How To Trade Futures

Courtesy of AskTraders

This article will get you started with futures trading. We will cover how to calculate Profit & Loss (P&L) and Futures Fair Value, how futures exchanges work and some futures strategies to use. Once you know how to trade futures on one asset class, you’ll find it easy to move to another asset class.

Futures are leveraged instruments, so it’s important to know how they are priced and how the margining system works. This article will explore all of these areas.

Before learning how to trade futures it’s worth making sure you know exactly what they are. Futures are a very simple form of derivative that can be traded on almost any market. The first futures markets existed for agricultural products like rice and sugar.

Today, futures markets exist on individual stocks, stock market indices, currencies, bonds and commodities. In most cases, futures markets are very liquid and relatively cheap to trade (compared to the underlying asset). Many futures markets trade 24 hours a day.

A future is a contract to buy and sell something on a specific date in the future. In most cases a “deposit” in the form of margin is paid at the time of a trade. When a trader buys a futures contract they are committing to take delivery of the underlying asset in the future, but agreeing on the price at the time of the trade.

Futures on financial assets like equity indices and currencies are sometimes cash settled. That means the difference between the trade price and the delivery price is settled in cash rather than by delivering the underlying instrument. Physical products like rice, corn or soybeans are usually settled by physical delivery of the underlying asset, in these cases the commodity itself.

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