options strategies—when you buy puts or calls, you immediately know the maximum amount you can lose on a trade. Depending on which option strike price you choose, you can buy an option for less than $1,000, and do not need to deposit margin. So if there is a market you are interested in, ask us what funding may be required and what the various risks may be with different strategies. If you are new to options, you’ll find they open up an exciting new realm of investment opportunities for you. An option is a contract that gives the buyer the right, but not the obligation, to buy or sell the underlying contract at a specific price on or before a given date. Buying a call gives the option holder the right to buy, while buying a put gives the option holder the right to sell. The price at which the option is executed is known as the strike price. Options can be used alone or in conjunction with other market positions for a variety of strategies, including portfolio protection, risk management, speculation, to generate potential income and to possibly enhance returns.

Know the Risks

Are My Funds Safe?

Financial Safeguards. When you are trading, you have a lot to think about. But one thing you don’t want to worry about is whether your funds are safe. Futures operate in a transparent, regulated environment with inherent safeguards that other alternative investments may not offer. As previously mentioned, participants in the futures markets are required to deposit margin upon initiating a position, and must maintain sufficient funds to cover any subsequent losses—on a daily, and sometimes intraday, basis. This protects everyone. In volatile markets, the exchanges increase margin requirements accordingly. The availability of such funds is what makes daily cash settlements possible under all market conditions. A clearing mechanism in futures markets helps mitigate default risk to the parties of every trade. Each futures exchange has its own clearing house. All members of an exchange are required to clear their trades, from customers like you, on that exchange through the clearing house at the end of each trading session and to deposit with the clearing house a sum of money sufficient to support their clients’ positions. Each purchase of a futures contract is precisely matched to the corresponding sale, and the clearing house steps in as a neutral party to both buyer and seller. In essence, the clearing house becomes the “buyer to every seller and the seller to every buyer.” CME Group’s $7 billion financial safeguard system also includes a type of mutualized risk-management pool to which all clearing members contribute. This is a pool of liquid deposits in case a CME Group clearing member defaults. The exchange also has the ability to call on other clearing members to make additional capital contributions in case of a member firm’s default. These are the types of safeguards CME Group and other regulated exchanges offer that aren’t available in over-the-counter markets.

Regulated Exchange

A Regulated Marketplace. In the 161-year history of the CME (including the Chicago Board of Trade and New York Mercantile Exchange), there never has been a failure of a clearing member resulting in a loss of customer funds. When you consider that over a billion trades are now processed each year at the exchange, worth over $1 quadrillion in value, that’s a pretty impressive record. On an individual level, you can also be assured that even if a clearing member firm is facing financial difficulties, your funds are secure. The Commodity Exchange Act requires that funds you deposit with a futures commission merchant (like Renesource Capital) be maintained in a “segregated” account. That means your funds can only be used by you, and are kept independent from any other funds used for firm operations, or for its debt obligations.

Leverage

The Ups and Downs of Leverage. So now that you know about some of the financial safeguards in place, you need to understand an important feature of futures—leverage. Every investment, including futures, carries risk. Homeowners who believed housing values could only go up learned a hard lesson in 2008. Home ownership is a good example of the power of leverage, which is a characteristic also shared with commodity futures. Say you buy a $300,000 home with 20 percent down ($60,000).
If in five years, your home appreciated to $360,000, you would have a $60,000 gain, or a 100 percent return on your initial $60,000 down payment. If however, your home falls in value to $200,000, you would be facing a loss in excess of your down payment—and if you sold your home, you’d owe the bank an additional $40,000 to cover the full mortgage value. You actually lost more than your initial investment (your $60,000 down payment). Futures operate in a similar fashion.
As previously mentioned, when you initiate a futures position, you deposit margin (your “down payment”) that’s typically about 10 percent of the full contract’s value. But similar to your mortgage, you are actually responsible for the full amount the contract is worth.
For example, the value of an E-mini S&P 500 futures contract is worth $50 times the current index price. So if the E-mini futures are trading at 1200, the total contract value is $60,000. The initial margin you must deposit to buy or sell a contract is only a fraction of that. (E-mini S&P 500 initial margin was just over $5,000 in June 2011.) Similar to the housing example, leverage creates the potential for magnified gains or losses in futures, with a lower up front initial investment. If the idea of leverage makes you uncomfortable, just like when you buy a home, you can avoid leverage by paying the full price of a contract instead of the margin (“down payment”). You will then see your investment value rise or fall with the market accordingly. If you deposit the full $60,000 E-mini S&P contract value in the example above, the only way you would only lose that entire amount would be if the S&P 500 fell to zero.

Futures vs. Stocks

Trade Bullish or Bearish

Take Bullish or Bearish Positions with Equal Ease. Many stock investors pursue a buy- and-hold approach, waiting for their stock to appreciate. With futures, you can easily take the opposite strategy too, “sell-and-hold.” If you think a market is priced too high and is likely to drop, it’s just as easy to sell (go short) as it is to buy (go long). There are no special forms to fill out, no special rules and no higher financial requirements to meet. The money required to take a short, or bearish potion, is exactly the same as to take a long, or bullish position. A strategy of “sell high and buy low” is as just as reasonable and easy to execute as “buy low andsell high.” During the financial crisis of 2008, short selling certain stocks was actually prohibited for a time in the stock market—which was not the case in futures. Futures speculators could benefit from the price drops in major stock indexes as well as physical commodity products such as crude oil and grains. In fact, this ability to speculate on falling prices as well as rising prices makes futures essential for many market participants as both a hedging and speculative vehicle.

Volatility

Volatility = Opportunity. Of course, the previously mentioned benefits of futures would be useless if it’s difficult to find opportunities. Futures are known for experiencing considerable price movement, and that’s another key benefit. Just look at the dramatic fluctuations in the price of crude oil in late 2010 and early 2011 and you’ll see that in action. Volatility can work for you or against you, but most speculators want markets that move. Not only that, you can trade global futures markets nearly 24 hours a day in an electronic marketplace. Opportunities are available both day and night.

Potential Tax Benefits

Tax Treatment. Finally, futures enjoy unique tax treatment. Unlike stocks, futures do not require the accounting of individual trades. The value of futures investments is determined at the end of the year; any open trade profits or losses in the account are treated as realized profits or losses as of the last day of the year. Generally, in the U.S., securities transactions are taxed as either short-term capital gains or more favorably as long-term capital gains if held over a year. Futures transactions, however, are simply lumped together and reported on a single Form1099 at year-end because most futures contracts mature within the year. With the exception of securities futures, any profits are taxed at the “60/40” rate – 60 percent taxed at the favorable long-term capital gains rate and 40 percent taxed at the short-term capital gains rate, no matter what the holding period. An investor in a stock or ETF must hold the security a year to receive long-term capital gains treatment. We’re not tax advisors, and everyone’s situation is unique. Tax laws are also subject to change, so please consult your tax specialist about your individual circumstances.

Financial Futures

What are Financial Futures

What Are Futures on Financial Investments?

Financial futures are contracts based on underlying financial instruments. There are futures trading opportunities in interest-rate sensitive instruments such as U.S. Treasury bonds, stock index futures, such as the Standard & Poor's 500® Index, or currencies, such as the Japanese yen.

Like all futures markets, a financial futures contract specifies a specific quantity of the underlying financial instrument at a market-determined price. Contracts can be settled via cash or physical delivery, depending on the instrument. Supply and demand factors determine pricing, and while common fundamentals often influence many markets globally, there are also factors unique to each particular market.

Financial futures were developed amid a rapidly growing trend toward globalization in the world's investment and economic landscape starting in the early 1970s. They were designed to meet new needs and risks that businesses, governments and individuals faced amid changing capital flows. Even though they have a shorter history than agricultural futures, they now dominate the exchange-traded product offerings. Today, the majority of activity in trading futures globally is in contracts on financial investments, and futures exchanges are continually on the lookout for new successes in this category.

Types of Financial Futures

Financial futures fall into three broad categories – those tied to interest rate or credit instruments, stocks or stock indexes, and global currencies, also known as fx or forex, short for foreign exchange. Some of the most popular are outlined briefly here.

Interest Rate Products

In simple terms, interest rates reflect the price of money. And like all goods and services, interest rates are determined mainly by supply and demand. A greater demand for money is likely to drive up the price of money, reflected in the interest rate. Demand depends on factors such as the nation's economic health, the level of government borrowing to support budgets, and societal perception of inflation. Also, a nation's central bank can manipulate interest rates — rates are adjusted upward in an attempt to slow the economy, while rates are adjusted downward to act as a stimulus.

Interest rate futures products encompass a range of short-term instruments, such as the Federal funds rate (an overnight inter-bank lending rate), to long-term, such as the 30-year U.S. Treasury bond. The relationship between short- and long-term interest rates along a broad time continuum is called the yield curve. Typically, the yield curve has an upward slope, with a longer period of lending risk resulting in higher rates for long-term instruments.

Eurodollar Futures

Eurodollars are U.S. dollars on deposit in commercial banks outside the country, mainly in Europe. Eurodollars are commonly used to settle international transactions and are not guaranteed by any government, but rather, by the obligation of the bank holding them. Eurodollar futures track the interest rate on 90-day Eurodollar deposits, and frequently top the list of the world's most popular contract in futures trading.

CME Group's Eurodollar futures contract reflects the London Interbank Offered Rate (LIBOR) for a three-month, $1 million offshore deposit. The exchange lists a total of 40 quarterly futures contracts, spanning 10 years, plus the four nearest serial (nonquarterly) months. This contract is frequently used as a barometer for monetary policy implications, with a cash yield that has a close tie to the Federal funds rate. Therefore, economic statistics that may alter monetary policy have a big influence on Eurodollar futures prices.

U.S. Treasury Futures

Because of the strength and stability of the U.S. government, which has never defaulted on debt, U.S. Treasury instruments are often described as "safe-haven" financial investments. Indeed, when strong buying occurs in the Treasury futures market because of some type of global or economic shock, it's often called a "flight to quality" among the part of global investors.

U.S. Treasury bonds are long-term debt issues of the U.S. government with maturities of more than 10 years. U.S. Treasury notes are medium-term obligations of the U.S. government with maturities that range from one to 10 years. Futures trading occurs on the 30-year bond and the two-, five- and 10-year Treasury notes. U.S. economic strength, inflation and monetary policy are the major influences on the pricing of Treasury futures. Demand for money in a strong and/or inflationary economy typically causes cash Treasury yields (i.e. the interest rate paid) to rise and the price of the futures market to fall, while conversely, a weak economy typically causes yields to fall while futures prices rise.

Treasury bills are U.S. government debt issues with maturities of up to one year. T-bills are the most widely issued government debt security and are auctioned weekly and monthly. The T-bill interest rate is considered the risk-free rate of variable return to investors. Because of their short durations, T-bills are considered money-market instruments. Treasury bills do not pay periodic interest. Instead, they are sold at a discount from their face value, and upon maturity, the investor receives the face value. The difference between the face value and the price at which it was sold is treated as interest.

Foreign Government Debt Futures

Similar to the U.S. government, most foreign governments also issue short- and long-term debt and many have corresponding futures markets listed at exchanges around the globe. Europe's leading futures exchanges, Eurex and Euronext.liffe, offer many popular euro-based contracts including euro-bund futures, which are long-term debt instruments, and three-month euribor futures, which are short-term instruments.

Prior to the start of the European Monetary Union in 1999, German government bonds were the recognized benchmark for the European government bond market due to their liquidity, credit rating, a record of stable German monetary policy and Germany's market size and depth. Germany had been considered the "safe haven" of Eurozone issuers, but the recent integration of Europe's markets with the EMU has created new debt instruments and market dynamics.

Swap Futures

Swaps are generally defined as agreements between two parties to exchange periodic interest payments. They have become an interest rate benchmark and are an innovative means for those seeking ways to transfer financial risk. Swap futures are traded at the CME Group and are designed to provide investors involved in U.S. dollar-denominated swaps with new trading and hedging opportunities. Investors can trade five-year, seven-year, 10-year, and 30-year swap futures contracts.

Forex Futures

When it comes to international investing, investment managers, corporations and private investors trade currency futures, also known as foreign exchange, forex or simply FX, to manage the risks and capture potential opportunities associated with forex rate fluctuations.

Trading a nation's currency doesn't occur in a vacuum; you don't actually trade one currency but a pair based on its relationship to another currency. A number of factors go into determining the "strength" or "weakness" of a currency vs. another, but it usually comes down to comparing one nation's economy to another's. Generally, expanding economies have stronger currencies while recessionary economies have weaker currencies.

Factors influencing a currency's value include gross domestic product (GDP) as well as the trade balance between countries. The current account balance and money flows from one country to another reflect a currency's supply and demand, so futures traders are always watching each country's trade balance to see changes in surpluses/deficits. Other factors influencing currency valuations include fiscal and monetary policies, including interest rates on government-issued securities, and political leadership.

CME Group is the leader for forex futures trading in the United States, and offers a variety of contracts with pricing based on a nation's respective currency value vs. the U.S. dollar. Traders can also access cross-rate futures contracts, which allow a value comparison of a currency against another currency besides the U.S. dollar. For example, you can trade futures on the Australian dollar vs. the Canadian dollar, or British pound vs. the Japanese yen.

