If you want to start trading futures or switch brokers, visit NinjaTrader.
If you’ve seen movies or videos with big crowds of people jumping and throwing hand signals at each other in the trading pits of an exchange, it’s time you know they are not stock traders — these are futures traders. And although trading pits are becoming a thing of the past, the popularity of futures trading has never been as high as it is now.
Futures trading offers tremendous opportunities, but it carries high risk. If you feel like me 25 years ago, this article is the first step on your road to learning how to trade futures.
Futures Trading Terminology
If you want to learn how to trade futures and options, you need to know a few terms that will inform your decisions.
Futures are financial contracts (agreements) giving the buyer an obligation to buy an asset and the seller an obligation to sell an asset at a predetermined price on a specified day in the future. Futures are considered derivatives, meaning their price is dependent upon (derived from) an underlying asset.
Derivatives are financial instruments whose value is based upon a physical commodity or other financial instrument.
What is a commodity? These are physical assets like wheat, grain, corn, etc. that are often involved in futures contracts.
Liquidity is the ability to sell an investment at or near its value in a relatively short period of time.
Futures margin is the amount of money traders must have on hand with their broker when they open a futures position.
And before you start trading futures, make sure you familiarize yourself with the process of placing an order and the lingo associated with it.
Here are some examples of orders you can place:
- Market order is an order to buy or sell futures contracts immediately. This order guarantees that the order will be executed (filled) but does not guarantee the execution price.
- Limit order is an order to buy or sell futures contracts at a specific price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher.
- Stop order is an order to buy or sell futures contracts once the price reaches the specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order.
- Day order is an order which will expire at the end of the day (daily trading hours) if not executed.
- Good Til’ Canceled (GTC) order is an order that will remain active until executed or canceled by you.
- Market-on-Close (MOC) order is an order that will be executed at the closing price of a daily session. It can be convenient for day traders who don’t want to hold their positions overnight.
How Futures Work: The Basics
If you want to know how to trade futures for beginners, this is a good place to start. Remember, there are a few places where you can land in the market. Futures are not always a free-for-all, and they are often only as complicated as you make them. In choosing between futures vs options, remember that futures and options are traded in a similar manner, but they are quite different.
There are 2 types of futures traders: hedgers and speculators. The concept of futures started with the idea of locking in prices of commodities. It started with the hedgers, who seek stability and predictability for their businesses. If you want to learn how to trade futures, you should decide where you want to be on this seesaw.
Let’s say you are a corn farmer. You grow and sell corn. And currently, corn sells for $4.25 per bushel. But you are concerned that the prices will fall in the future (for example 6 months from now), which will decrease your profit margin. Therefore, you would like to lock in today’s price.
The best course of action is to sell short futures contracts expiring 6 months from now. Selling short essentially means a bet on the downside. If corn prices indeed drop, your business profit will decline, but the gains in the futures contracts will offset it.
On the other side of the business spectrum, a company buys corn to make food products. And it is concerned that the price of corn will increase, which will make it expensive and negatively affect the bottom line. In order to lock in today’s price, it would buy corn futures contracts to offset rising prices.
While hedgers normally do not trade futures for profit and use them for business stability, speculators are there for profit. Speculators are attracted to futures due to fast price movements, liquidity and low margins.
Speculators do not buy or sell underlying commodities or financial products. They normally close their long or short positions before the expiration and delivery dates. They are not interested in the underlying products. Their only interest is to profit from predicting futures contracts’ movements.
How Futures Work: An Example
If you want to learn how to trade futures, you must remember that there a few angles you can take.
Speculators love the fact that they can control large amounts of underlying assets with relatively small amounts of money. Going back to the corn futures example, the initial margin for 1 corn futures contract is $2,025. The initial margin is the amount of money that needs to be in the account to initiate a trade in the futures market.
The maintenance margin for 1 corn futures contract is $1,500. The maintenance margin is the minimum equity that must be maintained in the account. If the equity drops below the maintenance margin, a trader must make a deposit to bring the account back up to the initial margin.
Keep in mind that 1 corn futures contract controls 5,000 bushels. If it trades at $4.25 per bushel, it is worth $21,250 worth of corn, which means you need less than 10% to trade it.
It’s prudent to have more money in your account to trade comfortably and avoid margin calls when you must deposit more money in your account if your trade goes against you. If you are a day trader (you close your futures position on the same day), your margin is even lower.
