Futures trading is one of the more exciting markets you can operate, because there is a broad spectrum of securities to trade. Also, you can start trading with small money amounts thanks to leverage.
To start trading, you need to begin learning the basics of this market, and here I am to help you. I will teach all you need to know so you can choose if this market suits you best for financial trading.
Keep on reading and learn what futures trading is, its benefits, and some of my best pieces of advice.
What is Futures Trading?
Futures trading is the buying and selling of contracts. And what is a futures contract? These are financial contract agreements to buy or sell a security at a predetermined date and price. You can profit thanks to the changing price of the underlying security or financial asset.
To make this explanation easier for you, I will divide the futures contracts into three main characteristics:
- The contract is the selling or buying obligation of a financial asset or security at a specific price once the expiration date comes.
- The underlying asset is the financial asset or security agreed to buy or sell in the contract. For this reason, there are futures of stock indexes, commodities, foreign exchanges, cryptocurrencies, and metals, to mention a few.
- The futures price will depend on the financial asset or security’s price.
Now you understand the three main elements.
To go further in the explanation, you shall know a brief history of the futures market.
Future contracts surged as a tool for risk mitigation in the trade of commodities such as corn, soybeans, wheat, oats, rice, and whey, to mention a few.
The reason is that if someone bought all the goods they needed, there was a chance that those items would perish before being used.
But why will someone buy all the goods at a specific time? To take advantage of the low prices.
Many future commodities have price volatility because they depend on weather conditions. That is why they can be expensive or cheaper from one time to another.
That being said, how did they solve the perish of the goods and their volatility price? With future contracts! In these contracts they agreed on a price and a future date to collect the purchased goods when needed.
For example, imagine it is January, and the price of corn is $10 per pound, but you would not need it until November. You can buy it now, but because you will use it until November, the corn could probably perish before, and you will lose your money.
On the other hand, if you wait to buy the corn until November, the price could rise to $20 per pound.
To prevent the corn from perishing and lock the price, you can agree on a future contract to buy it at $15 and collect it until November.
On the side of the seller, this helps them because they can assure a sale.
You, as the buyer, could profit if the price eventually rises. And the seller if the price goes down, since he already agreed to sell it at a more expensive price.
Following the last example, you will profit if you agree to buy the corn for $15, and then the price goes up in the market to $25. It will cost you cheaper.
On the other hand, the seller will profit if the price of corn on the market goes down to $8 because he will sell it more expensive to you, since both parties agreed on a price before it goes down.
And that is how futures trading began. Then the futures contracts extended to other assets (stocks, metals, crypto, and more), and a selling opportunity, buying and exchanging these contracts emerged.
How to do Futures Trading?
There are five essential steps you need to put into action for future trading.
1) Learn constantly
For futures trading, you need to learn about the variety of strategies to operate the markets and be aware of what is happening regarding economics, politics, and finance around the globe.
You have to be aware of innovation in the financial markets. Future trading implies operating with other financial assets linked to the agreements as stocks, metals, commodities, and now, cryptocurrencies.
Finally, keep learning about new technologies as trading platforms. Knowing this will help you automate your operation and take advantage of any existing tool.
2) Develop a critical thinking
Having a critical state of mind is fundamental for futures trading. You will need to constantly evaluate the efficiency of your operation in terms of profit and loss.
To be critical also means to be objective at the moment you are operating the market. It is always crucial to do a previous market analysis and to have a strategy to implement. By doing that, you will be more certain about your buying and selling decisions.
Another part of your critical thinking is related to something called “trading psychology”, this is the awareness of your state of mind while operating the financial markets to comprehend how you behave in front of certain situations. It helps you identify your emotions and know how to control them, so you can be more analytical and capable of avoiding the noise or rushing in your decisions.
3) Have a trading strategy
A strategy is indispensable to operate the financial markets, you should create one according to your objectives. If you are a beginner, you can adapt some proven plans and adjust them to your conditions.
A trading strategy is a plan to guide you through your operation of the financial markets. It needs to specify the amount of capital you can use in your trades, your schedule, your trading reasons, and even how professional you want to become.
4) Practice trading
There are trading simulators that can help you understand the financial markets without the risk of using real money. These trading platforms simulate the actual market behavior; thus, you can prove your trading knowledge.
Practicing in simulators is a great way to start trading: it helps you be more comfortable using platforms and understand how to operate without the fear of losing money, it will always be better not to risk your money if you have no experience. It can be dangerous for your trading career and discourage you. NinjaTrader has a great simulator for future trading for beginners.
