Futures Basics

Market Basics

A futures contract is an agreement to buy or sell a specific instrument or commodity at at a specific price and date in the future. Futures contracts traditionally you can use a futures contract to lock in a price of a commodity to protect against price volatility in the future. So if a coffee business wants to buy coffee at a fixed price they can buy a futures contract to acquire it at a current market price.

There are different markets futures allows you to get exposure to: there are interest rates, agriculture, metals, energy, equity index, forex, and options on futures.

Futures allows you to speculate on the price of these assets. A Futures trader can potentially profit by speculating on which direction the price will go. US Equity Futures markets are open 24 hours a day during the weekdays and open sunday during the sunday open.

Every product has their unique trading hours. Each contract also specifies the tick size. The minimum price increment the contract can fluctuate. Another is contract size which is a the amount of the commodity or instrument you control. For example 1 oil contract is 1000 barrels, 1 GC contract controls 100 oz of gold, and 1 ES contract controls 50x the price of the s&P.

Notional value is a the component of how much value each contract is worth. This is current market value of the futures contract. You multiply the size of the contract by current price. So ES is 50 x index price. So if its at 4000 then the value is 200k.

Contracts are either financially settled or physically settled, so when expiration comes you either receive cash or commodities. Most brokers do not allow delivery of products so it is usually cash settled.

You do not need to have cash the meet the notional value but the initial margin. Next I will talk about margin and leverage.

Futures contracts hold alot of leverage and many traders are attracted to this because it allows traders to commmitl a small amount of capital to control a large asset. So small changes in price can result in larger profits or losses.

In futures this leverage is made possible with trading on margin. It is the amount of funds required to enter a futures position which is usually a fraction of the contracts total value.

Its quite different from Stock margin as you borrow against your assets as a loan but with futures margin you put a good faith deposit called the initial margin requirement. Gains and losses can exceed the initial margin requirement.

If you go long ES contracts that means you are buying at the current price. For example if you buy at 4000 for example the notional value of the contract is 200,000 dollars. Which means that is cash equivalent of controlling 200k worth of assets. That means if you want to have a portfolio of 200,000 you would need 200,000 dollars in stocks or etfs. But with ES you can control that 200k with much less capital. Ninjatrader for example lets you control it with 500 dollars intraday. So 500 dollars lets you control 200,000 dollars.

There are different margins you need to be aware of, initial margin, maintenance margin, intraday margin. The initial margin is 110% of maintenance. When you enter a position for a swing trade you need to meet the initial margin.

Maintenance margin is lower than initial margin and is what you need to hold above in cash value or else you get margin called.

Intraday margin is the cash balance required if you were to hold or take positions intraday.

At the end of day futures are settled at the end of the day. Or marked to market. It is when the daily gains or losses are credited or debited to the account. If you lose you get debited and reduce your account balance, when you make money you get credited and your account value increases.

So why trade futures? Well futures your broker doesnt trade against you. For example forex the broker trades against you. Robinhood sells your information to the HFTS

Futures has extremely high margins some you can hve 200:1 leverage. This makes them a good product for beginners because it lets you trade in a short time frame without pdt rule and take alot of trades and give you more experience to learn from.

There are alot of intstruements that are sized for small accounts like micro futures. MES allows you to trade with only 50 dollars per contract but i recommend atleast 500-1k account value. It is 5 dollars a point so it is very manageable. Or you can trade sim in futures which is way more accurate than other markets.

Futures is the best way to learn pure trading. With futures you trade with one exchange and you can see all the data. Forex doesnt let you see volume, crypto is fragmented and across many exchanges and hard to see big picture.

Futures allows retail traders to have access to detailed market data.

Even taxes are lower in futures. You have a 60/40 rule so 60% of gains is taxed as long term capital gains and 40% is short term cap gains. More money to trade for you in the long run.

To build strategy you collect data and see what setups work and what doesnt work. Futures trading is all a probability game. You take a data set taken over a period of time and determine if it is a profitable strategy longterm.