Introduction to Futures Trading

What are Futures?

A futures contract is an agreement to buy or sell a contract sometime in the future. Futures contracts have been a part of tradable markets for hundreds of years and date back as far as rice grain futures in Japan. Futures is truly a game of high stakes and big money. A trader has the ability to hold enormous positions with very little money. The only thing required is that you have the cash on hand to meet your broker's margin requirements. There are futures contracts for forex, major indices, commodities, stocks and many other investment vehicles.

How do you trade Futures?

This was one of the hardest concepts for me to grasp as a trader. I remember thinking to myself, "do I have to pay $1,500 bucks for each S&P contract?". After 15 minutes of searching the internet with no luck, I finally called my broker to figure out how to get in the game. My broker informed me that I will first have to complete a futures application. This application will ask you about your trading experience, total assets, employer information, and a host of other personal questions. I quickly filled out the application and it took about 5 days for my account to be approved.

So how does it all work?

There are a number of futures contracts you can trade, but in order to keep it simple, we will be focusing on the S&P e-mini contract. The S&P e-mini contract is often recommended as the fist contract newbie futures traders should start out on. Are you ready for this? It only takes roughly $5,000 to open an e-mini futures trading account. I always thought that you needed some obscene amount of money to get in the futures game. Each point in the S&P e-mini contract represents $50. Now, the S&P e-mini contract moves in quarter point increments and each quarter point move represents $12.5 dollars. So, if you buy 1 contract with the S&P at 1,500 and it moves to 1,506, representing a 6 point move, then you have just made $300. So, as you can imagine, if you were trading 100 contracts, then you would have made $30,000. The one caveat to your road to millions, is that you must have enough cash on hand to meet the minimum margin requirements. This ratio of cash to contracts will vary depending on your futures broker.

Data Fees for Futures

One of the hidden costs with trading futures is the data feeds. Unlike cash market data, which is often free, futures data does not come cheap. These fees can range from as little as $25 to over $50 per exchange. This can become costly depending on how many exchanges you trade, i.e. (CBOT, CME, COMEX, Eurex, KCBOT, MGE, NYBOT, NYMEX, ONCH). If you plan on trading the S&P, you will only need access to Chicago Mercantile Exchange (CME) data.

First paper trade

Trading futures is not an easy business. There are a lot of financial and emotional risks to trading in this fast market. Even more than stocks, you will want to make sure you paper trade, because losing trades can turn into slippery financial slope.