Futures Basics: Understanding Futures Trading

What are Futures?

Futures are financial contracts to buy or sell an asset at a set date in the future for a fixed price. Futures trading benefit investor by allowing them to offset or assume the risk of a price change of an asset over time.

Futures contracts are available for a variety of markets including commodities, stock indexes, currencies, and more. Different-sized contracts allow traders to participate in these markets with reduced financial commitment.

How do Futures Contracts Work?

The best way to understand futures is to understand a brief history of futures and how it all started.

At the beginning of the monetary exchange, goods were often exchanged or “traded” for payment. As time went on, purchasers of goods realized there were some goods they needed throughout the year, but not right now.

If traders immediately bought all the goods they needed for the year, there was a good chance that those items would perish before being needed or used. Not to mention, if they chose to wait to purchase the goods until later in the year, there was a high probability the cost of goods would rise.

The entrance of futures in the market allowed purchasers to enter into a transaction in the present while still allowing them to collect the purchased goods at a later date. Purchasers were able to lock in the present price for goods delivered at a future date.

This new trading practice benefited sellers too. Sometimes sellers were not ready to part with their items quite yet. This is when futures trading came in handy, as it allowed sellers to also lock in a price for a future sale. In short, both sellers and purchases of futures were able to limit their price risk.

When Can you Trade Futures?

One of the many benefits of trading futures is the ability to trade around the clock. Futures markets trade nearly 24 hours a day, 6 days a week, from 6:00 p.m. ET on Sunday to 5:00 p.m. ET on Friday. This longer trading day allows futures traders more flexibility and the freedom to manage positions almost any time of day.

Trading hours for futures contracts are determined by their respective exchanges. Each category, such as the energy or equity index, has its own opening and closing times.

View the trading hours for each futures exchange here:

Types of Futures Orders

Orders are the core of futures trading. As a result, understanding various order types is an important first step in learning to trade futures.

  • Market Order – A market order is a basic order type that instructs the broker to buy or sell at the best available price. Market orders are considered to be the most immediate way to enter or exit a trade and are often executed instantaneously.
  • Limit Order – A limit order is an order type that enters an order to buy or sell a futures contract at a specific price or better. Limit orders do not guarantee a fill, they do allow the trader to specify a price to prevent negative slippage.
  • Stop Market Order – A stop market order is an order type that issues a market order once a specified price has been reached, known as the stop price. Once the stop price has been touched or surpassed, the stop market order becomes a market order and will execute at the best possible price.
  • Stop Limit Order – A stop limit order is similar to a stop market order, except that when the stop price is touched or surpassed, a limit order is issued. This gives you more control of where the order will execute but on the other hand, does not guarantee a fill.

What is Leverage?

In futures trading, leverage is the ability to control a high-value contract with a much smaller investment through the use of borrowed capital. This gives the trader additional buying power and allows traders to control larger positions with minimal risk capital. Compared to other financial instruments which use margin, futures require much less capital up-front and provide the most leverage for the margin. This allows traders to control contracts much more valuable than their initial investment.

However, financial leverage can result in losses greater than the initial margin. To effectively manage risk, traders implement appropriate stop-loss measures when trading volatile and unpredictable markets

What is Margin?

Margin in futures trading refers to the amount of equity that a trader must deposit with a broker to cover any credit risk. It is essentially a line of credit used to trade. A trader can buy on margin by borrowing money from a broker to purchase a futures contract. When trading futures there are different types of margin that one must understand.

  • Initial Margin – Initial margin is set by the exchange and is a percentage that a trader must post in order to hold a position in the next trading session. Initial margin can change frequently and can fluctuate based on volatility. They are only applicable when the market is closed.
  • Maintenance Margin – This is the minimum amount of equity a trader must have in their account at any given time. If funds drop below this account you may receive a margin call requiring you to receive funds immediately to bring the account back to the initial margin level. If you do not do this it can result in a full or partial liquidation.

What is Liquidity?

Liquidity represents the number of participants currently engaged in a market. In futures, this is represented by existing open positions plus all open buy or sell orders in the market. Liquid markets have consistently high levels of trading activity, which results in efficient pricing and execution.