Stock Futures

Some of the most popular futures contracts are related to the equity markets. Most major economies with a vibrant stock market also have a futures contract on a stock index that represents that particular economy. For example, in the United States, futures contracts are available on the Dow Jones Industrial Average as well as the broader Standard & Poor's 500 Index and the technology-oriented Nasdaq-100 Index. Other countries have similar contracts, such as the FTSE-100 in the United Kingdom, the Hang Seng in Hong Kong and the CAC 40 in France. The Dow Jones Euro STOXX 50 covers selected stocks in the euro economy.

Fundamental factors influencing stock markets encompass factors affecting companies' earnings potential, such as news about the global and domestic economy, inflation, currency values, politics and interest rates.

Index Futures

Stock index futures contracts were introduced in the United States in 1982, nine years after listed options investing began at the Chicago Board Options Exchange, the securities offshoot of the Chicago Board of Trade. Interestingly, the CBOT had come up with the idea of futures on stocks as a way to diversify its product line, although futures on individual stocks were many more years in coming.

The Kansas City Board of Trade launched the first stock index futures contract on the Value Line in February 1982, and the Chicago Mercantile Exchange followed with its S&P 500 Index contract a few months later. The S&P contract quickly became the market leader and continues to dominate U.S. stock index futures trading today. A number of stock index futures and options contracts are now available to futures traders, covering all areas of the market. The most popular major index futures contracts are listed below.

Standard & Poor's 500® Index

The S&P 500 Index is a market value-weighted index of 500 large-capitalization stocks traded on the New York Stock Exchange, American Stock Exchange and Nasdaq National Market System. Because the S&P is capitalization-weighted, those stocks with the most shares outstanding at the highest prices will have the most influence on the index movement. The S&P 500 index, introduced in 1957, is known as the investment industry's standard for measuring portfolio performance and is licensed by McGraw-Hill Companies Ltd.

The Chicago Mercantile Exchange introduced S&P 500 futures in 1982, and they originally traded at $500 times the cash index. As the market began to surge during the 1990s, the initial margin became too costly for many futures traders. In response, the CME decided to cut the contract's value to $250 times the index. The CME went even further to attract individual investors.

In 1997, the CME launched an even smaller version of its popular S&P 500 futures contract, which was felt to be more attractively sized for individual traders. The E-mini S&P 500 futures are priced at one-fifth the size of the big contract at $50 times the index, with a lower initial margin. But the real innovation of the new "mini" futures was the fact that they traded on an electronic platform, and not in open-outcry pits. CME officials decided trading would take place entirely on a trade-matching computer, giving traders direct access to the market and not an order-handler. Electronic trading would no longer be used only for after-hours trading or as a supplement to the primary pit contract. It became the mainstream market for the E-mini contracts. And, as long as trading was all computer-based, the CME decided to keep the market open nearly 24 hours a day. In just a year after its launch, the E-mini S&P futures were the third most active stock index contract in the country, and today, boast the strongest volume of any U.S. stock index product. Because of its strong liquidity, what started out as mainly a product for small speculators, day-traders and other retail investors is now also an institutional favorite.

Nasdaq-100® Index

The Nasdaq-100 Index is a modified market-capitalization index and includes the top 100 non-financial stocks (both domestic and foreign) listed on the Nasdaq Stock Market. Stocks such as Microsoft, Intel, eBay, Dell, Cisco, etc. dominate the index, so it's frequently associated with the technology sector of stock investing.

Futures on the Nasdaq-100 began trading in 1996 with a value of $100 times the index. Like the S&P 500 Index, the value of the Nasdaq-100 rose dramatically during the 1990s, and the CME launched a mini-sized electronic contract. E-mini Nasdaq-100 futures are priced at $20 times the index.

Both E-mini S&P 500 and E-mini Nasdaq-100 futures were smashing successes. Volume quickly grew in both to overtake their larger futures benchmarks and paved the way for many other mini-sized futures products at the CME and other exchanges.

Dow Jones Industrial Average

The Dow Jones Industrial Average is an index of 30 large capitalization "blue chip" stocks traded on the New York Stock Exchange, accounting for about 20 percent of the market value of all U.S. equities. The index, first published in 1896, is the most widely quoted market indicator in newspapers, radio, television and electronic media throughout the world. Futures on the DJIA began trading at the Chicago Board of Trade in 1997 after heated competition between the Chicago exchanges for the rights to trade futures and options on products owned by Dow Jones & Co., which had remained reluctant to allow its name to be used in trading.

CME Group, which merged with the CBOT, today offers three different DJIA futures contracts with sizes tailored to different market participant needs. Its "Big" DJIA futures contract has a value of $25 times the average, while its standard DJIA futures contract is $10 times the average. CME Group also offers an all-electronic, mini-sized DJIA futures valued at $5 times the average for smaller investors.

Single-Stock Futures

Single-stock futures, also known as security futures, began trading in 2002 after many years of regulatory debate. The so-called Johnson-Shad Accord in the early 1980s had set the ground rules for stock index futures, but futures on individual stocks and narrow-based stock indexes were not allowed to trade. They remained banned until Congress opened the door with passage of the Commodity Futures Modernization Act of 2000.

The legislation gave the green light to single-stock futures, and futures trading on individual stocks debuted in November 2002. In the United States, online futures trading in single-stock futures occurs at OneChicago, LLC, with each futures contract represents 100 shares of the underlying stock. Single-stock futures offer many potential advantages over stock investing, such as greater leverage, an easier ability to take a short position, and positive tax benefits.

Volatility Futures

The CBOE Futures Exchange, LLC (CFE) launched trading in VIX futures in March 2004. VIX futures are based on the CBOE Volatility Index, which was first introduced in 1993 and became known as a benchmark of stock market sentiment among investors. Derived from real-time S&P 500 Index option prices, the CBOE states the VIX is designed to reflect investors' consensus view of expected stock market volatility over the next 30 days.

Other CFE volatility futures products include Russell 2000 Volatility Index Futures and DJIA Volatility Index Futures.

The CFE also offers a realized variance futures contracts. S&P 500 three-month Variance Futures are based on the realized variance of the Standard & Poor's 500 Stock Index over a three-month period, while S&P 12-month Variance Futures are based on the realized variance of the S&P 500 Stock Index over a 12-month period.

Market Participants

Who Participates in Financial Futures Markets?

As in all futures trading, there are two basic types of participants in financial futures markets — hedgers and speculators. Hedgers want to reduce and manage price risk, while speculators hope to make a profit by assuming market risk.

Hedgers in financial futures include institutions such as banks and insurance companies, large multinational corporations, pension plans, and mutual funds. Despite their name, "hedge funds" actually often act as speculators in the marketplace. They utilize an array of complicated and varied strategies that seek to not only hedge against other cash investments held by their investors, but also to enhance returns through speculative positions.

As an example of a hedger in the financial futures markets, put yourself in the position of a mutual fund manager running an S&P 500 Index fund that contains individual stocks that comprise the S&P 500 Index. You are worried that a shaky U.S. economy and incidents of global terrorism could negatively impact the index and your returns, yet you can't disrupt your stock holdings. However, you could take a short position in S&P 500 Index futures, and if the stock prices fall, you could then buy back the index futures at a lower price. That would allow you to offset losses to the stock holdings in your fund. Of course, if your worries were unfounded and the stock prices rose, you'd lose money on the futures transaction. But, the idea is to use futures as a hedge to minimize your potential risk.

While speculators can include large institutions and funds, many are individual traders who provide valuable liquidity to the marketplace. An individual trader who commits his or her own capital to act as speculator on a particular exchange provide market liquidity by constantly buying and selling throughout the trading session and are viewed as important participants in the market by shouldering risk. While the term local has been used to designate those trading in the open-outcry markets, the Commodity Futures Trading Commission defines this new breed of electronic traders "E-locals," but they are often more simply known as independent traders.

A speculative trader typically takes a position in the futures markets—without any underlying cash stock market position—with the hope of making a profit. In the example above, the speculator may take the other side of the portfolio manager's trade, thinking it's unlikely a terrorist incident will soon strike and that stock prices will hold up.

History of Financial Futures

The history of established futures markets dates back to the 1800s, but up until the early 1970s, all futures markets were referred to as commodities markets because the products traded were mainly agricultural. However, futures on financial products were quickly and enthusiastically embraced. They now dominate trading activity, accounting for about 75 percent of all derivatives trading volume in the world.

The Chicago Mercantile Exchange (now known as CME Group) claims credit for the creation of financial futures with the launch of seven foreign currency futures contracts in 1972. According to the CME, they were introduced in response to the breakdown of the Bretton Woods Agreement, which had governed international currency exchange-rate policy since the end of World War II.

It was during the forex market turmoil leading up to the initial revision of the U.S. dollar "gold peg" that Leo Melamed, Chairman Emeritus of CME, with the endorsement of Nobel Laureate economist Milton Friedman, championed the idea of foreign exchange futures contracts. On May 16, 1972, the CME's International Monetary Market opened for business, listing seven foreign currency futures contracts: British pound, Canadian dollar, Deutsche mark, French franc, Japanese yen, Mexican peso and Swiss franc.

Also during the 1970s, the challenges of inflation and volatile interest rate fluctuations spawned the development of futures contracts tied to interest rates.

In 1975, the Chicago Board of Trade (now part of CME Group) launched its first financial futures contract on Government National Mortgage Association mortgage-backed certificates, or GNMAs. In 1977, the CBOT introduced trading in U.S. Treasury bond futures and a suite of other Treasury futures products followed.

In 1981, the CME launched Eurodollar futures, which had an innovative feature that paved the way for even more growth in financial contracts to come. Eurodollar futures were the first futures contracts that did not require delivery of an underlying instrument, but were settled in cash. The cash-settlement innovation safeguarded their usefulness to hedgers and opened the door for new types of contracts in which a delivery option would be impossible or prohibitively expensive.

The cash-delivery feature also helped fuel the creation of index futures. First came the Kansas City Board of Trade's launch of the Value Line Index in 1982, then the same year the CME launched the Standard & Poor's 500 Index contract.

In the 1990s, more financial futures products came to the marketplace, and the advent of online futures trading caused a further explosion in their popularity. Mini-sized, all-electronic versions of stock index futures contracts charged onto the scene in the late 1990s and were quickly embraced.

Today, volume in the E-mini S&P 500 Index futures contract at CME Group often tops a million contracts per day, surpassing the larger and older benchmark S&P 500 futures contract that spawned it. Exchanges continue to launch new financial futures products to meet ever-changing investor needs.

Among the newest innovations in financial futures are single-stock futures, launched in 2002, VIX futures, launched in 2004, and event futures, which are based on specific economic releases or events.

Tradable Contracts

What Contracts Can I Trade?

A wide variety of financial futures markets—including index futures, interest rate futures, forex futures, event futures and single–stock futures–are trading on exchanges around the world. The possibilities are endless, and new contracts are continually being introduced.

U.S. exchanges that offer futures trading in financial investments follow, along with their corresponding contract listings.

These lists are not exhaustive because some of these futures markets have limited liquidity and therefore can be more challenging to trade. Therefore, it is recommended you contact your futures broker and learn more before deciding to trade these markets.

  • CBOT – Chicago Board of Trade (now part of CME Group Inc.)
  • CFE – CBOE Futures Exchange
  • Chicago Mercantile Exchange (CME) Group
  • KCBOT – Kansas City Board of Trade
  • ICE Futures U.S. (Formerly New York Board of Trade)
  • OneChicago, LLC

U.S. Contract Exchanges

Stock Index Futures

DJIA CBOT/CME Group
DJIA, Mini-Sized CBOT/CME Group
Dow Jones Total Market Index (TMI) CBOT/CME Group
Nasdaq 100® CME Group
E-mini™ Nasdaq 100® CME Group
E-mini™ Nasdaq Composite® CME Group
Nikkei® 225 CME Group
NYSE Composite® ICE
Russell 1000® Index Mini ICE
Russell 2000® Index Mini ICE
S&P MidCap 400™ CME Group
E-mini™ S&P MidCap400™ CME Group
S&P SmallCap 600™ CME Group
S&P 500® CME Group
E-mini™ S&P 500® CME Group
S&P 500®/Barra Growth CME Group
S&P 500®/Barra Value CME Group
SPCTR® Futures CME Group
S&P/Topix 150™ CME Group
Value Line® KCBOT

Interest Rate Futures

Eurodollar CME Group
Midcurve Options CME Group
Euroyen CME Group
Euroyen Tibor CME Group
3-Month OIS Futures CME Group
13-week T-bills CME Group
30-day Federal Funds CBOT/CME Group
U.S. 30-year Treasury Bond CBOT/CME Group
U.S. 10-year Treasury Note CBOT/CME Group
U.S. 5-year Treasury Note CBOT/CME Group
U.S. 2-year Treasury Note CBOT/CME Group
Ultra Treasury Bond CBOT/CME Group
Eurozone HICP CME Group
Barclays Capital U.S. Aggregate Bond Index CME Group
Dow Jones CBOT Treasury Index CBOT/CME Group
One-Month Eurodollar CME Group
10-year Interest Rate Swap CBOT/CME Group
7-year Interest Rate Swap CBOT/CME Group
5-year Interest Rate Swap CBOT/CME Group

Currency Futures

Australian Dollar CME Group
Brazilian Real CME Group
British Pound CME Group
Canadian Dollar CME Group
CME$Index CME Group
Czech Koruna CME Group
E-mini Euro FX CME Group
E-mini Japanese Yen CME Group
Euro FX CME Group
Hungarian Forint CME Group
Japanese Yen CME Group
Mexican Peso CME Group
New Zealand Dollar CME Group
Norwegian Krone CME Group
Polish Zloty CME Group
Russian Ruble CME Group
South African Rand CME Group
Swedish Krona CME Group
Swiss Franc CME Group
U.S. Dollar Index ICE

