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Futures

Futures markets are among the world’s biggest and most active markets.

1. Futures Exchanges

The 2 biggest futures exchanges in the world are in Chicago.

There is the Chicago Board of Trade [CBOT] where U.S. bond futures are traded. The 2 most traded futures contracts are the 10 year note and the 30 year bond.

The other big exchange is the Chicago Mercantile Exchange [CME].

Through the CME you can trade currency futures such as the US dollar index, Euro, Yen, Pound and Australian dollar.

You can also trade the stock market indexes through the CME, such as the emini S&P and emini Nasdaq 100 futures.

2. Futures Offer Major Leverage

Futures offer more leverage than is available in most markets.

It is therefore imperative to use stop loss orders to cut losing trades fast.

3. You Can Buy Or Short Sell Futures

You buy or short sell futures contracts in the same way.

4. An Initial Deposit Is Required

Whether you buy or short sell, your broker will require what is called an initial deposit.

As an example, to trade one Australian dollar futures contract through the CME, your broker will put aside $2200 of your account as your initial deposit.
If you want to trade 2 contracts it will be $4400, and so on

5. You Need To Know The Tick Value

If you trade futures it is important to know the tick value. I refer to the value of an incremental price move on your account.

For the Australian dollar CME contract the tick value is $10.
In other words, if you buy one contract at 7035, and the price rises to 7036, you make $10.
For the emini S&P futures the tick value is $12.50. 1921 to 1921.25 = $12.50.
So, a move from 1921 to 1922 = $50.

6. Futures Are Marked To Market

Unlike owning shares, where you do not realise your profit or loss until you exit, futures are Marked to Market.

This means your profit or loss is realised at the end of each day, and your account is adjusted. If you have lost money that day the broker needs to access your account to top up your initial deposit.

If you do not have the additional money in your account your broker will require you to deposit the money, or close the position.

It is therefore unwise to commit your full account to positions, because there won’t be anything left aside to cover possible losses.

7. Futures Have An Expiry Date

Futures contracts have an expiry date, and you need to be aware of that date.

Some commodity futures are deliverable, so you need to exit your position before expiry. Your broker will let you know if that is the case.

The futures contracts for the stock market indexes, currencies, and bonds typically expire on a date in March, June, September or December.

Commodities however can have expiry dates in other months.

To continue your position past the expiry date, you will need to exit your position in the expiring month, and enter a new position in a contract that does not expire for another 3 months [i.e. the new spot contract].

For example, if you are long one September Australian dollar contract, because that contract expires in September, just before it expires you can choose to sell your September contract and buy a December contract [which won’t expire until December].

Knowing expiry dates is important. Your futures broker will have these listed.

8. Prudent Risk Management Is Critical

Due to the leverage, if you do not exercise prudent risk management, with the diligent use of stop loss orders, futures trading will be high risk, and you can lose significant sums.

However, with the use of stop loss orders, and sensible staking levels, the risk can be tamed.

9. Trade Just One Contract To Begin

For everyone new to futures, to minimise the risk, I recommend to trade no more than one contract for the first 6 months.

If you trade just one contract, and cut losses fast, in all likelihood, you will find the experience rewarding.

In contrast, if you ignore my advice and are irresponsible, then futures trading will almost certainly end in grief.

10. The Most Popular Futures To Trade

In my view, the best contracts to trade for the first 6 months are …

  • emini S&P [initial deposit $5000]
  • emini Nasdaq [$4400]
  • US dollar index, Australian dollar, Euro [$2200]
  • US 10 year note [$1485]

Note that these initial margins are estimates only, and you should confirm the initial deposit for yourself when trading futures.

11. About The SPI

For those who are wondering about the SPI, which is the futures contract based on the ASX 200 and traded on the Australian Securities Exchange, I suggest it is ideal NOT to trade the SPI for the first 6 months at least.

The reason is, the Australian share market is too easily dominated by big orders.

You can have a buy signal and be convinced it is a great one, and then for no apparent reason there is heavy selling and the market falls.

Yes, this can happen in any market, but it happens all too often in the Australian market making SPI trading a difficult undertaking, at least more difficult in my opinion that trading the emini S&P or emini Nasdaq.

12. The Next Step

Once you are happy with your trading, and have confidence in your rules and strategies, if you are interested in becoming a professional trader, then futures trading is the next step.

But remember, prudent risk management is all important. If you are going to trade futures you really must cut losses fast every single time. Failure to do so will almost certainly end in grief.

Key Points

  • The world’s biggest futures exchanges are the CME and CBOT.
  • Through the CME you can trade currency and stock market index
    futures, such as the emini S&P and emini Nasdaq.
  • Through CBOT you can trade bonds such as the 10 and 30 year.
  • Futures involve major leverage.
  • To trade a futures contract your broker requires an initial deposit.
  • It is very important to know the tick value of any contract you trade.
  • All open positions are marked to market at the end of each day.
  • All futures contracts have an expiry date. You must know this.
  • Diligent and uncompromising risk management is all important.
  • Trade only one contract at a time for the first 6 months.
  • In my opinion the best futures contracts to trade are the emini S&P,
    emini Nasdaq, 10 year notes, US dollar index, gold and oil.
  • Be sure you have a pattern of success trading ETFs before trading
    futures.