Commodities are in our everyday life. We buy meat, grains, and gasoline and we use money (currency) to pay for these, and all of these are commodities. All these items fluctuate in price. These price fluctuations are how we participate in trading commodities.
This blog on futures is intended to help improve your understanding of the futures market. There are so very many resources available to those of us who wish to learn more about trading in the futures markets, but this specific site will help you make better-informed decisions than other online sources that may not be as well thought out or intentionally designed to guide you better through the process.
Futures Trading is based on learning how to read charts and analyze activities. You do not have to know anything about cattle – or cotton, orange juice, pork bellies, gold, corn, wheat, cocoa, or soybeans! What you do need to know is technical analysis, which is the basis of this article.
What are Futures?
Like the stock market, you can buy a future at a low price and sell it at a higher price and make a profit, or you can sell high and buy low, in other words, you can short the market. (For example: assume oil prices are too high, we can sell oil at a high price and buy it back when it reaches a lower price, this is how we profit from shorting the market.) It’s also called short selling.
Futures are a sort of derivative contract in which the buyer and seller agree to buy or sell a specified commodity asset or security at a predetermined price at a future date. Futures contracts are used to trade tangible assets such as commodities, stocks, and financial instruments (interest rates, exchange rates, and stock indexes). Futures contracts are often more liquid (easier to trade) than other assets since they are an obligation to buy or sell something.
A futures contract obligates one party to buy and the other to sell a specific asset at an agreed price at a specific time in the future. Futures contracts are traded in exchanges around the world. Price is determined by bids and offers in the marketplace. Basically, Futures contracts are often traded on an exchange, with one side agreeing to buy a specific quantity of securities or commodities and take delivery on a specific date. The contract’s selling party agrees to provide it.
The following seven categories are different markets in which futures contracts are traded:
- Metals (silver, gold, etc….)
- Energy (crude oil, heating oil, etc….)
- Livestock (feeder cattle, pork bellies, etc….)
- Forest, Fiber, Food (Lumber, sugar, etc….)
- Foreign Currencies (Swiss Franc, etc….)
- Debt Instruments (US Bonds, etc….)
- Stock Indices (S&P 500, Dow Jones, etc.)
All futures traded can be found in the newspaper. They appear under the heading US Futures in any major business newspaper. Here is an example of how they are listed in the paper:
British Pound, 62,500 pds, $/10,000 pds
|Sea High||Sea Low||Month||Open||High||Low||Settle||Change||Opt-In|
Referring to the above chart we look for high open interest. That is the contract month we will enter. In this case, it is March99. High open interest allows us to get in and out of our trade quickly. As you will notice on this particular day the high of the day was 16556 and the low of the day was 16480. This was the trading range for the day.
As you progress through, you will realize how you as a futures trader will take advantage of movements within these ranges.
The most common futures you will be session trading are:
- S&P 500
- Mini S&P 500
- Mini Nasdaq
- Dow Jones
- Mini Dow Jones
- US Bonds
Although there are other futures you may session trade, most of them you will venture to position trade and hold for longer periods of time based on techniques that you will learn throughout this post!
The most common futures to position trade include:
- Metals (Gold, Silver, Platinum, etc.)
- Energies (Heating oil, Gasoline, Crude oil, etc.)
- Livestock (Pork bellies, Live cattle, etc.)
- Grains (Wheat, Com, Oats, Soybeans, etc.).
- Exotics (Coffee, Sugar, Cocoa, etc.)
As a trader, your goal is to make consistent profits. Based on your chart analysis techniques you will learn to participate in trading.
How Does It Work?
With each type of futures market, the movement value varies. Futures contracts allow traders to lock in a set price while also protecting themselves from unstable price changes, whether it’s going to go up or down in the future. Let’s use bunker fuel as an example of how futures work:
BUY: A Shipping Line company that wants to avoid an unexpected increase in jet fuel prices can buy a futures contract that commits them to buy a certain amount of jet fuel for delivery at a certain price in the future.
SELL: A bunker fuel distributor might sell a futures contract to ensure that the Shipping Line company has a consistent supply of fuel and to protect itself from a price drop.
