How to trade futures

September 08, 2020 11:05 UTC
Reading time: 21 minutes

Learning how to trade futures dates as far back as 1851 when the first futures contract was written. The product was corn and it occurred at the Chicago Board of Trade (CBOT). The plan was for the seller (who was a farmer) and the buyer (an industrial company) to commit to a future exchange of product for cash at a fixed price.

Since then, futures trading has attracted more markets along with bringing even more buyers and sellers into the fold. While the futures market is predominantly the arena for commercial and institutional traders, it also gave birth to the speculator - someone who profits from picking the correct future price direction of a given market.

But, with the advent of technology and super-fast computers, many traders have opted to trade on futures markets using CFDs (or Contracts for Difference). In this article, you will learn:

  • How to trade futures like a speculator.
  • How to invest in futures markets like indices and commodities.
  • The best futures trading platforms to use.
  • The pros and cons of trading futures and why futures trading via CFDs is becoming increasingly popular.
  • How to start trading futures CFDs in a virtual trading environment by opening a demo trading account with Admiral Markets UK Ltd.

What are futures?

The futures market originated in the commodities industry. It was farmers, miners and oil producers who wanted to manage the risk of not knowing the price they would get for their product in the future. This gave birth to the futures contract.

Essentially, the seller of a futures contract would agree to sell a fixed quantity of a certain commodity on a particular day in the future to whoever wanted to buy the contract. The price of this contract would depend on the demand from buyers, as well as the supply from other sellers.

In a similar way, the buyer of the futures contract would agree on a fixed price to buy the underlying commodity from the seller on the expiration date of the contract. With Admiral Markets you can use futures trading strategies on a variety of different asset classes via CFDs. Visit the Contract Specification page, type in 'futures' and you will see a list of futures CFDs covering indices, commodities, bonds and more!

A screenshot showing the Admiral Markets Contract Specification page searching for 'futures.'

Nowadays, when trading futures there are more than just commodities available (which we will explain in further detail later in this article). However, the pricing has remained in the same locations, such as the big futures exchanges in America. A few of them include:

  • The Chicago Mercantile Exchange
  • The Chicago Board of Trade
  • The New York Mercantile Exchange

Futures exchanges can also be found across Europe and in other major financial trading hubs. The only difference now is that instead of people buying and selling contracts in the 'pit', it's all performed electronically through a broker.

Did you know that you can view live and historical prices of different futures markets available to trade on via CFDs with Admiral Markets through the MetaTrader 5 trading platform? This platform is completely FREE to download! Once you've downloaded the platform it will also help you follow the next few examples.

Click on the banner below to start your free download today!

What is futures trading?

So far we've mentioned who the futures market was designed for - businesses, farmers, miners and so on. However, because of the often extreme price movements in some of these markets, it has also given birth to speculators and different styles of futures trading.

One such style is day trading futures. In this type of trading, a trader would speculate on short term price movements throughout the trading day. Most day traders are highly active, often taking multiple positions a day to seek out a profit at the end. However, it is considered very risky to start out this way, especially for beginner traders.

Another style of trading is futures spread trading. The foundation of this style is to profit from the change in the price of two different positions. For example, a futures spread trader could take two positions at the same time, on the same market, but with different dates to try and profit from the price change. Some traders may elect to use longer-term strategies, but as you go on to learn about futures trading contract sizes, it really is for those with very large sums of capital.

Let's take a look at how trading futures contracts actually work.

How to trade futures contracts

So far, we know that a futures contract is an agreement by one party to buy, or take delivery, of a product like a commodity or a currency, at a fixed future date and price. But how are they actually traded?

Futures are traded on exchanges where all contracts are standardised. This basically means that each contract has the same specification, no matter who is buying or selling. Contracts are typically standardised in terms of quality, quantity, and settlement dates. For example, everyone trading an oil contract on the New York Mercantile Exchange knows that one contract will consist of 1,000 barrels of the West Texas Intermediate (WTI) oil at a particular quality level.

Most futures contracts come in five-character codes. The first two characters identify the product, the third identifies the month, and the last two identify the year. For example, WTI oil could read CLX20. CL = Crude Oil, X = November (there is a certain code of months and letters listed on the relevant exchange's website) and 20 = the year 2020.

