How to Invest in Futures Trading - What You Need to Know

Basics – What is a futures market?

In the futures market, futures contracts are mostly bought and sold either for hedging or speculation to make profit. One party agrees to buy a given quantity of securities or a commodity,  and take delivery on a certain date. The seller agrees to provide or deliver the commodity at the specified date.

Futures and options are traded through exchanges and  firms or brokers registered with the Commodities Futures Trading Commission.

Basics of Futures Trading

Most futures traders are speculators who buy or sell futures contracts or options on futures with the goal of making profits. Most futures contracts are traded in centralized exchanges like the Chicago Mercantile Exchange and the Chicago Board of Trade, through a broker like PitBase.

Commodity futures markets include currencies, energies, financials, grains, stock indexes, indices, meats metals & softs.

Contract Specifications

There are key elements a trader needs to know before trading futures. The tick size, contract size and contract value. They help  traders determine the monetary value of their position, while managing risks

Tick Size:

Tick size refers to the smallest amount that the price of a futures contract can change or fluctuate.

Let’s use the E-mini S&P 500 as an example. One point of the S&P 500 index equals $50. The E-mini S&P 500 has a tick size equal to 0.25 of an index point.  So a tick size of the E-mini S&P 500 equals 0.25 X $50  = $12.50. So every tick move of the E-Mini S&P 500 is worth $12.50.

For tick values of other commodities, check out the contract specifications  on PitBase website.

Contract Size:

Contract size refers to the deliverable quantity of the underlying asset of the futures contracts. The contract side of the E-Mini S&P 500 is $50 X the index value.

For contract sizes of other commodities, check out the contract specifications  on PitBase website.

Contract Value:

Value of a contract can be calculated by multiplying the contract size by the current price.

Value of 1 contract of the E-mini S&P 500 is $50 x S&P 500 Index. If the underlying index is trading at $3,500, the contract value equals $175,000 ($50 x $3,500)

How to trade futures

Getting started is relatively easy. Open an account with a futures broker like PitBase. The process will involve asking and verifying information about who you are.

The broker will also ask about your income, net worth and experience with trading futures. These questions are required by Governing regulatory organizations and determine the amount of risks the broker will allow a trader to take on. This includes the margin and risk exposure.

Brokers charge commissions and fees as you trade with them. Brokers provide varying services and tools that influence your trading experience.

Some brokers like PitBase will allow you to open a Simulated Practice Account. You can practice trading with “paper money” before you commit real money to trading. A Simulated account helps you gain a better understanding of how the markets work.

You also get a better understanding of how to calculate and use tick size, contract size and contract value. A simulated account also helps understand the use of leverage and how commissions affect your account value.

If you are new to futures trading, a Demo or Simulated trading account is a great way to get comfortable with trading futures while developing, improving and getting comfortable with strategies.

Always remember there is a risk of loss in futures trading. Futures trading is not for everyone.

Past performances is not indicative of future results.