Futures Trading Basics

What Are Futures?

The basic concept of futures is that a futures trade is an agreement between two parties to buy or sell a futures contract at a specific price and time in the future.

You can buy or sell a futures contract across a wide range of markets including stock market indexes, bonds, gold, crude oil and much more.

Trades take place on a centralized exchange that matches and guarantees transactions. Traders can take either a long position (buying the contract) or a short position (selling the contract), depending on their market outlook. Futures traders can then profit based on the outcome of that market outlook prediction.

What is a futures contract?

A futures contract is a standardized exchanged traded contract between a buyer and seller for a specific financial instruments or physical commodity, to be settled at a specified price on a specific expiration date.

A futures contract can be settled in cash, or the buyer can take delivery of the physical commodity based on exchange rules and contract specifications. Each futures contract represents a certain amount of a product or commodity. For example a Gold Futures contracts represent 100 ounces of gold.

In today’s electronic futures marketplace, buyers and sellers are matched and cleared at a well-regulated central exchange, and there is transparent price and order data provided in real- time throughout the trading session.

Benefits Of Trading Futures Contracts

Flexible Trade Sizing

Traders of all experience levels can participate in futures due to a variety of contract sizes available which helps limit financial exposure.

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Diverse Market Opportunities

Access diverse and uncorrelated markets that drive the international economy including vital commodities which otherwise are difficult to trade.

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Virtual 24-Hour Trading

Trading opportunities can happen at any time including while the stock market is closed. Futures trade nearly 24 hours a day, six days a week.

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Tax Advantages

Futures trading gains are split between long-term capital gains and short-term gains providing a benefit over short-term stock trading.

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Build Your Foundation to Trade Futures

Becoming a consistently effective futures trader requires discipline to follow a trading plan, consistent risk management and emotional control.

Following a trading plan can help traders stay focused, reducing the risk of emotional decision making.

The plan should include the markets you want to trade, clear entry and exit criteria, how you are going to measure success, and more.

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Define Your Risk Management Strategy to Protect Your Futures Account

Effectively managing risk is often the difference between success and failure and can also help reduce stress when trading futures.

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Discipline And Patience Impact Every Aspect Your Ability To Follow A Trading Plan.

In futures trading, as in any profession, it is important to be aware of the role that psychology and behavior can play in your success or failure.

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What is the Relationship Between Leverage and Margin in Futures Trading?

Leverage is the ability to control a larger position with less capital, while margin is money set aside from a trader’s account as a guarantee against trading losses. These two important trading concepts work together to provide the financial framework for futures trading.

Leverage provides traders with much greater buying power than most other trading instruments and allows a trader to put on more positions and trade larger numbers of contracts than otherwise possible.
Margin is the amount of money needed in your account to open and maintain a new futures position. The margin amount is determined by the exchange and set based on potential volatility, liquidity, and pending news events.

Although increased leverage allows for potentially greater profits, it also comes with increased risk and the potential for greater losses. Defining a risk management strategy is a beneficial step to help traders protect their account.

How To Trade Futures

Like many industries and occupations, futures trading comes with its own unique processes and vocabulary that all traders should know before placing that first futures trade. Let’s get up to speed and learn how to trade futures with an introduction to order types, margins and leverage, contract symbology, and more.

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Develop The Trader In You

Get started on your futures trading journey with our exclusive video series. Watch an introduction to the basics along with actionable take aways to help you learn how to trade futures.

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Get Started With A Futures Trading Brokerage Account

A funded futures account with a licensed futures broker is required to trade futures. The first step to get started is to open a futures trading account with a reputable experienced broker. The broker will provide access to an online trading platform and a live market data connection that will allow you to trade futures contracts from your computer or mobile device.

We hope you will consider NinjaTrader as your futures broker of choice.

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Frequently Asked Questions

Futures provide access to diverse and uncorrelated markets including major market stock indexes, bonds and foreign currencies, as well as commodities like gold, crude oil, coffee, and more. This diversification allows futures traders to take advantage of many more unique trading situations and opportunities. View more benefits of futures trading.

Futures are also called derivatives, because a Futures contract derives its base value from the cash market for that product. In this article will look at the process of Futures trading which includes understanding Futures symbology, contract specifications, and Futures trading logistics.

There are many benefits unique to futures trading when compared to other asset classes. For many active traders, adding futures to their portfolio is a logical step. Hedging is a risk management strategy commonly used in futures trading which involves taking an offsetting position in the futures market to potentially lock in profit or mitigate the risk of loss and price movement in a stock portfolio or other underlying asset.

Futures contract specifications are the terms and conditions set by the exchange. These specifications outline important details related to trading a specific futures market, including items like the underlying asset, contract size, tick size, expiration date, delivery method, and any other specifications. For the CME Group, you can find contract specifications for the contracts available here.

A tick is the minimum price increment a futures price can change. Each futures market will have its own unique tick value. For example, the E-mini S&P 500 futures have a tick value of .25, and Gold Futures have a tick value of .10.

Notional value is the total dollar value of one futures contract, it is calculated by multiplying the contract size by the current price. For example, if Gold futures are trading at $2,000 an ounce, the notional value for a Gold futures contract is calculated by taking the contract size of 100 ounces multiplied by the $2,000 current price, which equals a notional value of $200,000, (100 X 2000 = 200,000). Each futures market will have its own unique contract size.

The futures markets provide direct access trading to a variety of diverse products that can affect our lives every day. The most active futures markets include Major Market Stock Indexes, US Bonds, Crude Oil and other energy products, Gold and other precious metals, Foreign Currencies, Crypto, and a wide range of Agricultural products, like Coffee, Corn, Cotton, Live Cattle, and any others.

All NinjaTrader futures symbols are comprised of three elements: The symbol root, the contract expiration month, and the contract expiration year. The symbol root is one or more characters that identify the exact futures market to trade, then a three letter abbreviation for the expiration month, and finally the two number expiration year. For example, MES DEC23 (E-Mini S&P 500), CL NOV23 (Crude Oil) , and GC APR24 (Gold).