An Introduction to Futures Trading

[stream1981]

An Introduction to Futures Trading Basics

Some Important Information About Trading Futures and Options on Futures

Futures trading involves the substantial risk of loss and is not suitable for all investors. Trading advice is based on information taken from trades and statistical services and other sources which we (as PCM Brokers) believe are reliable. We do not guarantee that such information is accurate or complete and it should be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder. Past performance is not necessarily indicative of future trading results.

When analyzing option strategies, it is important to take into account the commission and fees associated with making a trade. Similar to trading futures, each contract executed in an option strategy is charged commission and fees. Commissions and fees from brokerage firms can be up to $99 per round turn with the vast majority of people paying significantly less. Your actual charges may vary based on the service level you choose. The two primary factors investors tend to overlook when trading options include:

• Each contract traded is charged a commission. This is often misinterpreted as each spread or strategy that is charged a commission. If you trade one bull call spread, your account would be charged for 2 contracts rather than 1 spread.

• Customers often try to sell or collect premium on options that are far out of the money with the belief that they are collecting “easy money.” The further away an option strike price is from the current market price, the lower the value of the option. Make sure that you are not paying more in commission and fees than what you are collecting. Keep in mind that until an option expires, you do hold risk in the positions. Is the net premium collected after paying commission and fees worth the risk?

[stream1981]

Let's Get it Started!

Many of the savviest traders in the world trade futures. For starters, they appreciate the exposure to worldwide markets on regulated exchanges and regulated counterparties.

They also like increasing the efficiency of their trading capital via the leverage available in futures. And, finally, they know they can count on the futures markets’ liquidity to help them execute their ever-changing strategies.

You can be a savvy futures trader, too. This guide will start you down the path with a good explanation of the basics—from how prices are quoted to understanding margin to trading strategies. We hope it will inspire you to try your hand trading some of the most exciting markets in the world.

Everyone on our team is devoted to providing the service you need to become a successful futures trader.

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Futures 101

Futures contracts are financial instruments focused on discovering the price of a specific commodity or asset at a specific time in the future—anywhere from tomorrow to years from
now.

Most often, though, futures traders are focused on price prospects over the next few months.
In futures, as information about the supply and demand for the underlying asset changes over time, the price of the futures contract changes as traders take positions based on their opinion of what the asset’s price will be at that certain point of time in the future.

What is a Futures Contract?

A futures contract is an obligation to buy or sell a specific quantity of a certain commodity or asset on a future date at an agreed upon price.

Because the terms of futures contracts for each commodity or asset are standardized (i.e., same quantity, quality, delivery), they can be traded on an exchange. The only variable is the price.

Today, futures contracts represent commodities and financial instruments you know and hear about in the news every day, including oil, corn, gold, popular stock indices and foreign
currencies.

How Futures Trading Works

Futures trading occurs on federally regulated exchanges, which facilitate the place where buyers and sellers trade as well as post-trade clearing. In the United States, futures trading began in the mid-1800s as a way to bring together producers and users of grains and cotton. Today, the CME Group in Chicago is the largest futures exchange in the world; its stock is listed on the New York Stock Exchange.

In futures trading, the buyer and seller create a new contract with each trade, and the number of contracts that can be created is limitless. In contrast, a limited number of shares of stock are available to trade for each company that is publicly listed and traded.

Remember, it’s a “futures” contract. You are taking a position on what you think the price of something will be on the date the contract expires. If you’re trading crude oil and you
believe the future price of oil will be higher, then you would buy the contract. If you believe the future price will be lower, then you sell the contract.

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What is Margin?

Margin is essentially a good-faith deposit. It represents a small percentage of the total dollar value of the contract you have agreed to buy or sell at a future date.
There are two types of margin. Initial margin is the amount of cash (or equivalent) you must have in your account at the time an order is placed. Maintenance margin is the dollar amount that must be maintained in the account to continue to hold the futures position.

Margin Call

A margin call occurs when there is not enough cash in the account to cover all the maintenance margin required to hold all the positions in the account. It is a call for money. A margin call generally occurs when prices move against your positions. Many experienced traders view a margin call as a red flag that their trading strategy might be flawed. Market conditions permitting, brokerage firms might allow up to five days to meet a margin call, even though they are due payable before the next trading day begins.

Expiration and Delivery

An important aspect of trading futures is understanding that futures contracts ultimately expire and cease to exist. On the expiration date, futures contracts may call for physical delivery of the commodity, while others are settled in cash. But, don’t worry. When you make a futures trade, you don’t need to make or take delivery of the commodity. In fact, if you’re like the vast majority of futures traders, you will offset your position long before ever being faced with the delivery process.
To close out a position in a futures contract, and avoid delivery, you offset the contract by taking an equal, but opposite, position in the same contract month. Thus, if you were long a futures contract (i.e., having bought a contract), you would sell a matching contract; if your initial position were a sale, you would buy to offset it. Either of these actions exits your position and gets you even.

Counterparty

Once you have a position in a futures contract, that contract is cleared and held at a clearinghouse, which ultimately is your true counterparty so that you may exit the position at any time. The futures exchange clearing corporations handle this process automatically.

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Trading Symbols


In futures trading, each commodity has its own symbol, e.g. “C” for corn or “ES” for the E-mini S&P 500. However, each market might have more than one symbol to represent contracts trading on different exchanges or on different platforms, e.g. trading pit or electronic. For example, wheat in the Chicago Board of Trade trading pit is “W,” but is “ZW” on the CBOT’s electronic platform and “KW” on the Kansas City Board of Trade.


Your Broker representative can help you find the contract symbol for the product, exchange and platform you wish to trade.

Each commodity contract has an expiration month that also is abbreviated by symbol:

As an example, the symbol for the July 2014 soybean contract at the Chicago Board of Trade would be SN4 for the pit-traded contract and ZSN4 for electronic trading.

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Know Your Contracts

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[profit]

Isn't it better to trade futures as CFD? What is the sense paying more spreads, e.g., having more trading costs..

[nguoivodanh]

Each has different business orientation. I developed their work as widely as possible within your business stronger

[PCMNewsdesk]

Isn't it better to trade futures as CFD? What is the sense paying more spreads, e.g., having more trading costs..

Hi,
Thanks for your concern and your nice idea.
You are always welcome to say your idea around here.

I'm sure our dear member stream1981 have something to offer on intruding CFD as a thread too.

Isn't it stream1981?

[stream1981]

Hi,
Thanks for your concern and your nice idea.
You are always welcome to say your idea around here.

I'm sure our dear member stream1981 have something to offer on intruding CFD as a thread too.

Isn't it stream1981?

Hi,

Sure dear PCMNewsdesk

definitely it is!

I'm working on a a more detailed presentation stuff about futures trading, and I will try my best to offer it it as soon as possible right here in this forum.

The great God bless you all