Basic Futures Trading Strategies

Course Sections:

 
Introduction to Futures by RJO Futures Learning Center

 

The most-often used trading strategies in the futures markets are pretty simple. You buy if you think prices are going up or sell if you think prices are going down. And, in futures trading, selling first is just as easy as buying first—the positions are treated equally from a regulatory point of view.

The following two strategies are just a starting point. For more advanced futures-trading strategies, request the RJO Futures guide “Introduction to Spread Trading.” Or, learn some trading strategies for options on futures with the RJO Futures guide “Introduction to Options on Futures Trading.”

 

Buy Futures

 

If you expect a futures market’s price to be higher in the future than it is today, you would buy a futures contract, or “go long.” If you are right about both market direction and timing and the price indeed rises, you can then sell the same futures contract to collect your profit (minus commissions and other fees).

However, if you are wrong about the market’s direction or your timing is off and prices ultimately fall, then you will take a loss when you exit the position. And, because of the leverage in futures, that loss could be greater than your initial margin deposit.

Here’s an example, using July 2014 soybeans trading at $13.00 per bushel in January 2014. In January, you think soybean prices are likely to rally into the summer, so you put up $4,000 in initial margin and buy a July 2014 soybean futures contract.

Four months later, soybean prices have rallied $1 per bushel and you decide to take your profits and close out your long position by selling a July 2013 soybean futures contract. That generates a profit of $5,000 (minus commissions and fees*), or return on initial margin of 125%.

 

 Price Per BushelValue of 5,000-bu. Contract
JanuaryBuy 1 July Soybean Futures Contract$13.00$65,000
AprilSell 1 July Soybean Futures Contract$14.00$70,000
Gain$1$5,000

Example: July 2014 Soybeans Trading at $13.00 per Bushel

Of course, there’s always the possibility that prices don’t behave as you expect. If soybean prices dropped $1 per bushel from January to April and you exited your initial long position at a loss, you would have lost your initial margin of $4,000 plus an additional $1,000 (plus commissions and fees*).

 

 Price Per BushelValue of 5,000-bu. Contract
JanuaryBuy 1 July Soybean Futures Contract$13.00$65,000
AprilSell 1 July Soybean Futures Contract$12.00$60,000
Loss$1-$5,000

Example: If Soybean Prices Dropped $1 per Bushel from January to April

 

Sell Futures

 

The concept of selling something you don’t own is often a stumbling block for traders new to futures. But it’s easy to overcome. Just remember that a futures contract simply represents the commitment to either sell or buy an asset at a future date. So when you sell to initiate a position, all you’re committing to is selling at that price in the future. In the meantime, you don’t need to own the underlying commodity or financial instrument.

Selling a futures contract as your initial position is just as simple as buying a futures contract. You believe the price will go down, so you sell. If you ever traded stocks, you’ll be glad to know that no borrowing or loan fees are involved with shorting futures. You simply sell as easily as you buy.

If you are correct in your market direction and timing and prices decline, then you can profit from your short position by simply buying the same contract. However, if the market moves against your position and rallies, then you would suffer a loss when exiting—and the loss could be more than what you put up to make the trade.

As an example, you believe in January that soybean prices will fall into the summer. So, you put up $4,000 in initial margin to take a short July soybean futures position. By April, the market has fallen $1 per bushel, which equates to a $5,000 decline in the value of the contract. Because you shorted the market when the contract value was higher, you can buy it back at the lower price and make $5,000 (minus commissions and fees*).

 



Price Per BushelValue of 5,000-bu. Contract
JanuarySell 1 July Soybean Futures Contract$13.00$65,000
AprilBuy 1 July Soybean Futures Contract$12.00$60,000
Gain$1$5,000

 

However, if soybean prices rally $1 from January to April, your short position will show a $5,000 loss (plus commissions and fees*) if you buy July futures to exit the position.

 



Price per BushelValue of 5,000-bu. Contract
JanuarySell 1 July Soybean Futures Contract$13.00$65,000
AprilBuy1 July Soybean Futures Contract$14.00$70,000
Loss$1-$5,000

 

 

Get Comfortable with Futures

 

Here is a comprehensive list of some of the terms used in both futures and stocks trading, and what they mean in each. 

 

 FuturesStocks
RepresentsA commitment to buy or sell something in the future at
an agreed-upon price
Ownership of a corporation
TradingTraded on a regulated exchangeTraded on a regulated exchange or through a dealer
association
Issued ByA futures exchange writes the terms of each contract
and makes it available for trading
A corporation
Max Number OutstandingNo limit to the number of futures contracts that can be
traded
Set by the company’s charter; issuance regulated by filings
with the SEC
MarginRequires deposit of about 5%-20% of the value of
the futures contract, depending upon price level and
volatility
If purchased in a margin account, requires minimum initial
deposit of 50% of the value of the security; the remaining
50% is considered a loan from the broker who charges
interest
Selling ShortAs easy as buyingRequires borrowing stock, if available, and selling when
price is rising
TimingFixed expiration date, usually less than one yearStocks are perpetual instruments as long as the underlying
company remains solvent
Fundamental AnalysisFor commodities, research analysts provide views of
supply/demand and other economic factors or physical
conditions (e.g., weather) that could affect values
For financial futures, the same stock research applies
Research analysts provide views of micro and macro
economic factors that could affect values
Technical AnalysisTraders chart price movements to analyze patterns
and support/resistance levels; this generates buy/sell
signals
Traders chart price movements to analyze patterns and
support/resistance levels; this generates buy/sell signals
Risk of LossBecause the purchase or sale of a futures contract
requires only a small percentage deposit of the total
value of the contract, a client can lose more money
than the initial deposit
In terms of potential loss, a stock bought on margin works
the same as a futures contract
A non-margined stock purchase requires a 100% deposit
and therefore represents the total potential loss
Chart Info from CME Group

 

 

More Futures Trading Resources

RJO FuturesCast Newsletter
For a longer-term view on the markets as well as pointers on trading techniques, subscribe to RJO FuturesCast Newsletter, our free newsletter delivered to your inbox every two weeks. You’ll read insights from our team of professional futures brokers, whose commentary is often featured in major news media.

Click to sign up for your free RJO FuturesCast subscription today.

 

RJO Futures Learning Center
We believe that knowledge makes better traders. In the RJO Futures Learning Center you’ll find educational tools for every level of experience. We offer a library of guides and articles that help you learn about futures and futures on options from the basics to technical analytics. For an interactive experience, join us for our regularly scheduled live webinars. 

Click to visit the RJO Futures Learning Center.

 

RJO Futures Brokers
The RJO Futures brokers provide the experience and background to help you with your trading needs, and assist you with reaching your investment goals. We invite you to review each broker’s profile, experience, and techniques to help you select a partner that best fits your trading needs and style.

Click to meet our team.

 

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This material has been prepared by a sales or trading employee or agent of RJO Futures and is, or is in the nature of, a solicitation. This material is not a research report prepared by RJO Futures Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.