Futures trading for beginners: strategies, features and rules on FxPro
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As a real trader, you are probably eager to learn new things and gradually expand your portfolio of financial instruments. We present you a worthy candidate - futures.
What is a futures contract
Futures contracts are derivatives, i.e. artificially created exchange contracts, which are not so much securities as obligations. Their essence lies in agreements between two parties - a hypothetical seller and a buyer. One wants to buy the underlying commodity/asset, but not now, but in 3 months. The other is ready to sell this commodity at the price agreed upon now. The exchange acts as an intermediary for them.
Contracts can be not only bought (Buy), but also sold (Sell) without having anything at hand but a brokerage account with a balance on it. Transactions are concluded on the principle of speculation on price changes.
What are futures in simple words with examples
For example, the parties have agreed that they will make a deal to buy and sell a bushel of wheat at a price of $50. If in three months that sack will be worth $51, the buyer will be in the money. If it costs $49, the deal becomes a bad deal for him. However, the wheat will still have to be bought back, that is the contract.
It is not by chance that we brought grain as an example. Futures contracts were originally used in the agricultural environment. A farmer needs time to get grain for sale. To do this, he first plants wheat, then grows it, then harvests it. Of course, he does not only want to recover his costs, but also to earn money. That is why it is better for him to know in advance that there will be a buyer for his goods. The latter, in turn, also wants to be sure of a specific price for the raw materials he needs in the future (for example, he bakes bread).
It turns out that for the seller it is an opportunity to plan a guaranteed delivery of goods, and for the buyer - to freeze a favorable price. In fact, the main task of this instrument is hedging, i.e. risk insurance. If the seller thinks that the price of the goods may go down and the buyer is sure that it will go up, the deal becomes favorable for both parties.
Three months pass. Suppose the price of wheat does fall. This will not affect the price specified in the contract: the buyer will still have to buy the grain at the agreed price of 50 dollars per bushel. The seller stands to gain. The buyer can also wait for the price increase and resell this wheat. Or he can use it for bread production right away.
Futures for speculation
The next point is that the concepts of "seller" and "buyer" in this context are purely conventional. The contract itself is used for speculation, i.e. Buy and Sell transactions based on the CFD principle (on the price difference) during the whole period of its validity. In essence, it turns out that these positions are short-term. In order to be able to get a higher potential profit, traders choose margin futures trading with leverage.
And another important point is the commodity itself, for which the futures are issued. It can be: metals (gold, silver), oil (Brent, WTI), stocks (Facebook, Apple), stock indices (Nasdaq, DJ30), gas (Nat.Gas), commodities (wheat, coffee, corn), as well as currencies, bonds, interest rates and even on the volatility of the Russian market.
You can issue a contract for almost any asset, and therefore you will find quite a few of their varieties on your trading platform.
Collateral Assurance (CA, initial margin) is the insurance of the exchange as an intermediary between the buyer and seller of the futures against the fact that one of them fails to fulfill its obligations at the time of expiration. It usually amounts to about 10% of the full value of the asset, but it depends on the volatility - the higher the volatility, the higher the CS.
In addition, the amount of collateral can change before the expiration date of a futures contract if price fluctuations increase sharply. If the trader's account does not have enough funds to cover the new GO, the transactions on the account will be closed.
It should be said that the collateral is not a commission and is not charged by the exchange. Rather, it is a collateral that is frozen on the account until the correct execution of the futures contract.
How to read a futures specification
Futures are available on FxPro platforms for various types of assets, including the popular ones on cocoa, grains, wheat, various indices and resources. Their tickers are as follows: DJ30_H23, where.
- DJ30 (asset abbreviation),
- H (expiration month) 23 (year).
Expiration months are denoted by the following letters. Our example records a futures contract on the Dow Jones 30 Index that will stop trading on March 18, 2023.
To see which specific futures are available for each of the underlying assets, you can click on the ticker of interest in the corresponding section on our website.
Also on the page of each futures you will find its trading conditions: this information is a must for beginners.
Types of futures contracts
So, what is futures trading for beginners and not only?
FxPro Company offers its clients CFD trading on futures with expiration. For these assets, several contracts are available on the platform at the same time: with the nearest and farther closing months. If we open the SMI index futures page, we will see that the following tickers are available: SWI20_H20, SWI20_M20, SWI20_U20, SWI20_Z20 and SWI20_H21. You can see the charts of each of these contracts in real time.
What are long and short positions?
The rules for opening positions in futures are the same as in any other market: if you predict that the price will rise, open a long position in futures Buy. If you think it will fall, open a short Sell trade.
Once you decide to close the deal, you can do it at any time before the expiration date of the contract, which is known in advance. There is no need to wait three months: your deal can last even 5 minutes.
Futures Closing and Expiration Date
On the expiration date, one of two things happens on the exchange:
- Either mutual settlement of the futures contracts by the parties, private and institutional traders (this is a Settlement Futures),
- or delivery of the agreed commodity is made (this is a Delivery Futures).
Private traders who trade CFDs on futures are not subject to delivery (these contracts are "non-deliverable"). Thus, if you have an open trade on a Brent contract, no one is going to ring your doorbell with a barrel of oil at the time of expiration. We are talking about speculation on price changes.
So what happens if a trade is not closed before the contract expires? It will be closed by the broker automatically at the price that was last received on the trading platform. All pending orders will also be deleted. Usually, a trader always receives a notification that the contract he is trading is about to expire.
After this date, it will no longer be traded, and the most popular among traders will be a new futures with the next expiration month.
How to trade futures
Futures can be traded very actively, both for buying and selling. But it is still advisable to choose a few clear contracts for yourself, so as not to be atomized and not to overload your deposit.
