How To Trade Futures
Welcome to Trading Brokers step by step guide to trading futures online. Here you will find an easy to understand explanation of futures trading. This includes how to trade futures online, what you need to trade futures and how to open a trading account with a broker so that you can start trading futures online today.
What are futures contracts?
Futures contracts are an agreement to buy or sell a specified asset at a certain date and price. The asset can be tangible commodities such as grain, beef, corn, crude oil and metals. They can also be stocks, indices, commodities and currency pairs.
Trading futures can be a way for producers and suppliers of various commodities to try and avoid market volatility whilst investors can speculate on the price movement of the commodity in order to try and make a profit.
Standardized contracts help to ensure the ongoing stability of the futures market whereas supply and demand determine the commodity prices.
Futures give the buyer the obligation to buy the underlying market, and the seller the obligation to sell at or before the contract’s expiry.
What is the futures market?
A futures market is a central financial exchange for trading futures where you can buy and sell futures contracts. The New York Mercantile Exchange, the Chicago Board of Trade, the Chicago Mercantile Exchange, the Chicago Climate Futures Exchange, the Kansas City Board of Trade and the Minneapolis Grain Exchange are amongst some of the more popular futures exchanges.
How does futures trading work?
Futures trading works by speculating on the price of an underlying futures market. Traders will look to go long (buy) a futures contract if they believe the price will rise or short (sell) a futures contract if they believe the price will fall. The difference in price between the price at the start and expiry date of the futures contract is the profit or loss from the contract. For each futures trade, there is a winner and a loser.
Futures are traded in a different manner to the more traditional stocks and shares. Futures are trades in contracts. Each futures contract has a standard size which is set by the futures exchange that it is traded on.
As an example, the futures contract size for gold is 100 ounces. Thus, if you are buying one gold futures contract, you are in control of 100 ounces of gold. If the price of gold increased by $2 an ounce, your position will change by $200 ($2 x 100 ounces). Each futures contract and commodity have their own unique characteristics.
Where to trade futures?
ASIC, BVI, CBI, FFAJ, FSA, FSCA
Min $100 Deposit
FCA, CFTC, NFA, BaFin, FINMA, ASIC, FMA, MAS, FSA, FSCA, DFSA, JFSA, METI, MAFF
Min $250 Deposit
ASIC, FCA, DFSA, SCB, CySEC, BaFin, CMA
Min $200 Deposit
ASIC, CySEC, IFSC
Min $5 Deposit
Why trade futures?
There are some advantages to trading futures, and that includes the ability to buy long and sell short when speculating on prices. You can trade futures on a wide range of markets including stock futures, index futures, commodity futures, forex futures, bond futures and more.
You can trade futures contacts with leveraged positions when speculating which means that you are able to control a larger position size than you would have been able to do without leverage. However, whilst leverage can amplify potential profits, it also increases the potential loss if the market turns against you. It is imperative that you have a clear understanding of leveraged trading and the significant risks involved before you start trading futures with leveraged positions.
Futures contracts can also be used by corporations, fund managers and investors to hedge against losses elsewhere. Some will look to offset their price risk by obtaining a futures contract on a futures exchange, hereby securing themselves of a pre-determined price for their product. They are using their futures contract to try and reduce the overall risk of their investment portfolio.
For example, if an investor owned shares in companies that are listed on the FTSE 100 and were concerned about their value falling, they could short a FTSE 100 index future in order to try and offset a proportion of the share position losses.
How to trade futures?
If you have taken the time to read through the above, you should hopefully have an understanding of the futures market and how to trade futures. Here is a summary of the key steps:
1. Decide if futures trading is for you
Trading futures online carries an element of risk and can take more time than other forms of investing. You will need to research futures, manage your futures contracts, follow market news and decide how to react. It is important to understand the learning process, dedication and risks that comes with trading futures online.
2. Educate yourself
Before trading futures, it is imperative that you learn as much as possible about investing and the futures market. Any mistake could prove to be costly. There is an abundance of free educational materials provided by many online brokers that can help you to improve your trading skills and knowledge.
