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Derivatives trading involves the buying and selling of financial contracts whose value derives from an underlying asset, such as stocks, bonds, commodities, or currencies. Traders can speculate on price movements without owning the actual asset, using instruments like futures, options, swaps, and forwards. This form of trading allows investors to hedge against risk, leverage their positions, and potentially achieve higher returns, but it also carries a higher level of risk due to the complex nature of derivatives and the potential for significant losses.