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Looking to make Size? Wondering how to get started trading futures?
Chances are you are one of the 120,000,000 Americans with an active brokerage account, and you don’t even know you have access to trading futures.
Or maybe you’re outside of the USA and you’re interested in futures trading.
A futures contract is an agreement by two parties for the delivery of an underlying commodity, index or currency at some future date for a pre-agreed arranged price. It is a derivative product because it is a function of an underlying asset. Futures are derivative products that can speculate on forex, commodities (ex Gold, Oil, Pork Bellies) or indices and thus unlike equity (which has a limited number of shares), an unlimited amount of futures contracts can be created.
One can think of a futures contract in the most literal terms. An orange grove farmer is interested in selling his crops after the harvest. They would like to lock in a buyer today because they are concerned that there will be an oversupply in the future and the price of oranges will decrease. They are considered sellers and are thus “shorting” their position. A juice company may want to purchase this contract today because they believe that in the future the price of oranges will go up due to an increase in demand. They are considered buyers and are referred to as “going long.” In the above case there is actual delivery of product. A similar scenario could be given with an oil company and an airline.
Today, because of electronic exchanges, it is easy for speculators to take part in trading futures which include forex, commodities and indices. There are always buyers and there are always sellers. Most of the time speculators are not interested in taking delivery of product, rather, they are simply interested in taking advantage of price movements.
Up until the late 90’s only large financial institutions traded futures because it was done only on the “open cry” system at exchanges. In addition the margin requirments were too large for smaller funds or individual traders. With the advent of the internet, exchanges were able to trade futures electronically. Furthermore, exchanges created “mini future” products which required a fraction of the initial margin. Today, financial institutions, hedge funds and many individual traders take part in the futures market and in fact it is one of the most exciting and liquid markets.
There are many differences between stocks and futures, but we’ll just try and highlight a few of them here. We highly recommend traders and interested parties to browse SizeTrade as we have a wealth of knowledge available. Anyone can get FREE access to full length articles by clicking here and following the instructions to join SizeTrade.
As a trader, both stocks and futures can be traded electronically through platforms. In both stocks and futures the trader is speculating on a price.
- The main difference is that when trading stock, a trader is actually buying shares, or equity in a company or they are selling shares of a company by borrowing the shares first from someone else. There are only a certain number of outstanding shares of that company.
- In futures, the trader is either buying or selling a “derivative product,” a contract; i.e. a representation of an underlying asset. The trader does not actually own any shares of the underlying asset. The trader owns a contract which can actually be converted into physical delivery of a product. In the case of oil, barrels of oil. In the case of indices, actual shares of stock could be delivered at expiry. In most cases traders are day trading and simply trying to make profits on fluctuations in the price of the futures contracts and no delivery is ever taken or even considered.
- Stocks have no expiry, while futures contracts have expiry dates. As a trader this simply means you are usually trading the futures contracts with the closest expiry to the current date.
- With stocks, there exists a price per share and the cost of purchasing or selling that stock is equivalent to the number of shares multiplied by the price per share.
- Traders can borrow money from their broker (margin) in order to leverage their position. The maximum margin legally offered by brokers is 1:2 overnight, and 1:4 intraday. So for example a trader with $1,000 in his trading account, can purchase $4,000 worth of stock intraday, as long as he sells it before the the end of the trading day.
- With futures, margin refers to an initial deposit, or “good faith” deposit made into the account in order to buy or sell a futures contract. Thus a trader buying or selling a futures contract is not buying the contract “at the price” of the contract but rather buying contracts at set prices established by the exchanges and brokers.
- Much higher margins are offered to futures traders, which means that traders can make (and lose!) a lot money in comparison to stocks.Let’s take an example:$5,000 worth of ETF SPY stock (the S&P 500) at maximum 1:4 intraday margin could purchase about 100 shares of SPY stock @ $200/share. A $0.40 move in one day would yield either $40 profit or loss.SPY trades at 1/10 of the S&P and so a $0.40 move would be equivalent to a 4 point move in the ES future contract. With that same $5,000 a trader could hold 2 ES futures contracts while still leaving himself $2,000 as minimum maintenance and $1,000 in his account. A 4 point move would yield him $400 profit or loss.And so the futures contract is “10x riskier” than the ETF SPY stock in that the trader could lose 10X the amount, but with the same $5,000 the trader could also earn 10X what he made with the ETF SPY stock.
- The futures market is open 23 1/2 hours a day 5 days a week. This means that traders can be involved with the market around the clock, and traders can effectively set their stops and limits and not be as worried about gap ups and gap downs.