Currency Crosses

Large Euro/U.S. Dollar ICE
Euro/U.S. Dollar ICE
U.S. Dollar/Japanese Yen ICE
Small U.S. Dollar/Japanese Yen ICE
U.S. Dollar/Canadian Dollar ICE
Small U.S. Dollar/Canadian Dollar ICE
U.S. Dollar/Swiss Franc ICE
Small U.S. Dollar/Swiss Franc ICE
U.S. Dollar/South African Rand ICE
U.S. Dollar/Norwegian Krone ICE
U.S. Dollar/Swiss Krona ICE
U.S. Dollar/Hungarian Forint ICE
U.S. Dollar/Czech Koruna ICE
British Pound/U.S. Dollar ICE
Small British Pound/U.S. Dollar ICE
Australian Dollar/U.S. Dollar ICE
New Zealand Dollar/U.S. Dollar ICE
Euro/Japanese Yen ICE
Euro/Swedish Krona ICE
Euro/Swiss Franc ICE
Euro/British Pound ICE
Euro/Norwegian Krone ICE
Euro/Canadian Dollar ICE
Euro/Australian Dollar ICE
Euro/Hungarian Forint ICE
Euro/Czech Koruna ICE
Australian Dollar/New Zealand Dollar ICE
Australian Dollar/Japanese Yen ICE
Australian Dollar/Canadian Dollar ICE
Britizh Pound/Japanese Yen ICE
Canadian Dollar/Japanese Yen ICE
Swiss Franc/Japanese Yen ICE
Norwegian Krone/Swedish Krona ICE

Currency Crosses

Euro FX/Australian Dollar CME Group
Euro FX/British Pound CME Group
Euro FX/Canadian Dollar CME Group
Euro FX/Czech Koruna CME Group
Euro FX/Hungarian Forint CME Group
Euro FX/Japanese Yen CME Group
Euro FX/Norwegian Krone CME Group
Euro FX/Polish Zloty CME Group
Euro FX/Swedish Krona CME Group
Euro FX/Swiss Franc CME Group
Australian Dollar/Canadian Dollar CME Group
Australian Dollar/New Zealand Dollar CME Group
Australian Dollar/Japanese Yen CME Group
British Pound/Swiss Franc CME Group
British Pound/Japanese Yen CME Group
Canadian Dollar/Japanese Yen CME Group
Swiss Franc/Japanese Yen CME Group

Other

Volatility Index (VIX) CBOE Futures Exchange (CFE)
Nasdaq-100 Volatility Index Futures CBOE Futures Exchange (CFE)
Russell-2000 Volatility Index Futures CBOE Futures Exchange (CFE)
DJIA Volatility Index Futures CBOE Futures Exchange (CFE)
S&P 500 3-month Variance Futures CBOE Futures Exchange (CFE)
S&P 500 12-month Variance Futures CBOE Futures Exchange (CFE)

Stock index and Volatility Futures

Stock Index Futures

Index futures have been wildly successful with investors, and the list of actively traded contracts grows bigger every year. Here you can evaluate your choices for trading and learn more about various stock index futures.

Mini Stock Index Futures Contract Specifications

Mini-sized stock index futures are particularly popular with individual investors and traders. CME Group and ICE offer these products. View contract specifications for CME Group E-mini and ICE Russell mini-sized stock indexes

  • E-mini S&P 500
  • E-mini Nasdaq 100
  • E-mini Dow ($5)
  • Russell 2000 mini

A Beginner's Guide to Trading E-mini S&P 500 and Dow Futures

In conjunction with CME Group, Dan Gramza, President of Gramza Capital Management, leads you through an enlightening discussion of CME E-mini futures. Dan shows you how to trade stock index futures, and why he feels the dynamic CME E-mini markets are such compelling vehicles for traders large and small.

Active Futures Trading: Low-Cost Portfolio Insurance

This article outlines how traders and investors can use the S&P 500 futures to hedge their stock portfolios.

Comparing E-minis and ETFs

This research piece by John W. Labuszewski and Brett Vietmeier of CME Group analyzes the key differences between E-mini stock index futures and exchange-traded funds, and compares and contrast the advantages and disadvantages.

ETFs Vs. E-minis

Futures on Exchange-Traded Funds are available at OneChicago. OneChicago's DIAMONDS Futures are futures contracts on the DIAMONDS Exchange Traded Fund (ETF), which represents ownership in the DIAMONDS Trust, Series 1. The DIAMONDS ETF tracks the Dow Jones Industrial Average (DJIA), the most frequently cited market indicator in newspapers, on television and on the Internet. The exchange also offers SELECT SECTOR SPDR Futures, which are futures contracts on certain Select Sector SPDR Exchange Traded Fund (ETF), maintained by and Poors Corporation.

Volatility Futures

Volatility futures provide investors with the ability to act on their opinion of stock market volatility direction and magnitude.

Stock market volatility became a tradable part of the financial investments landscape in March 2004, with introduction of futures on the CBOE Volatility Index, or VIX, at the CBOE Futures Exchange. Developed by the Chicago Board Options Exchange in 1993, VIX measures market expectations of near-term volatility conveyed by stock index option prices.

CFE has continued to expand its futures product listings, and also offers: Russell 2000 Volatility Index Futures, DJIA Volatility Index Futures, S&P 500 BuyWrite Index Futures, S&P 500 three-month Variance Futures, and S&P 500 12-Month Variance Futures.

Why Futures Now

Why futures now?

Because futures markets respond quickly to world events. Because where there is volatility there is opportunity. Because you’re ready to be the best trader you can be.

Unique Opportunities

Commodity futures markets were designed as financial instruments to help ward off (or gain from) price volatility. The markets, which bring together buyers and sellers with a multitude of opinions and motivations, quickly absorb news that may have an impact on prices in the future. Today’s news is fast and furious in the geopolitical rena, which can impact financial futures worldwide in stock index, interest rate and currency markets. Mother Nature, too, can be a formidable force in physical commodity markets such as crude oil, natural gas, corn, wheat and soybeans when hurricanes and drought are in the headlines.

Volatility

Futures are known for experiencing considerable price movement, and that’s another key benefit. Volatility can work for or against you, but most speculators want markets that move.

The Power of Leverage

Futures are one of the most capitalefficient investment vehicles available. What does this mean? Simply stated, with futures you can make a larger investment using a much smaller amount. This can be described as “leverage.” Leverage can be a boon to investors on the winning side of the market as gains can be greater with futures than with other investments, but it’s a doubleedged sword. Leverage can also inflict a lot of pain if you are on the losing side. If you’ve bought real estate, you’re probably already familiar with how leverage works. Say you buy a $300,000 home with 20 percent down ($60,000). In five years, if your home has appreciated to $360,000, that’s a $60,000 gain, or a 100 percent return on your initial $60,000 down payment.

Example Scenarios

Futures are traded in “contracts.” In the stock market, your “contract” value is the number of shares times the price of the stock. For example, 1,000 shares of XYZ times $42 per share equals $42,000. So your “contract” size is $42,000. In futures, you often have to commit no more than 10 percent of a futures contract’s value in order to take a long or short position. For example, if a CME E-mini® S&P 500 contract is worth $50,000, you may need no more than $5,000 to buy or sell that contract. If you buy and the contract’s value rises just 10 percent, to $55,000, then your initial investment amount of $5,000 will have gone up 100 percent, to $10,000.

Leverage is equally potent when a position is going against you. Let’s say that you took the same action as before—you spent $5,000 to take a long position. But, now the contract’s value falls by 10 percent, to $45,000. In a nutshell… you’re wiped out. Your $5,000 is completely gone. And, unless you get out of the position with an offsetting sale when your maintenance margin level is violated, you’ll be obligated to put up even more money if the market keeps oving against you.

Capital Efficiency

With leverage, excess funds in your account can be used for other purposes, including investing in other assets. So that’s where you get the capital efficiency. And in the event the market is moving the way you want it to, your returns will be greater than with a similar cash-equity investment, such as an exchange-traded fund (ETF). On the flip side, losses will be greater than with an ETF position if the market moves against you. And, with futures it’s even possible to lose more than your initial investment. Please be aware that margins are subject to change by the exchanges or Renesource Capital without notice.

Easy to Undesrtand

Futures are very simple to understand. That’s not to say it’s easy to make money with them. But, futures are very straightforward. You either believe prices will rise or they will fall; you will either buy or sell. It really is that simple. Of course, there are other factors that you must be aware of such as contract months and expirations, but your Renesource Capital account representative, Trade Desk or broker can help guide you through the other details of trading futures, and make it an easy process. Simply put, a futures contract is an obligation to buy or sell an underlying product at a specific price at a specific time in the future.

1. An Obligation to Buy or Sell

The key word is “obligation.” Unless you offset your original position before the contract expires (and nearly 100 percent of speculators do just that), you must eventually buy or sell at the agreed-upon price when the contract expires.

2. Underlying Product

Each futures contract specifies a certain amount (and sometimes quality) of the underlying product, so that the contract terms are standardized for all participants. For example, one E-mini S&P 500 futures contract represents exposure to all 500 stocks in the Standard & Poor’s 500 index. Contract standardization means that investors don’t have to worry about anything but the real business at hand – changes in price.

3. Specific Price

Futures contracts are traded in public, government-regulated forums— exchanges where business is conducted either online or in traditional openoutcry pits on a trading floor. Prices are determined by the orders that come into the market from buyers and sellers. When an order from a buyer at $100 meets an order from a seller at $100, a trade occurs, and a futures price of $100 is broadcast to the world.

4. Specific Time in the Future

Futures contracts expire at a certain point in the future. For example, a December 2012 futures contract will cease to exist sometime during November or December in 2012 (depending on exchange-set rules). As with other elements of the contract, a standardized expiration date makes it easier for investors to focus on pricing decisions.

Unique Advantages

Around-the-Clock Trading

Most popular futures markets today trade around the clock, and around the globe. It’s easy to get in and out of positions in popular and liquid futures markets, and you can do so at the click of a button, with lightning-fast speed. Futures markets are user-friendly, and that has helped drive the incredible growth these markets have enjoyed, especially in electronic markets. Futures exchanges and futures brokerage firms are well aware that market-moving events happen around the world and around the clock. As a result, you can trade a wide variety of markets virtually 24 hours a day. Thus, if overnight events dictate action, you can participate. For example, news of the death of al Qaeda leader Osama Bin Laden created a sharp move in the E-mini S&P futures on Sunday, May 1, 2011, during the overnight session. You can see on an intraday chart how the market initially reacted to the news with a spike higher before the regular day session began on Monday. During the 2004 U.S. presidential election, the E-mini S&P futures rose and fell based on polling information for the tight race between George Bush and John Kerry, which continued back and forth into the evening after the stock market closed that day.

Pure Price Play

More than any other investment, futures allow you to invest directly in the markets and events you have an opinion about. Say you believe the crude oil price will rise from current levels. Your investment choices might include investing in oil and gas partnerships, an energy stock or perhaps a sector fund. But investing directly in a stock involves management issues, market share, risk of scandals and a host of other “company-specific risks” that really don’t relate to the price of the actual commodity. Crude oil futures, however, will move one-for-one with the underlying crude price. Whether you’re talking about interest rates, stock indexes, or currencies— where else can you directly invest in the markets affecting your world? Futures are a pure price play.

No Secrets

Supply and demand rule in futures markets, not quarterly earnings, corporate filings or management changes. Instead, the data that moves futures markets often come from government reports that are in the public domain and can be the primary source of market information. For example, the U.S. Department of Agriculture estimates crop size and international demand for wheat, corn and soybeans (www.usda.gov). Information about a country’s economy (which affect stock, financial and currency markets) comes from central banks (www.federalreserve.gov/releases/) and government agencies (www.bls.gov). And, to keep track of who’s holding what type of positions, you have to turn only to the U.S. futures regulator, the Commodity Futures Trading Commission, for its weekly Commitments of Traders report (www.cftc.gov/marketreports/commitmentsoftraders/index.htm).

Buy or Sell with Equal Ease This may seem obvious, but prices don’t always go up. Sometimes they fall. With futures, it’s just as easy to sell, or take a short position, as it is to buy, or take a long position. Unlike many cash-based investments, there are no special forms to fill out and no higher financial requirements to meet. The requirements to sell short are exactly the same as to buy long. Either strategy is treated equally, and can be executed with equal ease.

Stock Index and Single-Stock Futures Terminology

Alpha Capture

Alpha refers to that part of a stock’s risk and return that is attributable to the stock individually, as apposed to the overall market. Alpha capture is a spread trade between a stock future and a stock index future.

American Depositary Receipt (ADR)

A security that physically remains in a foreign country, usually in the custody of a bank, but is traded in the U.S.

Arbitrage

The simultaneous purchase and sale of identical or equivalent financial instruments or commodity futures in order to benefit from a discrepancy in their price relationship.

Ask

A motion to sell. The same as offer. Indicates a willingness to sell a futures contract at a given price. (See Bid.)

