How to Trade Futures: Platforms, Strategies, and Pros and Cons

Other benefits include exposure to actual prices, tax benefits, and lower transaction costs. With speculators, investors, hedgers and others buying and selling daily, there is a lively and relatively liquid market for these contracts. Spreading investments across markets demands knowledge and continuous position monitoring, which may lead to worse trading outcomes. Managing your risk by using tools such as stop-loss and limit-close orders can help you avoid significant losses while aiming to lock in profits. Most full-service online brokerages and trading platforms have access to futures trading. You will need to request and be granted approval to begin trading these markets.

More generally, bond futures are contracts to buy or sell a specific bond at a predetermined price on a future date. Investors use these to hedge against or speculate on changes in bond prices, which inversely correlate with interest rates. Investors, fund managers, and financial institutions use bond futures to protect their portfolios against interest rate changes or to take positions based on their interest rate outlook. Suppose an airline wants to hedge against the risk of rising fuel prices. To manage this risk, it enters into a futures contract to buy crude oil at a predetermined price.

Individual traders or speculators commonly use futures contracts to earn a profit, or corporations or hedgers use them to hedge against inflation. Whereas individual traders don’t want to own the physical commodity, institutional investors aim to avoid price increases of raw materials they need for production. Finally, futures trading is facilitated by futures contracts, commonly used by individual traders to make a profit or by corporations to lock in the prices of commodities they need for production and manufacturing.

Institutional Investors

Futures contracts require the buyer or seller to buy or sell the asset on a specific agreed future date and price detailed in the agreement. Hedgers, such as producers and consumers of commodities, can use futures in an attempt to fix prices, stabilize revenues or costs, mitigate the risk of price fluctuations, and add predictability to their businesses. For example, a farmer might sell wheat futures before harvest to secure a price, while a food manufacturer might purchase wheat futures to lock in raw material costs. Watch this short video for details on initial margin, marking to market, maintenance margin, and moving money between your brokerage and futures accounts. Some ETPs carry additional risks depending on how they’re structured, investors should ensure they familiarise themselves with the differences before investing.

Chicago SRW Wheat futures example

If you think that the underlying price of a future will increase based on your own fundamental and technical analysis, you’d open a long position. If, instead, your analysis suggests that the underlying market price will fall, you’d open a short position. If the market moves in your favour, you can close your position for a profit.

The risks of futures trading: margin and leverage

1. Equity index futures are one of the most popular futures contracts, providing another way for investors to trade on price movement in the stock market.
2. Trading futures instead of stocks provides the advantage of high leverage, allowing investors to control assets with a small amount of capital.
3. Currency futures should not be confused with spot forex trading, which is more prevalent among individual traders.
4. He holds dual degrees in Finance and Marketing from Oakland University, and has been an active trader and investor for close to 10 years.
5. The buyer of a futures contract must take possession of the underlying stocks or shares at the time of expiration and not before.

Some indices – like the Germany 40 – experience higher volatility than others, and could be better suited to day traders for example. Whether you go for futures that are traded on-exchange through our US-listed product offering or direct futures trades between two parties with us – via spread bets or CFDs – you can go long or short. So, you can profit from markets that are rising as well as ones that are falling, provided your predictions are correct.

A commodity futures contract is an agreement to buy or sell a predetermined amount of some commodity at a given price on a specific date. Like all futures contracts, commodity futures can be used to hedge or protect an investment position or to bet on the directional movement of the underlying asset. Proprietary trading firms trade their own capital, not that of clients. These firms are in the business of making speculative trades to benefit directly from market moves.

This approach necessitates transactions and a substantial amount of capital. Futures contracts are agreements between two parties to buy or sell an asset at a future date. You should familiarise yourself with these risks before trading on margin. Futures trading provides investors with a fast and cost-effective means of accessing global financial and commodity markets. Investors can speculate or hedge on the price direction of the particular security or instrument they’re trading. A futures contract is a legal agreement to buy or sell an asset at a predetermined price at a specified time in the future.

Short-term traders often work with front-month contracts, while long-term investors might look further out. All in all, when speculating underlying asset prices of futures, technical analysis is recommended. As a beginner, start small, choose a reputable broker, and opt for an asset class you are most familiar with. The maintenance margin for that same contract is $1,400, which is set by the broker and is a required minimum on your account at all times. If the money on the account drops below $1,400, the trader must make an extra payment to return it to the initial margin. Whereas the futures exchange is the one setting the initial margin, your broker will require you to have additional funds in your account, called maintenance margin.

What is a futures market?

Concerned about potential short-term market volatility, the fund manager hedges the portfolio against a possible market downturn using S&P 500 futures contracts. Hedge funds are managed pools of capital with wide latitude in generating returns for their investors. In the futures market, they may participate as speculators, leveraging their substantial capital to bet on the direction of commodity prices, interest rates, indexes, and other assets. Hedge funds often employ sophisticated trading strategies, including long and short positions, to capitalize on predicted market moves. Their activities can significantly influence prices because of the large volumes of trades they execute. Market makers provide market liquidity by staying ready to buy and sell futures contracts at publicly quoted prices.

That asset might be soybeans, coffee, oil, individual stocks, exchange-traded funds, cryptocurrencies or a range of others. Futures contracts can be used by many kinds of financial players, including investors and speculators, as well as companies that actually want to take physical delivery of the commodity or supply it. On the other hand, institutional investors or retail traders may use futures for speculation and attempt to profit from volatility and price trends. When trading futures, speculators can use leverage to manage positions for crypto miners bitcoin’s halving could mean a doubling in costs with only a portion of the total contract value, which can increase both profits and losses.

Measured by volume, most futures are traded by commercial or institutional entities. Of these, most are hedgers looking to cut their risk of financial losses, as in our examples thus far. Meanwhile, speculators trade futures contracts only to profit from price fluctuations.

How Futures Trading Works

As futures are leveraged, investors don’t have to put in the entire equity amount to enter the trade. It also makes futures trading riskier, as even though the initial margin is low if the trade goes against you, investors risk losing more money than they invested. Open an account with a broker that supports the markets you want to trade. A futures broker will likely ask about your experience with investing, income and net worth. These questions are designed to determine the amount of risk the broker will allow you to take on, in terms of margin and positions. Someone wanting to hedge exposure to stocks may short-sell a futures contract on the Standard & Poor’s 500.

Hedgers are not primarily motivated by profit but by the need to manage risk related to their business or investment portfolio. Impact on your credit may vary, as credit scores are independently determined by credit bureaus based on a number of factors including the financial decisions you make with other financial services organizations. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services.