What is Futures Trading?

What is futures trading? Simply put, futures trading is price speculation for profit using futures contracts.

Futures contracts began as a means of having predictable revenues and expenses for producers and users of commodities, hence the outdated monicker "commodity futures". Although there are still many commodity futures, there are a myriad of other futures contracts available as well.

How do futures make life easier?

Futures contracts were designed to allow producers of commodities and commercial and industrial users of commodities to secure a price in advance. Thus insuring themselves against unpredictable market volatility. This allowed producers and users to plan ahead and develop business plans. You can't really stick to a business plan designed to function on the assumption you'll be paying XXX amount of money for your raw materials when prices are all over the board due to seasonality and scarcity or abundance. Futures contract created an opportunity for producers and users of raw materials to have that certainty of price to plug into their business plans and go ahead with business and move on with life. This increased ability to plan ahead allowed for the economy to multiply. Read on to learn more on "What is futures trading?"

Nowadays, futures contracts are by no means limited to producers and users of raw materials. They are also available to people involved in intangibles, as well as physical goods, and currencies as well. Not only that, but it's not just producers and users of goods, intangibles, and currencies that use futures contracts, but also private and institutional speculators and investors who have absolutely nothing to do with industry actively trade futures contracts in the hopes of making profits. If you are reading this, chances are you fall into that latter category. The futures markets are one of the few places in the world where "the little guy" can bump elbows and play on the same field in the same game as the "biggest boys in town", exciting, isn't it? Read on to learn more on "What is futures trading?"

Where are futures traded?

Futures are traded on exchanges, just like stocks. Except futures are regulated by a different regulating body and require different licenses to broker and there is a clearance process. I won't go into details because it gets complicated and unless you want to be a futures trading broker, it really doesn't matter that much. What is important is to know that there are some main exchanges. In the United States the main exchanges can be found through "cmegroup.com" and "theice.com". Chances are, if you trade futures, you're going through these exchanges. There are a few other highly active exchanges, but not many. Japan, China, Brazil all have fairly large futures exchanges and I'm sure there are many other large exchanges in different countries around the world. The cmegroup.com and theice.com are "where it's at". Read on to learn more on "What is futures trading?"

Futures used to be traded in pits. There still are pits, but they are not like they were before. Now, most of the traffic is through electronic trading. Many futures contracts have both an open outcry trading time and an electronic session trading time, so you have to research the contract specifications of the product you want to trade so that you are informed about when the prices can change. Unlike stocks that open once during the day, futures can open twice in one day. For example, corn has an open outcry session from 9:30am to 1:15pm every day, then it closes for a few hours and opens up again at 6pm to 7:15am before closing again. Also, the corn (and most other futures) open for trading on Sunday evening. So you really do have to research the product you want to trade and make sure you're aware of when it is being traded. This is easily accomplished by finding your product on the exchange website where it is traded, and then looking up the product's contract specifications. Just by doing that small bit of research you should learn all sorts of things about futures, especially if you take some time to look around the sites.

What types of futures are there?

Futures are generally broken up into eight different categories. However, these are just the main categories. There are futures contracts for all sorts of weird things, but their liquidity is usually low. The main categories are:

  • Indices
  • Energy
  • Metals
  • Meats
  • Grains
  • Softs
  • Bonds & Interest Rate Products
  • Currencies

Continue reading to learn "What is futures trading?"

What are margins?

Futures are generally traded on margin. What is margin? Margin is almost like a down payment. This way you don't have to commit the entire value of a contract for a product you won't get for X amount of months. So long as you close out your position before the contract expires, you won't ever have to pay the full amount of the contract. Typically margins will be around 5% of the full contract value. Contracts for different products range in full value from about $15,000 to over $100,000. Margins are continually changing. The exchanges set them, and your futures trading brokers is obligated to ensure that you put that money up. If you don't put it up, you can't trade. If you're already in a trade and you don't have that money in your account, then they will liquidate you without even asking permission. If you want to trade futures you must understand the concept of margin and what is required of you in order to hold a futures contract. There is so much information on this subject that I think I will leave you to research it on your own. However, I will mention that many commodity futures brokers allow what is called a "day trading margin". Day trading margin is different from "overnight margin" (overnight margin is the real, exchange set, margin), because they will typically give you another 4 to 10 times leverage on your money than is required by the exchange set margin. However, before the day's market close they will cash you out if you haven't already unless you have the overnight margin requirement in your account.

I can't stress this enough, learn and become comfortable with the concept of margin and leverage. Leverage is what can help you make very good money, but unless you know how to properly manage your trades, then margin and leverage can eat all you capital and even cause you to owe money to your futures trading broker. Do an internet search for the terms "margin" and "leverage" in a futures context, either together or separately. Read on to learn more about "What is futures trading?"

It's important to realize that futures contracts expire. That does not mean that you will get 5000 bushels of corn dumped on your lawn. If you really want to take deliver you'd have to take a truck and your paid for futures contract to a railway station somewhere and pick the stuff up yourself. Otherwise, if a contract expires on you, you can roll it over. However, this is a costly and time consuming issue. It is best not to let your futures contracts expire. Make sure you are trading the right month so that this does not happen to you. Again, the best way to learn about this aspect of trading futures is to browse the exchange websites (cmegroup.com and theice.com). Read on to learn more on "What is futures trading?"

What do you need to trade futures?

To trade futures you need several things. Assuming you have a strategy, you'll need a place where you can check your charts. This can either be through a platform or a website. If you are trading on a daily time frame, you could use free charting websites like barchart.com or finviz.com or even the exchange websites cmegroup.com or theice.com. If you're trading intraday, you'll need a futures trading platform.

A very popular platform is ninja trader. I like to use a futures trading platform called firetip. You'll need a data supplier too, if you're going to use a trading platform. Often a futures broker can provide you data, but some people like to buy their own data somewhere. I can't speak to much to that, because I don't know much about the subject. I get all my data directly through my futures trading broker.

Obviously, you'll need a futures broker. If you're reading this page, chances are you're interested in making your own trading decisions, so get a discount futures broker. When you're researching commission, you must realize that brokers usually only quote you their commission price. However, when you place a trade you also wind up paying exchange fees and whatnot. So be sure to ask you potential discount futures broker about all the costs involved. Read on to learn more on "What is futures trading?"

You'll also need money. Most experience "pros" will tell you that you need $25,000 or $50,000 or even $100,000 to trade. Although these recommendations are prudent and long sighted, you could trade futures for much less. There are some discount futures brokers that will open an account for you with $1000. There are many futures contracts who's margins are in the $1000 ballpark. However, just because you can open an account with a "couple of grand" and start making actual trades, it doesn't not mean that you should or that you will be successful. You are an intelligent person and you can make your own decisions, use your best judgement. Be absolutely certain that you understand the concepts of margins and leverage, and make sure that you are familiar with the idea of "the double edged sword" of leverage.

Also, keep in mind that most futures brokerages have some sort of "practice account" promotion where you can have $50,000 of imaginary money to trade and practice with. This is an excellent idea for someone new to futures, not just to practice some trading, but also to become familiar with some futures trading platforms and the various services and order types that different brokers offer. Keep reading to learn more on "What is futures trading?"

Final Thoughts

Now you have a general idea of what futures contracts are, what is futures trading, and what you need to trade futures. Look around the rest of the site and learn as much as you can. Provide your own input or ask a question in contact us. Provide your own ideas and content in some of the other sections of the website such as: reviews, or articles.

Most of all, research your markets and decisions and never stop learning about the subject of "what is futures trading?" and all the topics that relate to it. Soon, you'll feel quite comfortable with what you know about "what is futures trading".


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