How to Trade Futures (2023): The Only Guide You Need ✅ (2024)

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Looking to take a position or manage risk in a volatile market? 💡

Maybe you heard about the recent success of Tesla short-sellers (a strategy used with futures) and want to know how you can benefit from futures too?

According to the FIA, more investors are becoming interested in futures. In 2019 alone, futures volume rose 12%, to 19.24 billion contracts.

So, why the rise in interest?

Futures contracts bring some very appealing benefits to the table. Most notably, they offer investors the flexibility to take long or short positions as needed. With the right strategy, movements in futures contracts pricing can help limit risk exposure in other markets. With the effects of COVID-19 continuing to throw millions into financial drought, a means to limit investment risk might be just what’s needed.

Some questions remain: How exactly do futures work? How much money do you stand to make? And how much risk is there?

In this guide, we will show you just how much money you can potentially make with futures contracts, as well as how much you could lose. More importantly, we’ll outline a simple and easy-to-follow plan with our top tips on how you can trade futures.

What Are Futures Contracts? 📅

Futures trading, also known as a futures contract, is an agreement to buy or sell an asset at a pre-agreed time and date in the future. Here, the buyer is obligated to buy or the seller is obligated to sell the asset at the predetermined price, despite whatever the market price is at the time of expiration.

Futures are identified based on the month they expire. For example, a January metal futures contract will expire in December. Underlying assets on the futures market include commodities like corn, metals, crude oil, and grain. It also includes a wider range of assets like stock, currencies, and indices.

How Do Futures Work? 💡

When traders buy a futures contract, they hope that the price of the commodity rises above the contract price at expiration, in order to make a profit. But beware some countries will occasionally try to influence commodity prices for example Chinese policymakers have been trying to tame surging commodity prices. Before the expiration date, the buy trade, or the long position, offsets a sell trade for the same quantity at the current market price which effectively closes the long position.

The price difference between the two contracts is cash settled in the investors brokerage account, a physical product will not reach your hands. However, if the market price of the commodity is lower than the price paid of the futures contract the trader will lose money.

Speculators also take short positions or sell speculative positions if they expect the price of the underlying asset to fall. If the price of the asset foes fall, the trader will take an offsetting position to close the contract. When short-selling, you should consider signing up with one of the leading brokers for short-selling.

Again, the difference in price between both contracts is settled at the contracts expiration date. The investor will make a profit if the underlying asset’s price falls below the contract price, and they’ll make a loss if the market price is over the contract price.

It’s important to know that trading on margin enables investors to trade on positions much larger than the amount in the brokerage account. As a result, investing using margin can seriously increase potential gains, but with that, they can magnify losses.

Let’s consider that a trader has $5,000 in a broker’s account and takes a position for $50,000 in gas. Were the price of gas to go against the trade they will lose far more than the $5,000 in their account. When this happens, a broker will put out a margin call, which requires the trader to deposit additional funds to cover the losses incurred.

What Are the Benefits of Trading Futures? 📈

Which Commodities Are Used in Futures Trading? 💡

The most popular energy futures are for gas and oil. Most food futures are wheat, meat, and sugar. Metal commodities used in futures trading include copper, silver, and gold. Traders of energy, food and metals use futures contracts to set a fixed price on the commodity they want to buy.

It must be noted that the coronavirus pandemic has rattled the commodities markets. This has resulted in oil prices plunging in 2020, with demand falling by an unprecedented amount. There was also some concerns rising about the security of the food markets, as countries enforced trade restrictions and began buying in excess.

⚡️ Important note: COVID-19 significantly impacted the supply and demand of the commodities markets. Similar black swan events can determine a futures trader’s strategy in a major way.

Real World Example of Futures Contracts 🎯

Let’s consider a trader who speculates on the price of gas and buys a futures contract in July 2020, expecting the price to increase by the end of the year. The December gas futures contract is $40 so the trader secures the contract.

Given that gas trades in increments of 1,000 barrels the position is now worth $40,000 of gas (1,000 x $50 = $40,000). However, the beauty of margin is that the trader will only need to pay up a fraction of that cost.

Between July and December, the price of gas moves and so does the value of the futures contract. If the movement is too volatile, the trader may be asked to deposit additional funds into the margin account.

In December, the contract is approaching its expiration date, which falls on the third Friday of the month. The price of gas rises to $55, allowing the trader to sell the initial contract and exit the position. The broker settles the net difference between the contracts in cash, and the traders pockets a cool $15,000 in profit, less the brokers commissions and fees.