Liquidity gives traders opportunities to buy or sell at every price level. Without it, no one would be able to get the prices they wanted. If a speculator is “long”, then they want the market to go up to sell at a higher price. If a speculator is “short, then they want the market to go down to buy back at a lower price.

What are Futures Roll Dates?

Futures contracts are only active for a specific amount of time before they expire. Each market has its specific expiration sequence throughout the year and often extends into the next year. Prior to a contract expiring, futures traders must either exit their active position or roll their position to a later date, which extends the expiration period. This is called rolling a contract.

In addition, all futures contracts are either cash-settled or physically delivered. When cash-settled futures contracts expire, a simple debit or credit is issued. Physically delivered contracts require a trader to either produce or take delivery of the underlying commodity upon expiration. While physical delivery of a commodity is technically possible, traders primarily avoid futures delivery by closing or rolling over their positions.

How do Investors use Futures?

To understand how investors use futures one must understand the back-and-forth relationship between hedgers and speculators.

Hedging with Futures

Someone who considers themselves a futures hedger is a person who takes an offsetting or opposite position in one market to offset losses in a related market. Traders use this strategy to limit risk, but it will also cap potential gains.

Speculation Investors

A speculator is someone who trades with a higher-than-average risk in return for a higher-than-average potential profit. Speculation traders are willing to take larger risks in the hopes of making larger potential gains.

Speculators have no intention of delivering or receiving goods, but they rather take advantage of price movements in a quest to be profitable in their position. They take on the risk of market fluctuation, which provides liquidity to the markets. Liquidity allows everyone to enter and exit the market easily.

Types of Futures

When trading futures there are many opportunities to trade different markets as well as trade different sizes of contracts. Futures give traders the ability to trade standard, e-mini and micro e-mini contracts. These smaller-sized contracts allow traders to trade smaller contracts in liquid markets with a reduced financial commitment and increased buying power.

Stock Index Futures

Some of the most popular futures markets to trade are stock index futures. Traders can use index futures to speculate on the price direction of the S&P 500, Nasdaq-100, the Dow, and Russell 2000, just to name a few.

Crude Oil Futures

Micro Crude Oil futures from the CME Group provide an ideal opportunity for traders to experience the benefits of oil futures trading at a reduced cost. With a smaller contract size, more traders can now take advantage of the leverage and liquidity of one of the largest commodity markets.

Natural Gas Futures

One of the most popular contracts available to trade Natural Gas is CME Group’s NYMEX Henry Hub Natural Gas (NG) Futures. Natural Gas is the world’s third-largest physical commodities futures contract & NG futures serve as a global benchmark for this market.

Metal Futures

Metal Futures from CME Group is designed for active traders looking to trade physical gold and silver in smaller increments or those seeking to trade a cost-effective alternative to the larger metal contracts.

Forex Futures

When compared with spot forex, currency futures trading offers considerable advantages for traders. From transparency on a regulated exchange to the absence of uncertain transaction costs, there are many reasons to explore trading forex futures.

Cryptocurrency Futures

Micro Bitcoin futures (MBT) & Micro Ether futures (MET) are the latest addition to the suite of ever-growing Cryptocurrency products from CME Group. These cryptocurrency futures contracts allows traders to get long or short to position themselves for movements in the price of Bitcoin and Ether.


Comprehensive List of Futures Contracts

Here is a comprehensive list of futures contracts available to trade with NinjaTrader

Commodities – corn, soybeans, wheat, oats, rice, milk, whey, butter, cheese, cattle, hogs, pork bellies, lumber, cocoa, coffee, cotton, sugar

Energies – crude oil, natural gas, electricity, ethanol

Interest Rates – Eurodollar, Fed funds, 30-year bonds, 10-year notes, 5-year notes, Euro-Bund, Euro-BOBL

Metals – gold, silver, copper, platinum, uranium

Stock Indexes – S&P 500, S&P Midcap, Nasdaq-100, Dow, Nikkei 225, CCi, FTSE 100, Euro Stoxx, DAX

Cryptocurrency – Bitcoin, Ether

Advantages and Risks of Trading Futures

Like all trading, there are many advantages to trading futures and there are also risks.

