Beginner's Guide To Trading Futures: A Real-World Example
  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

Beginner's Guide To Trading Futures: A Real-World Example

Now that you are more familiar with the concepts and tools of trading futures, let's take a look at a hypothetical step-by-step example.

Step 1: Choose a brokerage firm and open an account - For this example, we will use brokerage firm "XYZ" and open an account.

Step 2: Decide which category of futures to trade - For this example, let's choose to trade metals futures.

Step 3: Decide what instrument to trade within your chosen category - Let's choose gold.

Step 4: Conduct research on your chosen market - This research might be fundamental or technical in nature depending upon your preferences. Either way, the more work you do, the better your trading results are likely to be.

Step 5: Form an opinion on the market - Let's say that after doing our research we decide that gold is likely to rise from its current level of around $1675/oz. to around $2000/oz. over the next six to 12 months.

Step 6: Decide how best to express our view - In this case, since we think the price will rise, we want to buy a futures contract on gold - but which one?

Step 7a: Evaluate the available contracts - There are two gold contracts. The standard contract covers 100 ounces, and the "E-micro" contract covers 10 ounces. In order to manage our risk in our initial foray into the futures market, we will choose the E-micro contract.

Step 7b: Evaluate the available contracts - We next choose the month in which we want the contract to expire. Remember, with futures it isn't enough to get the direction of the market right, you also need to get the timing right. A longer contract gives us more time to "be right" but is also more expensive. Since our market view is for a move higher in 6-12 months, we can pick a contract expiring in four months, eight months, or 10 months. Let's choose 10 months.

Step 8: Execute the trade - Let's buy a 10-month E-micro gold contract. For this exercise, let's assume we pay a price of $1680.

Step 9: Post initial margin - In this case, the current exchange requirement is $911.

Step 10: Set stop loss - Let's say we don't want to lose more than 30% of our wager, so if the value of our contract falls below $625 we will sell.

Step 11: Monitor the market and adjust position accordingly.

Note: This example is purely hypothetical and is not a recommendation or opinion. These are basic steps for executing a futures trade and you may find that a different process works for you. As you gain more experience and knowledge, you are likely to develop your own system that you are comfortable with.

Beginner's Guide To Trading Futures: Conclusion

  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
RELATED TERMS
  1. E-Micro Forex Futures

    Currency futures contracts traded on CME Globex that are one-tenth ...
  2. Contract Unit

    The actual amount of the underlying asset represented by a single ...
  3. Contract Size

    The deliverable quantity of commodities or financial instruments ...
  4. Contract Month

    The month in which a futures contract expires. The contract can ...
  5. Front Month

    Used in futures trading to refer to the contract month with an ...
  6. Back Month Contract

    A type of futures contract that expires in any month past the ...
RELATED FAQS
  1. How can a futures trader exit a position prior to expiration?

    A futures contract is an agreement to buy or sell a commodity at a pre-determined price and quantity at a future date in ... Read Answer >>
  2. What is the difference between forward and futures contracts?

    Fundamentally, forward and futures contracts have the same function: both types of contracts allow people to buy or sell ... Read Answer >>
  3. What do the S&P, Dow and Nasdaq futures contracts represent?

    Every morning before North American stock exchanges begin trading, TV programs and websites providing financial information ... Read Answer >>
  4. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. A futures contract is as an arrangement between ... Read Answer >>
  5. How do the investment risks differ between options and futures?

    Learn what differences exist between futures and options contracts and how each can be used to hedge against investment risk ... Read Answer >>
  6. How can I calculate the notional value of a futures contract?

    Learn how the notional value of a futures contract is calculated, and how futures are different from stock since they have ... Read Answer >>

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