Introduction to Futures

Have you ever wished you could peek into the future? While we can't offer you a time machine, we can introduce you to something almost as exciting: futures trading!

Think of futures as financial time machines that let you lock in prices today for something you'll buy or sell tomorrow.

Cool, right? Let's dive into this fascinating world where traders get to play with time (and hopefully make some money while they're at it).

What are futures?

Imagine you're running a pizza shop, and you know you'll need 1,000 pounds of cheese next month. Cheese prices are always changing, which can be a real headache for your business. Wouldn't it be nice if you could lock in today's price and forget about it?

Wouldn't it be amazing if you could just lock in today's price and forget about it? That's exactly what futures contracts let you do!

In simple words, futures are financial contracts that let traders buy or sell an asset at a predetermined price on a specific date in the future. These contracts exist for commodities like crude oil, gold, and wheat, as well as financial instruments like stock market indices, currencies, and interest rates.

Now, here's where it gets interesting. When you trade futures, you're not actually buying a mountain of cheese, barrels of oil, or bars of gold.

Instead, you're trading something more like a magical receipt – a contract that changes value as the price of the real thing moves up and down.

For example, if you buy a crude oil futures contract, you’re not actually purchasing barrels of oil. You’re simply agreeing to buy or sell oil at a specific price in the future. The same applies to stock index futures — if you trade an S&P 500 futures contract, you’re not buying actual shares of the 500 companies in the index. You’re just speculating on its overall price movement.

Futures aren’t just for traders looking to make money. Businesses also use them to protect themselves from price changes.

An airline company might buy oil futures to lock in fuel prices and avoid paying more if oil prices go up. A farmer might sell wheat futures to guarantee a selling price for their crops before harvest.

But while businesses use futures to reduce risk, traders use them to speculate on price movements and try to make a profit.

Types of futures – what can you trade?

Futures contracts let you trade a whole bunch of different things, from oil and gold to stock markets and even currencies. If something has a price that moves, chances are, there’s a futures contract for it.

The best part?

You don’t have to stick to just one type of market — you can trade what interests you most or what you think will make the biggest moves. Let’s break it down in simple terms.

Commodity futures include contracts for crude oil, natural gas, gold, silver, wheat, corn, and coffee. These markets are driven by supply and demand, weather conditions, and global economic trends.

Stock index futures let traders speculate on the overall market by trading indices like the S&P 500, Nasdaq, or Dow Jones instead of individual stocks.

Currency futures involve trading different currencies like the U.S. dollar, euro, or Japanese yen, reacting to central bank policies and economic conditions.

Interest rate futures track government bonds and other fixed-income instruments, moving based on Federal Reserve decisions and inflation trends.

Since futures markets cover a wide range of industries, traders can find opportunities in different market conditions. Whether stocks are rising or falling, whether oil prices are climbing or dropping, futures trading provides ways to capitalize on price movements.

So, how exactly does future trading work?

How futures trading works

Every futures trade has two sides:

One person bets the price will go up.

The other person bets the price will go down.

For example, let’s say you enter a futures contract to buy crude oil at $80 per barrel. One contract represents 1,000 barrels.

If oil prices rise to $85 per barrel, your contract is now worth more because you locked in a cheaper price. You can sell it for a profit — without ever touching a barrel of oil.

But if oil prices drop to $75 per barrel, your contract loses value. If you sell it, you’ll take a loss.

Here’s the cool part:

You don’t have to hold a futures contract until it expires. You can enter and exit trades anytime before the expiration date. Many traders buy and sell futures contracts within the same day, looking to make quick profits from price changes. But how do these prices actually move?

How does Future Price Move?

Futures prices don’t move randomly — they move in ticks.

Clock ticks...

Hold on — not the ticking of a clock, but a tick in trading terms.

A tick is the smallest possible price movement for a futures contract. Every market has a different tick size set by the exchange.

A tick is the smallest possible price movement for a futures contract. Every futures market has a different tick size, which is set by the exchange.

For example, in the E-mini S&P 500 Futures, the tick size is 0.25 index points. Since each point is worth $50, every tick is worth $12.50. If the price moves from 4500.00 to 4500.25, that’s one tick, meaning a trader would gain or lose $12.50 per contract.