Advantages to Trading Futures

  1. Lower Financial Commitment – Trading futures has a significantly lower financial commitment. For Wall Street speculators, Micro E-mini equity index futures allow traders to get started at a fraction of the cost with minimal risk capital and low margins.

    While opening a margin stock trading account requires at least a $25,000 balance to actively day trade, there are no account minimums to trade futures.

  2. High Leverage – Futures trading provides the ability to control high-value contracts with smaller investments for boosted buying power. Known as leverage, the use of borrowed capital gives traders the power to control large positions with minimal risk capital.

    It is important to understand that financial leverage can result in losses greater than the initial margin and traders should be aware of the risks involved in trading futures.

  3. Trade Around the Clock – Compared to stocks & ETFs which have a regular trading session of only 6.5 hours 5 days a week, futures products trade nearly 24 hours a day, 6 days a week. This allows for more trading flexibility and the freedom to manage positions any time of day.
  4. High Liquidity – Futures markets tend to be highly liquid, making it easier to execute a trade quickly and at the desired price.

    A large presence of buyers and sellers means futures prices are less vulnerable to drastic price fluctuations. As a result, positions can be initiated & liquidated rapidly without significantly impacting price.

    Liquidity can be an issue when trading individual stocks and attempting to get a fill at the desired price. Additionally, due to the lower liquidity of stocks, they are more susceptible to rapid price swings influenced by institutional players.

  5. Centralized Markets – Futures markets are centralized and consolidated whereas equity markets are fragmented and much less transparent. With futures, all traders see the same transactions and volume information since all trades are transacted in a centralized market. On the other hand, stock trading takes place across dozens of exchanges. Liquidity and volume can be spread across several trading venues, obscuring volume data.
  6. Loading...
  7. Tax Advantages – There are tax advantages to trading futures. A profitable short-term futures trade will pay less in taxes than with an ETF due to the IRS classifications on markets such as futures under Section 1256. Capital gains and losses are calculated at 60% long-term and 40% short-term.

    This means a futures trader can take 60% of their profit at the more favorable long-term tax rate even if the contract was held for less than a year. This is unlike equities or ETFs where you are taxed 100% at your normal income bracket.

  8. Trade Stock Indexes – Lastly, when trading futures you can trade stock indexes. This allows participants to trade an entire market versus picking and choosing from countless individual stocks. With E-mini and Micro E-mini equity index futures, traders can participate in the 4 most popular US stock indexes:
    • S&P 500: Gain exposure to the most liquid US benchmark index (ES, MES)
    • Nasdaq-100: Trade the top 100 non-financial companies listed on the Nasdaq exchange. (NQ, MNQ)
    • Dow Jones Industrial Average: Speculate an index comprised of the 30 top American blue-chip companies. (YM, MYM)
    • Russell 2000: Access the bottom 2,000 stocks within the Russell 3000 index. (RTY, M2K)

Risks to Trading Futures

Managing risk is a critical component of being an effective futures trader and only risk capital should be used for futures trading.

Risk Capital is the monetary amount set aside for speculative trading which could be lost entirely when trading futures. Factors that influence a trader’s risk capital include risk tolerance, age, experience and portfolio size.

  1. High Leverage Means More Risk – One major risk associated with futures trading is leverage. Leverage is inherent in futures trading and refers to the ability to control a high-value contract with a much smaller investment through the use of borrowed capital. This boosts a trader’s buying power and allows traders to control large positions with minimal risk capital.

    While leverage is what makes futures trading so opportunistic, it is crucial for traders to understand how it works as well as the role of futures margins.

  2. Low Liquidity and Slippage – Another risk to trading futures is low liquidity and slippage. Liquidity refers to the number of active participants within a market at any given time. Some markets have higher liquidity than others. Low liquidity in a market can make it difficult for traders to enter and exit a position at their desired price.


    Slippage is the difference between the desired price and the price where a trade is filled, and most often works against the trader. Slippage tends to occur more often in times of low liquidity. Traders should choose contracts with appropriate liquidity for their trading style, position size, and risk tolerance, allowing flexibility in their strategy while reducing the chances of slippage.