What is futures trading?

Futures trading

Before we explain how you can trade futures options and indices, a bit of info on their origins is useful.

Futures contracts are one of the first derivative contracts. They were created out of the need of farmers to hedge against crop price variations, between planting and harvesting. This is why much of the futures still traded today are for livestock, as well as corn and wheat.

The futures market has since grown, and now features many other assets. You can now trade metals like gold and silver, indices like the S&P 500, as well as Treasury bonds.

Derivative financial products

At first glance, futures may seem a bit sophisticated, but they're actually quite simple.

A derivative product is when a financial asset derives its value from the price fluctuations of another asset. For example, the value of a derivative linked to the S&P 500 is simply a function of the price shifts of the S&P 500.

The S&P 500 is effectively a monetary index, compiled into a contract that trades like a stock. The futures contract has a price that will go up and down like a stock. In fact, your futures contract will likely look like your stocks, with opportunities to buy low and sell high.

Using leverage

Leverage is a key tool if you're trading futures contracts. This means that you don't have to pay the entire contract when you initiate a trade. Instead, you pay a minimum upfront payment to enter a position. This initial margin will depend on the margin requirements of the asset and the index you want to trade.

A plethora of choices

As a trader, you need to know the differences between various futures contracts. Day trading futures is way different than with stocks. You don't buy shares, you negotiate a standardised contract. Each contract has a specific standard size which has been set by the exchange on which it appears.

Let's say the size of the aluminum futures contract is 100 troy ounces. An aluminum futures contract allows you to take control of 100 troy ounces. If the price of aluminum changes by $4, you would make a profit of $400 ($4 x 100 ounces).


Below are two items that you will come across and need to understand:

First notification day

The first day of notification (FND) of a futures contract is the day after a trader who has purchased a futures contract may be required to physically take delivery of the underlying commodity of the contract. The FND varies depending on the contract and the rules of the exchange.

However, most traders will liquidate their positions before the FND because they don't want to own the physical commodity.

Last trading day

The last day of trading in wheat futures, for example, is the last day a futures contract can be traded or liquidated before delivery of the underlying asset or settlement in cash. In general, most futures contracts result in a cash settlement, rather than a delivery of the physical commodity. This is because the majority of the market is made up of hedgers or speculators.

You need to take into account unpredictable price movements during the last day of trading in wheat or aluminum futures, for example.

And before you start trading, you need to familiarise yourself with the asset you have chosen, as the amounts of the various futures contracts vary.

The best futures markets to day trade

Beyond the above-mentioned assets, what other options are available and which market offers the most potential for intraday traders?

Many say the E-mini S&P 500 is the best market. You can trade around $75,000 in stocks with a margin of just $3,500, which makes it very accessible. You'll notice that E-mini S&P futures contracts are all traded electronically, ensuring fast execution speeds and promising possibilities for auto trading software.

You may also consider the E-mini Nasdaq, the E-mini Russel or Dow Jones futures. All of them offer plenty of opportunities for futures traders who are also interested in the stock markets.

In addition, there are several other markets that offer the substantial volumes and volatility needed to make intraday profits. Soybeans, coffee, natural gas, the US dollar, Japanese yen, oil and 10-year T-bills all deserve attention.

However, before putting your capital on the line, remember that each market has its own features and careful analysis is required to find the market that suits your trading style and strategies.

Why trade futures?

Below are a few reasons why futures can be useful as part of one's investment strategy:

1. Low cost

While the stock markets require a decent amount of investment capital, futures contracts don't. You can open an account and start trading with less than £5,000 (or equivalent).

But the best part is, you don't even have to maintain this amount. You just need a sufficient amount to cover the margin. The margin is usually somewhere between 4-8% of the total contract value, so you only need a balance of a few hundred pounds (or dollars, or whatever your account currency is).

2. Futures contracts following the direction of the underlying asset

With options, you analyse the underlying asset, but trade the option. However, your profits and losses depend on how the price of the option evolves. The underlying asset may move as expected, but the option price may remain at a standstill. Futures contracts, on the other hand, move with the underlying asset.

This means that you can use technical analysis tools to analyse the futures market. You don't have to worry about the complexity of pricing derivatives.

3. No short-selling restrictions

As a short-term trader, you should only strive to make the best trades, whether long or short. With no restrictions on short or long positions, you can remain impartial and react to your current market analysis.

