Trading Futures Contracts

Trading is a simple process. Connect to the Internet and log onto your broker’s web site. Choose the contract you wish to trade and display its details on your screen.

You are presented with two buttons: Buy and Sell. (There are actually different ways to enter Buy/Sell orders, but we keep it simple here.)

To bet that the price will go up, press the Buy button to enter a Long trade. The trade is ended by pressing the Sell button.

To bet that the price will go down, press the Sell button to enter a Short trade. The trade is ended by pressing the Buy button.

As an example, the Dow Jones e-Mini futures contract (YM) trades at $5 per point.

The market is moving up and the trader decides to take a Long trade, pressing the Buy button when the index is at 11,600. 20 minutes later the index is at 11,640. The trader presses the Sell button, making $200 profit. (The index went up 40 points at $5 per point.)

Suppose that, after 5 minutes, the index has dropped to 11,580. The trader could press the Sell button to close the trade with a $100 loss. (The index dropped 20 points losing $5 per point.)

In a weak market, the trader might decide to take a Short trade, pressing the Sell button with the index at, say, 11,600. If half an hour later the index has dropped 100 points to 11,500, the trader could press the Buy button to close the trade, and book $500 profit. (A 100 point drop at $5 per point.)

If the assumption of weakness turns out to be wrong and 20 minutes after the start of the trade the market is up 30 points, the trader might exit by pressing the Buy button and taking the 30 point loss – $150. (The index gained 30 points losing $5 per point.)

In summary, Long trades make money if the price rises and lose money if the price falls. The opposite applies for Short trades.

Before trading, there must be a minimum amount of money deposited in your trading account. This is called the margin. It is not the same for different contracts. For example, at the time of writing the day trading margin for a soybeans contract is $3,591 at my broker, but it is $2,188 for the (mini) Dow Jones contract ,perceived as less risky. The margin on a single commodity varies considerably over time. Typically, a raging bull or bear market in the commodity attracts more trading, greater volatility, and consequently an increased margin.

If you are losing on a trade you may reach a point where your balance no longer covers the required margin for the position you are in. If this occurs, your broker may either close your position without consulting you, or contact you requesting that you immediately deposit more money to cover the margin. That is a margin call.

The broker charges you a fee every time you press the Buy or Sell button. That is the brokerage fee. (Charges vary depending on the instrument being traded, but are typically just a few dollars for popular contracts.)

 

 

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