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

NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments. A futures trading plan will revolve around your specific trading strategy. That is, your plan should factor in if you’re a technical analyst or if you use fundamental analysis in your trading. You may choose to go long or short, or you may decide to use calendar spreads. Whatever you choose, it’s always a good idea to plan your entry and exit strategies and basic risk management rules. 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.

  1. Your broker will determine your initial margin for the contract, which is usually a percentage of the contracted value you need to provide in cash.
  2. The trading plan could also include a stop-loss order placed 5% below the entry price to manage downside risk.
  3. But if the futures trader guesses wrong, he can lose his entire investment and more.

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Pick a futures market to trade

Instead of buying an energy stock, for example, you could buy a futures contract for oil. Futures contracts are typically traded on a stock exchange, which sets the standards for each contract. Since the contracts are standardized, they can be gci broker forex broker review freely exchanged between investors. This provides the necessary liquidity to make sure speculators don’t end up taking physical delivery of a tanker-load of oil. Index futures are a way to gain exposure to an entire index in a single contract.

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If that happens, they will profit, and the futures contract will be sold at the current price and closed before expiration. Moreover, futures contracts enable traders to speculate in which direction the prices of the underlying assets go and open either a short or long position. 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. The buyer of a futures contract must take possession of the underlying stocks or shares at the time of expiration and not before.

Traders should carefully consider their risk tolerance and engage in futures judiciously, employing risk management strategies such as stop-loss orders to protect against significant losses. Leverage allows traders to control a large amount of the underlying asset with a relatively small amount of capital, known as margin. Index futures are available for the Dow Jones Industrial Average and the Nasdaq 100, as well as their respective fractional value versions, e-mini Dow and e-mini Nasdaq 100 contracts. Index futures are also available for foreign markets, including the Frankfurt Exchange and the Hang Seng Index in Hong Kong. A commodity is a physical product whose value is determined primarily by the forces of supply and demand. This includes grains (corn, wheat, etc.), energy (such as natural gas or crude oil), and precious metals like gold or silver.

Speculate on a wide range of markets

If you had current short positions on the other hand, you could go long on an index future in case the market rises, with the idea that your long profits would offset your short losses. When trading with leverage, it is important to remember that your profit or loss will be determined by the total size of your position, not just the margin used to open it. This means there is an inherent risk that you could make a loss (or a profit) that could far outweigh your initial capital outlay. Watch this short video for details on initial margin, marking to market, maintenance margin, and moving money between your brokerage and futures accounts.

This direct market exposure offers the potential for a more macroeconomic view. If one wheat futures contract includes 5,000 bushels, and it sells at $12,50 per bushel, it is worth $62,000 of wheat, meaning that you would need less than 5% to trade it. As brokers set them, they can also adjust them, and the maintenance margin is primarily based on volatility. Large corporations can use futures as a hedge against the underlying asset’s price movements, where the aim is to prevent losses from rising prices.

How Does Leverage Work in Futures Trading?

To gain access to futures markets, though, they may ask more in-depth questions than when you opened a standard stock brokerage account. Futures contracts can be bought with very high leverage if the broker deems it appropriate. A futures contract is like a forward, but it’s done through an organized exchange, committing traders to buy or sell an underlying asset at a preset price on a future date. But others are settled in cash, the amount of which is the difference between the agreed-upon price and the market price when the future date arrives.

This guide will explain the basics, including what futures are, how they work, and its benefits and risks. A futures contract allows a trader to speculate on a commodity’s price. If a trader buys a futures contract and the price rises above the original contract price at expiration, there is a profit.

View futures price movements and trading activity in a heatmap with streaming real-time quotes. Be sure to ask around to find the broker that works best for you based on price and services. On the other side, a company might hedge the market for commodities they consume. That provides predictable expenses even if the price of jet fuel fluctuates.

NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Our estimates are based on past market performance, and past performance is not a guarantee of future performance. For example, it isn’t easy to know whether commodities’ prices, such as corn, go up or down without in-depth market knowledge.

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