Learn to Trade Futures: A Beginner's Guide

Futures trading can seem daunting, but with a solid understanding of the basics, a well-developed plan, and the right tools, anyone can participate in this dynamic market. This guide provides easy-to-understand steps for beginners looking to learn how to trade futures.

Introduction to Futures Trading

Futures are standardized derivative contracts that allow you to buy or sell an asset at a predetermined price and date in the future. This provides a unique opportunity to secure your right to take a position at a later date, but at a predetermined price. Before getting started, it's vital to build a solid foundational knowledge of futures trading and how it works. This way, you can manage your risk better and boost your overall market awareness.

Understanding Futures Contracts

One of the most important aspects of futures contracts is that they are standardized - this ensures liquidity. Standardization of futures contracts means there are specific benchmarks on a range of aspects relevant to any given asset. These factors include:

Underlying asset: The asset being traded, e.g., commodities or foreign currency
Quality: The grade of the underlying asset
Settlement type: Whether it will be settled in cash or through physical delivery
Contract unit: The 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: The 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 is worth, e.g., the tick size for gold is 0.10 and the tick value is $10
Maximum price fluctuation permitted: The highest change in price that is allowed within a trading session

Mark-to-Market in Futures

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 positions 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 and Leverage in Futures Trading

Notional value is how much the underlying asset’s units that is controlled by a derivatives trade is worth in total-the full amount that is at risk. Additional fees such as commission and margin relief are not factored into this amount. Position and market volatility affect buying power. For this reason, you need your initial margin to open your position and maintenance margin, the minimum amount required in your account. If there is less than this amount, a margin call occurs.

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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 is different from market value. The 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). When trading with leverage, it is important to remember that your profit or loss will be determined by the total size of your position, not just the margin used to open it.

Futures Contract Tick Size

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.

Choosing a Futures Market

When it comes to choosing a futures market, you might have certain preferences, e.g., broad exposure, debt instruments or natural resources. With various futures markets to choose from, you should establish which one is most-suited to your individual trading style. Other markets, such as gold or silver commodity futures are often preferred by traders who have lower risk appetites and enjoy markets with lower volatility. Additionally, the number of potentially beneficial opportunities within markets fluctuates-at any given time, one might have particularly better prospects.

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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
Livestock futures
Volatility Futures
Cryptocurrency futures

Opening a Futures Trading Account

Before you can start trading, you'll need to open a futures trading account. Apply for a futures trading account and get a taste of something fresh.

Developing a Trading Plan

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 are 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 is 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 is impossible that it will be entirely foolproof, it is always a good idea to stick to your trading plan. Switching things up might be tempting sometimes. So, it is vital to prepare for the hasty responses you could have along the way. Understanding what influences your decision-making, e.g., the psychological impacts of 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.

Identifying Trading Opportunities

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.

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Outright Futures Trading Strategies

Investors can speculate on the direction of a futures contract by going long (buy to open) or short (sell to open) a futures contract. When trading futures, you can go both long or short. Moreover, investors noticing price convergences or divergences between different contract months of the same future, or between two separate futures contracts, can speculate by establishing an outright futures calendar spread trade or pairs trade, respectively. Futures are not subject to Pattern Day Trading rules, unlike trading stocks or options. Investors seeking to speculate by day trading futures actively are not limited by how many day trades they perform within a trading session.

Buying/Long Individual Outright Futures

If you think that the underlying price of a future will increase based on your own fundamental and technical analysis, you can open a long position. Investors speculating that the price of a futures contract will go up can establish a long position by buying to open the contract. An investor can profit from a long futures contract as the price rises. Losses occur when the futures contract price falls below the contract's purchase price or cost basis.

Selling/Short Outright Futures

Alternatively, if you think that the price of oil is going to fall, you could go short with a CFD on the oil future. Investors speculating that the price of a futures contract will go down can establish a short position by selling to open the contract. An investor can profit from a short futures contract as the price falls. Unlike long positions, losses occur from a short futures contract position when the price rises above the sale price.

Futures Trading Examples

Suppose you are 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 would pay $1,700 instead of $1,750, $50 less than the new market price. You would benefit and the seller would lose out.

But there is more to calculating a futures contract profit or loss (P/L). First, you would 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 would 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 would 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 would pay $1,700 instead of $1,600. That means you would have missed an opportunity to pay $100 less than the new market price. You would calculate the P/L as per the previous example. In this case, it would be $10,000. As per this example, you would lose out and the seller would benefit.

Outright Futures Calendar Spreads and Pairs Trades

Investors who notice price deviations between different contract months of a specific futures contract or notice that prices between two separate futures contracts are inverse can speculate by placing an outright futures calendar spread trade or pairs trade.

