New to Futures

Basics explained

Futures trading can seem intimidating when a trader looks at them for the first time,even if they have experience in trading other products.  However there is no need to be afraid of futures trading.  After a little time, you may even find them much easier than trading stocks.

Futures today can be traded as easily as buy and selling stocks, all with the click of a mouse to buy and one more to sell, technically no harder. However before trading them it is always a good idea to understand the product into which you are about to invest your hard earned money.

Futures are the product used to trade/hedge/speculate on the direction of physical product or commodities.  These include the major grains, some meats, metals, energies, and many other products necessary to modern life. The Futures market was created so producers and users of the products can speculate on the value of the item in the future.  The purpose is to help a manufacturer control future cost of their needed inventory and, at the same time, let producers, like farmers, be able to control the price at which they sell the product.  Futures contracts can be used to take actual delivery of the product that each contract represents, hence terminating the contracts obligations.  There is also a few other Futures products that have nothing to do with commodities but have been made available to be traded using the Futures market place.  These are the major cash indices like the Dow Jones or the S & P 500. A Futures product was created so it mirrors the cash index.  This gives traders the opportunity to trade these indices by using Futures.  They do not include an actual deliverable product so are what is called cash settled.

As stated above,  a Futures contract, (and that is correct – they are a contract),  is a contract that you are trading.  With every contract there is a date of settlement or closing.  So unlike stock that you can buy and hold for the rest of your life, futures have a fixed length of time for which the contract is good.  So you can not buy and hold forever; the contract will simply vanish at the time of expiry.  Now that may sound like a scary thing, but that is not so bad.  There are things a speculator can do to avoid seeing their money just go down the drain.

For the purpose of this explanation, and due to the fact that most of this web site is about the ES Future, it will be the future contract of the SPX cash index (S&P 500) I will use.  I will describe the character and process of trading the ES.  With a little homework, you can then apply this knowledge to the other products. We will not talk about delivery because very few, if any of us,  will have a broker that will work with delivery.

S&P 500 futures is the ES contract.  The hardest thing about trading them might be that each broker uses a different way to show the symbol in their platforms.  However,  the basic concept will be similar. In the ES the contracts are broken into 4 contracts each year (some futures are monthly,  like oil) and each contract month uses a letter to indicate what quarter the trader is looking at. There is also a thing called a continuous contract, and that is your charting platform stitching each contract together so you have a chart that just keeps going.. It makes your chart look like one big contract.

The following is the way one popular trading platform requires the ES symbols to look like to be able to trade the ES futures on that platform.

/es = continuous es contract (making every month in history looking like one

/esh7 = es contract in the year 2017 and the month of March

The following is the letter codes for each month and in red/bold are the 4 that the ES uses.

January = F

February = G

March = H

April = J

May = K

June = M

July = N

August = Q

September = U

October = V

November = X

December = Z

When charting the individual contracts you will see on the left side of the chart very low volume that increases right to the day it just stops trading. And as the closest contract (front month) get closer to expiry,  the next contract (back month) is growing in volume to the point about 6 to 10 days before front expires,  the back month has more volume. So one more example /ESU7 is ES = product, U= month, and 7=year.

One more important fact of futures trading is the leverage factor the trader is provided. Now here is the crime scene caution tape.  Leverage can be a great thing, however can also be very hurtful, so use with extreme care.  Each contract of ES that one trades you control around $100,000.00 of value (current es price x $50.00 = value of contract), and you do this with about 20 times less cash in the trade.  This is why every 25 cent move in the Es you gain or lose $12.50 in your account.

After all is said and done in explanation of futures, the simple thing to remember is to set trading rules, and stick to them! When it is time to buy or sell you just have to click your mouse just like trading a stock.  And if it was wrong,  due to the leverage, it is best to get out of the trade.  If it was right,  collect your increase into your trading account, just like stock trading.