Basis

The difference between the current cash price and the futures price of the same commodity. The basis is determined by the costs of actually holding the commodity versus contracting to buy it for a later delivery (i.e., a futures contract). The basis is affected by other influences as well, such as unusual situations in supply or demand. Unless otherwise specified, the price of the nearby futures contract month is generally

used to calculate the basis. (See Carrying Charge.)

Bid

The price that the market participants are willing to pay. Opposite of offer.

Broad-Based

Generally referring to an index, it indicates that the index is composed of a sufficient number of stocks or of stocks in a variety of industry groups to satisfy certain economic

or regulatory criteria. (See also Narrow-Based.)

Carrying Charge (Cost To Carry)

For physical commodities such as grains and metals, the cost of storage space, insurance, and finance charges incurred by holding a physical commodity. In interest rate futures markets, it refers to the differential between the yield on a cash instrument and the cost necessary to buy the instrument. (See Basis.)

Cash Market

A place where people buy and sell the instrument on which a futures contract is based, such as a securities exchange, bank or grain elevator. The terms “spot” and “spot price” usually refer to the cash market price for the underlying instrument that is available for immediate delivery.

Cash Price

The price of the actual underlying commodity that a futures contracts is based upon. In the case of single-stock futures, the price of the underlying stock.

Circuit Breakers

A system of trading halts and price limits on equities and derivative markets designed to provide a cooling-off period during large, intraday market movements.

Cross-Margining

A procedure for margining related securities, options, and futures contracts jointly when different clearing houses clear each side of the position.

Day Traders

Speculators who take positions in futures or options contracts and liquidate them prior to the close of the same trading day.

Derivative

A type of investment whose value depends on the value of other investments, indices or assets. Futures contracts and stock options are common types of derivatives. A single-stock futures contract is a derivative security of the underlying stock on which it is based.

E-Mini

A trademark of CME Group Inc., an E-mini is a contract that is traded exclusively on its electronic trading facility. It is usually based on a similar, larger contract but priced more favorably for smaller investors with a reduced margin requirement and smaller tick size or multiplier.

Exchange-Traded Fund (ETF)

An ETF is a basket of securities designed to track an index yet trades like a stock. For example OneChicago’s DIAMONDS contract is a future on the DIAMOND’s ETF, which tracks the Dow Jones Industrial Average Index.

ETF Futures

Futures contracts on exchange-traded Funds. ETFs have similar characteristics to singlestock futures, although the underlying security is the fund itself rather than common stock in a specific company. Thus at expiration, the deliverable assets are shares in the underlying ETF.

Fair value

The theoretical worth of a futures contract as determined by a mathematical model. Fair

value is a popular calculation that quickly shows the relationship between a stock index futures contract and the underlying stock index. Traders use fair value as a tool in determining whether the futures contract is overpriced or underpriced.

GLOBEX®

CME Group’s global electronic trading system. Globex has a number of all-electronic

contracts that run virtually around the clock.

Hedge

The purchase or sale of a futures contract as a temporary substitute for a cash market transaction to be made at a later date. Usually it involves opposite positions in the cash market and futures market at the same time.

Initial Margin

The minimum value on deposit in an account to establish a new futures or options position, or to add to an existing position. Initial margin amount levels differ by contract. Renesource Capital sets the level of initial margin required, and it may change at any time at Renesource Capital’s discretion. Increases or decreases in initial margin levels reflect anticipated or actual changes in market volatility. Also called initial performance bond.

Leverage

The ability to control large dollar amounts of a commodity with a comparatively small amount of capital.

Maintenance Margin

The minimum value that must be present in an account in order to continue to hold a position. The maintenance margin is typically less than the initial margin, and also differs by contract. If an account falls below the maintenance margin requirement, the account holder will receive a margin call. If he or she wishes to continue to hold the position, they will be required to restore the account to the full initial margin level (not to the maintenance margin level). Also known as the maintenance performance bond.

Market Basket

A portfolio of common stocks whose performance is intended to simulate the performance of a specific index or other benchmark.

Margin

(See Performance Bond.)

Margin Call

A demand from a clearinghouse to a clearing member, or from a brokerage firm to a customer, to bring margin deposits up to a minimum level required to support the positions held. This can be done by either depositing more funds or offsetting some or all of the positions held.

Narrow-Based

Similar to a stock index future, but targeted to a specific group of stocks, such as the auto, airline or telecom industries. Also called industry-sector futures and exchangetraded baskets.

Offer

Indicates a willingness to sell at a given price; opposite to the bid. Also called the “ask” price.

Pair Trading

Another term for spread trading but more specifically to securities products (stocks in particular) rather than commodities. Commonly refers to buying one stock and selling another related stock against it. An example would be spreading a Coca-Cola Co. single-stock future against a Pepsico singlestock future.( See also Spread Trade.)

Performance Bond (Margin)

Funds that must be deposited as a performance bond by a customer with his or her broker, by a broker with a clearing member, or by a clearing member, with the clearing house. The performance bond helps to ensure the financial integrity of brokers, clearing members and the exchange as a whole.

Physical Delivery

The transfer of the underlying commodity from the seller of a futures contract to the buyer of a futures contract. Each futures exchange has specific procedures for delivery of a physical commodity. Some futures contracts, such as stock index contracts, are cash settled.

Position Trader

An approach to trading in which the trader either buys or sells contracts and holds them for an extended period of time.

Program Trading

A catch-all phrase for trading activities that involve the purchase (or sale) of a large number of stocks. The term commonly includes computer-aided stock market buying or selling programs, portfolio insurance, and index arbitrage.

Sell Programs

A specific type of index arbitrage that involves the simultaneous purchase of stock index futures against the sale of a large number of stocks that comprise (or closely resemble) the index.

Shock Absorber

A temporary restriction in the trading of stock index futures which becomes effective following a significant intraday decrease in stock index futures prices. Designed to provide an adjustment period to digest new market information, the restriction bars trading below a specified price level. Shock absorbers are generally market specific and at tighter levels than circuit breakers.

Single-Stock Futures (SSF)

Single-stock futures are an agreement between two parties that commits one party to buy a stock and one party to sell a stock at a given price and on a specified date. They are similar to existing futures contracts for gold, crude oil, bonds, and stock indices. Unlike actual stock, there is no ownership or voting rights contained in a SSF. (See also Universal Stock Futures.)

Spread Trade

The simultaneous buying and selling of two related markets in the expectation that a profit will be made when the position is offset. Examples include: buying one futures contract and selling another futures contract of the same commodity but different delivery month; buying and selling the same delivery month of the same commodity on different futures exchanges; buying a given delivery month of one futures market and selling the same delivery month of a different, but related, futures market.

Stock Index

An indicator used to measure and report value changes in a selected group of stocks. How a particular stock index tracks the market depends on its composition the sampling of stocks, the weighting of individual stocks, and the method of averaging used to establish an index.

Stock Index Futures

Futures contracts on a stock index, such as the Standard & Poor’s 500 or the Dow Jones Industrial Average. Stock index futures contracts are a derivative of the underlying index, and are cash-settled.

Systemic Risk

Market risk due to price fluctuations which cannot be eliminated by diversification.

Universal Stock Futures

Same as single-stock futures, but used to refer to those contracts that trade on the LIFFE.

Single Stock Futures

Security Futures Order Types

Two order types—All-or-None (AON) and Immediate-or-Cancel (IOC)—are unique to single-stock and narrow-based index futures. However, exchanges offering security futures also accept other orders, such as market, limit, stop, stop limit and stop with limit. - All-or-None (AON) This order type specifies both a quantity and price. The order will be filled only if the entire quantity can be filled at the specified price. Thus, no partial quantities will be filled. - Immediate-or-Cancel (IOC) An IOC order will be presented to the market, filled to the extent possible, and then immediately cancelled. Thus, you may receive partial fills on an IOC.

Narrow-Based Indexes

Narrow-based index futures offer sector specialization, and are considered part of the single-stock futures family. Narrow-based indexes, generally comprising five to nine stocks, represent a variety of equity sectors.

Benefits of SSF’s

Advantages of Single Stock Futures - Improved financing of equity positions by participating at competitive benchmark rates. - SSF act as a synthetic stock-lending vehicle replacing the process of locating stock when selling short. - All trades are cleared through The OCC, a triple A rated credit facility.

Range of Trading Strategies

Single stock futures are used with a broad range of trading strategies and can be applied to a variety of portfolio management needs. Since the price of an equity future typically tracks the price of the underlying instrument nearly tick for tick, trading strategies used in the stock market today should be transferable to the stock futures market.

Electronic Trading

Security futures trading at OneChicago is fully electronic. Trade processing and clearing are fully automated using state of the art technology.

Choice of Brokers and Accounts

Single stock futures and narrow-based indexes may be traded in either a securities account or a futures account. Many investors will be able to trade OneChicago products on their PCs through their existing securities or futures brokerage accounts.

Featured Articles

What are Options

An option is a contract that gives the buyer the right, but not the obligation, to buy or sell the underlying asset at a specific price on or before a given date. A call gives the option holder the right to buy, while a put gives the option holder the right to sell. The price at which the option is executed is known as the strike price.

The options holder refers to someone who buys options. Option writers are those that sell options. The option holder (buyer) has the right, but not the obligation, to buy or sell, while the option writer (seller) is obligated to buy or sell.

In addition to there being two basic types of options (calls and puts), there are also different styles of options depending on the product being traded, with different expiration procedures. American-style options can be exercised at any time prior to expiration. European-style options can only be exercised at the expiration of the option contract. Both types trade on U.S. exchanges.

Why Trade Options on Futures?

Defined Risk: Your risk is limited to the option premium paid when buying an option. Risk is unlimited when writing an option.
Risk Management: Options can help you protect your positions against price fluctuations when you don’t want to alter your position in the underlying.
Trading Opportunities: A wide variety of strategies can be created using options, from conservative positions to risky ones.

Basic Terminology

Premium – The cost of the option contract itself.
Strike Price – The price at which you can take a position in the underlying contract.
Underlying – The futures contract that the option is based on (i.e., March crude oil futures, December corn futures, June S&P futures, etc).
Exercise – The act of exchanging the option for a position in the underlying futures contract. The holder of an option exercises the right to buy (in the case of calls) or sell (in the case of puts) the underlying future at the strike price.
At-the-Money – If an option is at-the-money, the option's strike price is the same as the underlying price. For example, if March crude oil futures are trading at $71, the March crude oil 71 puts and March crude oil 71 calls are both at-the-money.
Out-of-the-Money – If the option is out-of-the-money, the option's strike price is higher (for calls) or lower (for puts) than the underlying price. For example, if March crude oil futures are trading at $71, the March crude oil 75 calls and 68 puts are both out-of-the money.
In-the-Money – If the option is in-the-money, the strike price is lower (for calls) or higher (for puts) than the underlying price. For example, if March crude oil is trading at $71, the March crude 78 puts and 70 calls are both in-the-money. In-the-money options have intrinsic value, because they could be exercised and the resulting futures position immediately offset in the futures market for profit.

Advanced Options

So what determines an option's value? In general, the option’s price is determined by the perceived probability of it expiring in-the-money. Of course, the basic fundamental forces of supply and demand still hold. Ultimately, the contract is worth whatever someone will pay for it. There are three major factors that determine the option’s price (premium): the underlying market, volatility and time remaining to expiration.

Underlying: The main factor determining the option’s price is the price of the underlying futures contract. The price of the underlying determines if the option is in-the-money or out-of-the-money. For example, if the price of the underlying market rallies, investors likely will pay more for the right to buy call options. Time: The more time there is until expiration, the greater the chance that the option could finish in-the-money. Therefore, the price of the option will be higher. The passage of time works against the option buyer because out-of-the-money options decrease in value at an accelerating rate as the expiration date approaches. This is commonly known as time-decay.
Volatility: The price of an option is also determined by volatility. As market participants anticipate large price swings, the chances of an option finishing in-the-money theoretically goes up, as will its value. An option in a volatile market is worth more than one in a calm market. Buyers of options are said to be long volatility, while sellers are short volatility.

Advanced Terminology

The Greeks -(e.g. delta, theta, vega) are basically tools used by option traders to manage risk. Each Greek letter corresponds to a unique measurement, the most common being delta.
Delta - The amount the value of the option changes in relation to the movement of the underlying is known as its delta. The delta is a number between -100 and 100. The deltas of calls range from zero to 100, with out-of-the-money calls closer to zero and in-the-money calls closer to 100. The deltas of puts range from zero to -100, with out-of-the-money puts closer to zero and in-the-money puts closer to -100. At-the-money calls and puts have deltas near 50 and -50, respectively.
Gamma-As the price of the underlying changes, so does the delta. The gamma measures the change in the delta as the price of the underlying changes. Gamma is used more commonly among professionals that need to manage the risk of large positions.
Rho- Rho measures the effect of interest rates. Specifically, it is a measure of how a change in interest rates changes the value of an option. Option values decrease when interest rates increase, and vice versa. However, interest rates have a very small impact on price so it is more important to be familiar with the delta, theta, vega and gamma.
Theta-Theta measures the rate at which an option loses its value as time nears expiration. Theta is known as the time decay factor and is usually expressed as a negative number, representing the loss of value as time passes. For example, if the theta is -.20, the option will lose $0.20 in value per day for each $1 in underlying price movement. If you are short options, a positive theta and time decay can work for you. If you are expecting a stable market, a short options position will make time decay work in your favor.
Vega-The vega, although not officially a Greek letter, and sometimes known as kappa measures the sensitivity to volatility. The option’s vega shows how much of a change in price to expect for a one-percentage point increase in implied volatility. Long option positions always have a positive vega. An option’s vega decreases with the passage of time.

