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Trading Futures for a Living: A Comprehensive Guide

Kick off your futures trading journey with our brand-new, AI-generated mini-podcast.

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Welcome to uh a deep dive into the world of futures trading. Ever thought about making a living, you know, actually trading futures? Yeah, we’re going to see if that’s really possible. We’ve got articles, guides, heck, even some academic papers here all about futures trading. And we’re going to break it all down, give you the need to know, the inside scoop, the stuff that’ll make you sound like a pro.
Think of it like we’re distilling these complex concepts, all this jargon, into something you could actually use. So, no, you won’t be writing a book on this after listening,
right? Not the whole textbook, more like, what did you say? The Spark Notes version.
Yes, something like that. But definitely juicier, you know, with more of the interesting details. By the end of this, you’ll be able to hold your own at a cocktail party. Futures trading edition.
Exactly. Speaking of which, one of our sources here mentioned something called Ein contracts. Sounds like something out of a sci-fi movie. Can you break down what a futures contract actually is?
It’s not as futuristic as it sounds. Basically, a futures contract is a promise. Well, not just any promise. It’s a legally binding agreement to buy or sell something at a predetermined price on a specific date in the future. Could be anything. Oil, gold, even the stock market index.
So, it’s like pre-ordering something online, but instead of the latest gadget, you’re getting what? Barrels of oil delivered to your door.
You’re getting warmer. But here’s the thing with futures. You have to buy or sell at that agreed upon price, even if the market takes a nose dive or skyrockets.
Okay, so maybe not as simple as clicking add to cart, then. I’m looking at this Schwab guide and it says these contracts have all sorts of details you need to pay attention to like uh contract size. Apparently, a contract for crude oil isn’t the same as one for gold. Seems important.
Critically important. Imagine mixing those up. One crude oil contract represents a thousand barrels of oil. And a gold contract. That’s for 100 troy ounces. Big difference. You don’t want to end up owning a tanker full of crude when you were expecting a few gold bars,
right? Talk about a delivery day surprise. And speaking of things you wouldn’t want to confuse, it’s not just oil and gold being traded in these markets. Our sources mention everything from carbon credits to wheat, even stock indices like the S&P 500 we talked about earlier. It’s a bit mind-boggling the variety.
Oh, absolutely. Futures markets are incredibly diverse, giving traders a chance to
well speculate on almost anything. Take wheat for instance. The data from, let me see, www.bartchart.com. Yeah, it shows how wheat prices are influence by things like weather patterns in the Midwest, global demand, things that might not directly affect, say, a tech stocks price.
So, you could be betting on the weather in Kansas affecting the global price of bread. It’s like having a financial stake in the real world. But, you know, a lot of our listeners might be more familiar with traditional stock trading. We’ve got some links here comparing futures to stocks. What are the major differences we should hit on?
Well, leverage is a big one. Think of leverage like a h a megaphone for your money. In futures trading, you can control a huge amount of asset with just a small chunk of your own capital. Sounds great, right? Amplifies your gains.
Yeah, there’s always a butt, isn’t there?
Of course, leverage is a double-edged sword. It can wipe you out just as fast as it can make you rich. Futures trading is way more volatile than the stock market, which is why understanding leverage is well, essential. Another difference is the trading hours. Unlike the stock market’s 9to-5 schedule, futures markets are often open 24/7.
So, you’re saying if I can’t sleep, I can always check on my pork belly futures. at 3:00 a.m.
You could though, whether that’s a good idea is debatable. And then there’s physical delivery.
This is the part where I end up with a truckload of oranges.
Right. Exactly. With certain contracts, you might actually have to take possession of the asset when the contract expires if you don’t close out your position beforehand. Imagine a mountain of coffee beans showing up at your doorstep.
Yeah, I think I need more than one cup of coffee to deal with that. So, let’s say someone’s listening to this and they’re hooked. They’re thinking, “Sign me up. Where do I start?”
Whoa, whoa, hold your horse. is before you jump head first into the world of futures trading, there are a few things you need to do. This isn’t something you just wing. You know, education is absolutely key here. You got to understand how these markets work, the risks involved, what strategies you can use. It’s a process.
So, more like training for a marathon than a quick sprint.
Exactly. And you need to figure out your risk tolerance. How comfortable are you with the very real possibility of losing money? Cuz let me tell you, it’s not for the faint of heart. And last but not least, a disciplined approach is non-negotiable.
Okay, so education, risk assessment, disciplined mindset. Got to have all those boxes checked. What’s next in this futures trading crash course?
