Futures trading is a financial strategy that allows you to buy or sell a specific asset at a predetermined price at a specified time in the future. It\u2019s a way to potentially profit from the price movements of commodities, stocks, and other assets. Are you new to futures trading? If you want to learn more about the futures contract, read our<\/span> beginner\u2019s guide to futures<\/span><\/a>.<\/a> Here we want to break down the complexities of futures trading and make it accessible for beginners to learn how to trade futures. You should read this article because it demystifies the complexities of futures trading, offering actionable insights for both beginners and seasoned traders.<\/span><\/p>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t Consider a trader named Alex who doesn\u2019t grow wheat but wants to profit from price movements. Alex believes that weather conditions will impact wheat prices positively. Alex buys wheat futures contracts for delivery in December 2024 at the current futures price is $6.80 per bushel.\u00a0<\/span><\/p> Alex hopes that the price will rise due to favorable weather conditions or increased demand. If the market price indeed rises above $6.80, Alex profits from the difference. However, if the price falls, Alex faces potential losses.<\/span><\/p> A futures market is an exchange where traders can buy and sell futures contracts. In typical futures contracts, one party agrees to buy a given quantity of<\/span> securities<\/span><\/a> or a<\/span> commodity<\/span><\/a> and take delivery on a certain date. The selling party agrees to provide it.<\/span><\/p> A futures market is an auction market in which participants buy and sell commodities and futures contracts for delivery on a specified future date. Futures are exchange-traded<\/span> derivatives contracts<\/span><\/a> that lock in future delivery of a commodity or security at a price set today.<\/span><\/p> Examples of futures markets are the New York Mercantile Exchange (NYMEX), the Chicago Mercantile Exchange (<\/span>CME<\/span><\/a>), the Chicago Board of Trade (CBoT) and the Minneapolis Grain Exchange.<\/span><\/p> Futures contracts allow players to secure a specific price and protect against the possibility of wild price swings (up\/down) ahead.\u00a0<\/span><\/p> To illustrate how futures work, consider jet fuel: An airline company wanting to lock in jet fuel prices to avoid an unexpected increase could buy a futures contract agreeing to buy a set amount of jet fuel for delivery in the future at a specified price. Also, a fuel distributor may sell a futures contract to ensure it has a steady market for fuel and to protect against an unexpected decline in prices.<\/span><\/p> Both sides agree on specific terms: To buy (or sell) 1 million gallons of fuel, delivering it in 90 days, at a price of $3 per gallon.<\/span><\/p> In this example, both parties are<\/span> hedgers<\/span><\/a>, real companies that need to trade the underlying commodity because it’s the basis of their business. They use the futures market to manage their exposure to the risk of price changes.<\/span><\/p> But not everyone in the futures market wants to exchange a product in the future. These people are futures traders or<\/span> speculators<\/span><\/a>, who seek to make money off of price changes in the contract itself. If the price of jet fuel rises, the futures contract itself becomes more valuable, and the owner of that contract could sell it for more in the futures market. These types of traders can buy and sell the futures contract, with no intention of taking delivery of the underlying commodity. They’re just in the market to wager on price movements.<\/span><\/p> With speculators, traders, hedgers and other daily traders, there is a lively and relatively liquid market for these contracts.<\/span><\/p> Exchanges provide a central forum for buyers and sellers to gather at first physically, now electronically. For the first 150 years or so, traders donned colorful jackets, stepped into tiered “pits” on the trading floors, and conducted business by shouting and gesturing, sometimes wildly. Today, so-called open outcry trading has largely been replaced by electronic trading.<\/span><\/p> Exchanges play another important role in guaranteeing futures contracts will be honored; many exchanges operate<\/span> clearinghouses<\/span><\/a> which serve as backstops or counterparties in every trade. The basic idea is to reduce or eliminate counterparty risk and ensure confidence in the markets.<\/span><\/p> Before you start trading, it is important to learn about some basic expressions which are used in futures trading.<\/span><\/p> As with almost all derivatives, futures traders can make money when asset prices rise or fall.<\/span><\/p> Taking a long position involves purchasing a contract with the expectation that the underlying asset will rise from the spot price (this is the price for immediate settlement and delivery). If the price of the said asset has increased from the time of purchase to the date of expiry, the trader can sell the contract at a higher price and make a profit.<\/span><\/p> Going short, on the other hand, means selling a futures contract on the expectation that the underlying asset will decline from the current spot value. These bearish traders are essentially committing to sell the asset at the expiration date for its contract price. If the trader guesses correctly and the asset value falls, they can make money by buying the contract back at a cheaper price.<\/span><\/p> Futures contracts specify dates when the agreement expires and when physical delivery of the underlying asset is due. But in practice, the vast majority of traders have no intention of taking possession of the asset in question.