Understand the Contract when Day Trading Futures

When you trade any futures contract it is important to understand the contract specifications.

You can find the specifications by visiting the web site of the exchange where the contract is traded. Make sure you are familiar with the following information:

  • The size and nature of the contract. For example, the soybean futures contract is for 5,000 bushels of Number 2 Yellow beans.
  • The tick size and its value. A tick is the minimum movement permitted in the contract price. For soybeans it is 0.25 cents per bushel, which equates to $12.50 per contract.
  • The way in which the price is quoted. Soybean price is quoted in cents per bushel (for example, 1302.25).
  • The months when the contract matures. Soybeans have contracts for September, November, January, March, May, July and August each year. As a day trader, you are only interested in trading the contract with the highest daily volume. This is usually the next contract due to expire, known as the front month. The exchange provides details of the volume of daily transactions for each contract, and the day trader should refer to this before the start of each trading session to ensure the correct contract is being traded.
  • The last trading day of the contract. For soybeans this is the fifteenth calendar day of the contract month. You should have stopped trading that contract well before then. If you had been checking volumes you would have noticed volume declining on this contract in the last few days of the previous month, with volume switching into the next contract further out. Beginner traders are sometimes concerned about getting stuck with a load of beans, but if you always trade the front month (highest volume) contract and ensure that you are out of all positions at the end of each trading day, there is no risk of becoming involved ln physical delivery issues.
  • The ticker code(s) for the contract. Often there are two contracts mentioned. One is the traditional floor-traded version, the other is the electronic version. Each has a different code, but you should ensure you choose the electronic contract. For soybeans this is ZS. Most trading platforms do not support floor-traded contracts, and, even if they do, you want to avoid them because of the delays in filling orders. Orders for electronic contracts are transmitted almost instantaneously.
  • The hours in which the contract is traded. The electronic contract almost always has extended hours compared to the floor-traded product. However, it is usually best to avoid day trading them outside the traditional floor trading hours because volumes are much lower. Most traders have switched to the electronic contracts, but stick to the traditional hours. For soybeans, this is 0830 – 1315 US Central Time, Monday to Friday.
  • Limit information. This tells you what happens after large price moves. Some markets are paused for a certain length of time, others are locked at the limit. For example, soybeans price is locked 70 cents/bushel above or below the settlement price on the previous day.(Note, this is an expanding limit. i.e. if the market closed at the limit yesterday, the limit is increased today. Make sure you know the rules.
  • The contract margin. This tells you the amount of money which must be deposited with the exchange to open, and maintain, positions. It is better to get this figure from your broker because brokerage companies sometimes specify different margin levels from those quoted at the exchange.

As an example of being aware of the contract specifications, consider the wheat market which has been very kind to day traders lately.

Just the other night it opened strongly with a continuation pattern on the charts which would normally prompt me to take a long position. My entry would have been at 947.25 looking for a strong upward break.

Fortunately, before the market opens I always note down the market limits. In the case of wheat, the market is locked if price moves 30* points up or down from the previous close. In this instance, the market had closed at 921.5 in the previous session, limiting the upside potential in this session to 951.5, just 4.25 points above my proposed entry. That was nowhere near enough to justify the risk, so I passed the trade.

It is easy to get caught out in this situation when the market has gapped up (or down) at the open because the full extent of the thirty point move is not apparent on a short term chart of the current session. The strong moves shown in recent wheat charts have frequently been capped by the thirty point limit.

If I had been trading soybeans, there would have been no problem because the market is allowed to move 70 points.

The point is, it is very simple to make an expensive error if you are not thoroughly familiar with the instrument you are trading.

(* This article was written in 2008. The limit move for wheat is now (Dec, 2013) 60 points up or down from the previous close. Things change, so don’t rely on an internet article to find the limit, check the actual contract information on the exchange’s web site!)

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