Well, you can’t really trade without a broker, right? Got to find a good one. Someone who knows their stuff and can help you navigate the markets.
Makes sense. Didn’t our research have some suggestions for finding a good broker?
Yeah, NerdWallet, stockbrokers.com, and Investopedia all have some solid guides on choosing the right trading platform.
Perfect. We’ll make sure to link those in the show notes. Now, before we move on to the really advanced stuff, what are some like essential tips for someone just starting out with futures trading? What do they absolutely need to know?
You’d think it goes without saying, but you’d be surprised to understand what you’re actually trading. I mean, each market, each asset has its own quirks, its own factors that make it move,
right? So, don’t just dive head first into say palladium futures, unless you know you’re a jeweler or something.
Exactly. Know your metals. And here’s another one that often trips people up. Try to avoid physical delivery.
You mean like actually ending up with a truckload of oranges dumped at my door?
You got it. Taking possession of the asset sounds exciting, but it’s usually a logistical nightmare, especially for beginners. Trust me, your Investipedia source goes into all the details, the costs, the headaches. It’s just not worth it.
So, unless you’ve got a secret warehouse for storing pork bellies, probably best to stick to closing those positions before they expire. What other golden nuggets of wisdom do you have for our newbie traders?
Trading hours. Got to be on top of those. Futures markets often have, you know, these crazy extended hours, sometimes even 24/7 trading. You don’t want to wake up to a nasty surprise because you forgot the coffee futures market never sleeps,
right? It’s like a global casino that never closes. Speaking of risks, we got to talk about margin requirements.
Ah, yes. Margin, the lifeblood of futures trading. Because of leverage, you usually need to put down a percentage of the contract value with your broker. Think of it as a security deposit.
So, they’re making sure you can cover your losses if things go south.
Precisely. The Schwab guide had a really good breakdown of how futures margin works. Basically, if the market moves against you and you lose more than what you put up as margin, you get hit with the dreaded margin call.
Uh-oh, that sounds ominous. What exactly happens then?
Margin call basically means, hey, you need to pony up more cash to cover your potential losses. If you don’t
Yeah.
Well, your broker can start closing out your position. to protect their own skin.
So, not a phone call you want to get. Okay. Avoid physical delivery. Be mindful of those trading hours and manage that margin like your life depends on it.
Got it. That’s all super helpful for anyone just starting out. But now, let’s step it up a notch. You mentioned different trading styles like scalping. What is that? Some kind of hair related trading strategy?
Not quite. Scalping. Think of it like hm you know those hummingbirds that flit from flower to flower getting a little nectar from each one. Scalpers are like the hummingbirds of the trading world. They make tons of super fast trades trying to profit from these tiny, tiny price movements.
So, we’re talking millisecond, split-second decisions.
Yeah, it’s intense. Requires nerves of steel, lightning reflexes, the whole shebang. Not for the casual trader, that’s for sure. Definitely not for me. I can barely decide what to have for breakfast. And then there’s this whole other thing, rolling futures contracts. When I hear that, I keep picturing bowling balls for some reason.
Well, it’s a bit of a strategic maneuver. Not unlike deciding which bowling ball to use for a strike. Let’s say you’ve got a futures contract that’s about to expire. Instead of taking delivery of all those oranges, you can roll that contract. Basically, you close out the expiring one and simultaneously open a new contract with a later expiration date for the same asset.
So, you’re basically kicking the can down the road, or should I say the oranges down the road.
Yeah, you could say that. It lets traders stay in the game without having to deal with physical delivery. But here’s the kicker. The price difference between that expiring contract and the new one can work for or against you. It all depends on something called the futures curve. One of our sources, an article from CME Group, use the S&P 500 to illustrate this whole thing.
Okay, futures curve. Now, we’re getting into some real Wall Street jargon.
It sounds scarier than it is. Trust me. Think of it like a graph, a visual representation of how futures contracts with different expiration dates are priced. If the future price is higher than the current hot price. That’s called contango.
So contango means I’m paying a premium to buy something in the future. Like those oranges would be cheaper today than 6 months from now if I use a futures contract.
Exactly. Now, if the futures price is lower than the spot price, it’s called backwardation. In that case, you’d be getting those oranges cheaper in the future.
Interesting. Why would anyone sell something for less in the future? Wouldn’t they want to sell it for more?
Well, it all comes down to supply and demand, market sentiment, all those fun economic forces at play. Sometimes sellers might prefer to lock in a price today, even if it’s built lower, to avoid uncertainty in the future. It’s like insurance for their oranges, you know?
Right. Makes sense. So, contango, backwardation, futures, it’s like learning a whole new language. Yeah. But important stuff to know, especially if you’re thinking about rolling those contracts.
