Futures trading allows you to speculate on the ‘future’ value of an asset such as gold, oil, gas, stocks, indices, or cryptocurrencies – without initially taking full ownership. The overarching objective is to predict whether you think the price of the asset will be higher or lower than the strike price set by the markets.
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Up to 5 signals daily
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Entry, take profit & stop loss
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Up to 5 signals daily
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6 - month
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Up to 5 signals daily
76% success rate
Entry, take profit & stop loss
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Lifetime
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Up to 5 signals daily
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Risk reward ratioSeparate Swing Trading Group
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Entry, take profit & stop loss
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Risk reward ratiomonth
Unlike options, the owner of a futures contract has an obligation to purchase the underlying asset when it expires. This is typically three months, although it can be shorter or longer depending on the specific market. You can, however, offload your futures contracts before the expiry date, which subsequently allows you to cash in your profits.
In our Learn 2 Trade 2023 Guide On Futures Trading, we explain the ins and outs of how the phenomenon works. We also explore what alternatives exist in the online brokerage space for everyday retail investors.
Note: Traditional futures contracts are typically reserved for the intentional space – not least because minimum lot sizes are often 6 or 7 figures. As such, you will need to consider CFD futures as a retail trader.
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What are Futures?
In a nutshell, futures are a sophisticated financial derivative that allows you to speculate on the future value of an asset. This can be anything from a stock market index like the S&P 500 or FTSE 100, to commodities like wheat, oil, gas, or gold. Futures trading actually has two specific purposes.
Firstly, they can be used as a speculative tool to profit from the future value of a financial instrument. This operates much the same as any other investment product in the financial markets. Alternatively, futures can also be used by large-scale manufacturers, farmers, or distributors to lock-in the price of the asset they are involved in.
Your profits and losses will be determined by the market price of the asset when the futures contract expires. In other words, you would need to multiply the difference between the buy and strike price against the number of contracts you hold. In other cases, you might decide to trade your futures contract before it expires, with the sale based on the current market value of the asset.
Pros and Cons of Futures Trading
- Futures contracts can be bought and sold against virtually any asset class.
- Allows you to speculate whether you think the asset will go up or down in value in the future.
- You often only need to put a small fraction of the total trade value up as a deposit.
- You can exit your position before the futures expire.
- Very useful in hedging against a sudden increase or decrease of an asset you have a vested interest in.
- Futures are typically only suitable for institutional clients.
- They are much more sophisticated than traditional assets.
- You could lose money.
Understanding Futures Trading – The Basics
Futures trading can be a complex battleground for newbie investors, so it’s important for us to break down the fundamentals in more detail. Before we do, let’s look at a super-basic example in order to clear the mist.
Example of Futures Trading
Let’s suppose that you think oil is heavily underpriced at $20 per barrel. You believe that in the coming weeks or months, the price will increase upwards of $30. As a result, you decide to purchase some futures contracts.
- The futures contract has an expiry of three months.
- The current expiry price of each contract is $27.
- You decide to purchase 100 contracts.
- When the futures contracts expire in three months, the price of oil is $40 per barrel.
- This works out at $13 per barrel higher than the contract price of $27, so you have made a profit.
- In total, you have 100 contracts so you make a total of $1,300 on this particular futures trade (100 x $13).
As you can see from the above, our profit was based on the difference between the contract price ($27) and the actual market price when the contracts expired ($40). If the trade had gone the other way – meaning that the price finished $13 lower, we would have made a loss of $1,300 (100 x -$13).
Futures Pricing
It is important to note that there will always be a difference between the price of the futures contract, against that of the current market price. For example, in the section above we noted that the ‘current’ price of oil was $20, but that the 3-month futures contract was priced at $27.
Crucially, this is because the markets will determine what the future price of the asset is likely to be – based on a range of variables and conditions.
It is also important to note that the price of a 3-month futures contract will be different to that of a shorter or longer contract. Sticking with the same example of crude oil, a 1-month contract might have an expiry price of $22, while a 12-month contract might be much higher at $45.
Long or Short
Once you have assessed the expiry price of the futures contract, you will then need to decide which way you think the markets will go. This will either need to be a long or short order. At some brokers, this is identified as a buy and sell order, respectively.
