Futures trading can be a smart and lucrative strategy for growing your portfolio, hedging yourself against risk or even replacing your full-time income.
Since futures are leveraged financial assets, you can turn a few thousand dollars into several thousand within just a few weeks. However, mistakes in futures trading can also add up quickly.
Starting with the same few thousand dollars, you can literally reduce your account to zero within just a few days.
What’s the difference? It has a lot to do with whether you seek expert futures trading help. But we’ll talk about that in just a moment. First, let’s have a look at what makes futures trading such an exciting financial venture.
What is Futures Trading and How Do Futures Work?
Think of futures trading as an agreement to do business at a scheduled date in the future.
In other words, when you buy or sell a future, you’re buying or selling a contract. This contract obligates you to buy or sell the underlying asset at some point in the future.
For example, let’s assume soybeans are selling at $8.78 per bushel. You create a contract agreeing to sell 1,000 bushels of soybeans at $8.78 at a date set for 90 days from now.
Likewise, someone else agrees to uphold the other end of the contract and buy the soybeans from you at the agreed $8.78. You’ve just created a futures contract with this person.
Imagine what this contract will be worth if the price of soybeans goes down to $6.78 a bushel within those 90 days. While everyone else is forced to sell their soybeans at $6.78, you have a signed agreement to sell them at $8.78.
This makes your futures contract worth more money than it was when you created it. But, futures contracts have winners and losers.
In this case, the person who agreed to buy your soybeans for $8.78 has to buy them at a higher price than their current market value of $6.78. For this person, the value of the futures contract has gone down.
On the other hand, imagine if the price of soybeans had increased to $10.78. In this case, you would be forced to sell your soybeans at only $8.78 instead of the market price of $10.78.
This makes your futures contract less valuable to you, but more valuable to the person who has the right to buy the soybeans at the agreed $8.78.
This change in contract value is how futures trading causes money to move from one person’s hands to another.
Of course, when you’re buying and selling contracts on the futures exchange, you never have to create, read, or sign a physical contract. Instead, the digital futures exchange allows you to trade these agreements at the click of a mouse.
Futures Move in Different Units Than Stocks
Just as stocks move in dollars and cents, futures move in “ticks” and “points.” Points are made up of ticks the same way dollars are made up of cents.
Depending on the types of futures you’re trading, a point can be worth $10, $50, $100 or more.
For example, the E-Mini S&P 500 (ES) is popular with short-term futures traders and has a 0.25 tick size. This means it takes four ticks of movement in the E-Mini S&P 500 to make up a total point.
Consider the following examples:
- A rise from 1314.00 to 1314.25 represents one TICK of upward
- A rise from 1314.00 to 1315.00 represents one POINT of upward
- A drop from 1314.25 to 1314.00 represents one TICK of downward
- A drop from 1314.00 to 1313.00 represents one POINT of downward
If each tick of the E-Mini S&P 500 is worth $12.50, each point will be worth $50. This means, if you take a long position on the E-Mini S&P 500 at 1314.00, and it moves up to 1324.00, you’ve gained 10 points. Multiply that times $50 per point, and you’ve just made $500 in profits.
Likewise, if you take the same long position at 1314.00, but it moves down to 1304.00, you’ve lost 10 points. Multiply that by $50 per point, and you’ve lost $500.
Of course, these numbers will change based on the types of futures you’re trading. For example, since Crude Oil (CL) futures have a 0.01 tick size, it takes 100 ticks of movement to equal one point. If the tick value of Crude Oil is $10, one point of movement in Crude Oil will be worth $100.
These numbers and ratios are different for corn futures, orange juice futures, currency futures etc. The important thing to remember is that futures move in points and ticks, and that points are made up of ticks just as dollars a made up of cents.
Futures are Traded On Margin
With stocks, you need $1,000 to buy 100 shares of a $10 dollar stock. With futures, you trade using a margin account. The margin required for trading will depend on many factors, including what you’re trading and who your broker is.
To take a simple example, let’s assume you want to trade one contract of the E-Mini S&P 500. Your broker requires you to have $2,500 of “margin” in your account to open a position.
Once you’re in position, your account will rise or fall based on whether your position is winning or losing.
For example, assume you have $2,500 in your account and you open a long position on one contract of the E-Mini S&P 500. If the E-Mini S&P 500 goes down 10 points, you’re down $500.
Thankfully, you’ve still got $2,000 of equity in your trading account.
However, if the E-Mini S&P keeps dropping, your account equity will decrease with it. If it gets too low, your broker could issue a “margin call,” which will either close your position (at a BIG loss) or require you to deposit more money into your account.
The good news is if you have a solid trading plan and good execution, you can use that same $2,500 as leverage to make several thousand dollars. It’s simply a matter of managing risk and being right more often than you’re wrong.
Cautions and Concluding Remarks About Futures Trading
One terrific benefit of futures trading is how futures gains are taxed. Right now, short-term gains carry a tax rate of 35% if you’re trading stocks. Futures traders aren’t required to pay this high tax rate on all of their gains.
Futures traders also enjoy more variety. You can trade currency futures, energy futures, grains, meats, indices and much more.
The high-volatility and leveraged nature of futures also gives you the opportunity to make more profits in less time. But leverage can be a double-edged sword.
New futures traders who make 100% or 200% might feel like they’ve just stumbled onto a license to print money. But, after a few bad days, they find themselves staring at an empty trading account.
This is why the smartest thing you can do as a new futures trader is get expert help.
Learn How to Buy Futures the Smart Way
Successful futures trading is all about having a well-planned, tightly executed strategy for managing risk and hitting your profit targets.
If you’re a smart investor who wants to learn more about futures trading and get started on the right foot, our specialized business directory can help.
We have a database of financial experts right at your fingertips. With the right help, you can start trading futures the smart way, save yourself the trial and error, and enjoy watching your portfolio grow.