The majority of online brokerages will also provide a free demo trading account so that you can practice trading futures online with virtual funds in order to familiarise yourself with how they work, the trading platforms and to practice your trading strategies until you feel confident enough to open a real trading account.
3. Choose a futures broker
In order to trade futures online, you will need a broker account and trading platform to execute your trade positions through to the futures market. When choosing a broker, there are a few important things to consider such as regulation, commission fees, platforms, tools, education, funding options and customer support.
If you do not have the time to research brokers, you can see a list of our best brokers that we have already prepared to help traders find a broker that meets their requirements. If you would like to know more, you can also view our detailed guide on how to choose a trading broker.
4. Research futures
If you have made it this far then you may be ready to start trading futures online! The next step is to research the different assets to discover which futures you may have an interest in trading. Perhaps there is a particular industry, product or service that is already of interest to you. Many brokers will allow you to filter future contracts according to various criteria in order to narrow down your search if need be.
With various futures markets to choose from, you should try to establish which one is most-suited to your individual trading style. Some indices such as the Germany 30 for example, can experience higher volatility than others, and may be better suited to short-term day traders.
Other markets, such as gold or silver commodity futures are often preferred by traders who have lower risk appetites and enjoy markets with lower volatility.
Many traders will begin by analysing different companies and industries, studying publicly available information such as finances, earnings and reports from professional analysts. The best brokers should have this information conveniently displayed for you within their trading platform.
5. Have a futures trading plan
Some of the most important factors that can help determine the performance of your futures contracts can be the trading plan and discipline. It is very important to have a solid trading plan personalised to your own needs that includes the money management and trading strategy that you will use. Most experts and professional traders would try to not let negative emotions such as fear, anger and greed affect their trading strategy.
6. Buy and sell futures
Once you know what futures you would like to trade online, you can analyse them to help decide if and when you will buy and sell future contracts.
Going long means that you are speculating on the value of a future increasing, and going short means that you are speculating on its value decreasing.
If you think that the underlying price of a future will increase based on your own fundamental and technical analysis, then you may consider opening a long position. If instead, your analysis suggests that the underlying market price will fall, then you may want to open a short position.
Before you open your position, you should consider adding stops and limits to your trade. Stops and limits are ways in which you can manage your risk while trading futures.
A stop order will close your position automatically if the price moves to a less favourable level, while a limit order will close your position automatically if it moves to a more favourable one.
After you’ve placed your trade, you will need to monitor it to ensure that the markets are behaving in the way that you had anticipated. If they are not, then you might want to close your trade to minimise your losses. If they are, then you might want to close your trade after reaching your target price level. This will all depend on your own money management strategy and personal preferences. Most brokers will allow you to close a futures contract trade before the expiry date of the contract arrives.
Is futures trading right for me?
Futures trading is a popular choice for active investors who would like to trade long and short with leveraged positions on a variety of different asset classes. The wide range of futures contracts means that there is ample opportunity to look for trades.
Traders who would usually trade CFDs, trade ETFs, trade options, or trade bonds, may look to diversify their portfolio. Professional investors and companies may consider using futures to hedge against losses.
However, it is important to understand the significant risks involved with trading futures, especially when using leveraged positions. Most experts would suggest trading on a demo account with virtual funds to begin with.
This can be a useful way to familiarise yourself with how to trade futures and using trading platforms whilst allowing you to practice your trading strategies until you feel confident and produce consistent results. Most futures brokers provide unlimited demo accounts free of charge.
Not sure which futures broker to trade online with?
If you are still unsure which futures broker is the best for you to trade online with then you can use our free online broker comparison tool to quickly compare futures brokers based on regulations, minimum deposit, leverage, spreads, commissions, funding options and more. You can also read our broker reviews and choose from our best brokers, best trading platforms, best social trading platforms and best trading apps. If you would like to look for the best trading brokers in a particular country, we have pages dedicated to our best brokers USA, best brokers UK, best brokers Australia, best brokers South Africa and best brokers Canada.
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