So, if you think that the price of the asset will be higher than that of the futures contract, you will be going long. If you think that the asset will end up lower, then you are going short. This is one of the biggest advantages of futures trading, as traditional assets only allow you to speculate on the price going up.
Expiry Dates
In the traditional futures scene, the vast bulk of contracts will have a 3-month expiry period. In terms of the specific date, this is usually the last Friday of the respective month. With that said, it is also possible to purchase a shorter or longer contract – which is down to the financial institution that creates the market.
Closing a Futures Trading Before Expiry
Although futures contracts will always have an expiry date, it is important to note that you are not required to keep the position open for its duration. On the contrary, you can typically close a futures trading position as and when you see fit.
In terms of pricing, the value of your futures contract trade will be dependent on current market conditions.
For example:
- Let’s suppose that you go short on a natural gas futures contract that has a 3-month expiry date.
- The price of the contract was $2 per MMBtu.
- Two months into the contract, the price of natural gas is at $1.50.
- You decide to lock in your profits at a $0.50 per contract, which amounts to gains of 25%.
As per the above, you were ‘in the money’ on your futures trade with one month to spare. Sure, you could have kept the position open until the contracts expired – and potentially have made even more. But, you instead decided to lock-in your profits and make a guaranteed return of 25%.
Futures Trading Markets
When it comes to the markets that you can buy and sell futures contracts on, the possibilities are endless. In other words, if a marketplace exists, it’s all but certain that a futures contract can be purchased. However – and as we discuss in more detail further down, the traditional futures scene is reserved for large-scale buyers, so you will likely need to trade CFDs instead.
Nevertheless, some of the most common futures trading markets are listed below.
- Indices: This includes all major and some minor stock market indices. Think along the lines of the S&P 500, Dow Jones, FTSE 100, and Nikkei 225.
- Stocks: It is also possible to trade futures contracts on traditional equities like Apple, Facebook, and Disney.
- Hard Metals: Commodities like gold, silver, and copper are hugely popular in the futures trading space. This allows investors to gain exposure to assets that would otherwise be difficult to access.
- Energies: This includes the main markets of crude oil and natural gas.
- Agricultural Products: You can also buy and sell futures contracts in agricultural products like wheat, corn, and sugar. This particular segment is popular with farmers that wish to hedge against future price movements of the asset they are involved in.
Do I Need to Take Physical Delivery?
One of the most common questions that newbie futures traders ask is that of physical delivery. For example, if you purchase 1,000 contracts in crude oil and you let the contract expire, will you need to take physical delivery of the actual barrels?
Well, this all depends on how the futures contract is settled.
Cash Settlement
In most cases, the futures contract will be settled in cash. For example, let’s suppose that you have 1,000 long contracts in gold. This means that you are essentially agreeing to buy gold at a later date. However, if you were to let the gold futures expire, you would need to pay the futures off in cash.
This is based on the strike price of the futures contract, and not the current market price. The key point here is that the futures trading scene is dominated by speculative investors who have no interest in taking physical delivery of the asset. On the contrary, they are merely looking to profit from the difference between the contract price and settlement price.
Physical Settlement
With that being said, some futures contracts are settled in the underlying asset, as opposed to cash. This became evident in April 2020 when the price of WTI oil futures went negative.
The reason for this is that there was simply too much oil in circulation. As per the coronavirus pandemic, demand for oil was virtually non-existent, meaning that those holding the physically-settled futures contracts had nowhere to store it on settlement.
As a result, traders were frantically hoping to offload their oil contracts to avoid the obligation of taking physical delivery. In turn, this pushed the futures price into negative territory. In Layman’s terms, this means that you would be paid to take delivery of the barrels, which is nothing short of unprecedented!
Hedging
While much of this page has focused on the speculative side of futures trading, it is important to note that the phenomenon is conducive for hedging. In the vast majority of cases, this will be an actual producer of the underlying asset that is looking to protect themselves from a sudden drop in price.
After all, assets like oil, wheat, corn, grain, and sugar are dominated by supply and demand. If there is too much supply and not enough demand, the price of the asset will all but certainly go down. This will then have a direct impact on producers, as they will have to sell the asset at a lower price. In turn, they might be forced to produce the asset at a loss.