Yes futures can be extremely profitable. Trader’s can also lose their entire account. Futures are also inherently riskier than stocks because there is greater margin involved than with stock. A trader should have a firm understanding of risk prior to trading either stock or futures. We have written extensively about risk at this link.
Yes, because there is more margin involved. There are also greater rewards with futures.
The futures market is open 23 ½ hours a day 5 days a week. Since ES is probably the most popular futures index traded, it has incredible trading volume and volatility. In today’s extremely global world, events taking place around the world have profound effects on US markets. For example a terrorist attack in the morning in Europe, a report coming out about oil production, or an announcement coming from China or Japan will have profound effects on the US stock markets when they open again the following day. These unforeseen events, or large events can lead to “gap ups” or “gap downs” i.e. large price fluctuation in a stock. Because futures are traded almost 24 hours a day, these “gap ups” and “gap downs” are mostly avoided as traders can effectively set their stops and limits to exit trades. Setting stops is the essential trading methodology that differentiates a profitable trader and one that loses. There is massive benefit to this for trader. For technicalities about setting stops and limits click here.
In addition, because the futures market is open 23 1/2 hours a day, it allows for traders to trade with much higher frequency than equity markets. For more information about trading, the fundamentals of risk management and how to make size, click here.
SizeTrade is a trading academy as well as an indicators and signals service provider. The goal of SizeTrade is to aid new and experienced traders to become extremely profitable traders by giving them the tools, insights and competitive edge that major financial institutions have. This is all made possible because of Gary, our head trader and boutique head-fund manager with over 15 years of trading and training experience. SizeTrade offers a unique unmatched signals and indicators service that allows for traders to see LIVE (traders receive push notifications via the SizeTrade IOS or Android app) exactly how and what Gary is trading. All trades have predetermined entry levels, stops and exit points which allows for traders to participate in trades as well. Finally SizeTrade offers unprecendenteted access for traders to chat about their trading with a real live hedge fund manager.
We are constantly adding to our services but as of now the following services are offered
1) Profitable Futures Trading Signals: Tiger, Dragon, Eagle, Wolf. Watch or trade exactly how Gary is trading. These signals are based off of algorithmic indicators and patterns that Gary has developed and modified over the past 15 years. Traders can get Instant access to our Flagship Eagle signal by clicking here and joining SizeTrade.
2) Dolphin Indicator: Get the overall feel for the market. This indicator gives traders the direction the market is trending as well as levels. This indicator can be used for futures and stock trading.
3) VIP 1-1 Coaching: Learn to trade by getting consistent direct access to Gary, a seasoned 18 year trading veteran and manager of his own boutique hedge fund.
“Unfortunately, the trading sector is filled with quacks and charlatans. There is really nothing we can say or write on our website that would convince you 100% that our services are completely legitimate. We know that the content that we provide our users is extremely valuable and not just filler BS content that many sites offer.
Sizetrade traders are not gurus, but we have over 15 years of positive PnL experience. We have made money in every environment despite the fact that we have not had the safety net of large institutions. We understand what it takes to make money as a mathematical certainty.
No. Futures, and ES futures especially are extremely liquid. For more information you can find ES volume on the CME where it is traded.
In order to trade futures you must have an existing futures account or you must create an account with a broker. Chances are, you already probably have access to trading futures if you trade stock as over 50% of American adults invest in the stock market. That’s over 120,000,000 people! If you have a stock broker, then you can probably open a futures account with them as well.
If you are outside of the United States, you can also gain access to trading US futures as long as you have a valid passport and utility bill to prove your address.
Futures are traded on exchanges, but you’ll actual execute your trades on your broker platform who will clear your order with the exchange directly, or indirectly via a clearing house. Simply ask your current broker about it, or to open a new account, Google “Futures brokers” and you’ll get plenty of options. Every broker offers different margin incentives as well.
Yes. There is no problem in gaining access to trading futures if you are not a US citizen. You can gain access to trading US futures as long as you have a valid passport and utility bill to prove your address. If you are unable to find a broker who will take your business, please contact firstname.lastname@example.org and we can help you find one.
First you have to open up an account with a broker. You can simply do this by Googling “futures brokers” and you’ll get 1000’s of results. You will need to provide your broker with identification and you will need to fund your account. Usually within 24-48 hours your account can be up and running, and ready to trade.
Not at all. On your broker platform you will have the option to either buy or offer. It’s that simple. For more information on how to actually conduct a trade click here.