Trading Strategies

Looking for some option strategies to implement in your trading? Check out some basic and advanced trading strategies to help you create bullish, bearish and neutral positions.

 

    • Bullish Strategies
  • Long Call: Buying a call allows you to define your risk – the option’s premium. An increase in volatility helps your position, while time erosion hurts your position.
    Bull Call Spread: A bull-call spread can be executed by purchasing a call option at a specific strike price while also selling the same number of calls of the same asset and expiration date, but at a higher strike. This spread is best to use when you are moderately bullish.
    Call Backspread: A call backspread is executed by selling one call and simultaneously buying two calls at a higher strike. This strategy is best to use when you are very bullish.
    Covered Call: A covered call is a strategy in which the trader buys an asset and sells calls on the same asset in an attempt to generate extra income from the asset.
    Protective/Married Put: This strategy involves buying a put option on an underlying asset that you already own. The position protects you from price depreciation in the underlying asset.
  •  

      • Bearish Strategies
    • Long Put: Buying a put allows you to define your risk – the option’s premium. An increase in volatility helps your position, while time erosion hurts your position.
      Bear Put Spread: To execute a bear put spread you must sell a put and then buy a put at a higher strike.
      Put Backspread: Involves selling one put and simultaneously buying two puts at a lower strike. Increased volatility usually helps this position while time erosion usually hurts the position.
    •  

        • Neutral Strategies.
      • Collar: Involves buying a put and selling a call with a higher strike price while owning the underlying asset. The goal of a collar is to protect profits gained in the underlying asset.
        Short Straddle: Selling a call and selling a put at the same strike.
        Long Straddle: Buying a call and buying a put at the same strike.
        Long Strangle: Buying a call and buying a put at a lower strike.
        Short Strangle: Selling a call and selling a put at a lower strike
        Long Call Butterfly: Involves selling two calls, buying one call at the next lower strike and buying one call at the next higher strike, while making sure the strikes are equidistant. For example, in an option on the E-mini S&P 500 futures trading at 1500 – you would sell two 1500 calls, buy a 1495 call and buy a 1505 call.

Featured Articles

Cash and Cash Equivalents

What is it?

Cash is the most liquid asset class and also includes checking and saving accounts where you have immediate access to your money. A Money Market Account is a short-term deposit account that aims to preserve capital, maintain liquidity (easy access to cash), and provide a return in line with prevailing short-term market interest rates. Money market accounts typically invest in the highest quality short-term securities, like US Treasuries and other US-government backed debt. Money market accounts are frequently referred to as 'cash-equivalents' because of their high liquidity (easy convertibility to cash).

Why is it important?

Money market accounts fall into the asset class of 'cash and cash equivalents.' Investors frequently park idle cash in money market accounts while they wait/look for suitable investment opportunities or consciously keep some of their investments in cash as part of their asset allocation strategy. Money market accounts are also sometimes used as safe havens during times of market volatility, when investors exit other investments and move into cash to preserve capital.

What do I do with it?

You should consider Money Market Accounts (effectively cash) as part of your overall asset allocation strategy. Investing idle cash in a money market account means it's free to invest if the right opportunity comes along. Money Market Accounts can also be used to accumulate savings to make larger periodic investments, potentially reducing investing costs while earning some interest. For instance, maybe you're able to save $200 per week and deposit it in your money market account. Once a month you could bundle those savings and make a single $800 investment at a lower transaction cost than investing each weekly deposit separately.

For Small Investors

Many investors want to know if an individual has any chance in the market. They worry that big investors grab all the gains and squeeze out any chance for an individual to find success. They hear that the market is rigged against them, and fear it is unsafe to invest in today's markets.

Here is a little fact that might come as a surprise: the modern investor has more advantage than ever when it comes to investing. At least that what billionaire investor Warren Buffett believes. "The game really hasn't changed," Buffett recently told a CNBC analyst when asked if investing is different now. He did point out one important change. "Commissions have gone way down over the past 25 years," Buffet said.

The truth is that costs for the retail investor have gone way down when in comes to investing in stocks, and the benefits of technology and research are way up. Even more important is the fact that new investment vehicles are being created all the time.

One innovation that has become important over the last ten years is the Exchange Traded Fund (ETF). ETFs are index-based funds that trade like an individual stock. Ten years ago there were only a small number of ETFs, while today there are hundreds to choose from, with more being created each year.

The greatest importance of ETFs is that they help investors target specific outcomes. Individual investors can now invest in not only the stock market, but the bond market, the commodities markets, and even the market for currency exchange, simply by buying and selling the ETFs of their choice.

This allows individual investor to create their own strategies for investing. With the wide variety of ETFs, individuals can create their own strategies for investing. They can diversify to reduce risks in turbulent times, or they can focus their investing when markets are healthy to increase their opportunity for gains.

Because costs are lower than ever before, individual investors are able to participate in the market in more effective ways with strategies that meet their individual goals. The smart investor simply needs to learn strategies that can work for them, and put those strategies to work.

Investing Time Horizon

What is it?

Your Investing Time Horizon is the timeframe for you to reach a specific financial goal. Your goal can be long-term, such as retirement in 30-40 years, or short-term, like a down-payment on a car next year, or something in between. The size of your financial goal will typically dictate the length of your investing time horizon, with larger or more expensive goals requiring more time than everyday objectives, like next year's vacation or a new smart phone.

Why is it important?

Your investing time horizon is a key factor in your overall investing strategy. The amount of time you have to save and invest will determine how much risk you may be willing to accept, which will influence your asset allocation decisions (how much to invest in stocks vs. bonds, etc.)

Generally speaking, the longer you have to reach a financial goal, the more risk you may be willing to accept. The idea is that riskier assets may achieve higher returns, and that over the longer term losses will be recovered. The shorter the amount of time, the less risk you'll likely want to be exposed to. Of course, never take on more risk than you're personally comfortable with, a concept known as risk tolerance. Lastly, the length of your investment time horizon will determine how long you have the power of compounding working to your advantage.

What do I do with it?

The critical first step is to set your financial goals. What are you saving and investing for? The sooner you get started, the sooner you put the power of compounding to work for you. See the Plan section of the Roadmap to your Financial Future to get some ideas of common financial goals.

Stay realistic when setting your goals and target dates to achieve them. If you can only save $100 each month, you're not likely to reach a $10,000 condo down payment target in two years. But if you can save $500 each month, it's another story. You can identify and save for short and long-term goals at the same time. A good approach is to devote 50% of your monthly saving to long-term goals, 30% to shorter-term goals, and the remaining 20% to your emergency fund until it's sufficient.

Use the time horizon of your goals to determine your asset allocation plan. For goals 10-years and longer, you may consider embracing riskier asset classes for a majority of your investments. For goals around 3-10 years away, a more balanced approach to risk might be warranted. And for goals less than 3 years away, a more conservative asset allocation mix may be best suited. Whichever asset allocation strategy you opt for, put it in action to maximize the power of compounding.

Cash Account

What is a Cash Account?

A brokerage account that does not allow for any extension of credit on securities is defined as a cash account. All trades in Renesource Capital accounts are accepted on the basis of receiving full payment in cash for purchases and good delivery of securities for sales prior to the execution of the trades.

What are the rules surrounding cash account trade settlements?

Rules for payment of securities transactions executed in accounts are established under Federal Reserve Board Regulation T. These rules allow for the acceptance of purchases in cash accounts if sufficient funds are in the account to fully pay for the purchase. Settlement date is generally 3 business days for equities from trade date.

What is Asset Allocation

What is it?

Asset allocation is the investment process where you decide how to divide your investments among the various asset classes, such as what portion to invest in stocks, bonds, commodities, or cash, for example. The purpose is to develop a diversified portfolio that reflects your risk tolerance and investment time horizon, and manage the overall risk of your portfolio in the process.

Why is it important?

Asset allocation is the critical first step in the overall investment process, because different asset classes have different risk and reward profiles (some more volatile/potentially higher returns, some more stable/typically lower returns). Some studies have shown that asset allocation can be the single biggest driver of a portfolio's returns. So rather than focusing on individual stock selection, for instance, first take a step back and consider how you want to divide your investments among the various asset classes.

What do I do with it?

Asset allocation is your first step in constructing an investment portfolio. The objective is to divide your investments to maximize return and manage your risk. One key factor to keep in mind is time:

  • How long will you hold the investment?
  • What is the timing of your investment goal?

Generally speaking, the longer the timeframe involved, the more risk you may be willing to accept. The shorter the time involved, the less risk you may want to take on. If the investment horizon is twenty or thirty years out, for example, it's possible that short-term market declines in riskier assets (like stocks and commodities) may be recovered over time. If your investment horizon is only a few years out, then you may want to avoid short-term market fluctuations and opt for more stable and predictable returns (using bonds and cash/money market accounts). Also, the longer the timeframe, the more the power of compounding can work for you.

After you have developed an asset allocation strategy that fits your needs, you'll need to review the composition of your portfolio periodically (like quarterly or semi-annually) to see that your allocation objectives are still being met. For instance, if you invested 75% in stocks and 25% in bonds, and stocks made strong gains over the next six months, you might find your portfolio is later composed of 80% stocks and 20% bonds (because stocks grew faster than bonds). To return to your desired allocation, you would need to sell some stock investments and buy more bonds, a process known as rebalancing.

Remember, asset allocation is not a set-it-and-forget-it strategy. In addition to periodic rebalancing, you'll also need to make adjustments as your investment goals get closer in time. One day the investment goal that's now twenty-five years away will only be five years away. Also, if your circumstances or your goals change, you'll also want to review your asset allocation strategy to make sure it still fits your objectives.

What is correlation

What is it?

Correlation is a statistical measure of how two different securities have moved in relation to each other in the past. (Past performance is not indicative of future results.)

The key number is called the ‘correlation coefficient’ and ranges in value from +1.0 to -1.0.

  • A correlation of +1.0 means the two assets have been perfectly ‘positively correlated’ in the period, meaning they have moved in the same direction and to the same degree.
  • A correlation reading of -1.0 means the two assets are perfectly ‘negatively correlated’, meaning they have moved in opposite directions and to the same degree.
  • A correlation of zero means that the two assets have no statistical relationship and their relative movements are random, or non-correlated.

Generally speaking, correlations greater than +0.7 or less than -0.7 are considered to be strongly correlated; between +0.4/+0.7 and between -0.4/-0.7 are considered moderately correlated, while readings between +0.4/-0.4 are considered only weakly or non-correlated.

Why is it important?

Understanding how two assets are correlated, or not (non-correlated), is important to creating a diversified investment strategy. Diversification is the primary tool to manage your overall portfolio risk. Creating a diversified portfolio requires selecting investments that have low correlations to each other. After all, investing in assets that historically have moved together (highly correlated) is almost the same as investing in just one security, or putting all your eggs in one basket, a major no-no in investing.

What do I do with it?

The major asset classes will typically have moderate to low correlations, meaning movement in one asset class will have little implication for the other, most clearly between stocks and bonds. However, within asset classes, stocks for example, correlations can be a useful tool to further diversify your investments. Your aim is to find individual securities that have lower correlations to each other. Keep in mind, low correlations within an asset class are relative, since securities in the same asset class will generally be affected by the same overall market factors. Rather than looking for a low absolute correlation, you should look for relatively moderate correlations of around +0.4 to +0.7 (instead of +0.8 or +0.9) to aid diversification. A few points to remember regarding correlations:

  • Correlation is not causation, meaning just because two assets displayed a relationship in the past doesn’t mean that movements in one asset caused the changes in the other.
  • Correlations only measure the relationship between two assets at a time, i.e. there can’t be a correlation for 3 or more different securities.
  • Correlations are based on historical data, and as the saying goes “past performance is not a guarantee of future results.” That means that correlations may change over time (and they do), but they’re still among the most widely used measures to gauge the relationship between two assets.
  • Correlations measure the relationship between two assets over a specific period of time, such as one year or five years. There may be big differences in correlations depending on the timeframe analyzed. For instance, two assets could be highly correlated on a 1 year basis, but statistically non-correlated over a longer period like ten years. Keep your investment time horizon in mind when considering correlations.
  • Correlations over longer periods of time are more statistically reliable. For instance, a ten-year study will be more statistically reliable than a one-year comparison, while short terms like three months would be statistically unreliable.

What is Diversification

What is it?

Diversification is a fancy word for not putting all your eggs in one basket. The idea is to spread your investments across different asset classes (e.g. between stocks and bonds) and within individual asset classes (such as different sectors of US stocks) to reduce the risk that one or a few of those investments could lead to major losses in your portfolio. Portfolio refers to the basket of individual investments you make viewed as a whole.

Diversification will not eliminate all risk, but it is widely practiced in portfolio management as a way to manage overall risk.

Why is it important?

Managing risk is critical to your investment success. Diversification is a way to reduce overall portfolio risk by spreading your investments among different asset classes. The idea is that if one investment does poorly, other investments will fare better, or not as badly.

Most financial literature will tell you to 'diversify, diversify, diversify.' But too much diversification can lead to a potentially risk-neutral portfolio that doesn't lose much, but won't make much either.

