1. Beginner's Guide To Trading Futures: Introduction
  2. Beginner's Guide To Trading Futures: The Basic Structure of the Futures Market
  3. Beginner's Guide To Trading Futures: Considerations Prior to Trading Futures
  4. Beginner's Guide To Trading Futures: Evaluating Futures
  5. Beginner's Guide To Trading Futures: A Real-World Example
  6. Beginner's Guide To Trading Futures: Conclusion

Prior to trading futures, there are several things to consider. Among these are which brokerage firm you wish to utilize; what types of futures you might want to trade; and what kinds of trades you are going to execute. We will now look at each of these topics in greater detail.

Choosing a Brokerage Firm
Prior to trading futures you need to choose a brokerage firm. You can choose a full-service broker, which will give you a higher level of service and advice, but will likely have somewhat higher fees. Alternatively, you can choose a discount broker, which will likely have more of a "do it yourself" approach, but will also have lower commissions and fees. The direction you choose to follow is entirely a matter of personal preference and inclination, but many readers interested in trading futures are probably self-directed investors, and for them a discount broker probably makes the most sense.

Some investors may choose to trade futures though an existing brokerage relationship. Some large discount brokerages such as TD Ameritrade and Charles Schwab offer futures trading at reasonable prices. Other investors might choose a brokerage firm that specializes in the futures market. Although there are too many of these to list, the CBOE maintains a directory of futures brokers which can be found at CME Group's broker directory.

As always, when choosing a broker, make sure that you research each thoroughly, particularly if you are not previously familiar with a particular one. Important considerations include commission rates, margin requirements, the types of trades handled, the level of executions provided, software and user interface for monitoring and trading, and general customer service.

SEE: 10 Tips For Choosing An Online Broker

Categories of Futures Markets
If you are trading stocks, there are many different kinds of companies (i.e., tech, oil, bank) and while the mechanics of trading a stock remain the same, the nuances of the underlying industries and companies vary widely. The same is true with futures. All futures contracts are similar, but because there are futures contracts that track such a wide range of instruments, it is important to be aware of the broad groupings that exist (it might be helpful to think of each category as similar to an "industry" in the stock market and then each underlying contract as similar to a "stock.") The main categories of futures contracts, as well as some common contracts that fall into those categories, are listed below.

Futures Markets by Category
Agriculture Energy Equity Index FX Interest Rates Metals
Grains (corn, oil, soybeans) Crude Oil S&P 500 Euro/$ Treasuries (2, 5, 10, 30 year) Gold
Livestock (cattle, hogs) Heating oil Nasdaq 100 GBP/$ Money markets (eurodollar, fed funds) Silver
Dairy (milk, cheese) Natural gas Nikkei 225 Yen/$ Interest Rate Swaps Platinum
Forest (lumber, pulp) Coal E-mini S&P 500 Euro/Yen Barclays Aggregate Index Base Metals (copper, steel)

You can trade as many or as few categories and instruments as you like, but a few suggestions are in order. For starters, you might want to consider what you already know. So for example, if you have been trading stocks for years, you may want to begin your futures trading with equity indexes. That way you already understand the underlying drivers of movements in the market you are following, and only need to learn the nuances of the futures market itself. Similarly, if you worked at Exxon for 30 years, you might want to choose to focus on energy initially since you probably understand what drives the direction of the oil market.

Once you have chosen a market category, the next step is to determine what instruments you will trade. Let's assume you have decided to trade energy. Now you need to decide what contracts you will focus on. Is your interest in crude oil, natural gas or coal? If you decide to focus on crude oil, you can then choose from among West Texas Intermediate, Brent Sea or a host of other options. Each of these markets will trade at different levels, and will have their own nuances as well as different levels of liquidity, volatility, and varying contract sizes and margin requirements. By this point, it should be clear that there is a fair amount of homework involved before beginning your futures trading career.

A good place to find a listing of many available futures products in the energy segment, as well as contract specifications and margin requirements is CME Group's energy product slate. Similar pages exist for the other product categories as well. Ultimately, after doing your homework, you will decide what product you want to trade. The next step is to decide what type of trades you want to do.

Trade Types
At the simplest level, you can decide to buy or sell a futures contract, thereby wagering that the price will rise or fall. These types of trades are familiar to most investors from the stock market, and they are easy to understand. Therefore, outright buys and sells are probably a good place to start your futures trading. As you progress in your trading career, however, you may find that you want to employ some of the more sophisticated futures trading techniques that exist. Because this is a Beginner's Guide, we will not cover these in great detail, but once you are aware of them it should be easy enough to conduct additional research online if you are so inclined. Two types of trades commonly used by professional futures traders are:

  • Basis trades: the trader is long (short) a futures contract and short (long) the cash market. This is a wager that the price differential between cash and futures will fluctuate. For example, a trader could buy 10-year U.S. Treasury bond futures and short physical 10-year U.S. Treasury bonds.

  • Spread trades: the trader is long and short two different futures contracts. This is a wager that the price difference between two different futures contracts will change. For example, a trader could purchase an S&P 500 contract for March delivery and sell an S&P 500 contract for June delivery. Or an oil trader might purchase a futures contract on West Texas Intermediate (WTI) oil and sell a contract on Brent Sea oil, betting that the price difference between the two will change.

  • Hedging: the trader sells a futures contract to offset positions he or she holds in the cash market. For instance, if you have a large portfolio of stocks that you do not want to sell for tax reasons, but you fear a sharp market decline, you could sell S&P 500 futures as a hedge against a stock market decline.

Beginner's Guide To Trading Futures: Evaluating Futures
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