However, were the price of gas to fall to $30 instead, the investor would be at a loss of $10,000 ($30 – $40 = – $10 x 1,000 = – $10,000).

Futures Hedging 🚨

Futures are used by hedgers to essentially make a bet on the price movement of the underlying asset. With hedging, the aim is to avoid losses from unfavorable changes in price movements, rather than speculating. In a lot of cases, companies entering hedges are producing the underlying asset.

For example, a beef producer can utilize a futures contract to set in place a certain price for their beef. This reduces the risk for the producer and ensures that they will get a fixed price.

Should the price of beef fall, the producer makes a profit on the hedge that offsets the losses on the market price. The gain and the loss will offset each other, effectively locking in a fair market price.

Are Futures Better than Options? 💭

Figuring out whether to invest in futures or options can be tricky. Though, futures contracts should not be confused with options contracts. Futures contracts are an obligation to fulfil the terms. Options, on the other hand, give the contract holder the option to exercise the contract or not.

A new trend on the rise is options trading, and people are getting into it very quickly. People have turned to options trading, due to the stay-at-home atmosphere, either people working from home or just genuinely scared/unable to go out due to the pandemic.

Bitcoin Futures Explained 🔮

While investing in Bitcoin is seeing increased popularity, so are Bitcoin futures. These contracts allow investors to speculate on the rise or fall of Bitcoin in the future. You don’t actually need to own any Bitcoin to do this.

Bitcoin futures work exactly the same as futures on traditional investment assets. A main benefit of Bitcoin futures is they can be traded on particular regulated exchanges.

Tips for the Futures Market🏅

Futures markets are the place to be if you are considering becoming a hedger or speculator. This marketplace allows traders to make bets on which way they predict a currency, commodity, or market index will move in the future.

Of course, there are risks involved, but the potential returns are considerable, mainly thanks to volatility. Before we go through the steps to futures trading, let’s discuss the different futures markets out there, and which strategies are best for success in each.

Commodities 🛢

A commodity is a material item with a value that is decided mainly by supply and demand. Commodities include energy, like crude oil and gas, grains, like wheat and corn, and precious metals like silver and gold, to name a few.

A commodity futures contract, allows you to hedge or protect an investment position, or you can bet on whether you think the commodity will rise or fall in the future. Commodity futures can be accessed mainly through specialized brokerage firms called Commodity Trading Advisors (CTAs).

Commodities can be influenced quite easily, their relation to supply and demand as well as political, economic or rather any type of events is quite sizeable. For example, oil prices had witnessed a huge collapse due to the pandemic and similar events are possible with other commodities too.

Currencies 💹

Currency trading, also known as forex trading, is the trading of currency pairs in order to make money on moving foreign exchange rates. For this market, traders often use a scalping strategy.

This strategy has the goal of making short-term profits off incremental moves in the value of a currency. If this is done enough times then the profits will accrue in the long run, amounting to a considerable size.

In general, you might have an extremely short time frame of just one minute, or you might have several days. To be successful with a scalping strategy, you will need to be very disciplined.

🏅 Interested in Forex trading? See our report on the top forex brokers.

Indices 📈

Another popular category of futures are index futures, like the S&P 500 index futures contract. However, a different multiple may be used for determining how much each futures product is worth.

For example, an S&P 500 futures contract is $250 times the value of the S&P 500 index value. E-mini S&P 500 futures contracts hold a value of $50 times that of the index.

Index futures are an effective way to use a passive indexed strategy by holding the whole index in one contract, and having greater leverage than that offered by an ETF—even with the leading ETF brokers.

Traders are required to have a minimum of 25% of the total trade value in their account by both the Financial Industry Regulatory Authority, Inc. (FINRA), and the New York Stock Exchange (NYSE). That said, some brokers require more than the 25% margin.

Interest Rates ⚖️

Another popular category with investors are interest rates. The two key strategies to know for this are the cycle and seasonal trading time based strategies.

Seasonal trading has the aim of trading based on the seasonal effects of the futures markets. Historical data shows that a lot of markets, sectors and commodities trade at similar levels each year. Understanding the patterns and trends can be an effective way to gain returns on the futures market.

On the other hand, cycle traders study historical data to find potential trends in an underlying asset. Stock index futures have two popular cycles: the 14-day cycle and the 23-week cycle. Savvy investors who can pin down trends associated with cycles set themselves up to make some big gains.

If you plan on trading stocks, you should consider finding the most suitable stock broker to help set you up for success.

Steps to Trading Futures Contracts👇

Like with any new skill you start, you will need extensive research depending on the field and the depth of it. Acquiring new skills takes time, an old proverb says 10,000 hours is mandatory in order to call yourself a pro.

