First of all, what is a “futures exchange”? Futures trade on different exchanges than stocks, options and forex.
These specialized markets are where you’ll be trading and include:
- CBOT (Chicago Board of Trade) is the 1st and oldest exchange in the world.
- CME (Chicago Mercantile Exchange) in 2007 became the largest exchange in the world and purchased the CBOT.
- ICE (Intercontinental Exchange) is the youngest and is only electronic.
- NYBOT (New York Board of Trade) is owned by (ICE).
Both the CBOT & CME are based in Chicago and trade the largest variety of markets. Including, but not limited to, currency futures, treasuries, meats, agricultures, and stock indexes.
Whereas, the New York Exchanges (ICE & NYBOT) trade in precious metals, petroleum, agricultures, and “softs”. The “softs” category includes cotton, cocoa, coffee, sugar, and orange juice.
Now, that we understand where we’ll be trading, what exactly are futures? Futures are financial contracts where two parties agree upon buying or selling something with the terms identified now but the payment and delivery taking place at a future date.
- If you buy a futures contract you are agreeing to buy something from a seller (for future delivery) at a specific price based on an underlying asset.
- If you sell a futures contract you are agreeing to sell something to a buyer (for future possession) at a specific price based on an underlying asset.
When the contract ends, one party purchases or sells the goods. The other party is responsible for its delivery as noted in the contract.
Settlement is the act of fulfilling the contract. Some contracts are cash settled and some with physical delivery.
- Cash settled contracts use an external reference to settle the contract between the buyer and seller. (Example: Equity indexes settle based on the closing price of the index on the settlement date.)
- Physical settlement contracts require the trader to make or receive delivery if they have an open position at expiration. (Example: “Soft” contracts like Corn, Oil, Wheat, or Cocoa require delivery or receipt by the trader after the settlement date.)
When day trading futures, our goal is to buy and sell futures contracts. Traders make decisions based on the volatility and price movement of specific markets. We are not interested in delivering or receiving the underlying asset, just with the electronic contracts being traded. We like to focus on technical analysis and deployment of trading strategies instead of fundamental analysis. During trading, we use price action, volume, candlesticks, indicators and specific software. This allows us to take advantage of opportunities intraday either for an income or for capital growth.
There are two types of futures contracts you can buy & sell: E-minis and full sized contracts.
- E-Mini’s are a certain type of futures contract. The “E” stands for electronically traded and the “Mini” tells us that the contract is typically 1/5 the size of the standard contract. E-mini’s provide faster fills and better prices than full sized contracts.
- Full-size contracts are a larger contract. Full-size contracts are pit traded and have larger leverage. Typically traded by larger traders and institutions. Also used to make large size trades due to liquidity requirements.
At NeuroStreet we prefer to trade e-mini’s and global futures because they have good volatility and liquidity. They give you great leverage with no short sale or day-trading restrictions. These types of contracts have great price transparency and good global coverage. In addition, they require less capital to trade. You can also trade them 23 hours/day, 6 days/week which allows you lots of schedule flexibility in your trading.
And that’s it. So, you are now on your way to becoming a futures expert. Next, you’ll want to build a trading “watchlist” of markets you want to trade. This is a personal decision and should match with your risk-tolerance and trading style.