Absolutely. Understanding this whole interplay between spot prices, futures prices, the futures curve, it can help you make smarter trading decisions. Avoid those nasty surpris urprises. Speaking of surprises, you dug up some fascinating, if a bit technical, academic papers about AI and futures trading. Is this something a regular person could even grasp, or is it all just algorithms and Wall Street wizardry?
Yeah, when I saw those papers, I thought, “Okay, time to break out the PhD in computer science.” But seriously, is AI taking over the trading world?
AI and deep learning can get pretty complex, but the basic idea is actually pretty simple. Imagine having a tireless assistant, someone who can crunch numbers at warp speed, spot pattern, turns in mountains of data that would take a human, you know, years to find. That’s what AI is doing in the trading world.
So, it’s like having a superpowered trading buddy constantly whispering winning trades in your ear. Sounds both amazing and a little unsettling.
It is a game changer, that’s for sure. Take highfrequency trading for example. We’re talking algorithms that can process news, social media sentiment, real-time market data, all in milliseconds. It’s mindblowing.
Wait, hold on. They’re analyzing Twitter for mentions of orange juice. futures and then making trades based on what people are tweeting.
It’s more nuanced than that, but you’re getting the idea. AI can handle these huge amounts of data, structured and unstructured, way faster than any human. And it can do it 24 to7. That MDPI article you shared, it goes into how AI can spot these tiny market anomalies and execute trades before a human trader can even blink.
It’s like those chess computers that can outmaneuver grand masters, except instead of chess pieces, we’re talking about real money, real assets.
Exactly. And the stakes are high. We’re talking about markets worth trillions of dollars. It’s a whole new ball game.
So, the big question is, if AI is already this good at trading, what happens when it gets even smarter? I mean, are we all just going to be sitting on the sidelines watching these algorithms battle it out?
That’s the million-dollar question.
It’s like Wall Street’s gone Hollywood humans versus machines. Who will win in the trading arena? But, uh, before we get too carried away with the future, let’s back to the present. Can you really I mean, really make a living trading. the million-dollar question right there. The honest answer is
it’s complicated.
So, it’s not as easy as what? Buying low and selling high. Or in the case of futures, maybe selling high and then buying even higher.
I wish it were that simple. Futures trading can be lucrative, no doubt. But it’s not a get-richquick scheme. It takes well, dedication, constant learning, and a cast iron stomach for risk.
Sounds like you need nerves of steel, too. And the patience of a saint.
Patience. Absolutely. Remember all that? Talk about leverage. It magnifies your wins, but it also, let’s be real, magnifies your losses. And sometimes those losses can pile up faster than you can say margin call.
Speaking of margin calls, how do you make sure you’re not on the receiving end of one of those?
It always comes back to managing risk. You got to understand the markets, know your own limits, and never ever risk more than you can afford to lose. And a trading plan. Crucial. Knowing your entry points, exit points, profit targets, stop-loss levels. It’s like having a road map in a jungle. So, it’s not just about picking the right asset like those oranges or pork bellies. It’s about having a strategy and sticking to it even when things get bumpy.
Exactly. Think of it like sailing through a storm. You need a map, a compass, and you got to know how to adjust your sales when the wind changes. Sometimes you just got to stay in port and wait it out.
Love the analogy. So, for our listeners who are feeling bold, ready to dip their toes into those futures trading waters. What’s your parting wisdom?
Don’t just jump in blind. Learn the ropes. Read up. Take some courses. Maybe even find a mentor, someone who’s been there, done that. And before you risk any real money, try a simulator. Think of it like driver’s ed for traders,
right? Better to crash a virtual car than your actual portfolio. Well, we’ve covered a ton of ground today from the basics of futures contracts all the way to AI algorithms trading at warp speed. The potential rewards are there, but so are the risks. I think the main takeaway here is futures trading definitely not for the faint of heart
or the passive investor. This is active trading, always on, constantly analyzing, adapting to the markets every whim.
But for those who are willing to put in the work, who can handle the heat, who approach it with their eyes wide open, well, it can be an incredibly exciting and, yes, potentially rewarding journey.
Couldn’t have said it better myself. And who knows, maybe one day we’ll all have AI trading assistants by our side making those split-second decisions for us. But until then, it’s on us to learn, to adapt, and to navigate the thrilling, everchanging world of futures trading. Well said. That was quite a ride through the exciting, sometimes confusing, always fascinating world of futures trading. We hope you enjoyed this deep dive, that you learned a thing or two, and maybe, just maybe, you’re feeling a little bit more confident about tackling those markets. Until next time, happy trading, everyone.