Of course, there are some disadvantages to having a fixed expiry date of your position (as we highlight further down in this article). Also, you cannot change the size of the contract, which can often be quite large. In the example of oil one contract is the equivalent to 1,000 barrels of oil. You cannot trade in less. As some futures contract sizes can be quite large, some of those involved in futures spread trading and day trading futures have turned to trading futures via CFDs.

Trading futures via CFDs

A CFD is a derivative product that allows a trader to speculate on the rise and fall of a market. They were originally developed in the early 1990s in London by two investment bankers at UBS Warburg. Essentially, a CFD is a contract between two parties, the buyer and the seller. It stipulates that the seller will pay the buyer the difference between the current value of a market, and the value when the contract ends.

In this instance, the seller is usually your broker, unlike futures trading where you trade directly with an actual buyer or seller of the commodity you are trading. With a CFD, the trader pays the difference between the opening and closing price of the underlying market. Whilst CFD trading may seem similar to futures trading, there are some big differences.

Fortunately, you can start trading futures CFDs from a demo trading account. This allows you to trade in a virtual trading environment to sharpen your trading skills and build your trading strategy until you are ready to go live!

Better yet, using a demo trading account is completely FREE. Get started today by clicking on the banner below:

Differences between CFD and futures trading

Futures Trading

CFD Trading

Expiry dates (monthly, quarterly)

Generally no expiry dates

Trade via an exchange (CBOT, CME, NYMEX)

Trade via a counterparty (your broker)

No ownership of product

No ownership of product

Can trade long and short

Can trade long and short

Tradable on margin

Tradeable on margin

Less markets available than CFDs

Can trade over 3,000+ markets

Futures trading vs futures CFD trading

There are many advantages and disadvantages of trading futures and trading futures via CFDs that will depend on the individual trader's circumstances. However, we will highlight some of the most important:

Advantages of trading futures

1. Full Price Transparency: Futures are openly traded on public exchanges like the Chicago Mercantile Exchange. As they are frequently bought and sold by institutional investors and commercial companies, the pricing reflects the underlying market very closely. With CFDs, the price is calculated from the underlying futures market and then adjusted to accommodate the fees of the broker. These could be minimal or large in liquid markets, but higher in more exotic markets that are not traded as often.

2. Cost-Effective for High-Level Traders: Commissions for futures contracts tend to be quite low in the larger markets. This makes it ideal for large quantity traders, due to the savings costs. However, as you will find out below, trading futures requires much more starting capital compared with CFDs.

Disadvantages of trading futures

1. Very Big Contract Sizes: When trading futures you are buying a contract to buy a certain amount of a product or a commodity. These amounts are standardised. For example, Gold trades in a size of 100 ounces per contract, with every one-point move being an equivalent of $100. This means if you bought just one contract (the lowest you can buy on the futures market) then a ten-dollar move would mean that you would lose 1,000 USD. Gold is volatile and can move much more than ten dollars a day. With CFD trading you can adjust your contract size to fit in line with your own risk management.

2. Expiration Dates: Every futures contract has an end date. This means the value of the contract is eroded the closer you get to the expiration date. It also means that if you wanted to stay in the trade for longer, it may not be possible to do so. With CFDs, there is no expiration date, which adds a great deal of flexibility for a trader who wants to exit their position when they want to.

3. Fewer Markets Available: Whilst there is a good range of markets available for trading futures, it is nothing in comparison to the volume of markets available to trade with CFDs. For example, Admiral Markets offers more than 3,000+ CFD instruments to trade on.

The best futures to invest in

When trading futures, the first markets available were commodity futures trading, and oil futures trading. However, nowadays people are trading currency futures, futures trading bitcoin and indices, as well as embarking on futures options trading. Finding the best futures to invest in will come down to individual trading styles, accessibility of markets and starting capital size.

While there may seem like quite a few different futures markets available to invest in, all the same futures markets are available to trade on via CFDs. There are some markets that are simply not listed on the futures market. For example stocks and shares are listed on the stock market, but are also tradable as a CFD. The futures market only offers some of the major currencies, whereas CFDs offer a greater variety of global currencies.

Of course, the more markets you trade, the more information you need to consider, such as futures trading hours. All the futures markets available to trade have different opening and closing times (although some are the same). Some also close for an hour in the middle of the day, at different times for each market.