<\/span><\/p> In fact, many futures contracts are designed so that physical delivery does not take place. Agreements instead are settled in cash, meaning that traders maintain their position until the final day and have the assurance of closing out their position at the expiration price.<\/span><\/p> The futures exchange will calculate the difference between the price at which the trader entered the contract and the final cash settlement price. If a person takes a long position, and the settlement price is greater than the entry price, they will receive a cash payment. Similarly, traders who initially went short and sold a futures contract will receive a payout if the settlement price is lower than their entry price.<\/span><\/p> In the event that the market moves in an adverse direction, the trader will have to pay the difference between the contract\u2019s initial purchase price and the final settlement price. This will be deducted from their trading account.<\/span><\/p> You can also go down the<\/span> roll over<\/span><\/a> route if you decide not to take delivery of the underlying asset. This involves closing out a futures contract before it expires and simultaneously opening a new contract with a later expiration date.<\/span><\/p> Rolling over allows you to continue as normal with your speculative or hedging strategies.<\/span><\/p> One massive benefit of futures trading is that high levels of<\/span> leverage<\/span><\/a> are available. In fact, the use of borrowed cash is extremely common in the buying and selling of these contracts.<\/span><\/p> Traders need to put down an initial deposit, known as<\/span> margin<\/span><\/a>, if they wish to use leverage. This is essentially collateral that is deposited to cover potential losses and is usually a percentage of the total value of the position that a trader wishes to control.<\/span><\/p> The use of loaned money from a brokerage means that traders require less capital to get started. It also allows them to make more money by controlling a larger position than they would be able to if they used only their own funds.<\/span><\/p> However, traders need to be careful with using leverage, and especially those who are new to futures trading.<\/span><\/p> Let me show you an example of how leverage works. Let\u2019s say that Trader A believes that the WTI oil price benchmark will rise in value, and they wish to take advantage of this by trading futures contracts.<\/span><\/p> They opt to buy a WTI futures contract with a three-month expiration date on NYMEX. With a current oil price of $70 per barrel, and the contract representing 1,000 barrels of oil, the total value of the contract is $70,000.<\/span><\/p> Trader A also chooses a broker that offers leverage of 1:10, meaning that they must deposit an initial margin of $7,000 to carry out the trade.<\/span><\/p> Now let\u2019s assume that the<\/span> WTI price<\/span><\/a> reaches $80 per barrel at the expiration date, an improvement of $10 from the entry price. The trader would have made a profit of $10,000 from that futures contract (the profit of $10 per barrel multiplied by the 1,000 barrels controlled by said contract).<\/span><\/p> Meanwhile, the return on their initial investment (in other words the margin) would stand at an impressive 143% (the $10,000 profit divided by that $7,000 initial deposit).<\/span><\/p> A futures trading first notice day (FND) comes the day after a trader who has purchased a futures contract may be obliged to take physical delivery of the contract\u2019s underlying commodity. The FND will vary depending on the contract and exchange rules.<\/span><\/p> The last trading day of oil futures, for example, is the final day that a futures contract may trade or be closed out prior to the delivery of the underlying asset or cash settlement. Usually, most futures result in a cash settlement, instead of a delivery of the physical commodity. This is because the majority of the market is hedging or speculating.<\/span><\/p> You will need to take into account unpredictable price fluctuations on the last trading day of<\/span> crude oil futures<\/span><\/a>, or<\/span> natural gas futures<\/span><\/a>, for example.<\/span><\/p> But before you start trading futures, you need to get to grips with your chosen asset, as the quantity of different futures varies.<\/span><\/p> Success in futures trading doesn\u2019t come from luck; it comes from understanding the market and implementing sound trading strategies. Here are what you should prepare before starting your trade.<\/span><\/p> Futures contracts are more complex than many other financial instruments. And as I\u2019ve also explained, the wide scale availability of leverage adds extra risk. For these reasons, new traders need to put in a lot of time and effort to find out how these securities work before they start trading.<\/span><\/p> But learning about futures themselves is just one part of the education process. To successfully trade these derivatives, one also needs to have a sound knowledge of what moves the prices of the underlying assets.<\/span><\/p> For instance, someone trading silver futures will need to understand how prices of this metal react to industrial production data,<\/span> inflation<\/span><\/a>, interest rate changes, supply-side news and US dollar movements, to name just a few influential factors.<\/span><\/p> Helpfully, there is wealth of information out there to help novice traders get in the swing of things and devise a trading strategy.