This is an example page. It’s different from a blog post because it will stay in one place and will show up in In finance, a futures contract ties two parties into a deal today for a transaction that will take place later. At the core, a futures contract sets the price, quantity, and date in advance for an asset. No guessing, no haggling when the time comes: the terms are already locked in.
Futures contracts are highly standardized and trade on organized exchanges. They follow strict standardized rules so that buyers and sellers don’t have to reinvent the agreement each time. Traders can act quickly, already knowing all the details of the contract.
Someone trading crude oil futures doesn’t usually end up with barrels of oil stacked in their garage.
Instead, most futures are settled financially, with traders pocketing the difference between the agreed contract price and the market price at expiry. That system makes futures attractive not only to businesses looking to protect themselves against price swings but also to speculators who just want to bet on market moves and do not actually need 5,000 bushels of Hard Red Winter wheat.
The Basic Mechanics
A futures contract has a few main ingredients:
- There’s the underlying asset, which could be anything from wheat to gold to a stock index.
- The contract size, which defines how much of the asset is represented.
- The contract has an expiration date.
- The price for the underlying asset, e.g. what will be paid for the 5,000 bushels of wheat upon expiry.
Once a buyer and seller agree, both are committed until the contract is closed, either by offsetting with another trade or by the contract reaching its expiration.
Margin and Daily Settlement (Marking to Market)
Futures contracts are traded on margin, and the exchange will impose margin requirements. This means that every trader must post collateral, and the amount required is adjusted daily based on gains and losses. This daily settlement process is called marking to market. It keeps the system stable, because no one can run up huge losses without paying for them day by day.
The Origin of Futures Contracts
Futures grew out of a simple need: stability. A farmer doesn’t want to plant corn as a cash crop without knowing whether he’ll be able to sell it for a fair price come harvest. An airline doesn’t want to guess how much jet fuel will cost six months from now. Futures solve that uncertainty by giving both sides a fixed deal. Some of the earliest futures contracts where created in Japan, where samurai were paid in rice and therefore needed to sell large amounts of rice.
Eventually, traders began using futures contracts for pure speculation. A speculator has no crops, gold, or fuel, but sees an opportunity to profit from market price fluctuations. By taking on the risk the farmer or airline wants to shed, speculators keep the market liquid. They make it possible for hedgers to enter and exit positions easily, even though the speculators themselves are just chasing profit from price changes.
The modern futures trading market as we know it today developed in the United States in the 1800s with the Chicago Board of Trade (CBOT) being a notable pioneer in the field. The CBOT was established in 1848 to serve farmers, merchants, and buyers that wanted to lock in grain prices. Initially the CBOT focused on forward contracts, but this practice developed into standardized futures contracts. The first standardized futures contracts for corn were introduced by CBOT in 1865.
When it comes to metal futures, COMEX has been a trailblazer. The Commodity Exchange, Inc. (COMEX) was formed in New York in 1933 through the merger of four commodity exchanges, including the National Metal Exchange (NME). At this point, metal futures for copper and tin had already been traded on the NME, and COMEX inherited the concept and expanded it. Silver futures were also a part of the early offering at COMEX, while gold futures would not be available on this exchange until the 1970s when U.S. restrictions around gold has become more soft.
The Role of Clearinghouses
The clearing process is a cornerstone of futures trading, ensuring the market functions smoothly, safely, and transparently. After a futures trade is executed between a buyer and a seller on an exchange, the trade details are sent to the clearinghouse, and the clearinghouse matches and confirms both sides of the trade to ensure accuracy.
The clearinghouse then performs a process called novation, which means it becomes the buyer to every seller, and the seller to every buyer. This reduces counterparty risk for the traders, as each party now faces the clearinghouse, not the original counterparty. Even if one trader defaults, the clearinghouse ensures the other party’s contract is honored.
The clearinghouse records all open positions and manages the settlement process. For contracts where there will be a physical delivery, the clearinghouse will coordinate the transfer.
To mitigate default risk, the clearinghouse requires traders to post margin deposits (initial margin). You will do this trough your own broker. The clearinghouse monitors positions daily through mark-to-market, and gains and losses are settled daily, adjusting margin balances. If margin falls below a maintenance threshold, a margin call is issued for the trader to top up funds, and your broker will let your know immediately.