Keep diversification in perspective, especially if you have a long investment time horizon (more than 10 years). Embrace and invest in your ideas for the future. For instance, if you think stocks offer the best long-term potential, there's nothing wrong with having a heavy investment concentration in stocks (say, 80—90% of assets). Within that stock allocation, if you think technology stocks are the way to go over the long-run, it's perfectly justifiable to be overweight that sector. If you have a shorter investment horizon, then greater diversification may be helpful to limit losses and pursue more stable returns.

What do I do with it?

The key to diversification is to invest in non-correlated assets, meaning investments that are less likely to move in the same direction at the same time. Learn more about correlation.

The first step to creating a diversified portfolio is through asset allocation, or selecting which asset classes to invest in, like stocks vs. bonds. The various asset classes typically have moderate to low correlations with one another, meaning changes in one asset class are less to see a similar change in the other.

Further diversification can be achieved by then selecting low- or non-correlated securities within each asset class. For example, an investor wishing to diversify her US stock investments might select a technology ETF and a health care ETF, since the two sectors only have a correlation of about +0.65 over the last two years, meaning they moved together around 65% of the time. So while they're both stock ETFs, there is some diversification gained from pairing the two.

What is Risk Tolerance

What is it?

Risk tolerance, or risk appetite, is a personal measure of how much risk you are willing to accept for an expected level of return in your investments. In general, the riskier the investment, the higher the potential reward, but also the greater the risk of loss. The lower the risk, the lower the expected return, but also the lower the risk of loss.

Different asset classes have different levels of risk and reward associated with them. Stocks and commodities, for example, are typically viewed as riskier assets due to the higher volatility of their returns. Bonds, in contrast, are generally viewed as less risky investments due to their relatively stable returns (that's why bonds are also referred to as 'fixed income').

Why is it important

As part of the asset allocation process, which is the first and possibly most important step in investing, your level of risk tolerance or risk appetite will determine how much you invest in particular asset classes (stocks vs. bonds vs. commodities vs. cash, etc.).

Your risk appetite is a function of several variables unique to your own situation, such as:

  • The time frame of your investment goals (long-term/short-term)
  • Your personal situation (single/married/caregiver/dependents/just starting out/etc.)
  • Your own individual investment style (aggressive/moderately risky/conservative/risk averse)

What do I do with it?

The starting point is to outline your investment goals to see how much money is needed and when. Generally speaking, the longer the time you have, the greater the risk you might be willing to take on. The closer the timing of your goal, the less risk you might be inclined to accept. A good frame of reference is goals shorter than 3 years away probably warrant less risk, while goals 10 years and further out suggest more risk might be considered. For periods in between, a more balanced risk approach might be preferred.

You also need to consider your personal circumstances. Is a spouse or partner or family member reliant on you? Do you have dependents? Is your employment situation stable or uncertain? Are you just starting out or is retirement on the horizon? What happens if you need money suddenly? No two investors will have the same situation, and only you can decide the balance between risk and reward that's right for you.

Lastly, it helps to do a gut-check and think about your personal appetite for risk. Can you roll with the ups and downs of the market and not lose sleep? Or will you feel every up and down like it's a final verdict? Don't fall into the trap of standardized personal finance models, such as "if you're X-years old, you should do XYZ." You're the one who will have to live with your investment decisions, so pick a level of risk tolerance that you are comfortable with.

Stock Index and Single-Stock Futures Terminology

Alpha Capture

Alpha refers to that part of a stock’s risk and return that is attributable to the stock individually, as apposed to the overall market. Alpha capture is a spread trade between a stock future and a stock index future.

American Depositary Receipt (ADR)

A security that physically remains in a foreign country, usually in the custody of a bank, but is traded in the U.S.

Arbitrage

The simultaneous purchase and sale of identical or equivalent financial instruments or commodity futures in order to benefit from a discrepancy in their price relationship.

Ask

A motion to sell. The same as offer. Indicates a willingness to sell a futures contract at a given price. (See Bid.)

Basis

The difference between the current cash price and the futures price of the same commodity. The basis is determined by the costs of actually holding the commodity versus contracting to buy it for a later delivery (i.e., a futures contract). The basis is affected by other influences as well, such as unusual situations in supply or demand. Unless otherwise specified, the price of the nearby futures contract month is generally

used to calculate the basis. (See Carrying Charge.)

Bid

The price that the market participants are willing to pay. Opposite of offer.

Broad-Based

Generally referring to an index, it indicates that the index is composed of a sufficient number of stocks or of stocks in a variety of industry groups to satisfy certain economic

or regulatory criteria. (See also Narrow-Based.)

Carrying Charge (Cost To Carry)

For physical commodities such as grains and metals, the cost of storage space, insurance, and finance charges incurred by holding a physical commodity. In interest rate futures markets, it refers to the differential between the yield on a cash instrument and the cost necessary to buy the instrument. (See Basis.)

Cash Market

A place where people buy and sell the instrument on which a futures contract is based, such as a securities exchange, bank or grain elevator. The terms “spot” and “spot price” usually refer to the cash market price for the underlying instrument that is available for immediate delivery.

Cash Price

The price of the actual underlying commodity that a futures contracts is based upon. In the case of single-stock futures, the price of the underlying stock.

Circuit Breakers

A system of trading halts and price limits on equities and derivative markets designed to provide a cooling-off period during large, intraday market movements.

Cross-Margining

A procedure for margining related securities, options, and futures contracts jointly when different clearing houses clear each side of the position.

Day Traders

Speculators who take positions in futures or options contracts and liquidate them prior to the close of the same trading day.

Derivative

A type of investment whose value depends on the value of other investments, indices or assets. Futures contracts and stock options are common types of derivatives. A single-stock futures contract is a derivative security of the underlying stock on which it is based.

E-Mini

A trademark of CME Group Inc., an E-mini is a contract that is traded exclusively on its electronic trading facility. It is usually based on a similar, larger contract but priced more favorably for smaller investors with a reduced margin requirement and smaller tick size or multiplier.

Exchange-Traded Fund (ETF)

An ETF is a basket of securities designed to track an index yet trades like a stock. For example OneChicago’s DIAMONDS contract is a future on the DIAMOND’s ETF, which tracks the Dow Jones Industrial Average Index.

ETF Futures

Futures contracts on exchange-traded Funds. ETFs have similar characteristics to singlestock futures, although the underlying security is the fund itself rather than common stock in a specific company. Thus at expiration, the deliverable assets are shares in the underlying ETF.

Fair value

The theoretical worth of a futures contract as determined by a mathematical model. Fair

value is a popular calculation that quickly shows the relationship between a stock index futures contract and the underlying stock index. Traders use fair value as a tool in determining whether the futures contract is overpriced or underpriced.

GLOBEX®

CME Group’s global electronic trading system. Globex has a number of all-electronic

contracts that run virtually around the clock.

Hedge

The purchase or sale of a futures contract as a temporary substitute for a cash market transaction to be made at a later date. Usually it involves opposite positions in the cash market and futures market at the same time.

Initial Margin

The minimum value on deposit in an account to establish a new futures or options position, or to add to an existing position. Initial margin amount levels differ by contract. Renesource Capital sets the level of initial margin required, and it may change at any time at Renesource Capital’s discretion. Increases or decreases in initial margin levels reflect anticipated or actual changes in market volatility. Also called initial performance bond.

Leverage

The ability to control large dollar amounts of a commodity with a comparatively small amount of capital.

Maintenance Margin

The minimum value that must be present in an account in order to continue to hold a position. The maintenance margin is typically less than the initial margin, and also differs by contract. If an account falls below the maintenance margin requirement, the account holder will receive a margin call. If he or she wishes to continue to hold the position, they will be required to restore the account to the full initial margin level (not to the maintenance margin level). Also known as the maintenance performance bond.

Market Basket

A portfolio of common stocks whose performance is intended to simulate the performance of a specific index or other benchmark.

Margin

(See Performance Bond.)

Margin Call

A demand from a clearinghouse to a clearing member, or from a brokerage firm to a customer, to bring margin deposits up to a minimum level required to support the positions held. This can be done by either depositing more funds or offsetting some or all of the positions held.

Narrow-Based

Similar to a stock index future, but targeted to a specific group of stocks, such as the auto, airline or telecom industries. Also called industry-sector futures and exchangetraded baskets.

Offer

Indicates a willingness to sell at a given price; opposite to the bid. Also called the “ask” price.

Pair Trading

Another term for spread trading but more specifically to securities products (stocks in particular) rather than commodities. Commonly refers to buying one stock and selling another related stock against it. An example would be spreading a Coca-Cola Co. single-stock future against a Pepsico singlestock future.( See also Spread Trade.)

Performance Bond (Margin)

Funds that must be deposited as a performance bond by a customer with his or her broker, by a broker with a clearing member, or by a clearing member, with the clearing house. The performance bond helps to ensure the financial integrity of brokers, clearing members and the exchange as a whole.

Physical Delivery

The transfer of the underlying commodity from the seller of a futures contract to the buyer of a futures contract. Each futures exchange has specific procedures for delivery of a physical commodity. Some futures contracts, such as stock index contracts, are cash settled.

Position Trader

An approach to trading in which the trader either buys or sells contracts and holds them for an extended period of time.

Program Trading

A catch-all phrase for trading activities that involve the purchase (or sale) of a large number of stocks. The term commonly includes computer-aided stock market buying or selling programs, portfolio insurance, and index arbitrage.

Sell Programs

A specific type of index arbitrage that involves the simultaneous purchase of stock index futures against the sale of a large number of stocks that comprise (or closely resemble) the index.

Shock Absorber

A temporary restriction in the trading of stock index futures which becomes effective following a significant intraday decrease in stock index futures prices. Designed to provide an adjustment period to digest new market information, the restriction bars trading below a specified price level. Shock absorbers are generally market specific and at tighter levels than circuit breakers.

Single-Stock Futures (SSF)

Single-stock futures are an agreement between two parties that commits one party to buy a stock and one party to sell a stock at a given price and on a specified date. They are similar to existing futures contracts for gold, crude oil, bonds, and stock indices. Unlike actual stock, there is no ownership or voting rights contained in a SSF. (See also Universal Stock Futures.)

Spread Trade

The simultaneous buying and selling of two related markets in the expectation that a profit will be made when the position is offset. Examples include: buying one futures contract and selling another futures contract of the same commodity but different delivery month; buying and selling the same delivery month of the same commodity on different futures exchanges; buying a given delivery month of one futures market and selling the same delivery month of a different, but related, futures market.

Stock Index

An indicator used to measure and report value changes in a selected group of stocks. How a particular stock index tracks the market depends on its composition the sampling of stocks, the weighting of individual stocks, and the method of averaging used to establish an index.

Stock Index Futures

Futures contracts on a stock index, such as the Standard & Poor’s 500 or the Dow Jones Industrial Average. Stock index futures contracts are a derivative of the underlying index, and are cash-settled.

Systemic Risk

Market risk due to price fluctuations which cannot be eliminated by diversification.

Universal Stock Futures

Same as single-stock futures, but used to refer to those contracts that trade on the LIFFE.

Technical Analysis Terminology

Bar Chart

A chart that graphs the high, low, and settlement prices for a specific trading session over a given period of time.

Bollinger Band

An indicator used to compare volatility and relative price levels over a specified time period. Three bands are plotted: a simple moving average, an upper band of the simple moving average plus two standard deviations, and a lower band of the simple moving average minus two standard deviations. When the markets become more volatile, the bands widen, or move farther away from the average. When the markets are less volatile, the bands contract, or move closer to the average.

Candlestick Chart

Candlestick charts provide a quick visual picture of the relationship between opening and closing prices and their relative strengths or weaknesses, especially for extended periods. The body, which looks like a candle, represents the difference between opening and closing prices. Shadows, which look like wicks, represent price action above and below the body.

Channel

The range of prices between support and resistance levels that a market has traded in for a specific time period.

Charting

The use of graphs and charts in the technical analysis of futures markets to plot price movements, volume, open interest or other statistical indicators or price movement.

Chaos Theory/Trading

Also called non-linear dynamics, chaos theory involves complex analysis but is essentially a tool to determine whether repetitive patterns and cycles exist in the markets; that is, the presence of an underlying order. It involves the study of historical price action and use of mathematical and statistical tools.

Closing Out

Liquidating an existing long or short futures or options position with an equal and opposite transaction. Also called offsetting.

Commitments of Traders Report (COT)

A weekly report from the Commodity Futures Trading Commission providing a breakdown of each Tuesdayís open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. Open interest is broken down by aggregate commercial, non-commercial, and non-reportable holdings.

Congestion

A period of time characterized by repetitious and limited price fluctuations.

Correction

A temporary reversal in prices following a significant trending period.

Counter-Trend Trading

The method by which a trader takes a position contrary to the current market direction in anticipation of a change in that direction.

Directional Movement Index (DMI)

A trend-following indicator used to determine market trends. It has three components-- one for upward price movement, one for downward price movement, and a third that measures the difference in these up-and-down market forces to arrive at an index showing the strength of a trend.

Double Bottom

Chart pattern describing a drop in price, a rebound, and another drop to the same or close to the level of the first drop, then another rebound. The chart typically looks like a ìWî in shape, and the two bottom points of the W represent support areas.

Double Top

Chart pattern describing a rise in price, a fall, another rise to the same or close to the level of the first rise, then another fall. The chart typically looks like an ìMî in shape, with the two top points of the M representing resistance areas.

