Futures Trading Basics Explained

 

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Trading Futures was created to match commodities buyers with sellers. There are two types of futures traders, the physical and the financial trader. The physical trader either has product he wants to buy or sell. The financial trader is trading for pure speculation that the price will change providing a profit.

 

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. The following will help you understand what the product really is that you will be trading.

 

Futures are the major grains, meats, metals, energies, and many other products necessary to modern life.  The purpose is to help a manufacturer control future cost of their needed inventory. At the same time letting 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.

There are 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.  This gives you as a trader the opportunity to trade these indices by using Futures.  They do not include an actual deliverable product so they are what is called cash settled.

Futures Contracts

 

For the purpose of this explanation, will focus the ES (S&P 500 mini index).

 

ES is traded in 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.

 

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

Futures Trading month details: 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 trading futures we keep all our trading in the contract that has the highest volume.

 

Futures Trading Leverage

One more important fact of futures trading is the leverage factor.  Leverage can be a great thing, however can also be very hurtful, so respect it and follow your rules!  Each contract of ES 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 your 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, it is best for you to get out of the trade.  If it was right,  collect your increase into your trading account, just like stock trading.

If you are interested in trading with us you can visit our Products page.You can also find out more about futures trading details by visiting https://www.investopedia.com/terms/f/futures.asp.