How does FCPO trading works?
In a real-life scenario, let's consider a trader named Kevin who is interested in FCPO trading. Kevin believes that the price of crude palm oil is going to decrease over the next few months due to an expected drop in demand.
Kevin decides to check the available contract months for FCPO trading and he sees that there are futures contracts available for trading in September, October, November, and December.
Based on his analysis and market research, Kevin decides to take a short position (sell) in the November FCPO futures contract at a price of RM3,900 per metric tonne. Each RM1 movement in the FCPO price is worth RM25 as each contract is for the size of 25 metric tonnes. Kevin sells one contract.
If Kevin's prediction is correct and the FCPO price drops to RM3,880, he can long (buy) to close his position and his profit calculation would be as follows:
Profit = (Sell Price – Buy Price) x Contract Size
Profit = (RM3,880 points – RM3,900 points) x RM25
Profit = 20 points x RM25
Profit = RM500
This is an example of how Kevin can make a profit by selling high and buying low.
Conversely, if the FCPO price rises to RM3,950 points and Kevin decides to cut loss, his loss calculation as follows:
Loss = (Sell Price - Buy Price) x Contract Size
Loss = (RM3,920 points – RM3,900 points) x RM25
Loss = 20 points x RM25
Loss = -RM500
As the market evolves, if the price of crude palm oil increases as Kevin predicted, he can potentially profit from her long position in the November contract by selling it at a higher price than he initially agreed to buy it for.
On the other hand, if the price of crude palm oil decreases instead, Kevin may face potential losses on her long position in the November contract.
**Considerations for Beginners**
Trading FCPO futures offers advantages such as leverage, hedging opportunities, and liquidity. However, it also carries risks, such as market volatility and margin calls. To navigate these complexities, beginners should seek advice from financial professionals, start with smaller trades to gain experience, and develop a thorough understanding of the futures market dynamics.