Exchanges determine margin rates, but your broker can adjust them. Margin is primarily based on volatility. Volatility in finance is the frequency and magnitude of price movements, up or down. The bigger and more frequent the price swings, the more volatile the market.
E-Mini S&P 500 Example
Here is an example of information on 1 of the most popular futures contracts, E-mini S&P 500 futures:
- Exchange: Chicago Mercantile Exchange (CME)
- Root symbol: ES
- Contracts available: Quarterly (March, June, September, December)
- Expiration dates: 3rd Friday of above-mentioned months
- Maintenance margin: $11,000
- Trading hours: Sunday through Friday 6 p.m. to 5 p.m. Eastern Time (ET) with trading halt 4:15 p.m. to 4:30 p.m.
- Contract unit: $50 x S&P 500 Index
- Minimum price fluctuation: 0.25 index points = $12.50
- You bought 1 futures contract at 3,500.00. The contract moved up to 3,510.00 (a move of 10.00 points). You are profiting $500 (10.00 x $50.00 per point).
Best Online Futures Brokers
It’s important to sign on with a trusted online broker whether you’re looking at stock market futures, options vs stocks, commodity stocks, equity futures, contract financing and much more. Take a look at our recommended brokers to get started now.
NinjaTrader is a powerful derivatives trading platform specializing in futures, forex and options. The platform has a number of unique trading tools. A free version does exist without the extra goodies provided by Trader + and OrderFlow + but users can still break down charts, backtest strategies and trade without upfront payment. NinjaTrader hosts its own brokerage services but users have their choice of several different brokerage options. Accounts have minimums depending on the securities traded and commissions vary depending on the version of the platform. Advanced derivatives traders will have endless fun with the platform’s mighty array of tools and analyzers.
The free version, which is included with all brokerage accounts is a great starting platform for new traders without the financial commitment. As you grow in your trading and are ready for more tools and functionality, you can add more complexity.
- Futures Traders
- Traders looking for 24/7 action
- Advanced Traders
- Powerful analysis tools
- Free download and simulated trading
- Open source trading apps to enhance experience
- Can only trade derivatives like futures and options
Tradovate is an innovative futures broker offering a tiered pricing structure and a comprehensive proprietary trading platform you can access with additional fees. Tradovate offers a community tab that allows you to connect with other traders and exchange trading ideas. New users can test out Tradovate’s platform with a demo account and free trial, which allows new investors to master the learning curve before opening an account. Though the platform might be too complicated for traders who prefer a simplified experience, it can be a strong choice for more experienced users.
- Experienced and intermediate futures investors
- High-volume traders
- Mobile traders
- Free trading platform packed with unique features
- Community tab allows users to connect with other traders
- Tiered pricing structure
- Easy to use out of the box for experienced futures traders
- Currently only supports futures trading
- Platform can be overwhelming for new traders
Discount trading is a no thrills futures trading broker that offers a multitude of options available to start trading. Low commissions, no inactivity fees, and powerful platforms to start trading.
- High volume / High frequency futures day traders
- Futures investors looking for the lowest futures margins
- Traders needing ultra-low commission rates
- Traders looking for great customer service and fast account opening
- Ultra-low commission rates ($0.49 or less)
- $500 (or less) Day Trading Margin on most markets
- No monthly inactivity fee
- Five different trade routing solutions
- Over 20 of the most popular platforms in the industry
- A completely free trading platform that includes free Level 1 Streaming Futures Quotes ● Support team that answers phone calls quickly
- Tough to find the best platform for your needs, due to the sheer number of options available
- Geared for traders with at least some experience trading the futures markets
Optimus Futures is a leading discount futures broker offering highly customized trading solutions geared towards cost-conscious retail traders with an eye for technology and personal service. Customers gain access to premium tools at no additional cost such as depth-of-market surface, footprint charting, and real-time news alerts along with a fully integrated trading journal.
Users can register a trial version of their software to take a test-drive of the platform, unlocking many of the analysis and charting features including unlimited simulated trades. Traders can also leverage Optimus Futures 3rd party app integration, allowing you to choose the futures trading platform best suited for you.
- Low account minimums, commissions, and margins
- Futures & micro futures traders
- Beginner futures traders
- Unlimited simulated trading
- Low day trading margins
- Highly experienced and competent technical support
- Customizable data fees and order clearing
- Limited to derivatives trading like futures
- The selection of data feeds and clearing firms can be overwhelming for newer traders
Generic Trade calls itself a “no bells, no whistles” broker, but that doesn’t mean it contains limited offerings. The company features trading for futures and options on futures. Research is limited, but customer support is available 24/7 and direct market access guarantees fast trades at optimal prices.
