The ultimate guide to futures trading
Futures trading is the process of buying or selling a contract to buy or sell a set amount of an asset at a specific time in the future. The contract’s price is agreed upon by both the buyer and seller when the contract is created.
The purpose of futures trading is to allow market participants to hedge their risks or speculate on the movement of prices. You can use futures contracts to protect businesses against price fluctuations in commodities, such as oil or wheat, or financial instruments, like stocks and bonds. Or you can use them for speculative purposes to make profits if the underlying asset’s price moves in the right direction.
Decide what you want to trade
The first step in futures trading is deciding what asset you want to trade. You can trade futures contracts on various assets, including commodities, stocks, ETFs, and currencies. Your choice will depend on your investment goals and trading strategy.
If you want to trade commodities, you can choose from various futures contracts, including those on energy, agricultural products, metals, and livestock.
You can trade stock index futures, such as the S&P 500 or the Dow Jones Industrial Average, if you’re interested in stocks. You can also trade individual stock futures based on the price of a specific stock. ETFs are another option; many ETFs track different indexes, sectors, or countries.
Currencies are another popular asset class for futures traders. The most popular currency futures contracts are those on the US dollar, euro, British pound, Japanese yen, and Swiss franc.
Reversal trading involves buying contracts when prices are reversing from a downtrend to an uptrend and selling them when prices are reversing from an uptrend to a downtrend. There’s also this strategy called mean reversion trading wherein traders take advantage of the price movement of an asset with the belief that it will revert to its original long-run price. This approach particularly relies on economic cycles and mean reversion.
Find a broker
You’ll need to open an account with a futures broker to trade futures. There are many different brokers to choose from, so it’s essential to research before selecting one.
When comparing brokers, be sure to look at their trading fees, margin requirements, and minimum account size. You’ll also want to ensure the broker offers the products you’re interested in. You can find a broker on this site.
Understand the contract specifications
Before you start trading futures, it’s essential to understand the contract specifications, including tick size, the value of the contract and the margin requirements.
The tick size is the smallest increment of a price change that can occur in a futures contract. The value of a contract is the price at which it can be bought or sold. The margin requirement is the amount of money you need to deposit with your broker to open a position.
Choose your trading strategy
There are many different trading strategies you can use when trading futures, including trend following, breakout, and reversal trading.
Trend following involves buying contracts when prices are trending higher and selling them when prices are trending lower. Breakout trading involves buying contracts after they’ve broken out of a price range and selling them after they’ve returned to the range. Reversal trading involves buying contracts when prices are reversing from a downtrend to an uptrend and selling them when prices are reversing from an uptrend to a downtrend.
Place your order
When placing an order, you’ll need to specify the type of order, the contract you want to trade, the number of contracts, the price you want to buy or sell, and the expiration date.
In futures trading, you can place various orders. The most favoured are market orders, limit orders, and stop-loss orders. Market orders are executed at the current market price. Limit orders are executed at a specified price, and stop-loss orders are used to limit losses.
Manage your position
Managing your position includes setting a stop-loss order and monitoring your margin levels.
A stop-loss order automatically closes your position at a specified price, which is essential if you want to avoid losing more money than you can. You can also use a trailing stop-loss order, which adjusts the price at which your position will be closed as the market moves in your favour.
Your broker will require you to maintain a certain margin level in your account at all times. If your margin level falls below the required level, they may close some or all of your positions.
Collect your profits
When you’re ready to collect your profits, you can sell your contracts at any time. The selling price is the same as the current market price. Should you choose to hold your contracts until expiration, you will be paid the difference between the contract price and closing price.