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

Futures could be useful, however, to invest in assets outside of standard stocks, bonds, and real estate investment trusts (REITs). Instead of buying an energy stock, for example, you could buy a futures contract for oil. Trading platforms for futures trading should align with your trading strategy and financial situation—the same way you would choose to a platform for any other financial transactions. Some key considerations you may want to take into account include how intuitive it is and whether it offers multiple order types.

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. The minimum amount should be on your account at any given time, usually between 50% to 75% of the initial margin. More advanced traders may want a platform that provides application programming interface (API) access to allow algorithmic trading functionality. Active traders should select a futures platform with a mobile trading app that lets them execute trades and manage positions on the go.

Speculation on price movements

Futures prices can turn on a dime, rapidly sinking even the most seasoned investors. Without prudent safeguards like stop-loss orders that trigger automatic sell-offs before additional losses and the self-discipline to avoid recklessly large gambles, futures traders can court ruin. Futures markets enable parties to hedge, speculate, or perform price discovery and delivery all through a standardized mechanism. Those participating in the futures market range from producers and consumers managing risk to speculators and firms placing sophisticated bets.

When the contract is close to the exercise date, they can easily sell the contract, hopefully for a gain. On the other hand, a futures trading plan that’s centered around fundamental analysis might generate buy or sell signals based on crop or energy inventory reports. For instance, a trader may short https://forexanalytics.info/ an oil futures contract if weekly oil inventories grow at a faster pace than analysts had expected. Of course, some traders may incorporate both technical and fundamental analysis into their futures trading plan.

What are the main benefits of futures trading?

Speculators are individual investors who want to benefit from the underlying asset’s price movements and don’t want to receive the physical assets. Their only interest is to earn a profit from trying to predict the price changes, which is why they close their positions before the futures contracts expire. Individual investors have also grown active in futures, enabled by user-friendly online brokerages.

Financial futures

The buyer of a futures contract must take possession of the underlying stocks or shares at the time of expiration and not before. American-style options give the holder fxtm forex broker review the right, but not the obligation, to buy or sell the underlying asset any time before the expiration date of the contract. Futures trading commonly refers to futures whose underlying assets are securities in the stock market.

Short-term traders often work with front-month contracts, while long-term investors might look further out. Another consideration is that if an investor trades multiple futures contracts, it can be difficult for them to monitor their respective expiry dates. As these contracts approach these dates, their value can change sharply, potentially losing their worth. Futures trading is a way to speculate on or hedge against the future value of all kinds of assets, including stocks, bonds, and commodities. Trading futures can provide much more leverage than trading stocks, offering the possibility for very high returns but with very high levels of risk.

If the value of the contract is $180,000 and the initial margin is 10%, you’ll need to provide $18,000 in cash. Be sure to ask around to find the broker that works best for you based on price and services. 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. Profitable futures are taxed on a 60/40 basis, meaning that only 40% of profits are taxed with the standard income tax rate, and the rest, 60%, is taxed as long-term capital gains. Moreover, a trader can opt to use spread trading between two correlated markets, as different needs tend to move in the same direction.

Futures trading strategies

1. While they have commonalities with other derivatives and financial securities, futures contracts have a distinct purpose, and their differences need to be well understood.
2. Trading futures instead of stocks provides the advantage of high leverage, allowing investors to control assets with a small amount of capital.
3. Once you’ve made your first futures trade, you can rinse and repeat, hopefully with great success.
4. For speculators, futures offer more ways to diversify than investing in stocks.

It may also be difficult to juggle and monitor expiry dates, especially if investors trade multiple contracts. Finally, traders run the risk of having to take physical delivery of the underlying asset if they don’t close out or roll their positions into an offsetting contract by the expiry date. When equities are the underlying asset, traders who hold futures contracts until expiration settle their positions in cash. The trader will pay or receive a cash settlement depending on whether the underlying asset increased or decreased during the investment holding period.

For example, agricultural companies might want to lock in prices for this year’s harvest, or airlines will choose a set jet fuel price since oil prices can be volatile. Comex gold futures and crude oil futures are some examples of futures contracts. This kind of trading can be very complex, so it is wise to conduct substantial due diligence before getting involved. It might be a good idea to spend a few months taking part in so-called paper trading so you can test out your strategy without putting money at risk. One more aspect of futures trading that might attract interested parties is the fact that these contracts make use of leverage, which can potentially amplify returns. However, investors should keep in mind that harnessing leverage can also increase potential losses.

Five reasons why traders use futures

The CFTC establishes rules, monitors market activity, and enforces regulations to prevent manipulation and ensure a fair and transparent marketplace. These speculative powerhouses trade their capital with algorithmic trading, often at lightning speed. Prop shops leverage sophisticated technologies and quantitative strategies for fleeting market inefficiency.

The index is 5,000 points, and the futures contract is for delivery in three months. Each contract is $50 times the index level, so one is worth $250k (5,000 points × $50). In futures trading, traders only need to post a margin, a fraction of the contract’s total value. If the initial margin is 10% of the contract’s value, the trader deposits only $25,000 (10% of $250,000) to enter the futures contract. If the index falls by 10% to 4,500 points, the value of the futures contract decreases to $225,000 (4500 points x $50). Traders face a loss of $25,000, which equals a 100% loss on the initial margin.

Getting started trading futures requires you to open a new account with a broker that supports the markets you want to trade. Another way to hedge using futures is if you own a broad and diversified portfolio of stocks and want to protect yourself against downside risk. Futures are derivative contracts that let you speculate on the future price of some asset or commodity, or to let you hedge against existing positions. Because they utilize leverage, futures can amplify your bets, making for larger returns, but also larger losses.