5) Create a trading account
Having a broker is fundamental for trading: this is an intermediary between your operation and the financial market. Through you can sell, buy and exchange futures. Later in this article, I will recommend some future brokers for you.
This is how you trade futures. The process is very similar to other financial markets, but it is different because of market conditions.
Futures Trading Strategies
There are three basic strategies to operate the futures market regarding the time, effort, and amount of your trades.
1) Scalping: the objective of this trading strategy is to profit from the small price changes in securities. The trader opens and closes trades on the same day, this process could be within a few seconds or a couple of minutes.
2) Day Trading: This strategy or style consists of selling and buying securities during a day. It means that the trader opens and closes traders on the same day. So the trades last more than a couple of minutes to hours.
The objective is to profit by taking advantage of the security’s price.
3) Swing Trading: the main objective of this strategy or style is to profit from the selling or buying of securities by detecting possible upward or downwards trends. The trades must be open for more than one day until a pair of weeks or months.
Choosing a style or trading strategy should be done according to your needs. Consider your trading experience and the time you dedicate to operating the markets. For example, Day Trading and Scalping require more expertise because you have to make quick decisions and have a certain level of technical analysis.
Futures Trading Brokers
A broker is a third party that serves as an intermediary between the trader and the financial markets. It has all the permissions for buying, selling, and exchanging securities.
Many trading platforms let you connect to the broker you want. The following are some of the brokers we are familiar with:
- TD Ameritrade: this broker provides investing and trading services for 11 million client accounts.
- NinjaTrader: It is one of the most well-known brokerages for trading futures. It has tools to analyze financial markets, for simulation, and automatization for your trades.
The best broker will be the one that suits your needs; take into consideration the commissions per trade and the contact support.
Best Futures Trading Platforms
A trading platform is a software with all the necessary tools to place trades and analyze the financial markets. They have automated functions, charts, and graphs. Also, they can be connected to brokers to sell and buy securities.
These are the ones we know in MDC Trading Academy:
- Quantower: this platform can use multiple brokers and data providers and have a rich set of functionality for analysis and future trading.
- TradingView: is a charting platform and social network used by more than 30 million traders and investors.
- Thinkorswim: analyze market movements and trade products with this platform.
- Sierra Chart: professional trading and charting platform for the financial markets.
- NinjaTrader: this platform offers software and broker service for traders with advanced charting, market analysis, and trade simulation
Choosing a trading platform is crucial for your operation. Consider the usability, the connection with other brokers, and their reputation.
Benefits of Futures Trading
Futures trading has some benefits in comparison to other financial markets. To operate with many types of securities is one of the main.
The following are more of the benefits of futures trading:
- Speculation without you being the owner: you can sell or buy futures contracts at your disposition. You can operate with gold or oil without owning those financial assets.
- The futures market is open almost all days: you can trade futures contracts 24 hours a day, six days a week. The markets open approximately Sunday from 6:00 p.m. until Friday from 4:30 to 5:00 p.m Central Time (CT).
- Operate with leverage: this is the use of borrowed money to trade positions with few risks. It means you can operate with high-value contacts using small amounts of investments.
- Centralized and consolidated market: the reason is to show all the traders equal information on volume and transactions.
- Liquid market: many traders are selling and buying in the futures market; for instance, these high volume levels make it possible to execute orders at the wanted price.
Risk Management in Futures Trading
Risk management is the tool that helps you to minimize your losses. Any trader has some risk exposures, but if you make correct risk management you can protect your money and avoid losing it all.
Take in mind the following:
- Make a plan for your trades: understanding the trends and patterns in the security’s prices will help you. Learn about technical analysis and all the tools that will allow you to comprehend market behavior.
- Try the one percent rule: this is a rule to establish the amount you can use for each operation. It is a good option for not jeopardizing your money because you are limited to using only one percent of the total of your available capital.
- Use automated orders: most trading platforms let you use trader orders to automate your operation. Some of the most used are “Stop Loss” and “Take Profit.” These orders can help you to put a limit on your losses and to secure profit at the indicated prices.
- Calculate your ROI: this means Return On Investment and let you visualize the possible profit to trade with a specific security.
- Diversify: if you invest in a small number of securities, your trading portfolio will have more risk. It happens because you depend on a few financial assets. If their prices change, your whole portfolio’s total price will.
Tips for Successful Futures Trading
Like any other type of trading, you should start learning all you can. All this knowledge will help you understand how the financial markets operate. But the theory is the first half, and the practice and the operation are the second half. It is when you put to test all you have learned.
