How To Trade Futures 2024: Free Guide

Futures are a financial instrument that has been around for quite some time, originally coming onto the markets in the mid-1800s. The origins of futures trading date back to wheat farmers in that area who would sell grains in real-time, promising a future physical delivery. 

At this point in time, futures trading goes beyond wheat farmers and includes many different financial securities, instruments, and commodities in a very complex and sophisticated market today. 

Continue reading through this guide as we discuss how trading futures contracts work, and how you can start trading futures today. 

What is Futures Trading?

Futures trading is when investors and traders speculate on the price direction of a given asset or security. 

Investors must purchase a futures contract, which is a binding and legal agreement between the two parties where they must buy or sell the asset at a predetermined price at a specified future date. 

Understanding The Basics of How to Trade Futures

Futures trading is a certain type of investment where a buyer and seller agree to execute a contract by either buying or selling a given asset at a fixed price, at a specific future date. 

While traditionally a futures trade meant that the buyer would receive a physical delivery of the asset upon the execution of the futures contract, this almost never occurs in today’s markets. Instead, most futures contracts are used as a way to speculate on the security’s price or hedge their portfolios against other risks. 

There are many different types of securities and commodities that are present in the futures market, including stock indexes, currency futures, energy commodities, grains, livestock, interest rates, and more. 

So as you can see, futures contracts are no longer centered around physical goods and commodities like they were at the inception of the futures market. Commonly, futures contracts will be traded through the Chicago Board of Trade or the Chicago Mercantile Exchange, where a futures trader can buy or sell futures contracts. Plus, certain crypto platforms even allow you to purchase Bitcoin futures. 

Types of Assets Can Be Traded Using Futures

To better understand futures trading, let’s discuss some of the different types of assets that can be traded in the futures markets. 

Forex

A widely used futures trade is to speculate on forex and price movements in the currency market. 

Read More: Best Forex Trading Platforms 2024

Stocks

One commonly traded financial instrument is the futures market stocks. This involves agreeing to buy or sell the stock at a future date at an agreed-upon price, among other stock index futures that are available on different markets. 

Commodity

Commodity futures are another common type of futures trades an investor can make. This means you’re speculating on the price of a certain commodity like crude oil, jet fuel prices, or gold, for example. 

Read More: Best Commodities Brokers 2024

Cryptocurrency

Nowadays, you can also take a futures position on cryptocurrencies to take advantage of market volatility in the crypto space. 

The Benefits of Trading Futures?

There are many advantages to trading futures, which we will now discuss in more detail. 

Diversification

Many traders like that purchasing a futures contract is a good method for diversifying their overall portfolios. Given the fact that you can buy futures on assets and instruments running from oil prices to cell phone data, these are financial contracts that allow you to widely diversify your holdings and not be pigeonholed into just one asset or market. 

Leverage

When you invest on leverage, you are essentially buying an underlying asset with borrowed money from your broker. This is a strategy to increase your potential return, though there is quite a bit of downside risk as well. With this in mind, futures are financial instruments that are traded on a margin, meaning investors can take larger positions than what they have the capital for. Again, this can be an advantage, though it can just as easily become a risk in certain market conditions. 

Around-the-Clock Trading

Another thing that traders like about the futures market is that there are opportunities at all hours of the day, not just during standard trading hours based on the stock market. 

Hedging Benefits

Lastly, futures help you take advantage of market moves to minimize potential losses or protect unrealized gains. Plus, given the amount of futures products available, you can easily create a cost-effective strategy to protect your portfolio by investing in specific sectors, individual companies, or commodities. 

The Risks of Trading Futures?

Just like there are great benefits of trading futures, you also need to be aware of the risks as well. 

Advanced Strategy

Possibly one of the biggest risks is that it can be quite complex and confusing to trade futures if you are unfamiliar with the market. Technically anyone can trade futures, though you should put some time and effort into doing the proper research to ensure you’re well-informed on what you’re doing. 

Leverage

As we discussed above, trading a futures account on a margin can be a good way to maximize potential upsides, though you could also put yourself at a lot of risks if the markets turn south. So, it’s important to know that this strategy could work against you just as much as it can benefit you. 

