What Are Futures Contracts? A Comprehensive Guide for Beginners

Trading futures is not a new career; it may be as old as the PC. Initially, this task was performed by floor traders who would scream at each other at the pits in places like Chicago. But the introduction of computers and the internet changed everything.

Can you day trade futures? Yes, traders are trading futures behind their laptops and smart devices at home. But you’ll need more than your trading platform and laptop to learn how to trade in futures. You need to be mentally prepared for a highly volatile market.

So in our trading futures for dummies guide, we’ll elaborate on everything you need to trade futures perfectly. After all, setting up your trading PC and software is just the start. Therefore, if your goal is to learn to trade futures, you have come to the right place; let’s dive right into our trading futures for beginners guide.

Exploring the Fundamentals of Futures Trading: Basics, Benefits, and Risks

As its name suggests, futures are financial instruments that include sellers and buyers agreeing to transact a particular asset at a specific future date and fixed price. Despite the above definition, it doesn’t always result in the delivery of physical goods.

Instead, investors use futures contracts to speculate on the price of the security or even hedge risk in their portfolio. Generally, they speculate on several commodities and securities using futures contracts. Some available vital futures include cryptocurrency, currencies, stock indexes, energy, and interest rates.

Currently, a considerable percentage of the futures are traded using various centralized exchanges like CME (Chicago Mercantile Exchange) and the Chicago Board of Trade.

Like other trading or strategy methods, futures contracts have some advantages and risks that you must know before trading futures. So with the above futures trading basics in mind, below are the reasons why you should or shouldn’t learn to trade futures.

Benefits

  • Leverage: basically, this means trading using borrowed cash to improve your likelihood of earning more.
  • Diversification: Futures traders can trade on a wide range of things, including stock indexes and grains. So you can diversify your portfolio.
  • You can trade around the clock: this means you can trade even after the market closes.
  • Hedging: traders can use these contracts to minimize potential losses and protect all unrealized profits.

Risks

  • With a huge margin, most traders can end up over-leveraging, which in some cases, can work against you. So you must learn futures trading before you start.
  • Managing expiry dates can be challenging: for beginners, managing these contracts with expiry dates can be difficult.

Step-By-Step Tutorial: A Practical Example of Trading Futures

With the above basics, we can now focus on how to trade futures. So here are some crucial steps to follow when trading futures:

  • Understand how futures work: generally, trading futures isn’t the same thing as regular trading. So all futures traders must understand the expectation of the sellers and buyers, but most importantly, the expiry dates. You must learn how to trade futures before risking your cash.
  • Know the above risks associated with futures trading.
  • Select the right market: as aforementioned, with futures, you have a wide range of markets to trade. You can go with stocks, treasury, and bond futures. Traders can even try interest rate futures.
  • Create a strategy, and finally, you can pick the platform: you can decide if you’re going long or short and then choose the right platform.

Like in our futures trading example, we decided to trade S&P 500 index futures. For instance, if this index created a new all-time high, we can try and fade the move, especially if we want a profit on the retracements of its original breakout, which is around $4,000.

With a management system that lets us risk 1% of our futures, the broker requires us to have a margin of about $12,000. Therefore, we went short and opened a position by placing our stop loss at 100 ticks or $30 above our entry position.

If we’re risking $1500 per trade ($15 per tick), we must have $150,000 in our account. Next, we placed our take-profit about 250 ticks below the breakout, but this will vary with your strategy. So if the market clocks our take profit, then we’ll earn $3,750 ($15 x 250 ticks).

Day Trading Futures: Techniques for Profitable Intraday Trading

Generally, there are lots of intraday futures trading that can make you can start day trading for a living. Some of the best strategies that you can learn from the best futures trading courses include:

  • Breakout trading strategy: with this strategy, timing is crucial, especially regarding decision-making. If you’re trading stocks, you must know the threshold points when the price drops or rises. You can go long if it exceeds the threshold point and vice versa.
  • Momentum trading: basically, this means never going against the trend and opening positions. The momentum can be created by a news report that can move the price up or down.
  • Reversal trading strategy: this isn’t ideal for beginners since you’ll be going against the trend. You will be looking for reversal points and then ride the change in trend. Therefore, it’s not ideal for intraday beginners. But if you perfect it, then you can earn some huge profits.

Understanding Elliot Wave Options Trading Strategies

The Elliot Wave is a unique technical analysis theory that stipulates that the price will move in certain recognizable patterns. Regardless of the market’s trend, these waves can be classified as correction waves and impulse waves. But first, make sure you learn how to trade futures options and the fundamentals of the Elliot wave.

If done correctly, it can improve your options trading strategies. Remember, you can use the Elliot wave to predict the change in the price of more than just stocks. You can predict the options market using the Elliot wave.

elliott waveLuckily, there are lots of Elliot patterns that you can plot on your options chart and easily spot a reversal or continuity of momentum. A great example of a simple pattern is to trade the high probability 5th Wave and the xBrat Elliottwave Trading Indicator does most of the hard work for you. Check it out HERE

Building a Profitable Future: Trading Futures for a Living

Can anyone trade futures? Yes, just like with stocks, and forex, you can start day trading futures for a living. But first, you must learn how to day trade futures. In fact, with the right strategy, you can create a profitable business at home. But you need a reliable risk management strategy and a reliable plan.

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