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Warrior Trading Blog

A Beginner’s Guide to Futures Trading

Futures Trading

Futures have grown from covering a few obscure agricultural products to dominating trading for a wide range of different assets and products. There are even futures for intangible measures, such as volatility, that are among the most widely traded securities on the market.

Futures were originally designed to allow buyers and sellers of raw materials to lock in prices to stabilize their costs and revenues. Now, however, futures are used by all manner of investors for hedging and speculation without the need to worry about the ownership of an actual underlying asset.

Trading in futures can often dwarf the trading in the underlying physical asset, such as oil futures, with many times the value of futures contracts changing hands than there is trading volume for the underlying asset.

It is no surprise, then, that many day traders are drawn to futures trading, both for the enormous potential profit and the ability to trade in markets that would otherwise be inaccessible.

However, futures trading has some key features that are important for day traders to understand before they start trading them.

What Is a Futures Contract?

A futures contract is an agreement between the buyer and seller to exchange a certain amount of a good, usually with a specified grade or quality level, for a specific price and on a specific date.

However, many futures contracts now specify the option for a ‘cash settlement’, where the buyer of the futures contract has the option to settle the contract based on the cash difference between the contracted price of the underlying good and its market value at the time of expiration.

One of the best things about trading futures is even though they are an expiring asset they do not experience time decay like options do. That is a huge bonus because with options you could be right on the direction but if it doesn’t move quickly enough you could lose out on profits due to time decay.

Valuing Futures

Futures valuation is different from what day traders will be used to from trading traditional securities.

As a derivative, a futures contract derives its value from the value of the underlying asset and the time until expiration.

Obviously the value of the futures contract is heavily influenced by the value of the asset from which it derives, but it is the time value of a derivatives contract that makes valuing futures unique.

The time value of a derivatives contract is the result of the potential price variation that can happen between the present and the expiration date.

For example, while a current barrel of oil may trade at $75 per barrel, a futures contract with a strike price of 75$ may have a different value because the price of a barrel of oil may change between now and the expiration date, and the holder of the contract would face a profit or loss based on that potential change.


Because most contracts are set to expire in a reasonably short amount of time, traders are generally allowed to place only a marginal portion of the contracted value for a futures contract.

This means that futures traders have access to a significant amount of leverage via their futures exchange, in addition to whatever leverage their broker provides.

Therefore, futures trading offers the opportunity to make highly leveraged wagers on many potentially volatile assets. Futures traders face the potential for gains and losses that are exceeded only by what options contract traders experience.

While leverage is neither inherently good nor bad, it can be a double edge sword because on one side you have the ability to make out sized gains while on the other side you can lose more than your account is worth. While trading futures you have to be very protective of your positions and make sure you have hard stops in at all times.

Trading Futures

To actually trade futures you will need to find a broker that offers this service, and often gain explicit approval to trade in the contracts. Not all brokers offer futures trading, and most require a minimum amount of knowledge or experience in futures trading, a minimum account balance, or both.

Once you have access to the futures market, you need to decide what kind of futures you want to trade and on which exchanges.

The futures for different asset classes will behave differently and each exchange will have its own rules for trading and settlement, all of which a day trader must understand before they can start making reliable trades.

Steve, head futures trader at WE Trade Desk, had this to say about trading futures, “Trading futures allows me to speculate on fluctuating prices of commodities at a fraction of the cost and the nearly around-the-clock access to the markets for most markets lets me manage risk prudently.”

Futures trading isn’t for everyone, but those with higher risk tolerance and the discipline to manage trades objectively, futures trading can be a great route to take.

Futures Trading Strategy

Unlike most equities and bonds for which day traders have generally universal access to all public information, futures contracts cover assets that may be only lightly regulated and for which little or no public information may exist.

This means that day traders will be going up against institutional traders with an understanding of fundamental factors that can be hard to match.

Therefore, most day traders tend to trade on technical factors in the futures markets for which institutional investors have a major advantage. Futures contracts also offer day traders a number of opportunities for arbitrage trades.

An easy way to start with futures in your portfolio is by analyzing the futures indices which include the Dow futures, S&P futures, and NASDAQ futures.

Another popular strategy for technical traders in the futures market is Market Profiling which entails using volume based on price, not time, to find value areas to trade against.

Final Thoughts

Futures have a lot of great attributes for traders but just like any other trading instrument they need to be approached with a firm understanding on how they work. To recap, futures are:

  • Highly leveraged
  • Trade almost all day and night
  • Extremely liquid
  • Not susceptible to time decay
  • Do not require a lot of capital to trade

Those are some pretty big benefits. If you are interested in trading futures you should definitely look at adding TAS Market Profile to your charting. It is one of the best tools you can have for futures trading and is used by institutional and retail traders.