How to trade futures

Easy-to-understand steps for trading futures:

1. Learn the basics of futures trading
2. Pick a futures market to trade
3. Create a futures trading account
4. Develop a trading plan
5. Identify an attractive trading opportunity
6. Open your first trade
7. Monitor and close your position

It’s vital that you build solid foundational knowledge of futures trading and how it works before getting started. This way, you can manage your risk better and boost your overall market awareness.

So, what are futures anyway?

Futures are standardized derivative contracts that enable you to buy or sell an asset at a predetermined price and date.

After acquainting yourself with the basics of futures, take a deep dive to make sure you have a good understanding of all the moving parts.

Learn more about what futures are and how they work

When it comes to choosing a futures market, you might have certain preferences, e.g. broad exposure, debt instruments or natural resources. Additionally, the number of potentially beneficial opportunities within markets fluctuate – at any given time, one might have particularly better prospects. Our extensive range of products across markets gives you the freedom to find what’s right for you.

tastytrade provides a variety of products within these markets:

• Equity index futures
• Interest rate futures
• Foreign currency futures
• Commodities:
  • Energy futures
  • Metal futures
  • Agricultural futures
• Volatility Futures
• Cryptocurrency futures

Explore our futures products

Developing a trading plan helps you lay out exactly what it is you hope to achieve. Remember to not walk in blindly – think carefully about what your long-term objectives are and how you’re planning to reach them.

Here are some essential questions you need to ask yourself when drawing up your trading plan:

• How will I choose my assets?
• What type of trading style am I going for and what strategies will I employ?
• How much capital is in my account and how much do I want to allocate per trade?
• What types of price extremes are there in various futures products?
• What’s my risk appetite and how will I manage my risk?
• Are there any binary events coming up to be aware of and possibly take advantage of?
• How volatile is the futures product? Is its price movement slow-moving or rapid?
• Do I have any correlated positions? If so, how will I hedge these?
• What is my ideal entry/exit point for this trade?
• How often and for how long do I need to monitor a trade (or my portfolio)?

Even though it’s impossible that it’ll be entirely foolproof, it’s almost always a good idea to stick to your trading plan. Switching things up might be tempting from time to time. So, it’s vital to prepare for the hasty responses you could have along the way.

Understanding what influences your decision-making, e.g. the psychological impacts in trading, is important. Is it your personality, emotions, or moods? Perhaps it’s behavioral biases such as loss aversion; or maybe it’s social pressures. It could even be a combination of factors.

With tools such as tastytrade’s Follow Feed and in-platform video feed, you can choose from a wide range of opportunities across markets. You can also use features such as the market watchlists to access curated lists of futures, as well as trade metrics to analyze trading performance, and more.

But before you choose your preferred futures market and asset, it’s important that you give thorough consideration to your risk tolerance level and the relevant disclosures.

Once you’ve been approved to trade futures, follow these steps to open your first futures trade:

1. Log in to your tastytrade account
2. Find the futures market and the asset you want to trade
3. Decide whether you’ll go long or short
4. Manage your risk by adjusting the quantity, price, and order type
5. Open your position and monitor the market

More specific guidelines depend on the futures market you want to trade and the interface you're using (desktop, mobile or web browser).

Once you've executed your futures trade, it’s important to manage it accordingly. You can either let the contract expire if it’s financially (cash) settled, or close it before the expiration if you believe you’ll lock in profits or cut losses this way.

The tastytrade platform has capabilities that empower you to manage your open positions effectively. These include the active trader interface as well as risk management tools such as stop orders, quote alerts, and charting features like technical indicators.

FUTURES STOP ORDERS

Instead of constantly monitoring your futures position manually, you can opt for in-platform features such as stop limit and stop market orders that can do a lot of the heavy lifting for you. Predefining your trading conditions this way lets you enter and exit your position at price levels that you’re comfortable with.