Management of Expiry Dates

It’s also important to know that futures contracts will have an expiry date that investors have to constantly be on top of. As the expiry date nears, it’s possible that the price loses value quickly and even loses its worth completely. So, investors can roll forward their futures contracts to longer-dated periods, though this will not happen automatically. 

7 Basic Steps to Trade Futures 2024

Now that you have a better idea of the ins and outs of futures products and the futures markets, let’s discuss how futures traders can start buying and selling futures contracts. 

Choose a Futures Trading Platform

The first thing you’ll need to do is select a futures trading platform where you can execute a futures contract and access the market. Similar to trading stocks on the stock market, you need the right trading platform in order to open up futures accounts and trade a futures contract.

You’ll need to consider a few aspects in order to find the right platform for you to start trading a futures contract, like how easy and intuitive it is to use, whether they have competitive fees and rates, technical analysis tools, and what sort of risk management features they provide.  

Read More: Best Futures Trading Platforms 2024

Developing a Futures Trading Strategy

Once you know what trading platform you will use to start trading futures, you need to create a trading strategy for yourself. Building a futures strategy is similar to any other type of investment strategy, though there are some added nuances to the market that you’ll need to consider in order to be successful. 

There are three main types of futures trading: long short, and spread. Each are beneficial in certain instances and are profitable with certain futures prices, so keep this in mind as you’re formulating your strategy. 

Consider Futures Markets You Can Trade

Once you have your account open, you can start thinking about all the different markets that you can speculate on with futures. Refer to the list above of all the potential assets and securities that you can trade futures on. There is no correct answer for which market to trade, though you should put some thought into this step–possibly which market you’re most familiar with or interested in. 

Determine Potential Opportunities

A lot of success in the futures market comes from understanding what’s going on in the economy and looking for opportunities to speculate on volatility–whether it’s on stock index futures, oil futures on crude oil, interest rates, and more. Depending on where you get your investment advice and how you stay up-to-date on the markets, each investor may have their own method for discovering opportunities and analyzing a futures quote.  

Choose Your Contract Specifications

You will also need to determine certain specifications once you purchase a contract, which you’ll need to decide on ahead of time. Some of the specifications you’ll need to set include the contract size, the contract value, and the tick size given the current market price, future prices, and fundamental analysis you’ve performed on the given asset. 

Set Up Your Order

There are many different order types you can utilize, like stop-loss, short-orders, and more. So, you’ll need to decide which type of order correlates best with your overall strategy, and set up the terms and specifications of the contract accordingly consider the current market price, what you expect the futures price to be if it requires an initial margin requirement, or any other aspects in order to successfully enter the order. 

Keep Track of and Manage Your Trade

Once you’ve set up your order for a futures trade, you’re not done yet. You will still need to monitor the futures contract and your other existing positions up until the execution date so you know what kind of performance to expect given the trading activity in the markets and the contract value that you agreed to. 

The Top 2 Futures Trading Platforms

Interactive Brokers

A widely-trusted futures trading platform is Interactive Brokers. It has very extensive offerings for tradeable assets and has competitive fees with other trading platforms. They have a great fee structure, research and education, and a modern platform. It has very advanced features, which likely makes them better suited for more advanced users. 

TD Ameritrade

TD Ameritrade’s online trading account platform is one of the most comprehensive available today if you want to buy futures. Trading futures on TD Ameritrade is a good option among the other US forex brokers, and they have some amazing trading tools for their futures accounts that other platforms do not have. 

Final Thoughts

Purchasing a futures contract can be a great way for investors to speculate on the volatility of the markets, take advantage of price swings, and diversify their portfolios. However, it’s important to understand the risks and do some in-depth research to ensure you’re prepared to participate in this market, as it can be quite complex and advanced. 

Thus, having a brokerage account with a high-quality and reputable trading platform can help you open up a futures account, have good resources available to you, and also provide other helpful tools like technical analysis and fundamental analysis features to help you get started and make your first trade. 

Frequently Asked Questions (FAQs)