An outright futures calendar spread, or intramarket spread, describes a strategy where an investor buys or sells the active month futures contract and performs the opposite order action on the same future in a back-month contract. It is important to note that investors can speculate between any two contract months of a specific futures contract. It is worth noting that available contract months vary for each outright futures contract.

Similar to intramarket futures spreads, a futures pairs trade describes a strategy where an investor buys or sells a futures contract and performs the opposite order action to a different contract. Investors can speculate between the inverse price action of two futures contracts by placing a pairs trade.

Whether an investor speculates by establishing an outright futures spread trade or a pairs trade, both have the same goal of price convergence or divergence.

Before we discuss an example, it is essential to understand what convergence and divergence mean in a futures calendar spread or pairs trade. Convergence assumes the two products or contracts are at price extremes far away from each other. A convergence would profit when the prices of the two products moved towards each other over time.

For example, if we are long the front-month /MESH4 futures contract at 4,000 and short the back-month /MESM4 futures contract at 4,050, we would see profitability if the price of the front-month contract rose, and the back-month contract fell. Of course, when the inverse occurs in the example above, we would see losses on both contracts.

The example above shows the spread narrowing from -50 points to -15 points due to the long front month /MES contract increasing 20 points for a $100 gain (20 pts x $5) and the short back-month /MES contract dropping by 15 points for a $75 gain (15 pts x $5). This equates to a $175 total profit between the two contracts ($100 + $75).

Conversely, traders can speculate on a divergence. Traders speculating on a divergence assume the price of each futures contract in an outright futures calendar spread will move away from each other over time.

For example, let’s say we are short the front-month /MESH4 futures contract at 4,000 and long the back-month /MESM4 futures contract at 4,050. We would see profitability if the price of the front-month contract fell, and the back-month contract rose. Both contracts are moving away from each other or diverging. If the price of both contracts started moving toward each other, in this example, a loss would be incurred.

The example above shows the spread widening by 10 points due to the short front-month /MESH4 contract dropping by 10 points (from 4,000 to 3,990) for a $50 gain (10 pts x $5) and the long back-month /MESM4 contract rising by 10 points. This equates to a $100 profit between the two contracts. Before establishing, it is essential to fully understand the risks of futures calendar spreads and pairs trades.

Placing Your First Trade

To place your first trade, go to our trading platform and select a market. Next, select the ‘Futures’ tab on the price chart (or ‘Forwards’ in the case shares, forex and ETFs), decide whether you want to buy or sell the underlying market, and choose your position size. Before you open your position, you should consider adding stops and limits to your trade.

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

Log in to your tastytrade account
Find the futures market and the asset you want to trade
Decide whether you will go long or short
Manage your risk by adjusting the quantity, price, and order type
Open your position and monitor the market

More specific guidelines depend on the futures market you want to trade and the interface you are using (desktop, mobile ,or web browser). Like the start of any trade, it all starts with entering the futures root symbol into the active symbol field at the top of the tastytrade desktop trading platform. The tastytrade Help Center also has video instructions on how to set up a futures trade on the platforms.

How to Set up a Long Futures Trade

Enter the futures root symbol.
Click on the Ask price.
Go to the order ticket to determine the quantity, price, time-in-force (TIF), etc., before clicking Review and Send.
Verify your order including commissions and fees before clicking Send to place the order.

How to Set up a Short Futures Trade

Enter the root symbol.
Click bid price.
Go order ticket determine quantity, price, time-in-force (tif), etc., before clicking review and send.
Verify…

Monitoring and Closing Your Position

After you’ve placed your trade, you’ll need to monitor it to make sure that the markets are behaving in the way that you expected. If they aren’t, you might want to close your trade to minimise your losses.

Avoiding Misinformation and Scams

If you search online to learn how to trade futures or options, you’ll find dozens of seminars, web courses, and training software. But while there are many useful resources available, there are also plenty of instructors promising expertise and results they can’t deliver - and in some cases, perpetrating fraud. How do you navigate the overwhelming number of options, sort the good from the bad, and steer clear of scams?

Before you pay for classes or training software, it’s useful to tap into free resources to learn how markets and trading really work. A strong foundation will help you evaluate your options for further education and zero in on the areas where you most need help. To help avoid misinformation and scams, it’s a good idea to start with public institutions, nonprofit organizations, and regulated trading organizations, such as exchanges. Once you’re ready to enroll in seminars or classes, sticking with established, trustworthy institutions can help you avoid scams and incorrect or misleading information. Many colleges and universities offer continuing education courses in trading strategy, taught by experienced instructors. Check course listings at accredited colleges in your area or colleges with online learning programs.