Once you understand the basics of trading, you should create a strategy and prove if it works. For this you can test it in a simulator; this is a great option to verify your trading ideas. Remember that a simulator is a representation of the real market, so you can trade without the risk of losing money. But even if it is not real, you should pretend it is to do your best while practicing.
Keeping a trading journal will help you to have a record of all your trades. This tool creates historical data of your trading operation so you can analyze it in the future to see how efficient you are. It is also a great way to keep improving your trading strategy, manage your losses and profit, and find out your weak spots and strengths.
Be sure about your trading objectives and write them down. You need a clear idea of why you are doing financial trading to have a successful career. Ask you if you want to become a professional or just to make some extra money; the answer will help you decide how involved you need to be.
How to Make Money from Futures Trading?
To make money from futures trading you have to aim to profit from the selling and buying contracts. How do you do this? With the two main trading movements:
- Short position: traders use this technique to anticipate a decrease in a security’s price in the short term. They borrow the security and sell it to another trader. Allow me to explain the process. They borrow the security and sell it to another trader, then, they buy back the securities at a lower price, and finally, give them back to the borrower. By doing so, the trader profits by selling at high prices and buying the same assets at a low price.Long position: traders apply this technique to anticipate an increase in a security’s price. The trader intends to buy a security at a low price and then sell it when the price increases. By doing so, the trader profits by buying at low prices and selling at a high price.
To anticipate these changes in security prices, you will need to learn Technical Analysis, which is the study of the trading graphs and charts to identify trends and patterns in price movements, with the objective of finding selling and buying opportunities.
Futures Trading Course
Futures trading means operating one of the more exciting financial markets, but keep in mind that you have to be prepared with the necessary knowledge to begin. Learning from experts and finding a community who can help you stay motivated is a great way to start.
If you are wondering how to learn futures trading? At MDC Trading Academy we are committed to the mission to develop professional traders and give them all the tools they need to be successful. If you want to become an expert trader, join our Senior Trader Program to learn more about futures trading, technical analysis, and trading indicators.
Be part of our trading academy and receive personal support from me and our experienced trader’s community.
What is a Futures Contract?
Financial contracts are agreements between two parties to buy and sell a security at a predetermined date and price in the future.
What are Futures Trading Hours?
Futures trading hours are the times determined by the financial markets when the traders can sell, buy or exchange futures contracts.
But, When do futures open?
For example, the CME (Chicago Mercantil Exchange) has the following trading hours:
CME and CBOT Products
Sunday 5:00 p.m. – Friday 5:45 p.m. CT with no reporting Monday – Thursday 5:45 p.m. – 6:00 p.m. CT
CME OTC FX Products
Sunday 6:00 p.m. – Friday 5:45 p.m. CT with no reporting Monday – Thursday 5:45 p.m. – 6:00 p.m. CT
NYMEX and COMEX
Sunday 5:00 p.m. – Friday 4:00 p.m. CT with no reporting Monday – Thursday 4:00 p.m. – 5:00 p.m. CT
Is Futures Trading Safe?
Yes, future trading is safe. The SEC (U. S. Securities and Exchange Commission) supervises the futures market, and the CME regulates it.
In terms of financial risk, any investment has some potential. For instance, you must include risk management tools in your trading strategy to prevent losses.
Do Futures Traders Make Money?
Yes, future traders make money. But any good trader can make money in any financial market.
If you want to make money, be sure to learn from experienced traders and create your trading strategy according to your personal objectives.
To be a profitable trader takes time and dedication; it is possible to achieve it if you are willing to put on the work.
Where can I Practice Futures Trading?
The best place to practice Futures Trading is in a simulator. There are excellent options, such as NinjaTrader.
Use a simulator to test your abilities in the market without risking your money and start getting familiar with the trading platforms.
Can I Make a Living Trading Futures?
Many people make a living trading futures, but many don’t.
If you want to make futures trading your principal income source, you will have to be committed to becoming a professional by educating yourself and practicing.
Another crucial aspect is the amount of capital you can invest. It can not be an amount that can risk your financial health. But it is an important variable to know if you can make a living with trading and will depend too on your economic necessities.
Is it Better to Trade Options or Futures?
There is no precise answer to knowing if futures are better than options. It will depend on your trading objectives to discover which financial market is better for you.
Senior Trader with more than 10 years experience trading NYSE stocks and 5 years in the Futures Markets. An Andrés Bello National University alumni with an MBA from the University of Los Andes, Bogota, Dany has more than 15 years of experience working with multinational companies in the areas of financial planning and strategy. Dany also spent 6 years as an entrepreneur in his own endeavors and now he is a motivator and teacher and has worked with over 400 traders of different countries.