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

Before trading futures, there are some decisions to be made regarding brokerage firms, the future contracts you want to trade and the types of trades you plan on making.

Choosing a Brokerage Firm

Before trading futures, you need to have an account with a brokerage firm that offers access to futures (not all brokerages do that). You can choose a full-service broker, which offers a higher level of service and advice, in exchange for higher fees. Alternatively, you can choose a discount broker, which offers more of a "do it yourself" approach – along with lower commissions and fees. The direction you choose to follow is a matter of personal preference and inclination, but for most self-directed investors and traders, a discount broker usually makes the most sense. 

You might be able to open a futures account with your existing brokerage. Some large discount brokerages offer futures trading at reasonable prices. Alternatively, you might choose a brokerage firm that specializes in the futures market. Although there are too many to list here, you can view an updated directory of futures brokers at CME Group’s Broker Directory

When choosing a broker, make sure you do your homework – especially if you’re completely unfamiliar with a certain broker. 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. (For more, see 10 Tips for Choosing an Online Broker.)

Categories of Futures Markets

If you trade stocks, you can choose from companies in different industries – such as energy, finance and technology. While the mechanics of trading a stock remain the same regardless of the stock, the nuances of the underlying industries and companies vary widely. The same is true with futures. All futures contracts are similar, but it’s 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 shown below:

 

Category

Examples

Agriculture (“Ag”)

Corn, soybeans, wheat, live cattle, milk, sugar, lumber

Energy

Crude oil, gasoline, heating oil, natural gas

Equity Index

E-mini and full-sized S&P 500, Nasdaq 100, Dow, Russell 2000

Currency

Euro, Japanese Yen, British Pound, Australian Dollar

Interest Rates

Treasury bills, treasury bonds, Eurodollar, swaps

Metals

Copper, gold, platinum, silver

 

 

When deciding what to trade, you might want to consider what you already know. For example, if you’ve 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 ExxonMobil for 30 years, you might want to focus on energy initially since you probably understand what drives the direction of the oil market. 

Once you’ve chosen a market category, the next step is to narrow down the specific instruments you want to trade. If you already have some familiarity with energy, for example, you can choose from crude oil (one of the most popular futures contracts), natural gas, refined products, biofuels, coal, electricity and petrochemicals. There are numerous contracts within each of those categories. If you focus on crude, for example, you can trade West Texas Intermediate (WTI), Brent Sea or a host of other options.  (For related reading, see Introduction to Trading in Oil Futures.)

 

Crude oil futures and options contracts available from the CME.

A good place to find a listing of the available futures products in the energy segment, as well as contract specifications and margin requirements, is CME Group's energy product lineup. Similar pages exist for the other product categories as well. Ultimately, after doing some homework, you’ll be able to make decisions regarding the product(s) you want to trade. The next step is to decide what type of trades you want to make. 

Trade Types

A good place for beginners to start is to buy or sell a futures contract – just like you would a stock. If you buy a contract to go long, you expect to profit from a rising market. Even though your losses could be substantial, they’re considered limited because price can only go as low as $0 if the trade moves against you.

If you sell a contract to go short, on the other hand, you expect to profit from a falling market. Once price reaches your target level, you buy back the contract (buy to cover) to replace what you originally borrowed from your broker. Trading short positions is an important part of active trading because it allows you to take advantage of both rising and falling markets – but it’s important to understand the potential for large losses since price can theoretically continue rising forever in the wrong direction. You can manage this risk by always trading with a protective stop-loss order. (For more, see The Stop-Loss Order: Make Sure You Use It.)

Spread trading is another strategy used by futures traders. With spread trading, you enter a long and short position in related futures contracts at the same time. The idea is to profit from the price difference between the two contracts while, at the same time, hedge against risk. For example, you could buy an S&P 500 contract for March delivery and sell an S&P 500 contract for June delivery. Or, if you’re an oil trader, you might buy a futures contract on WTI crude and sell a contract on Brent, betting that the price difference between the two will change.

One other strategy we’ll mention here is hedging, where you sell a futures contract to offset a position you have in the cash market. For example, if you are long a large portfolio of stocks that you don’t want to sell for tax reasons, 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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