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

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

Related Articles
  1. Trading

    Are You Ready To Trade Futures?

    If you want to trade futures in the hopes that you'll become rich, you'll have to answer some questions first.
  2. Trading

    How to Trade Dow Jones Future Contracts

    Learn about the Dow Jones Index futures contracts available and obtain step-by-step instruction on how to trade the stock index futures.
  3. Investing

    Introduction To Currency Futures

    The forex market is not the only way for investors and traders to participate in foreign exchange.
  4. Trading

    An Introduction To Trading Forex Futures

    We explain what forex futures are, where they are traded, and the tools you need to successfully trade these derivatives.
  5. Investing

    How Are Futures Used To Hedge A Position?

    A futures contract is an arrangement two parties make to buy or sell an asset at a particular price and date in the future.
  6. Investing

    Trading Gold and Silver Futures Contracts

    If you are a hedger or a speculator, gold and silver futures contracts offer a world of profit-making opportunities.
  7. Trading

    The Difference Between Forwards and Futures

    Both forward and futures contracts allow investors to buy or sell an asset at a specific time and price.
  8. Investing

    3 Ways To Increase Your Investment Performance

    Savvy investors deploy each of their dollars to work in more than one way. Find out how to multitask your money.
  9. Investing

    Opening Your First Brokerage Account

    Learn what steps you should take before you open your first brokerage account.
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center