Futures Markets and Their Trading Opportunities


Navigating futures markets requires know-how and know-when. Here is a guide.

The Malaysian capital market witnessed double-digit growth across all segments in 2017 according to Securities Commission Malaysia’s Annual Report. While it plays a major role in capital formation while financing the economy, it also offers a wide range of opportunities once investors understand how to navigate it. On hand to provide guidance is Steven Lai, Head, Regional Futures and Commodities, RHB Investment Bank, who shares some of his thoughts with Smart Investor.

Smart Investor (SI): What is your general perception of capital markets, especially when scouting for the best trading opportunities?

Steven Lai (SL): In looking at investment opportunities in the capital markets, most Malaysians see the stock market as the traditional choice for the active investor. In bullish market conditions, the stock market remains an excellent choice for the investor. Stock markets, as with many other markets, are cyclical in nature, going through bullish and bearish cycles. In volatile and down cycle conditions, an investor would find it extremely challenging to get good returns on their stock market portfolio.

Investors need to have deeper understanding of these cycles and how markets move and they need to react quickly when conditions in the stock market change to avoid losing money. To that effect good research information and education is the key compared to relying on “hot tips” or market rumors to trade or invest.

SI: Most people are familiar and comfortable with trading in the stock or equity market, but not everyone makes returns. In fact, the talk is most people lose money in the stock market. What would be your advice on this?

SL: An investor may seek to have a more diversified portfolio of alternative asset classes to invest instead of just equities. There are many other opportunities for investors who are willing to look beyond the stock market. For example, through April 2018, commodities were the top performing asset class.

Shorter-term traders, as opposed to long-term stock market investors, should take the time to explore other markets where many diverse trading opportunities abound. One way to access different markets and asset classes is via the futures markets.

SI: What are futures? What types of derivatives are available here and how do you benefit from trading these derivatives?

SL: Derivatives open up a whole range of markets. For example, retailers could trade commodities such as crude palm oil futures and gold futures that are available on Bursa Malaysia Derivatives Berhad (BMD). Besides commodities, index futures contracts like KLCI Futures on BMD and other global indices are available to traders.

Futures contracts, in simple terms, are exchange-traded derivative contracts whose prices are based on their underlying assets, such as gold, indices or crude palm oil. A trader buys or sells a specific futures contract depending on his view of how the price of the underlying asset is going to move. If one is bullish on gold, they would purchase a gold futures contract with the view that gold prices would rise.

Another advantage of the futures market is the ability to short sell, taking a view that an underlying market is on a down trend and profit from falling prices. As such, an investor has the flexibility to profit from both bull and bear markets when trading futures.

The other crucial difference in trading futures is leverage. Leverage is the ability to control a larger sized investment with a relatively smaller capital outlay. This is due to the ability to trade on margin.

Generally, a trader can buy or sell a futures contract with a margin of 5–10% of the actual value of the underlying asset. For example, to trade one contract of BMD Gold Futures (FGLD) currently only requires a margin deposit of RM700 which is equivalent to holding a 100g gold contract worth approximately RM16,500 at today’s prices. This greatly enhances returns.

However, leverage being a double edged sword can cut both ways. If a trader finds that he is wrong in his view and does not manage his position well, leverage will quickly multiply losses as well. This is something traders in futures market need to be keenly aware of and not overtrade or take unnecessarily more risk exposure than appropriate.

SI: Derivatives have long held the image of being too complicated, with more suitability for the institutional market. Could this perception be wrong or right?

SL: Many investors get the wrong perspective of risk in trading futures. Commodity prices are not inherently riskier or more volatile than that of stock prices. However, a trader who does not manage his risk or position well in a leveraged instrument such as futures could likely make serious losses. An aspiring trader starting outing futures trading would be well-advised to learn and understand how to control risk and manage their positions in order to be successful in futures trading.