Learn how to set up a stop order

TECHNICAL INDICATORS

Technical indicators, such as moving average convergence divergence (MACD) and relative strength index (RSI), are chart analysis tools. They can alert you of ongoing trends and give you a look at how a market has performed historically. Both of these analysis tools can be useful to your decision-making as they’re designed to enable predicting future price action. Relying solely on chart indicators can lead to bumps in the road, making it important to use them alongside your trading plan.

Learn how to set up a stop order

Suppose you’re bullish on gold. You take a long position on the precious metal at $1,700 and one contract (100 troy ounces). You close the position before it expires, at which point the price of gold is at $1,750.

• You’d pay $1,700 instead of $1,750, $50 less than the new market price. You’d benefit and the seller would lose out.
  
  But there’s more to calculating a futures contract profit or loss (P/L). First, you’d divide the profit per contract (or the difference between the futures price and the price at expiration/execution of trade) – $50 in this case, by the tick size (0.10 for gold futures). That gives you the total tick movement (500 ticks). Then you’d multiply this with the tick value ($10 for gold futures), which gives you your total P/L. In this case, your profit is $5,000.
  
  For a contract size bigger than 1, you’d multiply this figure with the number of contracts to determine your P/L.

Now imagine that you let the futures contract expire, at which point the price of gold is at $1,600.

• You’d pay $1,700 instead of $1,600 – that means you would’ve missed an opportunity to pay $100 less than the new market price. You'd calculate the P/L as per the previous example. In this case, it would be $10,000. As per this example, you’d lose out and the seller would benefit.

One of the important aspects of futures contracts is that it’s standardized – this ensures liquidity. Standardization of futures contracts means that there are specific benchmarks on a range of aspects that are relevant to any given asset.

These factors include:

• The underlying asset: asset being traded, e.g. commodities or foreign currency
• Quality: grade of the underlying asset
• Settlement type: whether it’ll be settled in cash or through physical delivery
• Contract unit: quantity of the underlying asset outlined in one contract
• Currency: the unit of money that the futures contract’s price quotation is in
• Date of delivery: time at which the final cash settlement, or the delivery, will be made
• Last trading date: the day before the contract expiration
• Tick size and value: the minimum increments by which prices can change and how much it’s worth, e.g. the tick size for gold is 0.10 and the tick value is $10
• Maximum price fluctuation permitted: highest change in price that’s allowed within a trading session

Futures and options on futures are marked-to-market at the end of each trading day, making them Section 1256 products. With fair value measured daily, this is reflected in the futures contract price.

Marking-to-market refers to the valuing of assets – a process where profits and losses between long and short position are settled at the end of each trading day. This means that the underlying asset’s settlement price becomes the new futures baseline price.

Notional value is how much the underlying asset’s units that’s controlled by a derivatives trade is worth in total – basically the full amount that’s at risk. Additional fees such as commission and margin relief aren’t factored into this amount.

Position and market volatility affect buying power. For this reason, you need your initial margin – to open your position – as well as maintenance margin, the minimum amount required in your account at all times. If there’s less than this amount, a margin call occurs.

To calculate notional value, multiply the spot price per unit with the futures contract size. For example, if the price of gold is $1,700 and the contract size is 100 troy ounces (one contract unit), the notional value would be $170,000. Had the contract size been 200 troy ounces (two contract units), the notional value would be $340,000.

Notional value isn’t the same as market value. Market value is the same as the futures contract price, i.e. the spot price of the underlying asset (one unit). Based on our example, the market value of gold would be $1,700.

The affordability of your trade is also affected by leverage, which lets you open your position at just a percentage of the full value of the trade. Regardless of this, your risk will still be equal to the notional value (excluding any additional fees).

Contract tick size is one of the fundamentals to understand in derivatives trading. Contract tick size refers to the minimum increment possible by which the underlying asset’s price can change.

The tick size of an instrument is set by an exchange, e.g. the Chicago Mercantile Exchange (CME) put the tick size of gold at 0.10 and the tick value at $10 since a gold futures contract controls 100 troy ounces. While ticks are indicated on the right side of the decimal point in the asset’s price, points are on the left of it.