Different markets have different tick sizes and values. In crude oil futures, the tick size is 0.01 per barrel, with each tick worth $10.

Understanding tick sizes is important because they determine how much you can gain or lose per price movement. If the tick value is bigger, every price move has a bigger impact on your account. So, you need to adjust your trade size based on the market you’re trading.

Leverage and margin – Controlling big trades with less money

One of the biggest differences between futures and other types of trading is leverage.

Leverage in futures trading is like borrowing superpowers — it lets you control a massive trade with just a fraction of the money. But just like in superhero movies, great power comes with great responsibility (and risk).

Futures allow traders to control large amounts of an asset with a much smaller upfront investment. This is possible because of the margin, which acts like a security deposit that lets you enter a trade without paying the full contract value.

Most new traders see leverage and think, “Wait, I can control a $100,000 contract with just $5,000? That’s amazing!”

Well, yes… but also no.

Leverage magnifies both profits and losses, meaning small price moves can have huge consequences. It’s like betting big in poker — if you win, you cash out huge, but if you lose, you’re suddenly washing dishes in the back of the casino.

But don’t worry — That’s why brokers and exchanges have margin requirements to keep traders from going overboard.

Margin — not the empty space on a Word document, but the money that keeps your trades alive.

Imagine margin as the down payment on a high-stakes bet. It’s your ticket into the game, proving that you’re serious about your trade. But unlike a regular bet, this isn’t a one-time thing — if your balance drops too low, the market will ask for more.

There are two key types of margins you need to know:

Initial margin – This is the minimum amount required to open a trade. Think of it as the cover charge to get into an exclusive club — without it, you’re stuck outside.

Maintenance margin – This is the minimum balance you need to keep your trade open. If your funds drop below this level, you’ll receive a margin call, which is basically your broker saying,

“Hey, either add more money, or we’re kicking you out of the club.”

Is leverage good or bad?

Leverage isn’t good or bad — it’s just a tool. Used wisely, it can help traders maximize their capital and take advantage of opportunities. Used recklessly, it can turn a small mistake into a financial disaster.

The key is knowing when to use it and when to back off. It’s not a shortcut to getting rich — it’s a high-speed race where you need brakes just as much as you need horsepower.

What happens when a futures contract expires?

Every futures contract has an expiration date – like a "best before" date on food. Before this date arrives, you have three choices:

Close the trade – Most traders exit their positions before expiration by buying or selling the opposite contract. This way, they lock in their profits or limit their losses.

Roll over the contract – If a trader wants to keep their position open beyond expiration, they can roll over to a new contract with a later expiration date.

Settle the contract – Some futures contracts require physical delivery, meaning the buyer must take possession of the actual commodity. However, most contracts are cash-settled, where traders simply pay or receive the price difference instead of handling physical goods.

Since most traders aren’t interested in receiving barrels of crude oil or bushels of wheat, they close their positions before expiration.

Futures trading hours & exchanges

Unlike the stock market, which takes regular naps, futures markets are like that energetic friend who's always ready to party. They run almost 24/7, taking only short breaks on weekends to catch their breath.

This allows traders to react to global events as they happen.

Major exchanges include the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE), which handle contracts for commodities, stock indices, and currencies.

Because futures markets open earlier and close later than stock markets, they give traders more flexibility in when they trade. For example, stock index futures begin trading before the stock market opens, allowing traders to react to overnight news before regular trading hours begin.

How are futures different from other markets?

Futures contracts have expiration dates. When a contract expires, the trader must either settle it, roll it over, or close it out.

Futures trading involves margin and leverage, meaning traders don’t need to pay the full contract value upfront. This allows them to control large positions with a smaller initial deposit but also increases risk.

Futures markets operate nearly 24 hours a day, five days a week. This gives traders access to global markets and allows them to react to economic events as they happen.

Final thoughts – Is futures trading right for you?

Futures trading offers unique opportunities to profit from price movements across different markets. Whether prices are going up or down, there’s always a way to trade.

But with high rewards come high risks. The use of leverage means that small price movements can lead to big gains — or big losses. That’s why risk management is essential.

For beginners, the best approach is to start small, learn how margin works, and practice on a demo account before trading with real money. The more you understand the mechanics of futures, the better prepared you’ll be to trade successfully.

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