BOTH: Both parties agree on particular terms: buy (or sell) 1 million gallons of bunker fuel for $5 per gallon, to be shipped within 60 days.
Both parties in this scenario are hedgers that must trade the underlying commodity because it is essential to their operations. They use the futures market to minimize their risk of price volatility.
However, not everybody in the futures market wants to trade a futures product. These folks are futures investors or speculators who seek to profit from changes in the contract’s price. Let’s say the price of bunker fuel goes up, the value of the futures contract also rises, and the owner of that futures contract may be able to sell it for a higher price in the futures market. These traders can purchase and sell futures contracts without intending to take delivery of the underlying commodity; they’re more interested in making a profit.
A “tick” in the Futures Market
Also, Futures contract prices are constantly changing. A tick is a minimum movement the underlying contract can move. A “tick” is the smallest price change a futures contract can experience at any one time during the day. The amount of the tick changes depending on the futures contract being traded.
For example, the S&P 500 minimum tick is 0.10 = $25.00 USD, and for the Mini S&P 500 minimum fluctuation is 0.25 = $12.50 USD. For the Canadian dollar, the minimum tick is 0.0001 = $10.00 USD.
For a trader owning a futures contract, each tick of movement represents a monetary gain or loss. The “tick value,” or how much each tick is worth, varies by contract. A tick in a crude oil contract (CL) is worth $10 per contract, whereas a tick in the E-mini S&P 500 (ES) is worth $12.50 each contract.
In order to trade Futures, you must have a margin account. Margin is the amount of deposit required to buy or sell the particular futures contracts. Each futures contract has an expiry date. We identify buying and/or selling opportunities during the duration of the contract and we exit our position prior to the expiry of the contract. All futures are traded throughout the year.
Example Currencies’ contracts traded expire in March, June, September, and December
Each contract represents a specific amount of commodity.
1 Japanese Yen contract $125,000 USD
1 Canadian Dollar contract $100,000 USD
1 Wheat contract – 5000 bushels
Investing in Stock Futures
Investing in stock futures allows you to trade individual company futures as well as ETF (exchange-traded fund) shares.
Bonds, as well as cryptocurrency, have futures contracts. Some traders like futures trading because they can take a large portion of the amount invested while only putting up a little amount of money. This provides them with savings and more leverage than simply owning the stocks directly.
Most investors consider purchasing an asset in the hopes of seeing its value rise in the future. Short-selling, on the other hand, allows investors to borrow money in the hopes of betting that the price of an asset will fall, allowing them to acquire it at a lower price later.
How to Get Started with Futures Trading
Step 1: Open An Account
You can start off by opening a trading account with a specialized broker. A futures broker will most likely ask you important questions relating to your investment experience, income that you’ve gained, etc. These questions are meant to help you figure out how much risk your broker will let you take on.
In futures trading, every broker that you meet offers a different set of services. Some offer extensive financial advice and research, while others merely provide a quote and a graph.
Step 2: Start Trading with “Paper Money”
Before you invest real money in your first trade, you can practice trading with “paper money.” This is a fantastic tool to double-check your knowledge of the futures market, as well as how markets, leverage, and commissions affect your portfolio. If you’re just getting started, we recommend practicing on a simulated account until you’re confident you’ve got the hang of it.
Step 3: Set your Margin for Trading Futures
Your broker will then determine your contract’s initial margin, which is the proportion of the contract’s value that you must pay in cash. If the contract’s worth is $10,000 and the first margin is 10%, you’ll have to pay $1,000 in cash.
Your position is marked to market at the end of each trading day. That is, the broker determines the position’s worth and adds or subtracts that amount from your account in cash. If the $100,000 contract was reduced to $99,000, $1,000 would be deducted from your account.
If your position’s equity falls below the broker’s margin requirements, you’ll be asked to deposit additional funds to meet the account’s maintenance margin.
I really hope this helped you a lot. If you have any questions, feel free to comment down below.
That’s it for Futures Trading! I know I’m not into this kind of stuff since I mostly day trade crypto! So if you’d like to learn more about it, just click on the link below and I’ll walk you through the world of day trading: