| Course Sections: |
| Part 1: Introduction to Futures Trading |
| Part 2: Futures Trading 101 |
| Part 3: Who Trades Futures? |
| Part 4: Why Trade Futures? |
| Part 5: Basic Futures Trading Strategies |
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.
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 2014 soybean futures contract. That generates a profit of $5,000 (minus commissions and fees*), or return on initial margin of 125%.
| Price Per Bushel | Value of 5,000-bu. Contract | ||
| January | Buy 1 July Soybean Futures Contract | $13.00 | $65,000 |
| April | Sell 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 Bushel | Value of 5,000-bu. Contract | ||
| January | Buy 1 July Soybean Futures Contract | $13.00 | $65,000 |
| April | Sell 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. Learn about Stop Loss Orders in RJO University.
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 Bushel | Value of 5,000-bu. Contract | ||
| January | Sell 1 July Soybean Futures Contract | $13.00 | $65,000 |
| April | Buy 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 Bushel | Value of 5,000-bu. Contract | ||
| January | Sell 1 July Soybean Futures Contract | $13.00 | $65,000 |
| April | Buy 1 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.
| Futures | Stocks | |
| Represents | A commitment to buy or sell something in the future at an agreed-upon price | Ownership of a corporation |
| Trading | Traded on a regulated exchange | Traded on a regulated exchange or through a dealer association |
| Issued By | A futures exchange writes the terms of each contract and makes it available for trading | A corporation |
| Max Number Outstanding | No limit to the number of futures contracts that can be traded | Set by the company’s charter; issuance regulated by filings with the SEC |
| Margin | Requires 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 Short | As easy as buying | Requires borrowing stock, if available, and selling when price is rising |
| Timing | Fixed expiration date, usually less than one year | Stocks are perpetual instruments as long as the underlying company remains solvent |
| Fundamental Analysis | For 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 Analysis | Traders 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 Loss | Because 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 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.
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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.