With that being said, futures contracts allow producers to alleviate the threat of reduced margins, as they can lock-in the expiry price that the futures market offers.
Let’s look at an example to clear the mist:
- Let’s suppose that the price of corn is currently at its highest for 4 years
- This is highly beneficial. for corn producers, as they can sell their product for a higher price. In turn, they might decide to take on more staff and subsequently increase production levels
- Understanding that the price of corn could do down at any given time, the producer decides to go short on a futures contract with a 12-month expiry
- Thereon, only one of two outcomes are possible
- Firstly, if the market price of corn goes down, the producer will have to sell their product at a lower price. But, they will make money from the futures contract that they went short on
- Alternatively, if the market value of corn continues to rise, the producer will be able to sell their product at an even higher price. But, they will lose money from the futures contract that they shorted.
Ultimately, the above example highlights that no matter what happens to the future value of corn in the next 12 months, the farmer will be able to lock-in the current price. There will, of course, be fees to take into account.
Futures Trading vs Options
There is often a misconception that futures and options are the same thing. On the one hand, both financial instruments allow you to speculate on the future price of an asset. Similarly, both allow you to go long or short. However, the key difference centres on the obligation of purchasing the underlying asset at expiry.
In the case of options, the investor has the ‘right’, but not the obligation to purchase the asset once the contract expires. Instead, they merely need to pay a premium upfront, which they will lose if they opt against the purchase.
When it comes to futures trading, investors ‘must’ purchase the underlying contract on expiry. This will be based on the price of the futures contract, and the number of contracts that you purchased. Whether or not you made a profit will depend on the closing price of the asset when the contracts expired!
Why Futures Trading is Difficult for Retail Clients
As we have noted throughout our guide, the futures trading industry is typically dominated by institutional money. This is because you are required to meet a minimum lot size, which is often 6 or 7 figures. For example, if you wanted to access the Bitcoin futures market on the CME, you would need to purchase 5 contracts.
This in itself requires a minimum net worth of $1 million, or an annual salary of at least $200,000 for the prior two years. With that being said, you will likely find it very difficult to access the futures trading market unless you meet the aforementioned criteria.
The good news for you is that there is a simple workaround in the form of CFDs.
CFD Trading
In a nutshell, CFDs (contracts-for-differences) allow you to speculate on the future value of an asset without you owning the underlying instrument. Instead, your trade is based on whether you think the price of the asset will go up or down in the future.
As the asset in question does not actually exist, CFDs can track the real-world price of thousands of financial instruments. In fact, if a marketplace exists – even if it’s reserved for institutional money, CFDs provide access.
This means that you can trade the very same asset classes that futures contracts track. Whether its stocks, indices, interest rates, gold, oil, gas, or cryptocurrencies – CFD brokers allow you to go long and short on the asset.
No Expiry Date
One of the biggest advantages of opting for CFDs over a futures contract is that there is no expiry date on the contract. On the contrary, CFDs remain active for as long as you wish to keep the position open. This means that you are not forced to settle the contract on a specific date, so you’ll have the flexibility of closing the position as and when you see fit.
No Minimum Lot Size
While the traditional futures trading space often places a minimum lot size that exceeds 6 figures, this isn’t the case with CFDs. In fact, you can often trade CFDs with an account balance of just $100. This is ideal for those of you that want to gain access to the futures arena, but you don’t want to risk large amounts of capital.
Leverage
Futures trading in the form of CFDs also allows you to apply leverage. This is where you will be trading with more money than you have in your account. For example, let’s say that you decide to go long on oil.
You are super confident on your prediction, so you decide to apply leverage of 10x. On an account balance of $200, this means that the value of your trade is $2,000. Any profits (or losses) that you make will subsequently be multiplied by a factor of 10.
How to Start Futures Trading Today
If you like the sound of futures trading and you wish to get started with an investment account today, we are now going to show you the steps that you need to take.
Step 1: Choose a CFD Futures Trading Site
As we noted in the section above, you will need to trade CFD futures as a retail client. As such, your first port of call will be to find an online broker that meets your needs.