In ES futures, the initial margin established by the Chicago Mercantile Exchange (CME). It is the initial deposit a trader must make as a good faith measure in order to purchase a futures contract. This initial margin changes per product traded (i.e ES initial margin is different than Oil or Gold or other Indices like the Russel).
The Chicago Mercantile Exchange provides the trader with tremendous leverage – approximately 1:18 (so $5500 can control a contract valued at approximately $100,000) and thus is allowing for the trader to control a large sum of money with an initial margin deposit.
Brokers can add on additional leverage called “regular margin” as they see fit. it is up to the broker to manage his own risk, as any additional margin it affords traders is the brokers’s responsibility. Once the trader settles the futures contract he is returned the initial or regular margin and any gains or losses are added or deducted based on the trade that was executed.
A trader must also establish “maintenance margin,” which is the absolute lower account balance which the trader must maintain when trading futures before a margin call is made, and the trader must deposit more money into the account.
In contrast to futures, with stock margin the trader actually borrows money from the broker (with interest!). Furthermore, regulation requires that traders can only leverage 1:2 overnight, and 1:4 intraday. So for example, a trader with a $5,500 deposit can control up to $22,000 worth of stock intraday (as opposed to $100,000 in the case of futures with that same $5,500).
Let us assume that the S&P index is currently valued at $2000. One ES point is equivalent to $50. Thus one contract of ES is equivalent to:
Let us assume that a trader deposits $2200 into his futures trading account and he would like to trade 1 ES contract. The initial margin set by the CME is $5,500 per contract but his broker is offering an incentive that offers an additional 1:5.5 leverage in addition to the 1:18 leverage that the Chicago Mercantile Exchange already offers. Now the trader can bid (buy) or offer (sell) one future contract for $1,000 which will leave $1,200 in his trading account. The absolute minimum intraday maintenance margin established by his broker is $1,000.
The trader buys one ES mini contract as he believes the ES will increase in price. He is looking for a 4 point move ($200 increase) and sets his upper limit (limit order) 4 points above the bid price so that when reached, the trading platform will trigger automatically and sell his contracts. He also sets a stop (stop order) at 4 points below his bid price so that if the ES price falls below 4 points (a loss of $200) his trading platform will sell the contract automatically with ONLY a loss of $200 (and not more!)
If the trader is right, and the ES moves up 4 points, his limit will trigger automatically and he will sell the contract and make $200 profit, as well as have the initial margin of $1000 available in his account. His total account balance will be $2,400 now.
If the trader is wrong, and the ES moves down 4 points, his limit will trigger automatically and he will sell the contract and lose $200. He will get back the initial margin of $1000 that he put up initially, and his total account balance will now be $2,000.
Remember in order to conduct a trade, a trader must always have enough maintenance margin in his account ($1,000 in the above example) in order to avoid triggering a margin call.
Since with futures, the trader can either buy or sell contracts, a similar scenario would occur if the trader made an offer (sell) on one ES mini contract. I.e., he is selling ES-mini because he believes the price of the ES will go down. If he is trading correctly and he sets his limits and stops, if indeed the price goes down his predetermined number of points, the platform will automatically buy the contract and earn money. If he is wrong, and the price goes up, his stop will automatically trigger and the trader will lose money.
TAKE NOTE: If the trader does not set limits, then he could very easily find himself in a situation where his losses are larger than his maintenance margin, and a margin call is made to him via his broker. This means that the trader must come up with money to cover the maintenance margin, or else his account will be frozen and positions liquidated. He probably won’t be able to trade again with his broker.
For example, the trader has a $2,200 balance, and offers (sells) one ES contract because he believes the price of ES is going down. Unfortunately he is wrong, and suddenly the ES increases 8 points, the equivalent to $400. The trader used $1,000 as initial margin, but now his account is at $800 while he is still in the trade, which is below the maintenance margin of $1,000. At this point, he will receive a phone call from his broker for a margin call for an additional $200.
With all futures, commodity, forex or indices, you are purchasing contracts, NOT shares. You buy 1 or more contracts per trade. The actual value of each ES contract is equal to the price of the ES future X $50 (0.25 points = $12.50, and so 1 full point = $50). So today assuming the value of the ES is $2000, then the value of one contract is $100,000. However, because of the tremendous leverage that futures brokers offer as trading incentive, you can control $100,000 worth of contract with as little as $1000 margin.* You should only purchase as many contracts as you are willing to risk with the understanding that the more contracts you purchase, the greater your risk. For more information on risk management click here.
