What Is Futures Trading?

Imagine being able to have the absolute best of every trading world.

All bundled into one instrument… With access to pretty much any index commodity or currency market in the world.

Where you can grow a small account with only a few hundred dollars into a powerhouse that generates profits equivalent to a full-time job. And unlike a stodgy old stock… You can trade in a few hours each day to bring home outsized gains.

Welcome to the wide world of futures trading.

For many, futures trading is a misunderstood niche of the trading world. It’s seen as too risky… Too complicated… Too expensive for most traders.

Not the case. Let’s pull back the covers on futures trading.

The Basics Of A Futures Contract

If you’ve listened to the morning news, you’ve heard it a million times.  

The radio announcer… Who is certainly not a trader… Says something like…

“Investors are bracing for a tough day on Wall Street… S&P futures are already down 5% in early market trading.”

What on earth are they talking about? What even is a future?

It’s basically a contract.

More specifically, it’s a contract that is tied to an underlying instrument like the S&P 500… or Crude Oil… or Soybeans… you name it. Technically it’s a derivative of that underlying instrument… because it’s tied to it… but it’s not actually that instrument, standardized and traded in the futures market. 

Every contract has a future date of expiration. And the current contract is known as the front contract.

Buyers and sellers then trade based on the expected price or value of that contract at expiration. You can buy or sell entire contracts… or you can trade partial contracts, depending on your risk tolerance and trading strategy.  

This allows both buyers and sellers to generate profit from rising and falling contract pricing… even if the price action is very small.  

Additionally, industry participants… specifically those that are involved in the actual commodity that’s being traded… also use futures to limit their risk.  

Think of farmers, oil producers, livestock breeders, and manufacturers, who actually have barns, tankers, fields, and warehouses filled with these real commodities.  

They use the futures markets to protect themselves from a spike, or even a fall in price that could impact their business.

Farmers for instance, can use futures contracts to reduce the risk exposure they face on a particular crop that they’re farming. Simply by selling at a higher price in that instrument.

If you don’t happen to be a soybean farmer… or looking to protect the price on a warehouse filled with barrels of oil… what are your options for trading futures?

In reality, there is almost an endless supply of futures markets you can participate in.  

Handshake between businessmen inside digital sphere

There is always someone to either sell to or buy from in the Futures trading markets.

For most, the most appealing markets can be broken into these basic buckets:

  • Commodities: Commodities are tangible assets, agricultural products and natural resources used in trade and industry. This includes soybeans, corn, wheat, crude oil and natural gas.

  • Currency: Just like Forex pairs, futures allows you to trade based on the projected value of any major currency, including the Euro, USD, Japanese Yen, etc.
  • Precious metals: Gold and silver are the most commonly traded metals available.

  • US Treasury: US Treasury Futures allow investors to speculate on possible interest rate fluctuations.
Bar chart showing massive upward trends while traders look on through magnifying glass

Futures investors can analyze markets to understand what drives the price action.

  • Stock Indices: Futures contracts can also derive their value from indices such as the S&P 500, Nasdaq, Russell 2000, or the Dow Jones.

Each of the above market categories offers amazing opportunities for price action trading. As a general rule, if you don’t understand the underlying market that’s driving the price action in any given futures market… You shouldn’t be trading it.

So, for instance… If you don’t know anything about what drives soybeans… don’t trade soybean futures.

For most retail traders, hoping to profit from price action in any given market, understanding the drivers that move price will mean the difference between profit and loss.

Here are the basics you should plan to become familiar with.

What To Know And How To Get Started

In reality, most retail traders jump into a futures market without any clue whatsoever as to what drives that market.

They think of trading as a video game.  

Perhaps they watch a few price action videos on YouTube… Get an indicator and then start risking their hard-earned money.

Doing this means that you are ignoring one basic principle of trading… especially futures trading:  There are humans involved.  

Specifically, you are trading with… And in many instances against… Other humans.

And not just folks like you and I… You’re in the deep water with the institutions. These are the guys that drive 90 percent of any given futures market. When they decide they want price to move… It moves.  

If you don’t know what’s driving them… or driving price in general… You’re going to get flattened. 

Here’s a perfect example: Check out this volume profile. See where the profile comes out onto the chart? Those are the price levels where the institutions have put their foot on the gas and asserted their will. 

Trading chart showing Price Action driven by institutional volume

If you think for a second that price action is a result of a pattern… think again. It’s the institutions that drive price action.

Not knowing this… or what these price levels are, is like taking a rowboat and a toy Barbie fishing rod into Puget Sound to fish for king salmon.

It’s not going to end well. Yet millions of aspiring futures traders furiously row their little accounts into the deep water – only to drown in seconds.

Here’s the deal: Understanding the human dynamics and behaviors of a futures market… specifically those of the institutions that drive those markets, is actually a massive, money-making opportunity.

You just need to know exactly what to look for. And knowing what to look for starts with putting the basic pieces together for any futures market.

Here’s a checklist to get you started when looking at any major futures market:

  • Price Action Events: What events will result in major volatility for that market? For instance… if you trade Crude Oil (CL), they announce oil prices every week… that injects MASSIVE price action that can tip your account over in an instant.
  • Historical Volume and Price Levels: Not volume in general… but VOLUME at PRICE. Just as the chart above describes. Understand the price levels that will serve as HIGH volume or LOW volume points from a historical point of view.
  • Volatility: What is the historical volatility… and can you afford the standard swings that may present themselves… especially for your given time frame?

If you’re not sure about the answers to any of these questions – no problem – we have the perfect place for you to start. The eMini S&P 500.  

If you’ve never checked out the eMini S&P, here are the basics:

Source: CME Group

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If you’re interested in trading futures… but you’re still not sure where to start… this simple step-by-step guide should be a good introduction. To learn more about NinjaTrader, automated trading, Ninjacators indicators and more, check out our FAQ page.

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