<\/span><\/p> Having a strong awareness of technical analysis is also important for trading futures. This is essential for spotting trading opportunities as well as managing risk.<\/span><\/p> Charts can help traders forecast price movements, gauge market volatility, identify trends, and establish support and resistance levels, to name just a few of their many benefits.<\/span><\/p> Technical analysis is an excellent tool for all market participants. However, it is generally considered to be a more critical tool for day traders than for longer-term investors.<\/span><\/p> This is because these traders (like<\/span> scalpers<\/span><\/a>) are focused on exploiting small price movements within extremely tight timescales. Technical analysis allows them to identify short-term trends, patterns, and price fluctuations which in turn can help them make profitable trading decisions.<\/span><\/p> Having completed these steps, the next stage is to select a brokerage with which to do business with. Fortunately there are plenty of companies out there that permit the trading of futures contracts, so traders have a good chance of finding a firm that can meet their needs.<\/span><\/p> Some of the key things to consider when deciding which brokerage to use include:<\/span><\/p> As a beginner, it\u2019s essential to start with simple strategies and gradually expand your knowledge and experience. Here are some basic futures trading strategies:<\/span><\/p> Many speculators borrow a substantial amount of money to play the futures market because it\u2019s the main way to magnify relatively small price movements to potentially create profits that justify the time and effort.\u00a0<\/span><\/p> But borrowing money also increases risk: If markets move against you, and do so more dramatically than you expect, you could lose more money than you invested.<\/span><\/p> Leverage and margin rules are a lot more liberal in the futures and commodities world than they are for the securities trading world. A commodities broker may allow you to leverage 10:1 or even 20:1, depending on the contract, much higher than you could obtain in the stock world. The exchange sets the rules.<\/span><\/p> The greater the leverage, the greater the gains, but the greater the potential loss, as well: A 5% change in prices can cause a trader leveraged 10:1 to gain or lose 50 percent of her trade. This volatility means that speculators need the discipline to avoid overexposing themselves to any undue risk when investing in futures.<\/span><\/p> If such risk seems too much and you’re looking for a way to shake up your trade strategy.<\/span><\/p> In the equity market, buying on margin means borrowing money from a broker to purchase stock effectively, a loan from the brokerage firm. Margin trading allows traders to buy more stock than they normally could.<\/span><\/p> Also, margin works similarly but is different in the futures market. When trading futures, a trader will put down a good faith deposit called the<\/span> initial margin requirement<\/span><\/a>. The initial margin requirement is also considered a performance bond, which ensures each party (buyer and seller) can meet their obligations of the futures contract. Initial margin requirements vary by product and market volatility and are typically a small percentage of the contract’s notional value. This type of leverage carries a high level of risk and is not suitable for all traders. Greater leverage can create much greater losses quickly and with small price movements of the underlying futures contract.<\/span><\/p> An individual or retail investor who wants to trade futures must typically open an account with a futures commission merchant. Then post the initial margin requirement, which, in turn, is held at the exchange’s clearinghouse.<\/span><\/p> As prices move against a futures trader’s position, that can produce a<\/span> margin call<\/span><\/a>, which means more funds must be added to the trader’s account. If the trader doesn’t supply sufficient funds in time, the trader’s futures position may be liquidated.<\/span><\/p> Your downside financial risk is not limited to the amount of equity in your account. Any or all of your positions may be liquidated at any time if your account equity drops below required margin levels.<\/span><\/p> Risk management is paramount in futures trading to protect your capital and minimize potential losses. Here are some essential risk management techniques for beginners:<\/span><\/p>\n\t\t\t\tTable of Contents\t\t\t<\/h4>\n\t\t\t\t\t\t\t
What Is a Futures Market?<\/b><\/h2>
![\"\"](\"https:\/\/metatradingclub.com\/wp-content\/uploads\/2024\/05\/e479d702-e9b4-4390-b918-dd44142f03ba.jpg\")
<\/p>How do Futures Contracts Work?<\/b><\/h2>
How do futures exchanges work?<\/b><\/h2>
Basics of Futures Trading<\/b><\/h2>
Long and Short<\/b><\/h3>
![\"Long](\"https:\/\/metatradingclub.com\/wp-content\/uploads\/2024\/05\/Long-Short.png\")
<\/p>Cash Settlement and Rollovers<\/b><\/h3>
Trading on Margin<\/b><\/h3>
Leverages<\/b><\/h3>
First Notice Day<\/b><\/h3>
Last Trading Day<\/b><\/h3>
![\"\"](\"https:\/\/metatradingclub.com\/wp-content\/uploads\/2024\/05\/25e4ec48-e2c0-40ba-9c44-e76cda058d60.jpg\")
<\/p>How To Start Futures Trading?<\/b><\/h2>
Mastering The Fundamentals<\/b><\/h3>
Using Technical<\/b><\/h3>
Opening Trading Account<\/b><\/h3>
![\"future](\"https:\/\/metatradingclub.com\/wp-content\/uploads\/2024\/05\/Future-Trading-Strategies.jpg\")
<\/p>Basic Futures Trading Strategies for Beginners<\/b><\/h2>
The Risks of Futures Trading: Margin and Leverage<\/b><\/h2>
Margin in Futures Trading<\/b><\/h2>
![\"\"](\"https:\/\/metatradingclub.com\/wp-content\/uploads\/2024\/05\/risk-managements.jpg\")
<\/p>Risk Management in Futures Trading<\/b><\/h2>