In addition to margin requirements for traders, clearinghouses maintain and enforce a range of other safeguards to maintain trust in the futures contracts market. They keep a default fund, and if a broker that is a member of the clearinghouse defaults, the clearinghouse will use money from the default fund to close out positions and prevent contagion.
Just like financial brokers, clearinghouses are regulated by financial authorities, and must comply with applicable clearinghouse laws and regulations. Clearinghouses also promote transparency by reporting trade and position data to regulators.
How to Start Trading Futures
Futures trading looks exciting from the outside. Fast-moving prices, margin trading, and global markets make it attractive, but it’s not something you should just jump into without a plan. Futures are designed for professionals and businesses who know how to handle risk, so stepping in as a retail trader is not easy. To avoid wiping out your bankroll, you need to go slow. Build up your knowledge, set up the right account type with a suitable broker, and learn how to control exposure.
As a part of this process, you must learn how futures contracts are constructed and what their terms and conditions actually mean. Futures contracts are created for exchange-trading and every futures contract is standardized, so you do not have to deal with tailor-made contracts, which is a plus for the novice trader.
Futures are built to give traders and businesses a way to lock in prices, shift risk, or speculate on what might happen next in markets. Using them isn’t as simple as buying a stock and holding it. They move fast, they carry leverage, and they require active management. But once you understand the mechanics, futures can be used as tools for protection or for profit.
As explained above, each futures contract specifies the underlying asset, the size of the contract (like 5,000 bushels of corn, or 1,000 barrels of WTI crude oil), the expiration time, the price that will be paid for the asset, and how the contract will be settled. Some settle in cash, others with delivery of the physical commodity. You can avoid physical delivery of delivery-settled contracts by closing out or rolling contracts before expiration.
Understanding the size and tick value is critical, because even a small move in tick value can mean hundreds or thousands of dollars depending on the contract. New traders often underestimate this until they see a position swing against them. The tick value is the monetary value of the smallest possible price movement (called a tick) in a futures contract. Example: For corn (ZC), one tick is $0.0025. For 5,000 bushels of corn, a 1-tick movement equals $12.50.
Choosing What to Trade
Most beginners stick to the really liquid futures contracts. Popular underlying assets include crude oil, gold, corn, the S&P 500 index, and U.S. Treasury bonds. Liquidity matters because it keeps bid-ask spreads tight and makes it easier to enter and exit trades. It’s also smart to focus on markets you follow and understand. If you track energy news, oil or natural gas futures may feel more natural. If you follow stocks, index futures provide a direct way to trade broad market moves.
Building a Strategy for Futures Trading
Jumping into futures trading without a plan is one of the quickest ways to lose money. Futures trading requires a defined strategy, whether it’s hedging, short-term speculation, or longer-term positioning. Some traders use technical analysis, focusing on price charts and patterns. Others trade based on fundamental factors like weather reports, inventory data, or interest rate decisions. A good strategy includes entry points, exit points, and a solid risk-management routine, including rules regarding position-sizes and stop-loss levels.
Many traders fail because they underestimate how crucial strict risk-management is. “Don´t lose money” is not a valid risk-management strategy. All traders, even highly skilled and experienced ones, experience losses. The long-term profitable ones are the ones who knows how to manage risk well and have the discipline to stick to their risk-management routines even when their emotions call for something else. Futures are leveraged, which means they exaggerate both profits and losses. A one-point move in the S&P 500 futures equals $50 per contract. A ten-point move, which is not uncommon on a busy day, means $500. If you hold multiple contracts, the exposure multiplies quickly. Using leverage also means you can´t just decide to ride out the storm and hope for the market to recover, because your broker will have strict rules in place regarding margin. When the market turns against you, you need to put enough cash into your account or close positions.
Your risk-management strategy should include elements such as stop-loss orders, a limit for the number of open contracts, a limit for total exposure, a limit for exposure per individual trade and market, and so on. Keep extra margin in your account to survive volatility. Be aware of exactly how leverage works with your particular broker and use it wisely.
Setting Up an Account
To get into futures trading, you will need a futures trading account. This is not the same as a regular stock trading account. Brokers who offer futures trading will usually ask for more information about your finances, trading experience, and risk tolerance before they approve you for a futures trading account. They want to see that you understand core concepts such as leverage and margin.
Once approved, you’ll need to fund the account with margin. Unlike stocks, you don’t pay the full price of the asset up front. Instead, you post a fraction of the contract’s value as collateral. That’s what allows you to control a large position with a smaller amount of money, but it also means price swings affect your account balance far more dramatically.