The actual “cost” for you to get into each contract is fixed by your broker as regular margin. The cost of purchasing 1 ES Future contract (initial margin) on the Chicago Mercantile exchange is about $5,500. Most brokers offer additional margin to traders as an incentive to trade with them. Depending on your broker, you could buy one ES futures contract for $1000 REGARDLESS of the current trading price of the actual ES future. In addition to the regular margin used to purchase the contract, you would need to maintain a free balance of at LEAST $1,000 as maintenance margin (the value of maintenance margin fluctuates from broker to broker) .
Let’s say you have an account with a broker and you have deposited $5,000 into your account. Your broker allows for a regular margin of $1,000 with a maintenance margin of $1000 per ES contract traded. Based on this you could purchase a maximum of 2 ES contracts: $2,000 for the contracts (regardless of the actual trading price of the ES future!), and $2,000 maintenance margin. After the purchase of the two contracts you’ll have $3,000 in your account, of which at least $2,000 MUST be maintained ($1,000 per contract).
The ES future contract is a derivative product of the S&P 500 index, and so the future contract fluctuates as the index fluctuates. If you buy an ES futures contract and the price of the index goes up, then the price of the future contract goes up and you have earned money. If the price of the index goes down, then you have lost money. Similarly if you sell an ES futures contract and the price of the index goes down, then the price of the future contract goes down and you have earned money. If the price of the index goes up after you have sold an ES futures contract, then you lose money. Click here for more information on the technicals of how exactly to conduct a futures trade.
If your account drops below the maintenance margin, then a margin call is made by your broker and you must replenish the funds in your account to make margin.
Since trading ES means you are trading futures, then this means there is an expiry date to the contracts.
The E-mini ticker symbol is ES plus the code for the expiration month and year. Contracts expire quarterly on the 3rd Friday of the month: March, June September and December (“H” , “M” , “U” and “Z” respectively). As a general rule, the contracts with the expiration closest to the trading date have the highest liquidity. So if the month is February, then March’s contract will have more liquidity than June’s. Below are the ticker symbols for Emini 2017.
- March 2017 contract: ESH17
- June 2017 contract: ESM17
- September 2017 contract: ESU17
- December 2017 contract: ESZ17
The VAST majority of traders should NEVER hold a future past expiry. 10 contracts would be delivery of $1,000,000 worth of stock roughly! ($2,000 X $50 X 10 contracts = $1,000,000)
Most brokers won’t even let you do this.
As the date moves closer and closer to the expiry date (usually within a week), traders begin trading the next quarter contract. At expiry the current quarter contract is usually within 10 points of the next following quarter contract.
Let us look at the following hypothetical example. The current price of the S&P 500 is $2000. A high worth speculator believes that the price of ES futures is going to jump 5% in the upcoming quarter to $2100, and he decides to bid on 100 contracts of ES futures. His cost for 100 contracts is $100,000 ($1000 initial margin per contract X 100 ES contracts). Yet, in reality he is controlling $50 X $2000 X 100 contracts = $10,000,000 worth of contracts.
If indeed the price goes up 100 points, and then the trader sells his position, he has made a whopping $500,000 ($50 X 100 points X 100 contracts = $500,000)
If the trader were trading the S&P500 index directly, for the same $100,000 he could own 50 shares without margin ($100,000/$2000 per share) or a maximum of 100 shares ($200,000/$2000 per share) with margin. Don’t forget with equity, margin is borrowed at interest! If the trader was correct and the value of the S&P 500 index does increase 100 points, and the trader sells his position, then the trader made $10,000 ($100 profit per share X 100 shares = $10,000).
In the above example we can see the value of leverage. At the same token, the trader must understand the risk that if he is wrong, and he has not set limits he can just as easily lose $500,000 if he was wrong and the ES future dropped 100 points.
While this all sounds extremely attractive, as far as traders using SizeTrade’s methodology the future contract value is really irrelevant. Our trades are mostly intraday trades and we are not long term speculators. Every SizeTrader is strictly concerned with their risk on each trade and will keep their risk constant for every trade executed.
Trading futures involves a serious commitment since the market is open almost 24 hours a day. We love trading and the life it affords including financial and personal freedom, but is not for the type of person who takes it easy, and is looking to work an “8 hour day” and then call it quits. All the signals we offer are very simple and sent out by mobile application. We do our best to send out signals between the hours of 7AM to 11PM. The signals are not labor intensive but you do have to be able to update and put in your orders.
All the information above is solely information purposes. Check with your certified financial advisor before getting involved with trading equity or futures.