Futures Market Trading Tutorial

What is the Futures Market?

Futures markets have been described as continuous auction markets and as clearing houses for the latest information about supply and demand. They are the meeting places of buyers and sellers of an extensive list of commodities. Today, commodities that are sold include agricultural products (grains trading), metals (such as gold and silver), Energies trading (crude and petroleum), financial instruments, foreign currencies, stock indexes and more.

Successful Trading

For futures traders, one of the best suggestions they can take in order to be successful is to follow the trends. Many futures traders trade without a plan. Even if they have a plan, they second guess it and make the mistake of not sticking to it--especially if the trade is a loss. After several profitable trades, using futures trading facts, many speculators become fierce and radical, basing their trades on hunches, and long shots rather than intelligible reasoning.

Successful futures traders are good businessmen and good money managers. Traders risk their capital, true, but those who are successful follow conservative and disciplined business practices. Money management is as important as being correct in the market.

When considering futures trading, people should not concern themselves with capital needed for daily sustenance. The capital recommended for futures trading is risk capital. Risk capital is money that, if lost, would not materially affect ones living standards. This is a very important concept to understand as you embark on your career in futures trading.

Basics of Futures Trading:

Margins: Before entering the futures market, you need to deposit a principal amount to assure the performance of your obligations. A margin deposit, as already stated, is usually 5-10% of the future contract. A good margin deposit indicates that the buyer/seller is willing and capable to compensate the opposite party to a transaction. As margin requirements are low, hedgers are able to lock in pricing of cash market goods without tying up a lot of capital. Counter productive it would prove for a hedger handling large quantities to put up 100% of the value of the hedged commodity. While low margin makes speculation the market attractive, minus the leverage rate the return on most commodities would be trivial. Margin requirements are set by the exchanges though brokerage firms can set a higher deposit. Initial margin fluctuates with the market and it is for this reason that the maintenance margin is set up, usually 75% of the initial margin. If the principal amount falls below this line either one must deposit more funds or liquidate one’s position. This is known as margin call.

Orders: Orders are of several types, the popular being market order, limit order and stop order. Analyzing “market order” first, it is used when one needs to enter and exit the market quickly. It does not yield profits and is preferred by those who prefer time to money. “Limit orders”, on the other hand, are used to buy or sell at a specified price, and will only be filled at a price that is more favorable. As the name suggests, “stop order” is used to close a position and if placed properly it will stop losses when the market tides against the interest of the traders. By definition, a sell stop will be placed below the market while a buy stop will be placed above. Please note that all orders are day orders and will be cancelled at the end of the trading day. By entering the order GTC, the order will be working in each trading session until canceled by the trader.

Execution: Ever thought how you execute a futures trade? Once decided, you call your broker to enter the futures market. The broker completes your order ticket, and stamps the time so as to be able to keep an accurate track of the time and specifics of each other. The broker then transmits the order to his firm’s trading desk. The order clerk at the trading desk then fills out an order card; time stamps it, and hands it to a runner who takes it directly to a pit broker. The pit broker then executes the order by open outcry, records the execution on the card before handing it back to the runner. The runner then takes the executed order back to the desk where the order clerk time stamps the card again before the reporting to your broker.

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