Before mastering any discipline, everyone must first grasp the basics. Futures trading is no different. Gaining an understanding of terminology, order types, and platform functionality is required before you enter the market.
Fortunately, learning how to trade futures isn’t all that difficult. Vast educational resources are available online, and by taking a few simple steps, almost anyone can become an active futures trader.
Step 1: Know Your Terminology
Venturing into the futures marketplace is like taking a vacation to an exotic locale―the people speak a unique language, and it’s very easy to get confused. If you’re brand-new to futures, here are a few terms to understand before diving into the market:
- Contract: A futures contract is an agreement to buy or sell a certain quantity of an underlying asset on a forthcoming date. The contract is the base unit by which futures are traded.
- Margin: Futures products are traded on margin. This means that participants only need to put down a small percentage of each contract’s value to trade. Accordingly, a review of your broker’s margin requirements is necessary before actually trading.
- Execution: Trade execution is the literal buying and selling of futures contracts on the open market. To execute a trade, an entry order is sent to the exchange, filled, and then closed out by an exit order.
- Long: To take a long position in the market means to buy a contract(s). If you’re long the market, then you profit from bullish moves in asset pricing.
- Short: To take a short position in the market means to sell a contract(s). If you’re short the market, then you profit from bearish moves in asset pricing.
If you want to learn how to trade futures, then starting with the industry nomenclature is the logical first step. Boosting your trading vocabulary will build solid communication skills useful for interacting with brokers and other traders.
Step 2: Understand Order Types
Ultimately, the job of a futures trader is to buy and sell contracts in the market. Good traders accomplish this feat regularly and make money in the process. One of the keys to their success is consistently using the right order type for the job.
In futures, you don’t simply buy or sell contracts indiscriminately. It’s necessary to designate a specific order type for each transaction. Here are a few of the most common:
- Market: A market order is sent to the exchange immediately and is filled at the best available price. Market orders offer instant market entry or exit, ideal for momentum-based strategies.
- Limit: Limit orders are placed at specific price points and are held at the exchange until elected. Sell limit orders are placed above price, whereas buy limit orders are placed below. Limits are frequently used as profit targets or for market entry in counter-trend trading plans.
- Stop: Like limit orders, stops are placed at specific price points and rest at the exchange until hit. However, buy stops are placed above price, whereas sell stops are placed below. Stop orders offer the trader an immediate market exit upon being elected, thus mitigating potential liabilities.
If you are learning how to trade futures, it’s imperative that you not ignore order types. Using an ideal order type for each trade promotes precision, efficiency, and long-run profitability.
Step 3: Learn your platform
The contemporary futures marketplace is almost exclusively digital in nature. This means that traders conduct business online via software platforms. Although there are broker-assisted and managed futures options, the average retail participant relies on the platform to facilitate trade.
It’s a basic point, but learning how to trade futures depends greatly on understanding the software platform. To successfully deal with sudden pricing volatility and market turbulence, a trader needs to be fluent in chart navigation, the application of technical tools, and order placement. If they are not, trading competently in live market conditions is a daunting task.
Trying to Find a Great ‘How to Trade Futures’ Curriculum?
For more information on the basics of futures, look no further than the online education portal at Daniels Trading. Featuring a comprehensive library of webinars, trading guides, and expert blog articles, this educational suite is an indispensable resource for market newbies and veteran traders alike.