The main difference between institutional traders and individual traders is that risk control and position management is largely institutionalised as company policy. An institutional trader is not allowed to take more risk or exposure than that stipulated in the company’s policies. The company-imposed discipline tends to make institutional traders more likely to succeed than individual traders who don’t adopt a disciplined and methodical way to trade.

SI: Could futures be suitable for retail investors? If so, why are there not many players in this market?

SL: Retail investors and traders can succeed in trading futures but education is key to succeeding in the long term.  Critical in the education of a futures trader is how to set up a proper trading plan which includes the entry exit methodology, money management and trading psychology. Traders should also understand underlying factors which move the prices of markets they trade in either through fundamental analysis or, more popular amongst futures traders, technical analysis.

Lack of participation in the futures markets stems mainly from lack of awareness as well as misconceptions of the risk involved when trading futures, although risk is pertinent in all types of investments or trading activities.

SI: When it comes to the stock market, one can study financial statements and analysis. But when it comes to derivatives, what should a derivatives investor look at? What kind of knowledge/groundwork/skill sets should investors have and where can they obtain hands-on education?

SL: A great way to get started to acquire trading knowledge is by joining one of the many seminars and regular workshops organised by RHB Investment Bank across the nation catering for beginner to intermediate traders. We share trading ideas and strategies with our clients and provide market alerts and technical signals as value added services to our clients so that they are well-informed of the opportunities in the markets. Alternatively the trader can visit the knowledge base available on the Bursa Marketplace website or the RHB Tradesmart website.

SI: Congratulations on RHB’s win at the recent Bursa Malaysia’s Broker Awards ceremony as the Champion Trading Participant for the Retail Derivatives category. Can you share with us how RHB reached out to retailers to achieve this recognition?

SL: This full commitment and dedication of RHBIB futures brokers to educate our retail clients, share trading ideas and strategies and keep clients in touch with the market with timely information are the main reasons why our clients find value trading with RHBIB. Our frequent seminars and workshops to educate and create awareness on futures trading paid off when RHBIB emerged Champions in the category of Top Retail Trading Participants for Retail Derivatives for 2017 during the recent Bursa Excellence Awards ceremony in March 2018.


RHB Invesment Bank Berhad (RHBIB), the invesment banking arm of RHB Banking Group won two awards at the Bursa Excellence Awards 2017 held on 29 March 2018. RHBIB was recognised as Champion for the 2017 Best Retail Equities Participating Organisation and 2017 Best Retail Derivatives Trading Participant.

SI: Could you provide examples of how retailers could successfully use BMD’s equity derivatives products?

SL: BMD futures contracts are a great way to get started in trading futures with contracts like the Futures on Composite Index, Crude Palm Oil Futures and Ringgit-denominated Gold Futures. With the recent volatility in equity markets, BMD KLCI Futures (FKLI) could be viable, should one have a view that it may follow the decline in global equity markets.

Bear in mind that the FKLI could also be used to hedge and protect a stock portfolio by selling an appropriate number of FKLI contracts. This could protect the value of an investor’s longer-term stock holdings from any bearish cycles. Additionally, if global geopolitical developments were to turn for the worse, an investor could take a position in BMD Gold Futures (FGLD), gold being the traditional safe haven asset to hedge against untoward global geopolitical events.

SI: What do you think of the “futures managed funds” concept? Do you think this is the best approach for retailers, or those who are interested to participate in the product but lack the know-how and prefer professionals to manage for them?

SL: Managed futures funds in Malaysia have not really taken off yet. However, we believe managed futures funds are a great alternative for investors who like the idea of diversifying into the futures markets yet do not have enough time to learn trading or monitor markets themselves. The prospect of professionally managed futures funds is certainly welcome as more savvy investors understand the opportunities and have the risk appetite for such funds.

SI: What is your outlook on the Derivatives Market for 2H2018 and advice to investors and market traders?

SL: The volatile market conditions are likely to continue for the rest of the year which will be beneficial for participants in the futures markets as traders love volatility.

By Steven Lai, RHB Investment Bank


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