In order to introduce futures market trading, we will be covering following topics: What is Futures Market, When Can you Trade Futures, types of futures, contract specification, margin requirements, Advantages of Trading Future Contracts, Disadvantages of Futures Contracts.
What is Futures Market?
Futures are financial contracts to buy or sell an asset at a set date in the future for a fixed price. It benefit investor by allowing them to offset or assume the risk of a price change of an asset over time. Futures contracts are available for a variety of markets including commodities, stock indexes, currencies, and more. Different-sized contracts allow traders to participate in these markets with reduced financial commitment.
The best way to understand futures is to understand a brief history of futures and how it all started. At the beginning of the monetary exchange, goods were often exchanged or “traded” for payment. As time went on, purchasers of goods realized there were some goods they needed throughout the year, but not right now.
If traders immediately bought all the goods they needed for the year, there was a good chance that those items would perish before being needed or used. Not to mention, if they chose to wait to purchase the goods until later in the year, there was a high probability the cost of goods would rise.
The entrance of futures in the market allowed purchasers to enter into a transaction in the present while still allowing them to collect the purchased goods at a later date. Purchasers were able to lock in the present price for goods delivered at a future date. This new trading practice benefited sellers too.
Sometimes sellers were not ready to part with their items quite yet. This is when futures trading came in handy. It allowed sellers to also lock in a price for a future sale. In short, both sellers and purchases of futures were able to limit their price risk.
When can you Trade Futures?
One of the many benefits of trading futures is the ability to trade around the clock. Futures markets trade nearly 24 hours a day, 6 days a week, from 6:00 p.m. ET on Sunday to 5:00 p.m. ET on Friday. This longer trading day allows futures traders more flexibility and the freedom to manage positions almost any time of day. Trading hours for futures contracts are determined by their respective exchanges. Each category, such as the energy or equity index, has its own opening and closing times. View the trading hours for each futures exchange here:
Advantages of Trading Future Contracts
- Limit downside risk in stock positions with futures
- Future trading is agnostic to market direction
- Take a consolidated view of markets or sectors
- High Liquidity
- No Time Decay Involved
- Stable Margin Requirements
- High Volatility
You can learn more about these advantages here.
Disadvantages of Trading Futures Contracts
- Settlement Risk
- No Control Over Future Events
- Complicated Products
- Leverage Issues
- Expiration Dates
- High Volatility
- Price Limits
You can learn more about these disadvantages here.
Different Types of Futures markets?
When trading futures there are many opportunities to trade different markets as well as trade different sizes of contracts. Futures give traders the ability to trade standard, e-mini and micro e-mini contracts. These smaller-sized contracts allow traders to trade smaller contracts in liquid markets with a reduced financial commitment and increased buying power.
- Stock Index Futures: Some of the most popular futures markets to trade are stock index futures. Traders can use index futures to speculate on the price direction of the S&P 500, Nasdaq-100, the Dow, and Russell 2000, just to name a few
- Crude Oil Futures: Micro Crude Oil futures from the CME Group provide an ideal opportunity for traders to experience the benefits of oil futures trading at a reduced cost. With a smaller contract size, more traders can now take advantage of the leverage and liquidity of one of the largest commodity markets.
- Natural Gas Futures: One of the most popular contracts available to trade Natural Gas is CME Group’s NYMEX Henry Hub Natural Gas (NG) Futures. Natural Gas is the world’s third-largest physical commodities futures contract & NG futures serve as a global benchmark for this market.
- Metal Futures: Metal Futures from CME Group is designed for active traders looking to trade physical gold and silver in smaller increments or those seeking to trade a cost-effective alternative to the larger metal contracts.
- Forex Futures: When compared with spot forex, currency futures trading offers considerable advantages for traders. From transparency on a regulated exchange to the absence of uncertain transaction costs, there are many reasons to explore trading forex futures.
- Cryptocurrency Futures: Micro Bitcoin futures (MBT) & Micro Ether futures (MET) are the latest addition to the suite of ever-growing Cryptocurrency products from CME Group. These cryptocurrency futures contracts allows traders to get long or short to position themselves for movements in the price of Bitcoin and Ether.
How Contract is Specified in futures amrket?
Various exchanges that offer futures provide this information on their websites, you will find contract specifications (“Contract Specs”) with all required information to know about your trades.
The following is a summary: Product code represents what ticker symbol they have. For example, the S&P 500 mini futures contract has a product code of “ES”. Each contract is calculated in points. For instance, the ES contract has a total point value that is $50. Trading hours vary from one product too another but most nowadays trade 24-hours over a 5-day week.
A point value can further be refined to ticks. For example, one ES contracts consists of four ticks.
You can see the table for point value, tick value and margin data on this page.
Futures Market Margin Requirements
Margin and leverage are considerations for managing the risk, which is one of the most important factors for trading. But just because leverage is available you should consider carefully how much of it to use for your trading, If you are a responsible trader then you will use minimal amounts of leverage.
Margin is the amount of capital needed to buy or sell one futures contract. It can be though of as a type of deposit. It is same as margins in other leveraged markets such as Forex, stocks, or another financial asset. In futures there are two types of margins: initial margin and maintenance margin.
The initial margin is the amount that is required by the exchange to enter into a position, whereas maintenance margin is the minimum amount required in your account to hold a position. If your account declines below the maintenance level you may get a ‘margin call’.
This introduction to futures market can be summarized as
Futures are traded on regulated exchanges and can be accessed through a futures broker similarly to other markets such as stocks, options, and currencies
Contracts are available on the all the major asset classes; equity indices, commodities, interest rates, and currencies
It is important to understand the contract specifications of the market you are trading
Leverage is available, but keep in mind it needs to be used responsibly within a risk management framework