The stock market doesn't allow short selling. In fact, financial regulators enforce strict rules to prevent short selling, hoping to avoid stock market meltdowns.

4. Reliable data on volumes

As there is no centralised clearing centre, you benefit from reliable volume data. It is impossible to get reliable volume data from a forex broker because forex trading is decentralised and no one has all the data. However, with futures you can actually see which players are interested, which allows for precise technical analysis.

The other side of the coin...

While there are many reasons to day trade futures, there are a few major drawbacks.

1. Fees

It's easy to over-trade the futures markets. Too many marginal trades can quickly lead to large commission fees. So, you might have made a lot of successful trades, but you might also have paid an excessive price.

If you have £50,000 in your account and trade an E-Mini S&P contract, you could pay between £15,000 and £25,000 in commissions each year. This means that you would need a return of at least 25% to break even. Therefore, you must use a careful risk management system, otherwise you may lose all of your capital.

2. Low levels of capital

Trading psychology plays an important role in the success of a trader. As you can start trading futures with such little capital, you have even more psychological pressure to overcome since you can't afford to lose much. This pressure can lead to costly mistakes and could quickly pull you out of the trading game.

How to get started day trading futures:

Day trading futures has never been easier. Technology has made brokers, accounts, trading tools, and resources easier to obtain than ever before. So how do you start trading futures?

Minimum capital needed

The futures market is one of the more accessible ones because you don't need as much capital as with stocks, but more than forex. Although there is no legal minimum, each broker has its own minimum deposit level.

E-mini futures have particularly low trading margins. With E-mini S&P 500 futures, you can find brokers for as low as £250. So you will need this £250 and enough money to cover the trading margins and the price shifts of your positions.

Picking the right broker

Most day traders will go with a discount broker, which will offer them greater autonomy and lower fees. What else should you look for in a futures broker?

  • Fees - Go with a broker that offers a competitive and transparent fee structure. With frequent trades, commission fees add up quickly, so make sure they don't swallow up all of your profits. It is also useful to note if there are any additional fees, such as withdrawal and penalty fees.
  • Client support - If you have a problem, you need a quick remedy. Every second can cost you money. So check the reviews to make sure they offer fast and dependable client support. Some brokers offer 24/7 support, by phone and online chat, in multiple languages. In addition, they should be able to give you information about trading hours.
  • Trading software - How good is the broker's trading platform? Does it offer all the charts and technical tools you need to perform your analysis? Will you have to pay for additional functions? Also, does the software allow fast execution speeds and easy navigation?

Picking the best futures to trade

Once you have opened an account with a broker, you need to choose a futures contract. With this in mind, you need to consider several key factors including volumes, margins, and movements.


Look for contracts that usually trade at least 400,000 per day. You will then know that you can buy and sell at the levels you want, and that there will likely always be another trader to buy and sell for you.

Some of the most traded futures contracts are:

  • E-Mini S&P 500 (ES)
  • Eurodollar (GE)
  • 10-year T-Bills
  • WTI crude oil (CL)

Once you have found a futures contract that trades in large volumes, you will need to take into account the margins and price shifts you see to adapt them to your trading style.

The margin issue has already been addressed. Depending on the margin terms offered by your broker, you will determine the amount of capital you need to initiate a position. Soy beans, for example, often require high margins, so you'll need more capital to trade it.

Price shifts

Some instruments are quite volatile, such as soy beans. This means that you have to take price movements into account.

Fortunately, you can evaluate these shifts in two ways: the value of the point and the number of points that your futures contract normally moves in a single day. A simple calculation of the actual average range will give you the volatility information you need before you initiate a position.

To find the trading range, you just need to look at the difference between the current day's high and low. However, keep in mind that the futures markets can experience price differentials, causing the day's action to be outside the range for the day's action. So what does this mean?

  • Actual high - Today's high or yesterday's close (whichever is higher).
  • Actual low - Today's low or yesterday's close (the lower of the two).
  • Actual range - The high minus the low.

Now that you've found the high and low, if the future closes one day at 85, then opens higher at 86, and hits an intraday high of 87, then the true range will actually be:

  • Actual high - 87
  • Actual low - 85 (yesterday's close, which was lower than today's low)
  • True range - 87 - 85

You can now identify and measure price movements, which gives you an indication of volatility and will improve your trading decisions.

