Futures trading is nothing new but with the rise in accessibility and growing interest in speculative trading such as cryptocurrency, many are venturing into other asset classes including futures. So what exactly are futures, and how can you trade them?

Futures trading involves buying and selling contracts for the delivery of a specific asset at a future date, at a predetermined price. These assets can be a variety of things such as a physical commodity, underlying assets of an index or currencies. The futures market is highly regulated and offers transparency and liquidity, which can help to reduce some of the risks associated with trading. Futures contracts are traded on organized exchanges and are subject to the rules and regulations of those exchanges, which can help further mitigate risks.

Unlike futures markets, cryptocurrency markets are decentralized and largely unregulated, which can lead to increased volatility and risks  such as significant price fluctuations, regulatory risks, security risks, and other factors. Depending on how they are employed, futures markets can provide investment diversification and stability to highly speculative swings utilizing high amounts of leverage.

It is important for any trader to thoroughly research and understand the risks involved in any type of trading, and to carefully consider their own goals, risk tolerance, and financial situation before investing in any asset.

Leverage and Margin

Leverage in trading refers to the use of borrowed funds (i.e., margin) to increase the potential returns of an investment. In other words, leverage allows a trader to control a larger position in an asset than they could with their own capital alone. A single futures contract controls an exceptional amount of the underlying asset and it is not expected that the trader fronts the total value. For example, a single gold contract is for 100 Troy ounces  or a single oil contract is 1,000 barrels. In order to be traded, the brokerage will require a deposit or margin at a fraction of the contracts true value. This margin requirement works as an insurance that the trader will be able to cover losses if the value moves against them. Each day a minimum amount of capital is needed to support any outstanding contracts that the trader may have, this is called maintenance margin.

If the value of the contract moves against the trader enough, they may not be able to cover the losses which will trigger a margin call. This requires the trader to deposit additional funds into their margin account to bring the account back up to the required maintenance level. Failure to do so will result in the broker liquidating your position and possible further punitive measures such as closing your account and collection of any amounts not covered by your margin. Make sure you know exactly how much the maintenance margin requirements are for each contract you’re trading and stay well funded to avoid margin calls even if you’re in a losing trade.

Contracts Expire

Futures contracts have a set expiration date, after which the contract ceases to exist. When a futures contract approaches its expiration date, traders who hold open positions in that contract must either close their positions or roll them over to the next contract with a later expiration date. Contract rollovers allow traders to maintain their exposure to the underlying asset without having to take physical delivery of the asset itself.

For personal accounts, brokerages will automatically assume non-delivery and liquidate any outstanding contracts prior to expiration. Nobody wants to deal with taking responsibility of accepting shipment of 5,000 bushels of wheat!

Futures contracts are often denoted by their symbol,  2 or 3 character followed by the month and year that the contract expires. For example, CL 4-23 is crude oil (CL) which expires in April (4) of the year 2023 (23). It is important to keep track of when a contract nears expiration and to roll over to the next contract to avoid unplanned liquidation or drastic volatility and low volume leading towards the expiration date. Most popular contracts operate with contracts which expire every 3 months.

Getting Started 

To start trading, you will need to get and become familiarized with a trading platform. A trading platform is software which allows you to visualize market data and submit orders from. I’d recommend  NinjaTrader which is a popular trading platform and brokerage designed for trading futures, forex, and equities. It provides advanced charting, market analysis, and order execution tools for traders of all levels, from beginners to advanced professionals. They offer their award winning desktop platform for free with access to both their web and mobile applications.

Within NinjaTrader they provide simulated or papertrading accounts which allows you to get familiarized with futures trading and develop your own strategies. Whenever you’re new to trading any asset class, I’d always suggest beginning on a simulated account to understand things such as market behavior and getting a feel for the gains/losses for each tick of price movement.

If you’re looking to start with a smaller account and don’t want to worry about high margin requirements, consider looking into mini futures contracts which operate as 1/100 of the underlying contract. Many of the most popular futures markets have these mini markets!