Futures Trading Basics– Best Guide for Trading and Investing

futures trading

What is futures trading?

Futures trading is when two parties come under a contract where they agree to buy or sell an asset at a pre-decided price on a date in the near future. Futures contracts are mainly made over the commodity sector of the market. Oil is one of the most traded commodities traded in the futures market. Let us understand about futures and the basics of it. 

What is a futures trading contract?

Futures contracts are a legal agreement that binds two parties under an agreement to buy or sell as an asset at a predetermined price on a date in the future. Trading via futures can happen only on futures exchanges. The Buyer and the seller both have an obligation to either sell or buy the underlying asset as soon as the contract expires.

The seller has to sell; the Buyer has to buy. Since futures trading happens majorly over the commodities sector, the traders have to generally prove in an audit that they have the space to store the asset which they have traded on.

This is how the futures contracts work:

The contract opens and closes at a certain date. This is when the price of the asset is decided, this is usually the current price. The profits and the losses depend on the fluctuation that the asset witnesses. If the price plunges lower than what it was when the contract was locked, the seller is at a loss and vice versa. 

One thing to remember while trading in futures is that the casino never loses. No matter how big the trades are and no matter how right you were in the speculation, the market is always in the profit. One thing that you should never do is to try and outrun the market because since it is genetically designed that way, it outran you the moment you made a bet. 

How to use futures contracts for a better profit:

The futures market is heavily influenced by leverage. This technically means that the trader does not need to have the total value of the contract as he or she enters the trade, but just a fraction of it. The rest will be fulfilled by the broker. 

Here is how leverage on futures trading works:

The trade is for, say, $1000. The trader is using the leverage of 1:100, and hence, the trader is now playing over a position worth $100,000. It is not crucial that the trader has the same capital. It is good but not crucial. Now, assume that the position that is being traded is fluctuating.

 It is natural that the fluctuations will be reflected in the principle that the trader has invested. Now assume that the fluctuation is worth $800.

This is not as large if compared to the position being played. But it is a staggering 80% of the initial capital invested. If that happens, which hypothetically did happen, then the broker has a right to make a margin call to the trader. If the trader fills up the funds immediately, only then he or she can stay inside that trade. 

If not, then the trade is automatically exited from the broker’s end. It does not matter that from the point from where the broker exited the trade, the trade would go up and beyond. 

This is what happens in the real market and in the futures markets as well. That is how leverage lays you when you try to outplay it. 

What are the best futures trading strategies?

1. Pull-BackTrading Strategy:

It is a powerful futures trading strategy that is mostly based on price pullbacks. Pullbacks occur when the price breaks above or beyond the support/resistance levels, reverses, resets and breaks again.

While going with an UpTrend, the price will break from a strong resistance level. It will also reverse for testing that level again. Once the testing is done, the trader will enter a long position in the direction of the uptrend. 

While seeing a downtrend, the price will break below a strong support level; it reverses and retests the levels again. This is a classic case of a pullback, and the trader will enter a short position here. 

Pullbacks are formed when the participants of the market begin cashing their profits out. This pushes the price in the opposite direction, almost imitating a breakout. The participants who just missed their initial price move are generally waiting for the price to return to the point where it broke the resistance so that it can enter a better price. 

The pullbacks generally take advantage of an important characteristic of technical analysis. When a crucial resistance or support level breaks, that level changes genetically and becomes the support or resistance, respectively. 

The resistance may become the support, and the support may become the resistance. This phenomenon is correct for the higher time frames like the 24-hour frame. This can also be observed in the smaller time frames like the 20 or 6- minute chart. 

When the traders are playing around with pullbacks, they are advised to place their stop-loss orders right below the support, which was previously the resistance. During an uptrend, the traders are advised to aim for the recent highs so that they can book the maximum profits. 

Similarly, while trading in a downtrend, the traders should look for the previous support for maximum results. 

2.Range trading:

Range trading refers to the trading when the traders try and scrape profits off of bouncing from different resistance and support levels on a chart. The markets are different in their nature. Some of them like to move in trends. Like the stocks, while others like to trade in the range. 

What most of the market participants think is that when the market has difficulties breaking over a certain point, the participants will think of that level as the level of resistance. When the price reaches the same level, some will be booking profits, and others will begin going short in the market. Both cases increase the selling pressure, and as a result, the price falls.

On the other hand, when the price has difficulties in breaking free from a certain level and then reaching the same level again, the participants who have already shorted begin booking their profits, and the others will begin buying them at lower prices. Both the cases will increase the buying pressure, and the instrument is likely to see a price hike. 

Apart from trading strategies, there is also a buyer and a seller interest involved in future’s trading. Let’s read about it more:

Buyer and seller interests:

Traders sometimes utilise the data of the seller and buyer interest when they have to decide whether they have to sell or buy the future’s contract. The Buyer and seller interests are determined with the help of the depth of the market window. This place shows the number of open and closing positions at a price level. The depth of the market is also a metric for the liquidity of the underlying asset. A bigger number in terms of orders at a price means higher liquidity and vice versa.

Some brokers also refer to the market depth as the order book since it shows the exact number of pending orders for an underlying asset or currency. These lists are updated in real-time to reflect the absolute trading activity in the market. 

If there are large orders, then that will not necessarily reflect the price of an asset that is highly liquid. However, if the liquidity and depth of the market are low, even smaller trading orders can have a big impact on the price. 

The traders can build concrete strategies around the order book or the depth of the market.

The stocks and all the other financial instruments have a tendency to move towards the price levels that have the largest orders. 

What should  I avoid while futures trading:

While trading in futures there are a few things that you should avoid:

1. Do not trade in highly illiquid markets: 

The market liquidity depends on the number of sellers and buyers at every price level. Any highly liquid market or an instrument, like any currency pair or any blue chip stock all have one thing in common and that is a large number of market participants who are ready to jump in at any given price level. This in turn, reduces the volatility of the asset and thetrading risks involved, both at the same time. The thing with illiquid markets is that they can fluctuate a lot even on very small trading orders. This can lead to heavy losses. 

2. Scalping:

Scalping is a well known short term trading style and the traders try to scrape off the profits from the slightest of the price movements in this strategy. ITs fast paced and will mostly attract the traders who are just beginning to trade. Scalping needs a strong heart of the trader and the discipline of a ninja. The idea is to first learn long term trading strategies and then get into short term trading like scalping. 

Bottom Line:

Futures trading can be risky for novices, and hence it is advised that you study the market for a while first and then begin trading in the derivatives like CFD and futures. It has to be kept in mind that both of these are leverage heavy instruments and leverage can create havoc if not checked in time. 


How can I trade in futures?

To trade in any derivative, you need a trading account first. We recommend the leading online broker HFTrading. The broker has been in the market for a long time and is the trading name for CTRL investments Pvt. Ltd. The parent firm is regulated by the Cyprus securities and exchange commission (CySEC). 

With the broker, the traders have an option to trade over more than 160 CFD tradable assets via three different trading accounts. Each account is created while keeping the level of expertise a trader might hold. 

Is trading in futures risky?

Futures trading can be a little risky since the game is about speculations only. Make sure you are speculating right by using the correct math.

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