Some of the factors that you need to look out for prior to signing up are:
Regulation: You should only use the CFD futures broker if it is regulated by a tier-one licensing body. This includes the likes of the FCA (UK), CySEC (Cyprus), MAS (Singapore), or ASIC (Australia).
Tradable Assets: Spend some time reviewing the trading arena at the broker to see what assets you can buy and sell. Popular asset classes that you can trade CFD futures on are commodities, indices, and stocks.
Payment Methods: You will be trading CFD futures with real-world money, so make sure the broker supports your preferred payment method. The easiest way to get funds into a trading platform is via a debit or credit card.
Fees and Commissions: You will always need to pay a fee when trading CFD futures, so be sure to assess the broker’s pricing structure prior to signing up.
Customer Support: Finally, explore what support channels are supported (such as live chat) and what hours the customer service team works.
If you don’t have the time to research a broker yourself, we have listed our top-five CFD futures platforms towards the end of this page.
Step 2: Open Account and Upload ID
As you will be using a regulated investment platform, the broker will be legally required to verify your identity.
To get the ball rolling, open an account by entering the following information:
- Full Name.
- Date of Birth.
- Home Address.
- National Tax Number.
- Residency Status.
- Mobile Number.
- Email Address.
You will then be asked to upload a form of ID. This can be a passport, driver’s license, or government-issued ID card.
Step 3: Fund Your Futures Trading Account
You will now need to deposit some funds into your newly created CFD brokerage account.
Support payment methods typically include:
Step 4: Place a Trade
Once your deposit has been credited – which is typically instant, you can then place your first CFD futures trade.
You will need to:
- Search for the asset that you wish to trade (oil, gold, wheat, etc.).
- Decided whether you want to go long (buy order) or short (sell order).
- Enter your stake.
- If applicable – specify the amount of leverage you wish to apply.
- Set up a stop-loss order.
- Set-up a take-profit order.
- Confirm the order.
Unlike a traditional futures contract, CFDs never expire. This means that you can exit your position whenever you like. If you opened up with a buy order, then simply place a sell order to close the trade – and visa-versa.
Best Futures Trading Sites in 2023
Don’t have time to research a futures trading broker yourself? If so, below you will find our five best-rated brokers of 2023.
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The team at AVATrade are now offering a huge 20% forex bonus of up to $10,000. This means that you will need to deposit $50,000 to get the maximum bonus allocation. Take note, you'll need to deposit a minimum of $100 to get the bonus, and your account needs to be verified before the funds are credited. In terms of withdrawing the bonus out, you'll get $1 for every 0.1 lot that you trade.
- 20% welcome bonus of upto $10,000
- Minimum deposit $100
- Verify your account before the bonus is credited
2. VantageFX – Ultra-Low Spreads
VantageFX VFSC under Section 4 of the Financial Dealers Licensing Act that offers heaps of financial instruments. All in the form of CFDs - this covers shares, indices, and commodities.
Open and trade on a Vantage RAW ECN account to get some of the lowest spreads in the business. Trade on institutional-grade liquidity that is obtained directly from some of the top institutions in the world without any markup being added at our end. No longer the exclusive province of hedge funds, everyone now has access to this liquidity and tight spreads for as little as $0.
Some of the lowest spreads in the market may be found if you decide to open and trade on a Vantage RAW ECN account. Trade using institutional-grade liquidity that is sourced directly from some of the top institutions in the world with zero markup added. This level of liquidity and availability of thin spreads down to zero are no longer the exclusive purview of hedge funds.
- The Lowest Trading Costs
- Minimum deposit $50
- Leverage up to 500:1
Conclusion
In summary, futures trading is a great way to gain exposure to hard assets like gold, oil, and wheat – without you needing to take direct ownership upfront. Instead, you will merely be speculating on whether you think the price of the asset will go up or down when the contract expires.
With that being said, the traditional futures trading space is typically only available to institutional money. This is because minimum lot sizes are often well over $100,000. As such, your best option is to trade futures via CFDs.
If you’re keen to get started today, we would suggest using one of the pre-vetted brokers that we have discussed on this page.
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