Futures Short Covering

The futures market is a high-risk and high-yield investment field, which involves a variety of trading strategies and terms, such as long, short, opening, closing, covering, etc. Today we will introduce the concept of futures short covering.

The so-called short positions refer to investors who believe that the market price will fall. In the futures market, they will sell contracts they do not hold, that is, short selling or going short, in order to buy at a low price to close their positions after the price falls. Earn the difference. The so-called covering means that investors who originally held a certain position change direction after the market changes and re-buy or sell the same number of contracts to end the original position. Therefore, in the futures market, short covering refers to the entry behavior of traders who were originally short and are forced to close their positions and leave the market or make backhand operations before buying when the market direction and the position they hold develop in the opposite direction.

For example, suppose an investor shorts 100 lots of futures contracts of type A, that is, sells 100 lots of futures contracts. At this time, the price of type A is 100 yuan/ton. If the price of variety A drops to 90 yuan/ton, then the investor can buy 100 contracts to close the position, thereby earning a price difference of 10 yuan/ton. This is where shorts take profits and exit. But if the price of variety A instead rises to 110 yuan/ton, then the investor will face the risk of loss. If he thinks that the price will continue to rise, then he may choose to buy 100 contracts to close the position, thereby stopping the loss of 10 yuan/ton. This is where shorts are stopped and eliminated. If he thinks that the price increase is just a temporary fluctuation, then he may choose to buy another 100 contracts to open a position, that is, go long on the backhand, hoping to sell and close the position after the price drops to make up for the previous loss. This is short covering.

What are the effects of short covering?

The impact of short covering on the futures market is mainly reflected in two aspects: first, the impact on price trends, and second, the impact on market sentiment.

On the one hand, short covering can have a stimulating effect on price movements. When investors who were originally short are forced to close their positions or go long, they need to buy contracts, which increases buying pressure in the market, pushing up prices. If a large amount of short covering occurs in the market, then the price may rebound or rise significantly.

On the other hand, short covering can also have an impact on market sentiment. When originally bearish investors are forced to change their stance, they may experience emotions such as panic, uneasiness, or disappointment, which may be contagious to other investors and affect their trading decisions. For example, when short covering occurs, originally bearish investors may lose confidence in the market and reduce their willingness to go short or switch to long positions. On the contrary, when long covering occurs, originally bullish investors may lose confidence in the market, thereby reducing their willingness to go long or switching to shorting. This creates a self-reinforcing cycle that can lead to market overreaction or reversal.

How to deal with futures short covering?

Futures short covering is a common market phenomenon. For investors, how to deal with futures short covering is an important issue. Here are some possible suggestions:

First of all, you must have a clear trading plan and risk management strategy, and do not blindly follow the trend or be swayed by emotions. Before entering the market, you must determine your trading goals, stop loss points, and take profit points, and make timely adjustments and executions when the market changes.

Secondly, you must have sufficient market analysis and judgment capabilities, and do not be fooled by superficial phenomena. When judging market trends, we must comprehensively consider a variety of factors, such as fundamentals, technology, capital, news, etc., and distinguish between main trends and secondary trends, and do not be disturbed by short-term fluctuations.

Thirdly, you must have flexible trading strategies and methods, and do not stick to one thinking mode or operating method. When facing short covering in futures, you can choose different trading strategies and methods according to your own risk preference and market conditions, such as operating with the trend, operating against the trend, arbitrage operations, hedging operations, etc., and you must flexibly change positions and leverage.

Finally, you must have the ability to continue learning and summarizing, and do not stand still or be complacent. After each transaction, you should summarize your trading process and results in a timely manner, learn lessons from them, and continuously improve your trading level and capabilities.

In short, short covering in futures is a common but complex market phenomenon. For investors, they must have the correct understanding and response methods in order to succeed in the futures market.