The past few decades have brought unprecedented growth for Asia’s financial markets in terms of size, volume and diversity. With so many trading opportunities to choose from, the most popular strategies in Asia will depend on the asset class (i.e. commodities, currencies or stocks) and whether you are investing for short-term gains or long-term wealth.
First up, the futures trading Singapore market is considered by investors as a cost-effective instrument that allows them to broaden their investment portfolios beyond traditional investments like stocks, bonds and money market instruments while mitigating risks at the same time.
There are currently three central futures contracts:
- commodity futures,
- currency/interest rate futures, and
- stock index/equity futures contracts.
Within these categories are various investment strategies that traders can choose from to suit their needs. For example, “spread” and “straddle” trading techniques for commodity futures have been in use since ancient times to help investors mitigate risks while maximising returns.
If you’re interested in currencies/interest rates, price movements of currencies are based on different economic factors, including interest rate differentials, relative inflation rates and domestic demand-supply conditions. It makes it essential for today’s investors to identify the driving forces behind currency prices before committing capital. It’s where analytical tools like correlation matrixes or multi-factor regression models (e.g. Fama-French 3 factor) may come in handy to help decipher the market movements.
Stock Index Futures
As Asia’s meanwhile, stock index futures trading has evolved from cash-based to cash-and-carry strategies. Today, many investors use options contracts as part of their overall hedging and speculative activities in Asia’s stock markets. It provides more latitude for investors to customise their investment portfolios beyond simply buying or selling stocks at prevailing prices.
For example, Asian call options are trendy among retail investors because of their high leverage potential, making it easier to double or triple their capital overnight when they know that a particular stock will go up a few points within the next month.
With these basic fundamental concepts laid down, let’s get you an idea of the most popular strategies being used by futures traders today. Keep in mind these are just a handful of the more common investment techniques being practised across Asia’s various markets.
They may not be appropriate for you as an individual trader due to multiple factors such as your risk tolerance, experience level, and financial resources. For example, suppose you have a relatively high-risk tolerance. In that case, speculative trading on equities may be suitable for you but if you’re a beginner with a limited budget or capital, buying and holding on to stocks over a long period is probably better suited for your needs – it all depends on your personal preferences and financial capabilities.
Commodity Futures Trading
In general, commodity futures trading remains extremely popular among those who trade them regularly, especially those in the industry for years. The reason is that it allows them to generate healthy profits from market volatility without spending too much time monitoring their investments, mainly when trading oil and gas futures that tend to be more liquid than other types of commodities.
In other words, unlike other assets classes where investors need to constantly monitor price movements or news announcements relating to a particular stock or index, commodity futures traders only have to closely watch specialised reports on developments affecting supply and demand dynamics while using technical tools like moving averages to determine whether a swing low or high point has been reached.
Also, the fact that there is very little correlation between the price movements of two different commodities means that commodity traders can easily hedge against losses by trading one type of commodity against another (e.g. buying oil futures to lock in the price while simultaneously shorting gold futures).
The other popular investment strategy used by Asian investors is “pair trading”, making it easier for them to trade two different highly correlated assets (i.e. they move in opposite directions). For example, stock index movements are driven by news announcements relating to economic growth and corporate earnings. In contrast, interest rate-based bonds may rise when there is an increase in inflationary pressures due to strong demand for consumer goods, especially during festive seasons like Christmas or the Chinese New Year. People have extra disposable income released all at once.