Be wary of the following red flags:

Promise of big returns: Risk is inherent in any trading strategy, and there is no such thing as a foolproof method with guaranteed results. Typically, the opportunity for higher returns goes hand in hand with higher risk.
Easy answers and secret tricks: Derivatives markets are complex, with many factors in play day-to-day and minute-to-minute.
Claims of past success: Scammers may advertise the exceptional results they and their students have seen following their strategies. While hard evidence of positive results may indicate a quality course, note that it’s easy to fake success measures or frame stats in misleading ways. Don’t take claims of success at face value if you haven’t verified them. Also keep in mind that individual students who offer testimonials may be outliers who don’t represent success for students overall.
Urgency: Fraudsters may pressure you to sign up for seminars or classes right away. Be skeptical of claims that there are only a few open seats left or that the window is closing to lock in a discounted price.
The “free” offer: One common sales technique is to offer an introductory seminar for free and then charge for more advanced training or other “required” features or services. This could seem like a logical way to try before you buy, but you could also be subjecting yourself to high-pressure sales tactics and ongoing phone calls to get you to try another seminar.
Upfront commitments: Conversely, fraudsters may ask you to sign up for an extensive course load - and extensive fees - right off the bat.

Whether or not you spot any red flags, it pays to do some background research on a company and instructor before signing up. Learn about the history of the organization, including how long it’s been in operation, and check online professional profiles for instructors. It may be helpful to check online for reviews from past students and articles about the company, but take this information with a grain of salt. Positive ratings and reviews don’t guarantee quality and can be faked. Finally, it’s a good idea to contact a company or instructor before enrolling, so you can confirm what the course will cover, learn more about the instructor’s background, ensure you understand all costs upfront, and ask any additional questions.

Hedging with Futures

Hedging with futures enables you to control your exposure to risk in an underlying market.

Understanding the Role of Margin

In futures trading, margin is not borrowed money. When trading futures, a trader will put down a good faith deposit called the initial margin requirement. The initial margin requirement is also considered a performance bond, which ensures each party (buyer and seller) can meet their obligations of the futures contract. Initial margin requirements vary by product and market volatility, and are typically a small percentage of the contract's notional value. This type of leverage carries a high level of risk and is not suitable for all investors. Greater leverage can create much greater losses quickly and with small price movements of the underlying futures contract.

Practical Examples

Here are some examples that illustrate how futures contracts work:

Micro E-mini S&P 500 Futures Example: A Bet on the Broader Market's Direction

In this scenario, a short-term trader believes the S&P 500® index (SPX) will rise over the next month following a series of strong earnings reports from some of its component members. To act on this view, the trader buys one December Micro E-mini S&P 500 futures contract at a price level of 5,000 index points. The notional value of this position is $25,000. However, the initial margin required to open the position is likely to be between 3% and 12% of that notional value.

Each point of movement in the contract is worth $5. If the index rises to 5,050 index points, the trader could close their position by selling an offsetting December contract, securing a gain of 50 points × $5 = $250.

However, if the index falls to 4,950, the trader incurs a $250 loss. This example illustrates how futures can be used for short-term speculation based on market conditions like earnings announcements, economic data, or Federal Reserve policy updates.

Natural Gas Futures Example: A Seasonal Trading Strategy

A trader who studies seasonal trends notices that natural gas futures prices historically rose in late summer as utilities begin building up supply for winter. Based on this pattern-and recent weather forecasts-they believe futures prices may climb over the next month.

The trader buys an August Natural Gas futures contract (/NQ) at $3 per million British thermal units (MMBtu). The contract size is 10,000 MMBtu, making the notional value of the position $30,000. However, the initial margin requirement to open the position is likely to only be between 3% and 12% of that value.

The trader places an order to sell at a target price of $3.40 and a stop order-an instruction to a broker to automatically activate a sell order if the price falls to a certain price-at $2.85 in an attempt to manage risk.

Over the next few weeks, futures prices rise as expected, and the trader's order to sell the open August futures contract is filled at $3.40, closing the position. This would result in a gain of $0.40 × 10,000 = $4,000.

If, instead, futures prices fell to the $2.85 stop-loss level, the stop order would be activated, creating an exchange-designated limit order to sell the position. If this order was filled at the stop price of $2.85, the loss would be $0.15 ×10,000 = $1,500. However, a futures stop order does not guarantee the order will be filled, or that it will be filled at the desired stop price.

This example shows how futures can be used not just for day trading or hedging, but also for short- to medium-term speculation strategies based on market cycles and technical analysis.

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