Using this information

So with an understanding of volume comparisons, volatility comparisons, and comparisons of futures price shifts, what should you choose?

E-Mini S&P 500 futures are a good place to start for new day traders. You can get margins as low as £400 and you have greater volumes than with wheat. You should also see enough action to make steady profits, and you can start trading with just £4,000 in your trading account.

Crude oil is another good candidate. While it requires the greatest margin, you also get most volatility to capitalise on. However, the huge price swings have also caused many traders to lose all of their capital.

The last important instrument to consider is the 10-year Treasury bill futures contract. You'll see a lot of volume, but not as much as with S&P 500 futures. While there will always be price movements, you won't see as much volatility as you will with oil. A 5-minute chart should give you a clearer picture.

Futures trading strategies

Whether you're interested in trading strategies for Emini futures or FTSE futures, all of the below is applicable.


Once you're ready and you have a market in sight, you need to use an effective trading strategy. Whichever strategy you choose, you will need to rely on fundamental analysis. Charts and chart figures can help you predict future price movements by examining historical data.

However, your initial analysis will help you identify the factors that influence the performance of your asset. If you wanted to trade T-bill futures, for example, you would have to analyse the fundamental factors that determine bond prices. This means examining economic activity and policy, supply and demand, investor sentiment, and staying in tune to recent news.

If you want to start trading wheat futures, you need to consider other factors. Maybe even familiarise yourself with weather reports while looking for details on crop yields, alternative grains, and transportation costs.


The best strategies take risk into account and avoid trying to make huge profits on minimal trades.

Let's look at an example using a proven strategy

Let's say you have £16,000 in your trading account and you are aiming for a 55% success rate. You want to risk only 1% of your capital, or £160 per trade. To do this, you can use a stop-loss. You place a stop-loss order five ticks from the entry price, and a target nine ticks further.

So your risk on the trade could be five ticks x £27.00 = £135.00, which is less than your maximum risk of £160. You should also have enough left over to pay for any commissions. If you can achieve this reward on 55% of your trades, you will be on your way to steady weekly profits.

If you increase your risk rate to 2% (which some traders do), you could trade two contracts and potentially double your weekly profits.


One of the best day trading strategies for futures is scalping, which many traders use to make big profits. The idea is to limit your losses to just one or two ticks, while still taking your profits, almost as soon as you get them. You can also use spreads, which is the difference between the buy price and the sell price, to capture the quick profits coming in from either side of the market. This makes scalping even easier.

Scalping requires a high volume of transactions, but if you have enough time, it can help you minimise losses while maximising profits.

As you probably now realise, futures contracts offer great potential for profits. However, day trading strategies on oil futures may not be effective when used with Russell 2000 futures, for example. The key, then, is to be patient and find the right strategy to complement your trading style and the market.

A few tips...

To make consistent profits, many factors must come together. You will need to invest time and money to find the right broker and test the best strategies. To make the learning process even easier, we've put together a few good tips for day trading futures.

  • News - The price of your future can rise or fall in response to economic announcements. You therefore need to be attentive to anything that could affect your positions. Some reliable online sources include Forbes, CNN and Investopedia.
  • Practice first - Whether you're trading gold, oil or index futures, a trading simulator is a great place to learn about the markets and develop a strategy. Additionally, futures day trading demo accounts are funded by virtual money, so you don't have to risk real capital while training yourself.
  • Always have a plan - You need to be well prepared. A trial and error approach can cause you to lose everything, so test your strategy on the market until your stats indicate a winning method.
  • Beware of margins - While futures day trading margins can generate profits, don't get carried away. Maintain low risk and minimal margin levels, and you should never lose so much that you have to completely withdraw from the trading game for good.
  • Stay disciplined - Too many traders fail because they fail to control their emotions. If you've backtested your plan, you know it's going to be successful, so don't give in to fear or greed. Let math guide you and stay disciplined.

Can YOU make a living by trading futures?

Yes, you can. But as the success rate of day trading futures shows, it's not easy. First of all, you need enough starting capital so that you don't let initial mistakes force you out of the game. You also need to have a high tolerance for risk and a good strategy.

In addition, you must be prepared to invest your time and energy in learning and keep in mind everything that's discussed in this article. If you do this, you just might be part of the minority that is able to make a living by trading futures. It's entirely up to you.

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