Elliott Wave Theory

A theory named after Ralph Elliott, who contended that stock market trends move in discernable and predictable patterns reflecting the basic harmony of nature. In technical analysis, it reflects a charting method based on the belief that all prices act as waves, rising and falling rhythmically in a pattern of five up and three down. Waves essentially reflect psychology or the marketplace as it makes its normal rallies and corrections.

Fibonacci

Leonardo Fibonacci was a thirteenth-century Italian mathematician who discovered the significance and unique properties of a simple number series, in which each numeral is added to the previous to create the next one in the series: 0,1,2,3,5,8,13, etc. Fibonacci numbers, and more significantly the ratio of those numbers to each other, can be found throughout nature and cycles. Fibonacci ratios are used in technical analysis to predict retracement areas during pullbacks, as well as targets, called ìextensions,î for projected price moves.

Gann Theory

A method of predicting price movements through the relationship of geometric angles in charts depicting time and price. The methodology was created by W.D. Gann, a financial astrologer who was born in 1878 and became one of the most successful traders of his time. Gann techniques can be complex, but are based on price study, time study and pattern study and operate under the premise that markets are cyclical in nature.

Gap

Price areas on a chart where no trading takes place. Gaps happen often in markets that trade only part of a day because price-moving events and announcements take place during times when markets are closed. Follow-up price action may cover them, or ìfill the gap.î

Head-and-Shoulders

A chart formation that resembles a human head-and-shoulders and is generally considered to be predictive of a price reversal. A head and shoulders top (which is considered predictive of a price decline) consists of a high price, a decline to the support level, a rally to a higher price than the previous high price, a second decline to the support level, and a weaker rally to about the level of the first high price. The reverse (upside down) formation is called a head and shoulders bottom (which is predictive of a price rally).

Liquid Market

A market in which selling and buying can be accomplished with minimal effect on price.

Momentum

The relative change in price over a specific time interval. Often equated with speed or velocity and considered in terms of relative strength.

Moving Average

A statistical price analysis method of recognizing different trends. A moving average is calculated by adding the prices for a predetermined number of days and then dividing by the number of days.

Moving Average Convergence/ Divergence (MACD)

MACD analysis uses three moving averages, often exponential. Two of them are based on the number of price periods used and the third an average of the difference between the two moving averages. The difference between the readings of the two moving averages is usually shown as a histogram, while the average of that difference is shown as a moving average line plotted on top of the histogram. An important part of MACD analysis is how its movements compare with price movements to determine strength or weakness in the market.

Oscillator

A term for indicators used to determine overbought and oversold conditions, often useful when a clear trend canít easily be determined. Oscillators include stochastics, moving average convergence/divergence, relative strength index and momentum.

Overbought

A term used to describe a technical opinion on a market that has risen too steeply and too fast in relation to underlying fundamental factors.

Oversold

A term used to describe a technical opinion of a market has declined too steeply and too fast in relation to underlying fundamental factors.

Parabolic Indicator

A strategy that uses trailing stops and a reverse method called stop-and-reversal (SAR) to pinpoint entry and exit points. Price action above the SAR would signal a bullish posture, price action below, a bearish posture.

Point-and-Figure Chart

A method of charting that uses prices to form patterns of movement without regard to time. It defines a price trend as a continued movement in one direction until a reversal or predetermined criterion is met. ìXsî are used to represent upticks, while ìOsî represent downticks.

Rally

An upward movement of prices.

Range

The difference between the high and low price of a commodity during a given trading session, week, month, year, etc.

Relative Strength Index (RSI)

The Relative Strength Index compares periods with up closes with periods that have own closes to produce an index reading reflecting the strength of price changes on a scale of 0 to 100. The index provides overbought or oversold signals, and divergence/convergence with prices is an important part of the analysis.

Resistance

A price area where new selling is expected to emerge to dampen a continued rise. Areas of resistance are found above current prices.

Retracement

A move opposite the direction of the main market trend.

Reversal

A change in the direction of prices.

Squeeze

A market situation in which the lack of supplies tends to force shorts to cover their positions by offsetting at higher prices.

Stochastics

The stochastics indicator measures the closing price relative to the low of the range for a selected period to indicate rising or falling momentum, providing trading signals when its lines cross into overbought or oversold territory. As an overbought/oversold indicator, it attempts to forecast turns in market action.

Support

The place on a price chart where it is expected buying of futures contracts will be sufficient to halt a price decline. Areas of support are found beneath current prices. Technical Analysis An approach to forecasting commodity prices that examines the patterns of price change, rates of change, and changes in volume of trading and open interest, without regard to underlying fundamental market factors.

Trend

The general direction, either up or down, in which prices have been moving.

Trendlines

Lines drawn across successively higher bottoms in uptrending price action or progressively lower tops in downtrending price action. Prices crossing a trendline may indicate a change in direction has occurred.

Volatility

A statistical measurement of the rate of price change of a futures contract, security, or other instrument underlying an option.

Volume

The number of contracts traded during a specified period of time. It may be quoted as the number of contracts traded or as the total of physical units, such as bales or bushels, pounds or dozens.

Trading Strategies Terminology

Arbitrage

The simultaneous purchase and sale of identical or equivalent financial instruments or commodity futures in order to benefit from a discrepancy in their price relationship.

Black Box Trading

Black box trading, or automated trading, refers to the use of computerized systems with buy and sell instructions generated by a proprietary software program. (See also Systematic Trading.)

Bear Spread

The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a decline in prices but at the same time limiting the potential loss if this expectation does not materialize. In agricultural products, this is accomplished by selling a nearby delivery and buying a deferred delivery.

Bull Spread

The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a rise in prices but at the same time limiting the potential loss if this expectation is wrong. In agricultural commodities, this is accomplished by buying the nearby delivery and selling the deferred.

Cabinet Trade

A trade that allows options traders to liquidate deep out-of-the-money options equal to less than one tick.

Calendar Spread

(See Horizontal Spread.)

Call

An option to buy a commodity, security or futures contract at a specified price at any time between the purchase and expiration of the option contract. A call gives the buyer the right, but not the obligation, to purchase (go long) the underlying futures contract at the strike price on or before the expiration date.

Computerized Trading System

(See Systematic Trading.)

Convergence

The tendency for cash and futures prices to come together (i.e., the basis approaches zero) as the futures contract nears expiration.

Contrarian

Contrarian traders take positions against the prevailing market trend, that is, buy, or go long, when prices are falling and sell, or go short, when prices are rising. A contrarian trader may aim to profit from a series of small trades based on fluctuations within the prevailing trend, or may be anticipating a change in direction based on momentum indicators or other analysis tools.

Counter-Trend

Against the prevailing trend. The market may make a short-term counter-trend move within a prevailing long-term trend. Countertrend traders aim to take advantage of this tendency by buying when prices are low and selling when prices are high, or they may be anticipating a change in direction based on momentum indicators or other analysis tools.

Counter-Trend Trading

The method of trading by which a trader takes a position contrary to the current market direction in anticipation of a change in that direction.

Covered Call

An option spread position where calls are sold against a long position in the underlying instrument. In essence, the trader is limiting his profit on the long position in exchange for receiving the option premium. On option expiration day, the breakeven on the long futures is lower by the amount of option premium received, less commissions.

Covered Option

A short call or put option position which is covered by the sale or purchase of the underlying futures contract or physical commodity. For example, in the case of options on futures contracts, a covered call is a short call position combined with a long futures position. A covered put is a short put position combined with a short futures position. Also called a covered write. (See also Covered Call and Covered Put.)

Covered Put

An option spread position where puts are sold against a short position in the underlying instrument. In essence, the trader is limiting his profit on the short position in exchange for receiving the option premium. On option expiration day, the breakeven on the short futures is raised by the amount of option premium received, less commissions.

Day Order

An order that is placed for execution during only one trading session. If the order cannot be executed during that session, it is automatically cancelled.

Day Trade

The purchase and sale of a futures or options contract during only one trading session. If the order cannot be executed during that session, it is automatically cancelled. A day trader places and liquidates trades during one trading session.

Day Traders

Speculators who take positions in futures or options contracts and liquidate them prior to the close of the same trading day.

Delta

A measure of how much an option premium changes, given a unit change in the underlying futures price. Delta is often interpreted as the probability the option will be in-the-money by expiration.

Differentials

Price differences between classes, grades, and delivery locations of various supplies of the same commodity.

Discretionary Account

An arrangement by which the holder of the account gives written power of attorney to another person to make trading decisions. Also known as a controlled or managed account.

Exercise

The action taken by the holder of a call option if he or she wishes to purchase the underlying futures contract or by the holder of a put option if he or she wishes to sell the underlying futures contract.

Exercise Price

The price at which the futures contract underlying a call or put option can be purchased (if a call) or sold (if a put). Also referred to as strike price.

Fill or Kill (FOK)

An order that must be filled immediately at a specified price, or cancelled if not filled at that price.

Gamma

A measurement of how fast delta changes, given a unit change in the underlying futures price.

Global Macro

A strategy in which trading decisions are based on global economic and political factors, that is, macroeconomic principles.

Good ëtil Canceled (GTC)

An order worked until it can be filled or until canceled (See Open Order.)

Hedge

The purchase or sale of a futures contract as a temporary substitute for a cash market transaction to be made at a later date. Usually it involves opposite positions in the cash market and futures market at the same time.

Horizontal Spread

The purchase of either a call or a put option and the simultaneous sale of the same type of option with typically the same strike price but with a different expiration month. Also referred to as a calendar spread.

In-the-Money Option

An option with intrinsic value. A call option is in-the-money if its strike price is below the current price of the underlying futures contract. A put option is in-the-money if its strike price is above the current price of the underlying futures contract.

Intrinsic Value

The amount by which an option is in-the-money.

Inverted Market

A futures market in which contracts nearer to expiration are priced higher than those in more distant months. Also called backwardation, an inverted market typically reflects a market facing a supply shortage.

Limit Order (LMT)

An order type that is to be filled at a specified price or better. A limit buy order is placed at or below market price, while a limit sell order is placed at or above the current market price.

Liquid

A characteristic of a security or commodity market with enough units outstanding to allow large transactions without a substantial change in price.

Liquidate

Selling (or purchasing) futures contracts of the same delivery month purchased (or sold) during an earlier transaction. Or, making (or taking) delivery of the cash commodity represented by the futures contract.

Market Depth

A dimension of market liquidity that refers to the ability of the market to handle large trading volumes without a significant impact on prices. Traders may study market depth to determine how and when particular orders may impact price action, and to help time the entry and exit of trades.

Market Neutral

A trading strategy that aims to profit from both rising and falling prices, often by taking a combination of long and short positions in one or more markets. True market neutrality means the expected beta, or market risk, is equal to zero. Traders who employ a market neutral strategy are attempting to exploit market momentum.

Momentum

The relative change in price over a specific time interval. Often equated with speed or velocity and considered in terms of relative strength.

Naked Option

The sale of a call or put option without holding an offsetting position in the underlying commodity. Also referred to as an uncovered option, naked call, or naked put.

NOB Spread (Notes over Bonds)

A futures spread trade involving the buying (selling) of a 10-year U.S. Treasury note futures contract and the selling (buying) of a U.S. Treasury bond futures contract.

One Cancels Other (OCO) Order

A pair of orders, typically limit orders, whereby if one order is filled, the other order will automatically be cancelled.

Open Order

An order that remains in force until it is filled, canceled or until the futures contract expires.

Out-of-the-Money Option

A term used to describe an option that has no intrinsic value. For example, a call with a strike price of $800 on gold trading at $790 is outof- the-money $10.

Out-Trades

A situation that results when there is some confusion or error on a trade, e.g., over difference in the understanding of a price at which a trade is done, or the number of contracts traded.

Position Trader

An approach to trading in which the trader either buys or sells contracts and holds them for an extended period of time.

Put

An option to sell a commodity, security, or futures contract at a specified price at any time between the purchase and the expiration of the option contract. A put gives the option buyer the right but not the obligation to sell (go ìshortíí) the underlying futures contract at the strike price on or before the expiration date.

Pyramiding

The use of profits on existing positions as margin to increase the size of the position, normally in successively smaller increments.

Risk/Reward Ratio

The relationship between the probability of loss and profit. This ratio is often used as a basis for trade selection or comparison.

Scale Down (or Up)

To purchase or sell a scale down means to buy or sell at regular price intervals in a declining market. To buy or sell on scale up means to buy or sell at regular price intervals as the market advances.

Scalp

To trade for small gains. Scalping normally involves establishing and liquidating a position quickly, usually within the same day, hour or even just a few minutes.

Small Traders

Traders who hold or control positions in futures or options that are below the reporting level specified by the exchange or the CFTC.

Spreading

The simultaneous buying and selling of two related markets in the expectation that a profit will be made when the position is offset. Examples include: buying one futures contract and selling another futures contract of the same commodity but different delivery month; buying and selling the same delivery month of the same commodity on different futures exchanges; buying a given delivery month of one futures market and selling the same delivery month of a different, but related, futures market.

Speculative Bubble

A rapid, but usually short-lived, run-up in prices caused by excessive buying which is unrelated to any of the basic, underlying factors affecting the supply or demand for the commodity. Speculative bubbles are usually associated with a ìbandwagonî effect in which speculators rush to buy the commodity (in the case of futures, ìto take positionsî) before the price trend ends, and an even greater rush to sell the commodity (unwind positions) when prices reverse.

Straddle

An option position consisting of the purchase or sale of put and call options with the same expiration date and the same strike prices.