Practicing Before Going Live
Many brokers offer paper trading accounts, which simulate futures trading without real money at risk. Also known as a Demo Account, the paper trading account is filled with free play-money that you can use to carry out play-money trades on the platform. Practicing this way gives you a feel for how contracts move, how margin changes, and how orders are filled. It also help you learn the platform, which can prevent beginner mistakes later when real money is on the line.
It is important to understand that while play-money trading is great and can prepare you in many different ways, it will not prepare you for the emotional impact of having real money at stake. Do not go crazy in your demo account, because that might foster bad habits that can be difficult to shake later, especially in situations where your discipline is lowered due to lack of sleep, over trading, stormy markets, or similar.
Starting Small
When you move to live trading (real-money trading), start with a single contract at a time and keep position sizes small even if your account balance is quite big. Futures move fast, and it’s easy to get overwhelmed by large swings early on. By trading small, you can focus on execution and discipline without the stress of over-sized losses. Keep a trading journal and analyze your trading over time, to spot your strengths and your weak spots. When you are ready, you can gradually begin risking more money and having more than one contract open simultaneously. Take it step by step, and continue to journal and analyze to really see how it is going.
Trading futures is less about predicting prices and more about managing risk. Long-term successful futures traders are dedicated to controlling downside exposure, because the upside takes care of itself if the strategy is solid. Beginners who treat it like gambling and go with their gut feeling usually don’t last long. Those who approach it like a business, with planning and discipline, give themselves a better chance to stay in the game.
Brokers for Futures Trading
To trade futures, you can’t just walk into an exchange and place an order yourself. You need a futures broker that will give you access to futures contracts, handle order execution, and manage the clearing and margin process. Choosing the right broker matters because it shapes everything from your trading costs to the contracts and tools you have available. To compare platforms, fees, and clearing arrangements side-by-side, see broker reviews and comparisons at BrokerListings.com
Your futures broker will give your access to the trading platform and related infrastructure required to place trades in futures markets. Brokers also handle margin requirements. Futures contracts don’t require full payment upfront, just a margin deposit. The broker keeps track of daily gains and losses, adjusting your account balance as contracts are marked to market. If your margin falls below the required level, the broker issues a margin call, forcing you to add funds or close positions.
It is a good idea to carefully pick a broker that suits your trading strategy, needs, and preferences, rather than simply opening an account with whichever broker that´s running he most attention-grabbing marketing campaign right now. Different traders need different things, so it is not possible to recommend one particular broker as optimal for everyone. An experienced commodities trader might choose a broker with advanced analytics and direct market access, even if it comes with higher fees. A beginner might prefer a discount broker with simple account setup and lower costs. Businesses that use futures to hedge often stick with full-service brokers who can advise on contract selection and risk management.
The futures market moves fast, and execution quality, margin policies, and fees all impact the bottom line. The wrong broker can make trading more expensive, less efficient, or even riskier than it needs to be, while the right one can give you reliable access and stability.
Types of Futures Brokers
Futures brokers generally fall into a few categories:
- Full-service brokers offer trading access plus advice, research, and personalized support. They often charge higher commissions.
- Discount brokers typically focus on execution only. They give you the platform and tools, but leave research and strategy to you. Their fees are lower, which appeals to active traders. Sometimes, generalized educational material is available, but not tailor-made advice and analysis.
- Introducing brokers (IBs) are smaller firms or individuals who bring clients to a larger clearing broker. They often provide personalized service but don’t handle the clearing process themselves.
Will My Futures Brokers Be My Counterpart in the Trade?
If you are familiar with stocks or forex trading, you have probably come across retail brokers that will take your counterpart in the trade (take the other side in the trade) instead of sending it on an exchange or liquidity pool. Many traders, especially beginners, pick this type of broker because they tend to offer a good solution and competitive pricing for small-scale novice traders. These brokers are known as market maker brokers, since they internalize orders and provide liquidity themselves rather than routing all trades directly to external places. The setup allows brokers to offer tighter spreads and sometimes better execution, but it also creates a conflict of interest since the broker profits when the trader loses. As retail traders grow more experienced and build their bankroll, some of them move on to other broker types, e.g. Straight Trough Processing brokers (STP brokers) or Electronic Communications Network (ECN) brokers where your broker is not your counterpart in the trade.
