Factors Affecting Futures Trading

Any investor with an exposure to the futures market needs a grasp of the various factors that affect futures. Here is an overview:

General Factors

As with any investment, the general economic condition of the country plays an important role in establishing the futures market sentiment. A booming economy is the basis for expectation of price rise. 

Futures traders may opt to go long in a flourishing economy to make profits when prices rise in future. Political stability or uncertainty can have a major impact on futures prices as these directly affect the economy of the country. The growth prospects for a particular sector of the economy should also be a consideration before making an investment in futures.

Factors Influencing Commodity Futures

Commodities form an important segment of the futures markets. Any factors affecting the supply or cost of production of a particular commodity affects its futures contracts. For example, unfavorable weather can have a major effect on the futures of an agricultural commodity. 

Traders will expect supply to dry up in coming months causing the price to go up. Most traders will want to go long on the commodity, expecting price to rise. This will push the price up for futures of the commodity.

Export import policies and restrictions may have a bearing on how futures trade when the goods are actually deliverable. Considering that many futures trades are often cross border transactions, complicated export import formalities can lower prices.

Factors Influencing Currency Futures

Currency futures are influenced by many factors, most important being the policies of the Federal Reserve and the US Treasury regarding money supply. Government policies regarding taxation and other decisions to bring down inflation will also have an effect on currency futures.

The recent performance of the dollar versus the opposite currency in the contract plays an important role in determining the price at which a futures contract can be struck. GDP growth and trade deficit should also be considered when trading in currency futures.

Factors Influencing Index Futures and Single Stock Futures (SSFs)

Index and single stock futures are influenced by many of the same factors as the delivery based stock market. High interest rates, changes in taxation policies, market sentiment, GDP growth etc affect the prices of these futures. SSFs move largely in line with the current price movement of that stock in the market, with some premium or discount based on the expected direction that the stock price will move in.