Become Futures Trader - What is Futures Trading?

To become a successful futures trader, it is crucial to first understand what futures contracts are and how to trade them effectively before proceeding.

What is Futures Trading, Trading Indices, Commodities and Stocks?

What are Futures? - Become Futures Trader

Futures are traded via contracts - agreements between two parties to buy or sell a commodity or financial instrument at an agreed-upon price on a future date.

The quantity of the contract and lot is specified

The day of the delivery date is also specified

The above are also specified in the contract. These are known & referred to as "specifications"

At the opening of this lot, everything is set but not the opening price (delivery price is set, this is opening price for the start of the contract trading.)

Futures can either be Commodities or Financial Instruments

Commodities - Gold, Silver, Coffee, Wheat, Corn, Soybean, Oil, Natural Gas

Financial/Trading Instruments - Shares, Stocks, Stock Index such as Nikkei, Dow Jones, DAX, FTSE, NASDAQ, S&P, SMI, Euro Stoxx and Cac 40.

Unlike FX, the Futures market is all in one place: these financial products are traded in one central place, meaning all trades happen in that market. This also makes futures trading very easy to buy and sell, and there's always someone ready to trade at any moment. Traders also like trading these contracts online more than getting them as actual physical items.

Contracts for futures have expiration dates. When one ends, it closes out, and goods go to the holder. Trade coffee futures? You get beans delivered if you hold past expiry. Most brokers close positions early to skip delivery. Traders keep cash instead of goods.

How Futures Work?

Take a wheat miller and a farmer starting to plant. They agree the miller buys the wheat at harvest in three or four months. Price is set at $1,000 per contract. Over the next months, these futures trade in the market. At delivery in three months, if price drops to $900, the farmer gets $1,000. The trader pays the $100 gap and loses. If price hits $1,200, the farmer gets $1,000. The trader gains $200 from the spot.

Therefore, the farmer is sure after 3 months: he will get paid $1,000 dollars per the contract specification produced irrespective of whether the price of wheat in the market goes up or goes down within that period.

However, a futures contract will get traded my many traders within these three months and most traders will speculate by trading a contract and holding it for a duration ranging from minutes, hours, days or even weeks. A trader will speculate for an up or down move from which they can make a profit.

This means that futures contracts are watched closely every day, and the profits and losses for that day are given to whoever holds the contract at that time.

How Do I Trade - Become Futures Trader

Like Forex, the futures trading market also uses borrowed money to trade. Therefore, instead of using $10,000 to buy shares as in the stock market, you can trade these shares in the futures market and buy, for example, five times the amount of your money if you use a borrowing amount of five times. This is what makes the futures market more appealing due to the borrowing option, as traders can open more trades with the choice of trading with borrowed funds.

Futures contracts also have a set time limit before they expire, and after that time, you can't trade that specific futures trading instrument anymore because the contracts are settled and the actual goods named in the contract are delivered after that date.

Commodities

On most trading platforms, the most common futures you can trade through brokers are XAUUSD, Silver, and Oil.

Indices

E - mini futures are available for electronic trading. These eminis are popular due to their liquidity and the leverage options offered to trade them. Indices in the financial trading markets can be traded and transacted as futures contracts, the index is drawn as a chart & this chart is then traded as a financial instruments. (e minis are smaller contracts of the Maxi futures contracts, Maxis are only traded by Floor traders and not online, e minis on the other hand are designed specifically for electronic trading through online computer networks. Eminis move $50 dollars while Maxi Contracts move $250 per point)

So, the E - minis are typically what most brokers offer for trading because the eminis are made for trading online using computers.

Examples include : Nikkei, Dow Jones, DAX, FTSE, NASDAQ, S&P, SMI, Euro Stoxx & Cac 40.

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