With futures contract trading, brokers regulated by strict financial authorities are not your counterpart in the trade. They are middlemen only and will route your order directly to an exchange and not take the opposite side themselves. This transparent, exchange-driven structure reduces counterparty risk and conflicts of interest.
Some trading platforms based in lax jurisdictions will offer future-like products and be your counterpart in the trade, and some of them promote this product with vague language that can make a trader believe it is exchange-traded futures that are being offered. It is important to understand that this type of product is not the same thing as trading actual futures on a regulated exchange such as the CME or ICE.
If you’re evaluating short-duration, OTC instruments marketed as “futures-like,” read more on structure, risks, and red flags at BinaryOptions.net to understand how they differ from regulated exchange-traded futures.
What to Look For in a Broker
Here are a few examples of key factors to look at when comparing futures brokers. As always, you need to take your specific trading strategy, needs, and preferences into account. A broker that is optimal for one trader can be all kinds of wrong for another.
- Commissions and fees
Costs can add up quickly and erode an otherwise sound trading strategy. Some brokers charge per contract. Some bundle execution and clearing fees. Make sure the fee structure is clearly displayed and suitable for your particular trading strategy. Look at the whole situation and do not forget miscellaneous fees such as withdrawal fees and platform fees. - Margin requirements
Each broker sets its own rules, and a broker can put the requirements well above the exchange minimums. - Platform and tools
Some brokers provide basic platforms, while others offer advanced software suited for professional traders. Among other things, a good trading platform should be stable and provide fast execution and real-time price data. Some traders want analysis tools to be integrated into the platform. - Customer support
In fast markets, technical issues or account problems need quick solutions. Reliable customer service can make a big difference. Make sure the support is open during your regular trading hours. - Regulation and safety
Make sure you are familiar with applicable rules and legislation in your jurisdiction and pick a broker that will be held to a high standard, e.g. when it comes to trader protection rules. Futures brokers in the U.S. must be registered with the Commodity Futures Trading Commission (CFTC) and be members of the National Futures Association (NFA) and this oversight adds a layer of protection for traders. Many other countries have similar financial authorities supervising futures broker, but there are also countries where broker supervision and enforcement of trader rights and trader protection rules is weak. You should assess the risk level and make an informed decision.
Futures Trading Strategies
Trading futures isn’t just about guessing which way prices will go. The contracts are flexible enough that traders and businesses can use them in different ways, from locking in future costs to betting on short-term swings. The strategy you choose depends on your goal: protection, speculation, or arbitrage. Your strategy will also depend on if your prefer day trading, swing trading, or longer-term trading. Some traders focus on intraday moves, using futures for scalping or other forms of day trading. These strategies involve holding positions for minutes or hours, not days. For deep dives into intraday setups, execution, and order flow concepts, explore day trading strategies and guides on DayTrading.com. The high liquidity and tight spreads in major futures contracts make them suitable for this style, but it requires discipline and a broker that enables really fast execution. Unlike daytraders, swing traders hold positions over night, and can keep positions open for days or even weeks when conditions call for it. Some futures contracts that are unsuitable for daytrading are great for swing trading. Longer-term traders (also known as position traders) keep their positions open even longer than swing traders, although the exact line between swing trading and position-trading can be blurry. Longer-term futures trading looks more like investing, but still requires rolling contracts forward as they expire.
The best strategy partly depends on why you’re in the market. Wheat producers hedge because their livelihood depends on stable prices. A speculator trades because they want to profit from price swings. An investment fund might use spreads to manage exposure without wild volatility. Each approach uses the same contracts but in very different ways.
Below, we will take a look at hedging, traditional speculation, spread trading, and arbitrage.
Hedging
Hedging is the original purpose of futures, as businesses use futures contracts to protect themselves against price swings in the goods they buy or sell. A farmer sells corn futures months before harvest to lock in a selling price. If corn prices collapse later, the lower crop value is offset by gains in the futures position. An airline might do the opposite, buying fuel futures so a spike in oil prices won’t wreck its operating costs. For the hedger, the futures position is not about making money on the contract itself but about protecting profit margins in the real business.
Traditional Speculation
Traditional speculators use futures to profit from price changes. Because contracts are leveraged, even small moves can mean big gains or losses. If you think gold prices are heading higher, you buy a futures contract. If they rise, you profit. If they fall, you take the loss. Unlike hedgers, speculators don’t have an offsetting business need, they’re just aiming to catch market moves. Stock index futures are especially popular here. Instead of picking individual stocks, traders can bet on the entire market in one trade.
