Understanding the futures trading market may seem to be a daunting task, but the principles are actually quite easy to understand. In futures trading, what is mainly involved is a futures contract which is a standardized agreement between a seller and a buyer. The futures contract will indicate that a particular item will be purchased at a fixed price, on a future date. The item to be bought or sold can take the form of foreign currency, crops, precious metals, energy, fuel and other similar commodities.
The history of futures exchange can be traced back to the time of the Ancient Greek, but the industry as we know it today started during the early 1800's. Back then, Chicago was a commercial hub with telegraph lines and railroads connecting the state to the East. There was also high wheat production during the time, which is the reason why farmers came to sell their crop to dealers.
The dealers were the ones who shipped and distributed the product to other parts of the country. In 1848, it became common practice to exchange cash for the immediate delivery of the crop, but the farmers usually had to succumb to the price that the dealer wants – which is not beneficial for them.
Eventually, the participants in the wheat industry started using the futures contract, where the farmer would commit to delivering a particular number of bushels of wheat to the dealer at a future date. This way, the buyer would benefit by knowing in advance how much the product costs, and the seller would have a guarantee that his crop would be bought at a specific price and a future date. This is also how the rising and falling trends in the futures trading market began. As the prices of the crop varied, the seller's contract would either increase or decrease in value.