For example, gold futures trading hours are: Sun – Fri 5:00 pm – 4:15 pm CT with a 45-minute break each day beginning at 4:15 pm on the CME Globex exchange. And when do bitcoin futures start trading? On the CME Globex exchange, it is: 5:00 p.m. – 4:00 p.m. CT Sunday – Friday.

To help dissect and manage all of this information, traders will often use premium analytical tools to help with their decision making. For example, in the Admiral Markets Premium Analytics section, users can access a variety of features completely FREE! This includes a portal with market news, technical analysis, global sentiment indicators and more!

Click the banner below to receive access today!

Get started with futures trading strategies

When trading futures, it is not dissimilar from trading on any other market. Of course, there is a lot more to know about the expiry dates of your trades, as well as risk management and contract sizing. However, the process of developing a strategy is the same. Here are some key things to consider when getting started with futures trading strategies:

  • What style of trading should I have? There are a variety of styles to choose from. Will you be day trading futures? Will you embark upon futures spread trading or futures options trading? Having a clear plan is essential in building a solid foundation from which to work from.
  • What markets will I trade? Will you be trading on oil futures? Or perhaps commodity futures trading? Remember, each futures contract has different contract sizes and minimum amounts that you can trade. Traders with small accounts may struggle to find suitable markets to trade when trading futures.
  • What strategy will I use? Your trading strategy helps to define your parameters for entering and exiting trades. Maybe you use trading indicators, or simple price action patterns to help you with your decisions. The key part is to try and remain consistent with your tools so that you can start to build a solid foundation upon which you will contribute toward your future success.

In addition to finding the right style, the market and the strategy are also important factors behind finding the best futures trading platform for you. There are quite a few futures trading platforms out there, but it may be useful to use a platform that also offers you a multitude of asset classes such as foreign exchange, indices, commodities, stocks and shares. Combining multiple products may prove to beneficial in the long run, depending on your trading outcomes.

Did you know that you can access a variety of different futures CFD markets to trade on through the MetaTrader 5 trading platform? This FREE download allows you to trade directly from the chart, view multiple timeframes and chart types and access advanced order type functionality. Get started today and click the banner below:

Futures trading example - US Treasury Note

As discussed above, finding the best futures trading platform for you may not be measured on things such as mobile trading, or even ultra-low commissions. For some traders, having the flexibility to generate and act upon ideas in all markets may be the leading factor.

For example, let's take a look at the long-term monthly chart of the US Treasury Note futures CFD chart which can be accessed directly from the MetaTrader 5 trading platform provided by Admiral Markets.

Source: Admiral Markets MetaTrader 5, #USTNote_U0, Weekly, - Data range: from 20 May 2012 to 21 August 2020, performed on 21 August 2020 at 9.00 am BST. Please note: Past performance is not a reliable indicator of future results.

And now, let's zoom in to the price action of the 2018 - 2020 period:

Source: Admiral Markets MetaTrader 5, #USTNote_U0, Weekly, - Data range: from 1 January 2017 to 21 August 2020, performed on 21 August 2020 at 9.00 am BST. Please note: Past performance is not a reliable indicator of future results.

The first thing you will notice is that the name of the symbol is USTNote_U0. This means we are viewing the US Treasury Note in 'month U' of 2020. Looking at the Chicago Mercantile Exchange codes, the month U is in September. This means that this contract will expire in September. Here is a list of the futures trading codes for products traded via the Chicago Mercantile Exchange:

A screenshot of contract codes from the Chicago Mercantile Exchange website.

But when does it actually expire? A simple way to check is through the MetaTrader 5 trading platform provided by Admiral Markets. Follow these steps:

1. Open the Market Watch window by pressing Ctrl+M on your keyboard or by selecting View from the menu above.

2. Right-click in the Market Watch window and select Symbols. Here you will see a list of all the Bond Futures CFDs, Index Futures CFDs and Commodity Futures CFDs available to trade on, as shown below:

3. You can select any individual symbol or a group of symbols in the Specification column and press OK. These will now appear in your Market Watch window.