Spread Trading
This is also a type of speculation, but it differs from traditional speculation where you simply buy a contract and hope for the price to move in the right direction. Spread trading futures contracts involve buying one futures contract and selling another at the same time. The goal isn’t to bet on outright price direction but on the price relationship between the two contracts. For example, a trader might buy December crude oil futures and sell March crude oil futures, betting that the price gap between near-term and longer-term contracts will narrow or widen. Spreads tend to be less volatile than outright speculation, making them appealing to traders who want more controlled exposure.
Arbitrage
Arbitrage can only take place when there are small price differences between markets. Futures and the spot market usually track closely, but if they don’t, arbitragers step in. They might buy the underpriced asset in one market and sell it in another, locking in a small but low-risk profit. In practice, arbitrage trading this is today dominated by large institutions and algorithmic traders, because the opportunities are tiny and disappear quickly.
Different Types of Futures Contracts
Futures contracts cover a wide range of assets. While the rules for how they trade stay the same, the underlying assets are very different from each other. Each type of futures contract reflects a different corner of the economy. Agriculture links to food supply, energy connects to sectors such as transport, heating, and industry, metal markets are driven by both investment demand and manufacturing, and so on. The variety is what makes the futures market central to how global finance and trade function.
Commodity Futures
Commodity futures are the oldest and most well-known, and they grew out of farmers and merchants wanting stable prices for crops.
- Agricultural futures are based on farm products like corn, soybeans, wheat, coffee, sugar, cotton, and livestock. These commodities are also known as soft commodities. Farmers use agricultural commodity futures to lock in selling prices, while food companies and manufacturers hedge their input costs. Traders step in to speculate on seasonal trends, weather risks, demand shifts, etc.
- Energy futures include crude oil, natural gas, gasoline, and heating oil. Energy producers hedge against falling prices, while airlines, shipping firms, and utilities hedge against rising costs. These contracts attract heavy speculation because energy prices move sharply on geopolitical events and economic data.
- Metals futures can be based on a wide range of metals, from gold, silver, and platinum to copper and zinc. The category can be sub-divided into precious metals and non-precious metals. Industrial demand and global supply chains are main price drivers of certain metals (such as copper), while precious metals such as gold are also impacted by their position as safe-haven assets. Traders often use metal futures as a way to play inflation or shifts in investor sentiment.
Financial Futures
Not all futures are about physical goods, and many of the most liquid contracts are based on financial instruments.
- Stock index futures track benchmarks like the S&P 500, Nasdaq 100, or DJIA. Investors use them to hedge portfolios or gain exposure to the market without buying individual stocks. They’re also used heavily for speculation because they offer quick access to market direction.
- Interest rate futures are tied to government bonds or short-term interest rates. Banks, funds, and corporations use them to manage the risk of rising or falling borrowing costs. Traders use them to speculate on central bank policy decisions.
- Currency futures cover major forex pairs such as the EUR/USD, JPY/USD, and GBP/USD. Businesses that earn revenue or pay expenses in foreign currencies use them to lock in exchange rates. Speculators use them to bet on currency swings without directly holding the currencies.
Alternative Futures
Beyond the mainstream categories, exchanges have developed futures on more specialized assets. One important type of future is the weather future, which can be based on things such as temperature or rainfall in a particular place. Weather futures are commonly used by energy companies, agricultural businesses, and tourism ventures to protect revenue against adverse weather.
There are also the volatility futures. These contracts give traders a way to hedge against or bet on sudden market swings, and the contracts are based on measures like the CBOE Volatility Index (VIX) which reflects market expectations of future volatility.
Cryptocurrency futures have developed as an alternative to the classic currency futures and work pretty much the same way a they do. Some are for crypto-crypto speculation, while others are for crypto-fiat. It is important to know that some of the trading platforms that market cryptocurrency futures are not regulated exchanges, and are therefore not subject to the same strict regulation and supervision. Cryptocurrency futures are popular because they allow institutional and individual traders to gain exposure to cryptocurrency without directly holding the digital assets, but it is important to check the regulative situation before you proceed. One example of a regulated exchange for crypto futures is the Chicago Mercantile Exchange (CME), one of the largest and most respected regulated derivatives exchanges in the world. It offers institutional-grade futures on cryptocurrencies.