A beginners guide to trading futures in China
Futures trading takes place in China on the Shanghai Futures Exchange (SHFE) and the Dalian Commodity Exchange (DCE).In 2021, the number of trading days reached 243 instead of 240 in 2020. It is due mainly because there was 14% growth year on year for SHFE with total volume at 2.3 billion lots – a new high.
The SHFE is the larger of the two exchanges. The Shanghai Futures Exchange is a regulation-based exchange where trading approved by the CSRC takes place. The ultimate goal of this organization, according to their website’s about page on futures contracts and commodity options available for sale at SHFE.
In 2021, the DCE trading volume saw a jump to 2.4 billion lots (a one-sided same) with an average daily open interest of 1055 thousand units – this number increased by almost 50% from last year.
Commodities traded on SHFE and DCE
Futures contracts traded on the SHFE include metals (copper, aluminium, lead, zinc, nickel), energy (crude oil, gasoline, kerosene), agricultural products (soybeans, soybean meal, corn, wheat) and chemicals (urea). Futures contracts traded on the DCE include metals (aluminium, copper), energy (coal)and agricultural products (soybeans, soybean meal).
To trade futures in China, you must have a trading account with a broker who is a relevant exchange member.
After you have opened a trading account and provided a guarantor, you must deposit a margin with your broker. Margin requirements vary depending on the contract being traded but are typically around 10% of the value of the contract. For example, if you wanted to trade one lot of SHFE aluminium futures (5 metric tons), the margin requirement would be around 500 RMB ($77).
When trading futures contracts, you need to know the “margin call”. It is when your broker notifies you that you must deposit additional margin (or sell some of the contracts you hold) to maintain your position. If you have insufficient funds to meet the margin call, your broker will close out your position.
Futures contracts can be bought and sold at any time before expiration. However, if you hold a contract until expiration and it is not in your favour, you will have to take delivery of the underlying asset. For example, if you are long one lot of SHFE copper futures and the price falls below the purchase price, you will have to take delivery of 5 metric tons of copper.
Risks of trading futures
One of the risks of trading futures is that you may not be able to sell your position when you want to. It can happen if there is a sharp decline in the underlying asset price, and no buyers are willing to purchase the contract at the current price.
Another risk is that you may not be able to receive the total value of your position if it is liquidated. It can happen if the market moves against you and causes your loss to exceed the maintenance margin requirement.
Finally, futures contracts are not guaranteed to be liquid. This means that it may not be possible to find a buyer or seller when you want to exit your position. As a result, you could end up holding a losing position for an extended period.
What are the benefits of trading futures?
When it comes to trading futures, several benefits make this investment strategy appealing to novice and experienced investors alike. Perhaps most notably, futures offer the potential for leveraged profits. In other words, with a relatively small amount of capital, investors can control a much more prominent position in the underlying asset.
This leverage can magnify both gains and losses, so it’s essential to understand the risks before entering into any futures contract. However, leverage can be a powerful tool to maximize returns when used correctly.
Another benefit of trading futures is the ability to hedge against risk. For example, if you’re a farmer who produces corn, you can use corn futures contracts to protect your crop from price fluctuations. It can help to stabilize your income and protect you from unexpected losses.
Finally, futures contracts offer a high degree of liquidity. It means that they can be easily bought and sold, making them attractive for investors who want to minimize their risk exposure.
All in all, there are many reasons why trading futures can be a lucrative investment strategy. By understanding the benefits of this investment vehicle, you can make more informed decisions about how to best use them in your portfolio.
Trading futures in China can be profitable, but it is essential to understand the rules and risks involved. For more information, don’t hesitate to get in touch with a broker, like Saxo Bank, who specializes in trading futures contracts in China.