Step 1 – Get Up to Speed🏃‍♂️

Before you dip a toe in the futures market, the most important step should be to spend some time learning as much as possible about futures. Understand the key terms and phrases, like derivatives.

Get to know the difference between a managed account and a commodity pool – a commodity pool is the safest way to pursue trading futures. In addition, read up on the difference between a hedger and a speculator.

The futures markets generally use high leverage. Most brokers offer traders a leverage, which means the trader won’t need to fund 100% of the contract’s value.

Instead, the broker will ask for a minimum deposit to cover some of the cost. The minimum deposit needed varies from broker to broker, depending on the terms and conditions, the credit worthiness of the investor, and the contract itself.

Step 2 – Decide on a Strategy 📚

One mistake made by novice traders is that they fail to make a strategy before they start trading. Everyone should have a trading plan that outlines their goals, risk tolerance, and objectives.

The plan should include enough detail for you to know what you will do each hour you trade. In this way, you can effectively monitor your performance as well as being able to voice your exit strategy for losing trades.

What Are Some Futures Trading Strategies?

Some popular futures trading strategies include going long and going short. The pullback strategy, based on price pullbacks.

Trading the range, which refers to trading the bounce off important resistance levels and support in a chart, and breakout trading, one of the most popular strategies with day traders. The goal of this is to catch the volatility that happens when the price breaks out of trend lines, chart patterns, channels, and other technical levels.

Step 3 – Scope Out Potential Opportunities🔭

E*TRADE gives you access to a wide range of tools and information to help you find and evaluate possible trades.

Do your fair share of research to help you identify and evaluate potential trading opportunities. Many brokers offer a wide range of research tools and even market analysis from experts to help you recognize the opportunities available.

Step 4 – Pick Your Contract and Month 🗓

Each futures quote has a certain ticker symbol which is followed by the month and year of the contrat year.

Choosing the contract can be one of the tougher parts of trading futures. To help you out, ask yourself these questions:

1. What is the margin necessary?
2. What is the price difference, called the spread, between the and the ask?
3. How much liquidity does the contract offer? (Contracts offering more liquidity can enter and exit the market for less.
4. Is your volume consistent? Inconsistencies or fluctuations in volume can indicate price movement.

Backtesting

Backtesting is an effective way for beginners to learn futures trading. It’s ideal for getting a sense of the market environment and helping you get to know trading indicators.

More than anything though, it will help you hone your strategy. You will see directly how your contract will perform in the current trading environment.

Step 5 – Get To Know How the Money in Your Account Works 🤓

Futures accounts have two main ideas that stock and options traders may not have dealt with before. The first is “initial margin.”

This is different to a margin in stock trading. The second is that equity in a futures account is “marked to market” daily.

Step 6 – Place Your Order 🏁

When you have all the above steps completed and think you’re ready to take a step into trading futures your next step is to contact one of the leading brokers to help you make an order. When doing this you will need to specify the details of your order, including your contract size, and expiration date.

If you’re a trader on the go, you might benefit from using a smart investment app.

Do Futures Trade 24 Hours?

Yes, the futures market trades virtually 24 hours a day throughout the week. It also trades a part of the weekend. In fact, futures start trading at 6:00pm EST on Sunday evening.

Step 7 – Monitor and Manage Your Trade 👨‍💻

Once you’ve placed an order, make sure to keep track of your positions. Futures contracts and contracts have some properties that are unique to those of other assets.

Selling Futures Contracts 🧾

Trading futures has several advantages, including buying long and selling short. Bear in mind, you don’t have the option back out of futures contracts in the same way you do with options contracts. If you find that the market price has gone in the wrong direction on the time of expiration you are obligated to pay the agreed amount.

Tesla short sellers had a fantastic month in September 2020 after the tech company’s stocks plunged another 15.8%. After the stock hit an all time high of $502.49 on August 31st, the post fall in stocks will have provided some relief to its worn down short sellers.

The Bottom Line 🏁

Trading in various futures markets can be exciting and rewarding but it can be equally very challenging. Young investors should consider the different markets and strategies to find the ones that work best, including the ones mentioned in this guide.

It’s important to do your research and understand exactly how futures work to give yourself the best chance of success.To help you get the best start, we’ve created a guide with all the best tips on how to choose your first broker.

Just remember – entering the world of investing is a great way to secure your financial future. Mastering the world of futures is certainly one way to do just that! 🍾

Choosing a Reliable Futures Broker

All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.