You might be wondering what futures are. A futures contract is an agreement between two parties to buy or sell a commodity or investment at a predetermined price at a future date. The vast majority of futures contracts fail to deliver the underlying commodity or security. Because most futures transactions are purely speculative, they provide a way to hedge risks or profit.
The first step toward maximizing the potential of your assets is to find the best futures to trade. Selecting a futures broker is only the beginning of futures trading. You must also select a proper product or market, as well as decide the appropriate size of your trading account and develop a trading strategy.
Futures contracts come in a variety of shapes and sizes. One that is ideal for you may not be ideal for another trader. Markets, on the other hand, have distinct personalities and are as different as the people who trade them. When choosing a market to trade, keep the following crucial characteristics in mind:
- Volatility. Because some futures contracts have a wider daily trading range than others, they are considered more volatile. Volatility is an important factor in calculating risk and reward potential. You might select more volatile contracts because the profit potential is higher. The transactional cost is practically unchanged. Others may find that the contracts with the lowest volatility are better suited to their tactics, as increased volatility raises the risk of losing money.
- Liquidity. Choose extremely liquid products while you’re first starting out. Trade in active markets with enough volume to allow you to enter and exit orders without significantly altering pricing. This will ensure that you can quit a position with the same ease with which you entered it.
- The size of the contract. Select a contract size that is appropriate for your account and trading strategy. You have the option of choosing between a conventional contract and a smaller version known as an E-mini contract. E-mini contracts are traded electronically, are very liquid, and have a minimal starting margin requirement. Micro E-mini contracts, which are smaller, are also an option.
Eurodollar Futures
Eurodollar futures are the most actively traded interest rates in the world. They are a valuable and cost-effective financial instrument for hedging interest rate variations in the United States dollar. Eurodollars are essentially U.S. dollars held in commercial banks outside of the United States. Among their advantages are:
On the CME Globex trading platform, over 98 percent of Eurodollar futures are being traded electronically.
E-mini S&P 500 Futures
E-mini S&P 500 futures, denoted by the ticker symbol ES, are an excellent way to increase or manage your exposure to large-cap firms in the United States stock market. They provide an efficient, liquid, and cost-effective option to invest in the S&P 500 Index, which tracks 500 of the top firms in the United States. The following are some of the advantages of ES futures:
Crude Oil Futures
Crude oil futures are the most cost-effective option to trade the international oil markets. The most commonly traded crude oil contract, the NYMEX WTI, trades around 1.2 million contracts each day. To clarify, one contract equals 1,000 barrels and is worth about $44,740. NYMEX WTI futures provide you direct exposure to the global oil market – a huge benefit over alternative ways to trade. If you fit into one of the following two groups, you can trade crude oil futures:
- Hedger. These futures can help you mitigate the impact of anticipated price variations on the value of your oil-related assets.
- Speculator. Crude oil futures can be used to express and profit from your opinions on the direction of oil prices.
Year Treasury Note Futures
Treasury futures are a cost-effective option to trade the US government bond market, which has the highest level of security and diversification of any government bond market in the world. These highly liquid futures can be used to possibly boost income, hedge interest rate risk, spread trade, speculate on interest rates, and modify portfolio duration.
Micro E-mini S&P 500 Index Futures
Micro E-mini futures are a tenth of an E-mini contract’s size. They allow you to trade in the equity index markets in a straightforward and cost-effective manner. These futures help you manage your exposure to the 500 largest companies in the United States. The following are some of the advantages of trading equity index futures:
What factors should I consider while selecting a futures contract?
1. What is the required margin?
- The amount of capital necessary to trade a futures contract is known as the margin requirement.
- The majority of traders finance their futures trading accounts with three to four times the contract’s margin requirement.
2. What is the margin of error?
The spread determines how much it costs to enter or exit a futures transaction.
3. What impact does liquidity have on the contract?
- The constancy of interest by traders to purchase and sell a futures contract is referred to as futures market liquidity.
- Because there is greater interest in the contract, more liquidity will cause the spread to tighten.
- Because there is less interest in the contract, decreased liquidity will cause the spread to widen.
- The less expensive it is to enter and exit the market for a certain contract, the more ‘liquid’ it is.
4. Is the daily volume consistent?
- Price movement can be predicted by volume fluctuations or inconsistencies above or below the historical average.
- The volume of contract trading may have an impact on the spread: if the volume is low, the spread may be broader; if the volume is high, the spread may be smaller.
Backtesting comes next after you’ve chosen a few contracts that fulfill the specifications you’re searching for based on the questions above.
Backtesting helps traders to compare their trading technique to past data in order to estimate possible performance. You can acquire some more insights into your strategy…or find fresh possible opportunities…by employing trade indicators like Bollinger Bands or the Relative Strength Index (RSI). Always remember that past success isn’t always indicative of future outcomes.
Are you ready to start backtesting and simulating traders for free?
To find out which methods perform best for you, use our FREE trading software.
What places do futures contracts trade?
You may be able to trade futures depending on your broker and your account status with that broker. You’ll need to apply for and be accepted for a margin account. Qualified traders in the United States will frequently be able to trade futures on exchanges such as the Chicago Mercantile Exchange (CME), ICE Futures United States (Intercontinental Exchange), and the CBOE Futures Exchange (CFE).
To trade futures, how much money do I need?
If you assume you’ll need to employ a four-tick stop loss (the stop loss is four ticks distant from the entry price), the minimum you should risk on a trade in this market is $50, or four times $12.50. The minimum account balance, according to the 1% rule, should be at least $5,000 and preferably higher. If you want to risk a larger sum on each trade or take more than one contract, you’ll need a bigger account. The recommended balance for trading two contracts with this method is $10,000.
Are all futures traded on an exchange?
A forward contract is a contract that is closely related to a forward contract. A forward is similar to a futures contract in that it defines the exchange of products for a set price at a set date in the future. A forward, on the other hand, is not traded on a stock exchange and hence does not have the interim partial payments associated with marking to market.
While both futures and forward contracts are contracts to provide an asset at a certain price at a future date, they differ in two key ways:
- Futures are exchanged on a stock market, whereas forwards are traded over the counter. Futures are standardized and traded on an exchange, whereas forwards are customized and traded on a non-exchange.
- Forwards are not margined, whereas futures are.
- As a result, futures have a lower credit risk and a distinct funding structure.
Credit risk exists in forwards, but not in futures, because a clearing house protects both parties of the exchange by marking to market their positions every night. Forward contracts are mostly uncontrolled, whereas futures contracts are regulated at the federal level.
In 2007, the Futures Industry Association (FIA) estimates that 6.97 billion futures contracts were traded, an almost 32% increase over 2006.
Why are futures preferable to options?
- Futures and options are common derivatives contracts used by hedgers and speculators on a wide range of underlying securities.
- Futures have various advantages over options, including being easier to comprehend and value, allowing for wider margin use, and being more liquid.
- Even yet, futures are more complicated than the underlying assets they track. Before you trade futures, be sure you’re aware of all the hazards.
Which of the following markets does not deal in futures contracts?
Which of the initial markets listed below does not sell futures contracts? B. The NYSE is a stock exchange, not a futures exchange. The CBOT (Chicago Board of Trade), the NYMEX (New York Mercantile Exchange), and the CME (Chicago Mercantile Exchange) are all futures markets that do not trade securities.