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How to trade futures

Trading futures gives you the unique opportunity of securing your right to take a position at a later date, but at a predetermined price. Get the details on how to trade futures in this guide.

How to trade futures in 7 simple steps

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

1. Learn the basics of futures trading

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

2. Pick a futures market to trade

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 give you the freedom to find what’s right for you.

tastyworks 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 futures1

You can also opt for Small Exchange futures if you want to kickstart your futures journey with something more accessible.

Explore our futures products

3. Create a futures trading account

Apply for a futures trading account and get a taste of something fresh…

  • Try new features that are intuitive and engaging
  • Use our in-app content to boost your market awareness
  • Increase your potential returns and take your capital further with leverage

Ready to Trade?

Open an Account

4. Develop 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’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.

5. Identify an attractive trading opportunity

With tools such as tastyworks’ 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.

6. Open your first futures trade

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

  1. Log in to your tastyworks 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 type2
  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).

7. Monitor and close your futures positions

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 tastyworks 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

Futures trading example

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.
Expiration date/execution of a trade: $75.72 was the agreed price. If price is higher, you'll buy at the agreed price. If price is lower, you'll also buy at the agreed price.

Futures contracts standardization

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

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 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 and leverage in futures trading

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).

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.

FAQs

How much money do I need to start trading futures?

There’s no minimum account balance for tastyworks account holders to start trading futures in a margin account. If you’re looking to boost your capital efficiency with Small Exchange futures using a margin account, the same applies.

Using an IRA account, however, means that start-of-day net liquidation for Smalls, CME micro e-mini futures and CME options on micro e-mini futures must be $5,000; and $25,000 for standard CME futures contracts and options on futures.

IRAs also have increased buying power requirements – they are:

  • Long options on futures: Debit paid
  • Short options on futures: 2X CME SPAN Margin Requirement
  • Long/short options on futures spreads:  2X CME SPAN Margin Requirement
  • Outright CME futures contract + any options futures position in the same root symbol: 2X CME SPAN Margin Requirement
  • Smalls, outright CME futures, and CME micro futures: 125% of the overnight requirement

Whether you’re looking to trade futures in a margin account or an IRA account, you’re good to go if you meet the overnight requirements, in addition to the buying power requirements.

Can I trade futures at night?

Yes – you can trade futures day and night. However, some contracts have specific trading hours. With a tastyworks account, futures trading is available to you 23 hours a day for most products.

Learn more about market trading hours

Which futures trading platform is the best?

The best futures trading platform is the one that works for you, as it depends on whether your needs as a trader are met.

While we’ve been named the best online broker3 we’ll leave it up to you to decide. Join the tastyworks customers that are already dabbling in futures and let’s see whether we’ve got the best futures trading platform for you.

In comparing platforms you might want to consider factors such as:

  • Educational resources
  • Commission rates4
  • Safety, reliability and speed
  • Optimisation for desktop, browser and mobile
  • Trading hours
  • Trade desk support
  • Customer communications
  • Customizable trading preferences
  • Regular updates and feature releases
  • Wide range of product offerings
  • Support with tax documentation
How do you buy and sell futures?

You can buy and sell futures on the tastyworks trading platform by following our steps on how to trade futures.

The tastyworks trading platform also offers the active trader interface, purpose-built for active futures traders.

What are the risks associated with trading futures?

Due to the speculative nature inherent in futures products, the risk of loss in trading futures products can be substantial. You should carefully consider whether trading futures is suitable for you in light of your investing circumstances, risk tolerance, and financial resources. Please read all applicable futures risk disclosures at www.tastyworks.com/disclosures prior to trading futures products.

1You can trade CME Bitcoin, Micro Bitcoin, and Small Exchange crypto equity index futures with tastyworks

2Currently, futures can only be routed as a Day Order, and not as a Good Til Canceled (GTC) or Good Til Date (GTD)

3Named the Best Online Broker by Investor’s Business Daily (IBD) in its ninth annual survey

4Commission on smalls futures is $0.25 per contract. Some additional applicable commissions are capped at $10 per leg on equity option trades and $10 per opening and closing cryptocurrency trades. See our full commission fee structure