What it is

Futures contracts, such as ASX (200) futures, are a type of derivative (a financial instrument that ‘derive’ their value from another underlying asset e.g. the ASX 200), in this case, is used for forecasting. 

How it works

When ASX 200 futures are used to forecast the direction of the market ahead of open, it is the ASX SPI 200 Index being referenced. Traders will be buying and selling contracts for hours ahead of the Market open, so this often gives a reasonable indication as to where the market will open.

Why it matters
In summary, futures can be used for short-term trading strategies to ‘predict’ market trends. However, ASX 200 futures are not always on the money and futures contracts can be much riskier than investing in quality companies due to leverage and the short-term time horizons.