In fact, everything is traditional in trading futures contracts: if the underlying asset is expected to grow, we should buy, and if it falls, we should sell. However, if the quotes do not go in our direction, we lose the value of the contract when buying, and when selling, the loss is not limited, because the growth can be as big as you want. These risks should be understood and evaluated.
What should be taken into account when trading futures
When trading futures, it is important to remember that it is a speculative asset and a derivative that has a lifetime. Trading futures is different from investing in stocks, it can be a little more technically complex, but there are enough pros that cover this.
Pros of trading futures
Among the pros of trading futures with FxPro are:
- dynamic trading, sufficiently high volatility and liquidity;
- the possibility to trade in microlots in the amount of 0.01 of the whole contract;
- absence of hidden commissions and costs;
- futures trading strategies are already embedded in many popular EAs (Expert Advisors);
- access to the pool of contracts with expiry for a year in advance (possibility to trade not only the nearest two contracts);
- possibility to use leverage up to 1:500 or trade without it.
Minuses of trading futures contracts
It is important to take into account the disadvantages of trading these assets as well:
- risky leveraged futures trading strategies carry not only the possibility of increased profits, but also losses;
- futures have an expiration date and therefore are not suitable for long-term traders;
- the need to select specific strategies;
- at the moment of expiration, all open trades are closed automatically at the current market prices of futures, and pending orders are deleted;
- open trades are not transferred to the futures with the next expiration month: the trader has to open such a deal himself;
- according to the feedback from beginners, it is sometimes difficult to understand how to trade futures: it is necessary to study additional materials.
What is the difference between trading futures and stocks
Futures trading is considered more attractive for private traders than stock trading. There are several reasons for this, among them high volatility, i.e. active price changes. Traders try to open deals on chart fluctuations. Accordingly, the more obvious these jumps are, the more opportunities for a profitable position placement.
However, there is a difference that can be attributed to the disadvantages of futures contracts - it is their expiration date. It is not possible to open a deal on them for several months and forget about it, like on shares.
Another difference is the level of quotations. As a rule, the price of the nearest stock futures and the price of the stock itself do not coincide at the moment. This is because supply and demand for the stock itself and its futures diverge, because traders on the stock exchange do not just buy a security in the hope of growth, but can get into a position to buy, predicting an increase in price in three months, and in the same way get into a position to sell, predicting its imminent fall.
Distinguishing futures from options and forwards
Another important point: a futures contract is a derivative that allows you to realize a deal to buy or sell an asset with certain conditions. But this is not the only option, there are other ways to invest on the stock exchange.
Thus, a forward contract is similar to a futures contract in many respects, however, it is concluded without an intermediary - the stock exchange. All relations take place exclusively between the buyer and the seller, so the expenses on commissions and CS are excluded. In addition, the delivery of a forward cannot be canceled, so it is most often used for the real purchase of an asset.
An option is also an agreement to buy or sell between two parties. However, while an asset must be delivered and redeemed necessarily at the time of expiration of a futures contract, an option only assumes this right. It is the buyer of the option who decides whether he wants to exercise the contract, but he can also refuse to do so. Therefore, an option is a right, not an obligation, unlike a futures contract.
Why are futures interesting to traders?
As you have realized, the basics of trading futures are different from stocks and other derivatives. Not everyone is willing to wait for a long time to make a profit, so they prefer to work futures on the stock exchange as a speculative tool.
In addition, futures are traded 6 days a week around the clock, while stocks are available in certain sessions of a particular exchange.
In terms of margin requirements, futures contracts also win out. Short trades (Sell) with stocks have higher costs, while the margin for working with futures is always the same, about 5-10%. But this advantage should be used carefully, without loading the deposit completely.
Hedging with futures
Often futures are used for hedging, trading simultaneously the contract and the net asset in different directions, thereby insuring positions from receiving disadvantages.
Most often this method is used to work with shares, protecting from the fall of their price by a short position on futures. Then, if the stock price does fall, the profit on the derivative will compensate for this loss.
Futures trading strategies
To successfully trade futures, some traders look for clues to future price movements by comparing the charts of the contract on the exchange with the nearest delivery month and the one following it.
Another category of traders trades on "calendar spreads": it is possible to sell and buy futures with different delivery dates at the same time and make a profit due to the small difference between the sold and bought contracts.
The third compares the spot price of, say, a stock and its futures. If the futures price is higher, this situation is called contango, which translates as "premium over the asset price." If the price of the futures is lower than the price of the asset, a situation called backwardation, a "discount to the underlying price," occurs. It is this difference in rates that traders try to capitalize on. Be prepared that this requires complex calculations.
Of course, the most familiar trading strategy for traders is to treat the futures chart like the chart of any other asset on the exchange, applying the same technical analysis indicators and taking into account the same fundamental factors that affect the underlying asset.
How else to make money on futures
We have already considered in detail the pros and risks of using futures for speculation and hedging on exchanges. But there are more options for successful earning with the help of these derivatives. For example, futures can be traded when important strategies are released, trading and investment strategies can be tested, and the effects of dividend gaps can be reduced.
Where is the best place to trade futures
You can trade futures contracts on other venues. But it is optimal if you have an account with a broker that allows you to trade different asset classes from a single account. Then you won't have to switch between accounts and platforms, and you can save your futures trading strategy settings as a template and use them by default.
For example, the international broker FxPro provides an opportunity to open CFD deals on futures on various assets, including indices, energy resources and commodities. Choose the ones you are interested in and open the familiar Buy or Sell trades with the same Stop Loss and Take Profit levels.
We hope you have learned a lot of interesting things from this article and now you know the answer to the question of how and where to trade futures!