How to Trade Futures
Learn how to trade futures and explore the futures market
Understanding the basics
A futures contract is quite literally how it sounds. It’s a financial instrument-also known as a derivative-that is a contract between two parties that agree to transact a security or commodity at a fixed price at a set date in the future. It is a contract for a future transaction, which we know simply as “futures.” The vast majority of futures do not actually result in the delivery of the underlying security or commodity. Most futures transactions are purely speculative, so it’s an opportunity to profit or hedge risks, and not usually used to take delivery of the physical good or security for most traders.
There are many types of futures contract to trade. They include:
- Interest Rates
- Stock Index
The futures market is centralized, meaning that it trades in a physical location or exchange. There are several exchanges, such as The Chicago Board of Trade and the Mercantile Exchange. Traders on futures exchange floors trade in “pits,” which are enclosed places designated for each futures contract. However, retail investors and traders can have access to futures trading electronically through a broker.
Some things to consider before trading futures:
Leverage: Control a large investment with a relatively small amount of money. This allows for strong potential returns, but you should be aware that it can also result in significant losses.
Diversification: Access a wide array of investments including oil and energy, gold and other metals, interest rates, indexes, grains, livestock, and more.
After Hours Market: Futures markets trade at many different times of the day. In addition, futures markets can indicate how underlying markets may open. For example, stock index futures will likely tell traders whether the stock market may open up or down.
Liquidity: The futures market is very active with a large amount of trading, especially in the high volume contracts. This makes it’s easier to get in and out of trades. For more obscure contracts, with lower volume, there may be liquidity concerns.
Hedging: If you have an existing position in a commodity or stock, you can use a future contract to protect unrealized profit or minimize a loss. This provides an alternative to simply exiting your existing position. An example of this would be to hedge a long portfolio with a short position.
Setting up an account
To start trading futures with Charles Schwab Futures and Forex LLC, you’ll need to open a standard account. The standard account can either be an individual or joint account. You will also need to apply for, and be approved for, margin privileges in your account.
Choosing a trading platform
With a TD Ameritrade account, you’ll have access to thinkorswim, a powerful trading platform for futures trading, as well as other investments. This feature-packed trading platform lets you monitor the futures markets, plan your strategy, and implement it in one convenient, easy-to-use, and integrated place. One of the unique features of thinkorswim is custom futures pairing. Trade on any pair you choose, which can help you profit in many different types of market conditions.
In addition, TD Ameritrade has mobile trading technology, allowing you to not only monitor and manage your futures positions, but trade contracts right from your smartphone, mobile device, or iPad.
Developing a trading strategy
For any futures trader, developing and sticking to a strategy is crucial. Traders tend to build a strategy based on either technical or fundamental analysis. Technical analysis is focused on statistics generated by market activity, such as past prices, volume, and many other variables. Charting and other similar technologies are used. Fundamental analysis focuses on measuring an investment’s value based on economic, financial, and Federal Reserve data. Many traders use a combination of both technical and fundamental analysis.
For those traders focused on technical analysis, it’s a dual-layer proposition, meaning you’ll need to look at the technical data for both the actual security or commodity, and the associated futures contract. The good news is that TD Ameritrade’s thinkorswim trading platform has a high level of technical analysis tools for futures trading, helping you make the correlation.
You’ll also find plenty of third-party fundamental research and commentary, as well as many idea generation tools. You can also use paperMoney® to practice your trading strategy without risking capital. In addition, explore a variety of tools to help you formulate a futures trading strategy that works for you.
Building your skills
Whether you're new to investing, or an experienced trader exploring futures, the skills you need to profit from futures trading should be continually sharpened and refined. You’ll find thinkorswim, has a nearly endless amount of features and capabilities that will help build your knowledge and futures trading skills. You can also contact a TD Ameritrade futures specialist anytime via chat, by phone 866-839-1100 or by email 24/7. Explore our educational and research resources too.