4. If you right-click on the #USTNote symbol (once you've added Bond Futures CFDs to your list), then select Specification. This will now open a Description window which details contract size, profit currency, and the Last Trade date which is the expiration date of this current futures CFD contract, as shown below:

As you can see above, the 'Last trade' date is 2020.08.31 which means this particular contract will expire on 31 August 2020. So, we really are seeing the September 2020 contract for the US Treasury Note on the chart. Now let's go back to the futures trading chart of this market to see what we can learn:

Source: Admiral Markets MetaTrader 5, #USTNote_U0, Weekly, - Data range: from 1 January 2017 to 21 August 2020, performed on 21 August 2020 at 9.00 am BST. Please note: Past performance is not a reliable indicator of future results.

In the light yellow ellipse in the chart above, you will notice that the market has stayed above the blue line on the chart which is the 21-period exponential moving average. This indicator is useful as it can help traders to identify the overall trend of the market. As the price is trading above the moving average, it highlights the market is in an uptrend. Trend based traders may aim to trade with this move to the upside, and look for potential long positions. They may also use other technical indicators or price action patterns to help time potential turning points.

Here is an example:

Source: Admiral Markets MetaTrader 5, #USTNote_U0, Weekly, - Data range: from 1 January 2017 to 21 August 2020, performed on 21 August 2020 at 9.00 am BST. Please note: Past performance is not a reliable indicator of future results.

The highlighted yellow box in the chart above shows an example of a bullish pin bar reversal. This is where sellers have pushed the market lower but buyers stepped in to push it back with the open and close in the upper half of the bar. Some traders will use these bars to trade from, and may enter when the high of the bar is broken, with a stop loss located at the low of the bar.

In this instance, an entry price of 129.40, with a stop loss at 127.89 traded with 1 lot would result in a loss of 151 USD if the market first went through the entry price and then hit the stop loss. If the trader held on and closed out at the next swing high point on the chart at 132.38, the profit would have been approximately 298 USD.

However, let's say that the trader wanted to capitalise on this move further, but did not want to add any more risk into this market. Well, the trader may have researched the negative correlation of US bonds, like the US Treasury Note with the USDJPY currency pair. As one goes up, the other goes down, but not always. Having access to other markets to diversify the risk of a trade could prove to be useful.

Combining futures trading with other markets

Let's take a look at a weekly chart of the USD/JPY currency pair during the same time period as the US Treasury Note. Let's first start with the bigger picture of the currency pair which is shown below:

Source: Admiral Markets MetaTrader 5, USDJPY, Weekly, - Data range: from 1 January 2017 to 21 August 2020, performed on 21 August 2020 at 9.00 am BST. Please note: Past performance is not a reliable indicator of future results.

While not a perfect correlation, overall as the US Treasury Note moved higher, USDJPY has moved lower. In this instance, the USDJPY is trading below its 20-period exponential moving average, suggesting a possible downtrend. Trend traders may follow the same process and look for price action reversal patterns like bearish pin bar setups, or they may use other technical trading indicators.

In this simplified example, the best futures trading platform for the trader wanting to diversify between markets would be one that offered a multitude of markets to trade on. When it comes to CFDs vs Futures Trading, it is down to the individual's preference. However, a combination could well be the right balance for most traders which is why trading futures via CFDs has become increasingly popular.

Why start futures trading with Admiral Markets?

  • Trade with a well-established, reputable company that is authorised and regulated by the Financial Conduct Authority (FCA).
  • Access the world's most popular trading platform called MetaTrader for PC, Mac, Web, Android and iOS operating systems so you can also trade on the go.
  • Supercharge and upgrade your trading platform completely FREE to the Supreme Edition for actionable trading ideas on thousands of different markets.
  • Trade futures CFDs commission-free on Trade.MT4 and Trade.MT5 accounts!

One of the best ways to get started is to test-drive the trading platform and practice your ideas and strategies in a virtual trading environment. Did you know that you can open a FREE demo trading account with Admiral Markets? This means you can trade in a virtual trading environment until you are ready for a live account.

Get started today - completely FREE - by clicking on the banner below!

About Admiral Markets

Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Jitanchandra Solanki
Jitanchandra Solanki Financial Markets Author, Admirals London

Jitanchandra is a financial markets author with more than 15 years experience trading currencies, indices and US equities. He is an accredited Market Technician with a BA Hons degree.