Generic Trade’s big selling point is its flat $0.59 commission on all trades. Better educational materials and platform varieties are available elsewhere but Generic Trade offers true bang for your buck — one of the most important variables when comparing brokers.
- Futures Traders
- Options Traders
- Low volume derivatives traders
- Flat $0.59 commission on all trades, regardless of account size or volume
- No minimum needed to open an account
- Exchange minimum margin and aggressive day trading margin
- Contracts available for most asset classes
- 24/7 tech support and customer service
- No volume discounts
- Must pay platform fee to use full suite of trading tech
- Even though the free Generic Trader Online offers real-time quotes and charts, they are not streaming and do not offer market depth. Also, the trading tools are not nearly as robust as the other platforms
Before you start trading futures, you must familiarize yourself with the specifications of different futures products. Futures are traded on exchanges like the Chicago Mercantile Exchange and New York Board of Trade (ICE Futures), among others.
Futures contracts are available on numerous asset classes. The most popular categories are:
- Index futures: S&P 500, NASDAQ 100, Russell 2000, VIX, DJIA, foreign indexes
- Interest rate futures: treasuries (2-, 5-, 10-, 20-year, euro
- Currency futures: currencies and currency spreads
- Grains futures: wheat, corn, soybeans, rice
- Metal futures: gold, silver, copper, platinum
- Energy futures: crude oil, heating oil, gasoline, natural gas
- Softs futures: cotton, cocoa, coffee, sugar, orange juice
- Livestock futures: cattle, lean hog, pork bellies
All the necessary information is available on their websites as well as your broker’s website. It’s a good idea to speak with your broker to confirm that information.
Futures Trading Strategies
Some traders (speculators) specialize in 1 or 2 futures sectors simply because they have an edge and understanding of those markets’ fundamentals and economic trends. Others trade all or most of them because they view them as nothing more than charts and approach them with technical analysis.
The technical approach is analyzing futures based on chart patterns and sentiment. Both strategies have merit, but you need to decide which avenue you prefer to take as you learn how to trade futures.
Short term traders tend to trade the most liquid contracts, usually front month contracts (contracts which are close to expiration).
The most common strategy in futures trading is a directional strategy where a trader bets on the direction of a certain commodity or a financial instrument. They either buy (going long) and sell (going short) depending on whether they expect prices to rise or fall.
A more complex approach involves spread trading. Spread trading may involve going long March crude oil futures contract and simultaneously going short June crude oil contract. That is a good strategy if a trader perceives the March contract as being undervalued compared to the June contract. This trader seeks to benefit from a contraction of a spread regardless of the absolute direction of crude oil. This is a bet on a spread.
Another example of spread trading is a spread between 2 correlated markets. Correlation means when two or more markets tend to move in the same direction. A good example would be to go long S&P futures and simultaneously go short NASDAQ futures if a trader thinks S&P is undervalued compared to NASDAQ.
Keep in mind that spread strategies are no less risky than directional strategies. A spread can go against you as much as a directional trade.
Pros & Cons of Futures Investing
There are several factors, which should be taken under consideration while choosing the right firm for you:
- What are the commissions or how much does it charge for a futures transaction)?
- What kind of online trading platform is offered? Is it easy and intuitive to place a buy or sell order?
- Does it offer a mobile app for trading?
- Does it provide research, education, futures news and insights? Are those features free or is there a fee?
- Is charting software available, and how user friendly is it? Is it free?
- Are there charges if you are not trading actively?
- Does it provide friendly and patient customer service? Can you talk to someone over the phone?
- What kind of security does the broker use to keep your account safe?
- How long have they been in business?
- Does it allow retirement accounts, and what are the options?
- What is the minimum account size?
- Does it provide user-friendly account management features where you can see your transactions, balances, history and cost?
- Does it offer advisory services, and how much do they charge for them?
Trade Futures Today
Futures are highly leveraged (margined) instruments, which makes them appealing and risky at the same time. Most traders recommend learning and using technical analysis for futures trading.
Get comfortable with some of the futures markets, and start small. All you need is a few thousand dollars, a reputable broker and the ability to control your emotions.
Frequently Asked Questions
Are there any restrictions on day trading futures?
There are no restrictions on the size of the account or the number of daily trades.
What is required for trading futures?
It involves following the news, market commentary and reading charts. You must have the time, patience and energy to succeed.