Strangle

An option position consisting of the purchase or sale of put and call options having the same expiration date but different strike prices.

Strong Hands

When used in connection with delivery of commodities on futures contracts, the term usually means that the party receiving the delivery notice probably will take delivery and retain ownership of the commodity; when used in connection with futures positions, the term usually means positions held by trade interests or well-financed speculators.

Systematic Trading

A mechanical means of trading in which a computerized trading ìsystemî is developed from a mathematical formula (containing a group of specific rules, or technical-based parameters) that determines entry and exit points for a given trade. These points, known as signals, prompt a trade order. Trading systems are said to remove human emotion from the trading process. Also called ìalgorithmic trading.î

Time Value

The amount option buyers are willing to pay, above the intrinsic value, for an option in the anticipation that, over time, a change in the underlying futures price will cause the option to increase in value. In general, an option premium is the sum of time value and intrinsic value. Any amount by which an option premium exceeds the optionís intrinsic value can be considered time and volatility value. Also referred to as extrinsic value.

Trading Arcade

A trading facility where independent traders can gather for computerized trading, often operated by a clearing member.

Trailing Stop

A technique often used in attempt to protect profits without limiting potential gains by moving a stop up or down with the market. A stop order would be raised on a long position in a bullish market, and lowered on a short position in a bear market. For example, a trader initiates a long futures position when the market is at $4, and places a protective stop at $3. The market then rallies to $10. He or she then moves the stop up to $9, exiting the position if the market falls to $9.

Trend-Following

Trend following is a strategy that follows the marketís prevailing direction, buying when prices are rising and selling when prices are falling. This presumes the prevailing trend will continue.

Vertical Spread

Buying and selling puts or calls of the same expiration month but different strike prices.

Volatility Trading

Strategies designed to take advantage of the changes in volatility of the market rather than the direction of the market.

Weak Hands

When used in connection with delivery of commodities on futures contracts, the terms usually means that the party probably does not intend to retain ownership of the commodity; when used in connection with futures positions, the term usually means positions held by small speculators.

Regulatory Terminology

Associated Person (AP)

An individual who solicits orders, customers, or customer funds (or who supervises persons performing such duties) on behalf of a futures commission merchant, an introducing broker, a commodity trading advisor, or a commodity pool operator.

Audit Trail

The record of trading information identifying the parties involved in a transaction ñ the floor broker, clearing firm, customer, etc. - as well as the terms and time of the trade.

Boiler Room

An enterprise which often is operated out of inexpensive, low-rent quarters (hence the term ìboiler roomî), that uses high pressure sales tactics (generally over the telephone) and possibly false or misleading information to solicit generally unsophisticated investors.

CFTC

(See Commodity Futures Trading Commission.)

Clearing Margin

Financial safeguards to ensure that clearing members (usually companies or corporations) perform on their customersí open futures and options contracts. Clearing margins are distinct from customer margins that individual buyers and sellers of futures and options contracts are required to deposit with brokers. (See Customer Margin.)

Clearing Member

A member of an exchange clearinghouse. Memberships in clearing organizations are usually held by companies. Clearing members are responsible for the financial commitments of customers that clear through their firm.

Clearinghouse

An agency or separate corporation of a futures exchange that is responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery, and reporting trading data. Clearinghouses act as third parties to all futures and options contracts acting as a buyer to every clearing member seller and a seller to every clearing member buyer.

Commercial

An entity involved in the production, processing, or merchandising of a commodity.

Commitments of Traders Report (COT)

A weekly report from the CFTC providing a breakdown of each Tuesdayís open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. Open interest is broken down by aggregate commercial, non-commercial, and non-reportable holdings.

Commodity Futures Trading Commission (CFTC)

A federal regulatory agency established under the Commodity Futures Trading Commission Act, as amended in 1974, that oversees futures trading in the United States. The Commission is comprised of five commissioners, one of whom is designated as chairman, all appointed by the President subject to Senate confirmation, and is independent of all cabinet departments.

Commodity Pool

Similar to what a mutual fund is to the securities industry. An enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures or options on futures.

Commodity Pool Operator (CPO)

An individual or organization that operates or solicits funds for a commodity pool.

Commodity Trading Advisor (CTA)

A person who, for compensation or profit, directly or indirectly advises others as to the value or the advisability of buying or selling futures contracts or commodity options. Advising indirectly includes exercising trading authority over a customerís account as well as providing recommendations through written publications or other media.

Customer Margin

Within the futures industry, financial guarantees required of both buyers and sellers of futures contracts and sellers of options contracts to ensure fulfillment of contract obligations. FCMs are responsible for overseeing customer margin accounts.

Delivery

The transfer of the cash commodity from the seller of a futures contract to the buyer of futures contract. Each futures exchange has specific procedures for delivery of a cash commodity. Some futures contracts, such as stock index contracts, are cash settled.

Exchange

(See Futures Exchange.)

FCM

(See Futures Commission Merchant.)

Floor Broker

An individual who executes orders for the purchase or sale of any commodity futures or options contract on any contract market for any other person. A floor broker executing orders must be licensed by the CFTC.

Floor Trader

An exchange member who generally trades only for his/her own account or for an account controlled by him/her. Also referred to as a ìlocal.î

Futures Commission Merchant (FCM)

A firm or person engaged in soliciting or accepting and handling orders for the purchase or sale of futures contracts, subject to the rules of a futures exchange and, who, in connection with solicitation or acceptance of orders, accepts any money or securities to margin any resulting trades or contracts. The FCM must be licensed by the CFTC.

Futures Exchange

A central marketplace with established rules and regulations where buyers and sellers meet to trade futures and options on futures contracts.

Give Up

A contract executed by one broker for the client of another broker that the client orders to be turned over to the second broker. The broker accepting the order from the customer collects a fee from the carrying broker for the use of the facilities. Often used to consolidate many small orders or to disperse large ones.

Guaranteed Introducing Broker (GIB)

An introducing broker that has entered into a guarantee agreement with a futures commission merchant (FCM), whereby the FCM agrees to be jointly and severally liable for all of the introducing brokerís obligations under the Commodity Exchange Act. By entering into the agreement, the introducing broker is relieved from the necessity of raising its own capital to satisfy minimum financial requirements. In contrast, an independent introducing broker must raise its own capital to meet minimum financial requirements.

Initial Margin

The minimum value on deposit in an account to establish a new futures or options position, or to add to an existing position. Initial margin amount levels differ by contract. Renesource Capital sets the level of initial margin required, and it may change at any time at Renesource Capitalís discretion. Increases or decreases in initial margin levels reflect anticipated or actual changes in market volatility. Also called initial performance bond.

Introducing Broker (IB)

A person or organization that solicits or accepts orders to buy or sell futures contracts or commodity options but does not accept money or other assets from customers to support such orders.

Maintenance Margin

The minimum value that must be present in an account in order to continue to hold a position. The maintenance margin is typically less than the initial margin, and also differs by contract. If the account falls below the maintenance margin requirement, the account holder will receive a margin call. If he/she wishes to continue to hold the position, they will be required to restore the account to the full initial margin level (not to the maintenance margin level). Also known as the maintenance performance bond.

Margin

(See Performance Bond.)

Margin Call

A demand from a clearinghouse to a clearing member, or from a brokerage firm to a customer, to bring margin deposits up to a minimum level required to support the positions held. This can be done by either depositing more funds or offsetting some or all of the positions held.

Mark-To-Market (Marked-To-Market)

A daily accounting entry that is the bedrock of regulated futures bookkeeping. Itís the end-of-day adjustment made to trading accounts to reflect profits and losses on existing positions. In other words, winnings are credited and immediately available to the account and losses are debited and immediately owed. This brings integrity to the marketplace because participants are not allowed to trade unless funds are available to cover the positions.

National Futures Association (NFA)

An industry-wide, industry-supported, self-regulatory organization for futures and options markets. The primary responsibilities of the NFA are to enforce ethical standards and customer protection rules, screen futures professionals for membership, audit and monitor professionals for financial and general compliance rules, and provide for arbitration of futures-related disputes.

Over-the-Counter (OTC)

The trading of commodities, contracts, or other instruments not listed on any exchange. OTC transactions can occur electronically or over the telephone. Also referred to as off-exchange.

Performance Bond (Margin)

Funds that must be deposited as a performance bond by a customer with his or her broker, by a broker with a clearing member, or by a clearing member, with the clearing house. The performance bond helps to ensure the financial integrity of brokers, clearing members and the exchange as a whole.

Position Limit

The maximum number of speculative futures contracts one can hold as determined by the Commodity Futures Trading Commission and/ or the exchange upon which the contract is traded. Also referred to as trading limit.

Registered Representative

A person employed by, and soliciting business for, a commission house or futures commission merchant.

Reporting Level

Sizes of positions set by the exchanges and/ or the CFTC at or above which commodity traders or brokers who carry these accounts must make daily reports about the size of the position by commodity, by delivery month, and whether the position is controlled by a commercial or non-commercial trader.

Rules

The principles for governing a futures exchange. In some exchanges, rules are adopted by a vote of the membership, while regulations can be imposed by the governing board.

Suitability Requirement

A requirement that any investing strategy fall within the financial means and investment objectives of an investor.

Wash Trading

Entering into, or purporting to enter into, transactions to give the appearance that purchases and sales have been made, without incurring market risk or changing the traderís market position. The Commodity Exchange Act prohibits wash trading. Also called Round Trip Trading, Wash Sales.

What is "BIC"?

"BIC" stands for "Bank Identifier Code", and uniquely identifies a bank within the SWIFT network, the largest network of bank-to-bank instructions used by about 10’000 financial institutions throughout the World. Providing BIC ensures that your money arrives faster. We urge you to get this information from your bank.

What is "IBAN"?

"IBAN" stands for "International Bank Account Number" and serves as an ID of your bank account. IBAN is mandatory for payments within European countries; we therefore strongly advise you to check with your bank if an IBAN is provided for your account.How can I withdraw money out of my Renesource Capital account? Please fill in the form, sign it, date it (no post-dating, please) and send it to us. Please be aware that fund withdrawals can only be done by bank transfer to your bank account declared in Client questionnaire.

How can I fund my Renesource Capital account?

You can fund account in your choice of currency. For convenience, you can fund your account in a wide range of currencies including: USD, Yen, GBP, Euro, Canadian dollar, Australian dollar, Danish Krona, Swedish Krona, Swiss Franc, Japanese Yen. The currency you choose to fund your account can be converted to alternative currencies if you wish. You are able and welcomed to transfer money between multiple accounts to satisfy margin requirements in certain circumstances. Please contact Renesource Capital dealing desk.

You can request your bank to transfer funds directly to the Renesource Capital segregated client account. You will find full banking details for Renesource Capital here. Please note that your bank may charge you to make a payment by electronic means and the date of delivery of the funds to the Renesource Capital account is at the discretion of your bank.

How long does it take to process my withdrawal?

If your instructions contain all the required information, your withdrawal request will be processed by us within a maximum of 3 business days, although we do our best to process withdrawal requests within 1 business day.
If you require an "express/ urgent" money withdrawal your request must be sent to us before 10:00 Riga time. We will then process it within the same day and you will be charged a fee of USD 50.00.
However, please note, that your money transfer may involve other banks and we cannot guarantee that those banks will handle the transfer immediately. Nevertheless, you should receive your money within 3 business days.

What are the costs involved?

Renesource Capital charges fee for all money withdrawals. Standard as well as “Express/ urgent” withdrawal is subject to a USD 50.00 fee. However, other banks involved in transfer will charge their fees and these fees will be deducted from the amount of the withdrawal.

Can I withdraw money if I have open positions?

Yes, you are allowed to withdrawal funds from your account when your positions are opened. However, you will not be able to withdraw an amount more than free equity on your account. Also, if you withdraw most of your free equity, please bear in mind that the risk of seeing your open positions being stopped-out increases, due to less margin available.

Is there a minimum amount I am allowed to withdraw?

There are no minimum or maximum restrictions. You are allowed to withdraw any amount available on your account.
However, considering that fees will be charged by other banks involved in the withdrawal process, it makes sense to request a withdrawal for a sensible amount: our recommendation is not to request a withdrawal of any amount less than USD 100.00 (or equivalent).

How often can I withdraw money from my account?

You can withdraw money as often as you like. However, please consider the fact that fees charged by other banks involved in the transfer may occur. In order to minimize these fees we advise you to avoid frequent withdrawals, for example make a larger withdrawal instead of 2 smaller withdrawals.

Can I request a withdrawal in favor of another person than me?

No, Renesource Capital does not accept 3rd party payments. Third party receipts are prohibited. Please note that only account holders may fund an account. The account owner must be the final beneficiary of the withdrawal request. The name on both the bank account and the Renesource Capital account must match. Also under no circumstances Renesource Capital does not accept cash deposits. Such deposits are strictly prohibited under Money Laundering regulations by our regulators.

Risk Disclosure Statement. Margin transactions (Forex, contracts for difference CFD, futures and futures options, stock options, REPO transactions, transactions in over-the-counter derivatives and transactions using broker credit, including selling short) involve higher risk. The level of risk increases with the leverage ratio. As the result of margin transactions, relatively high profits are possible with low level of initial investments, as well as significant losses which may exceed the principal amount of investments or the amount of the collateral. Please ascertain whether margin transactions in their essence and content suit the risk profile that was assigned to you by AS IBS Renesource Capital and whether the content of margin transactions corresponds to your investment goals.