Futures trading is a dynamic and often exhilarating form of investing that attracts traders looking for high potential returns and diverse market exposure. Unlike traditional stock trading, futures allow you to speculate on the price movements of commodities, currencies, and financial instruments, leveraging contracts that settle at a later date. Further, in futures trading, you can find some of the most unique instruments to trade on, including Carbon Dioxide emissions futures and even futures contracts on weather.

With the right knowledge and strategy, futures trading can certainly be a powerful way to diversify a portfolio or even become a primary source of income.

However, the complexities of margin requirements, leverage, and fast-moving markets make it a challenging endeavor, requiring thorough preparation and discipline. In this comprehensive guide, we explore what futures trading is, the key components of futures contracts, and essential strategies to help you navigate this volatile but potentially lucrative market.

What is Futures Trading?

Futures trading is an exciting and fast-paced corner of the financial markets, offering potentially high rewards but also significant risks. It involves entering into a contract to buy or sell a specific quantity of an asset, such as a commodity or a financial instrument, at a predetermined price and date in the future.

For example, if you buy a crude oil futures contract for June at the price of $70, then you are obligated to buy the specific number of barrels listed on the contract at the time of delivery, regardless of the market’s price. The same applies to the seller who is obligated to sell crude oil barrels at the specified future contract price. For that reason, futures contracts are primarily used by hedgers and producers who often need to hedge their commodities or fix a current price level. 

Therefore, understanding the intricacies of futures trading is crucial for anyone considering venturing into this market, whether seeking to diversify a portfolio or aiming to trade futures for a living.

The Components of Futures Contracts

A futures contract has several key components that traders must understand:

  1. Underlying Asset: This refers to the physical commodity or financial instrument upon which the contract is based. Examples include crude oil, gold, wheat, FX currency pair, or stock indices like the S&P 500.
  2. Contract Size: Futures contracts have standardized sizes, but the specific size can vary depending on the underlying asset. For instance, one crude oil contract represents 1,000 barrels, while one gold contract represents 100 troy ounces.
  3. Contract Value: This value, also known as the contract’s notional value, is calculated by multiplying the contract size by the current price of the underlying asset.
  4. Tick Size: This represents the minimum price increment for a particular contract. For example, a tick in the E-mini S&P 500 contract might be 0.25 points, equivalent to $12.50.
  5. Delivery Date: Every futures contract has a specified expiration date, at which point the contract must be either settled financially or through the physical delivery of the underlying asset.

Who Uses Futures Contracts?

Futures contracts are employed by a diverse range of market participants, including:

  1. Hedgers: These are typically producers or consumers of the underlying asset, using futures contracts to mitigate the risk of adverse price movements. For example, an airline company might use oil futures to hedge against rising fuel costs.
  2. Speculators: These traders aim to profit from price fluctuations in the futures market itself. They do not intend to take delivery of the underlying asset but rather buy and sell contracts to capitalize on price movements.
  3. Arbitrageurs: These sophisticated traders seek to profit from price discrepancies between the futures market and the spot market (the market for immediate delivery of the underlying asset). They often use High Frequency Trading (HFT) trading techniques and sophisticated algorithmic trading systems. 

futures trader

Generated using Imagen-3

What Can You Trade in Futures?

The futures market encompasses a wide array of tradable assets, providing traders with ample opportunities across different sectors:

  • Stock Indices: Traders can gain exposure to the overall performance of major stock markets by trading futures contracts based on indices like the S&P 500, Dow Jones Industrial Average, or Nasdaq 100. The popular E-mini contracts offer a more accessible entry point for trading index futures.
  • Commodities: The futures market is renowned for its deep liquidity in commodity contracts. Traders can engage with a wide variety of commodities, including:
    • Energy: Crude oil, natural gas, heating oil, gasoline.
    • Grains: Wheat, corn, soybeans, oats.
    • Metals: Gold, silver, platinum, copper.
    • Livestock: Cattle, hogs, pork bellies.
    • Softs: Coffee, sugar, cocoa, cotton.
  • Forex: Futures contracts on currency pairs, like the EUR/USD or USD/JPY, allow traders to speculate on fluctuations in exchange rates.
  • Interest Rates: Futures exchanges also provide trading of interest rate products such as bonds, notes, and SOFR. 
  • Cryptocurrencies: Futures contracts on digital assets include Bitcoin and Ethereum. 

Futures vs. Stocks: Which is Better?

One of the most common questions for beginners is which market is better for trading – Futures or stocks. 

Both futures and stocks offer distinct advantages and disadvantages, making it crucial for traders to carefully consider their investment goals, risk tolerance, and trading style before deciding which market is more suitable.

Here are some of the key factors to consider before deciding between the futures market or stock market:

FeatureFuturesStocks
LeverageHighLow (margin accounts offer limited leverage)
RiskHighModerate to High
Trading HoursTypically 23 hours per dayRegular market hours (e.g., 9:30 AM to 4:00 PM EST)
Underlying AssetPhysical commodities or financial instrumentsShares of ownership in a company
Investment HorizonShort-term to medium-termShort-term to long-term

In sum, while it is difficult to determine which market is better, it’s worth noting that the stock market is better suited for long-term trading techniques, while futures trading is mostly suited for short-term trading techniques, algo trading, and hedging. 

What Do You Need to Start Trading Futures?

Embarking on a journey into futures trading necessitates careful preparation and consideration of several key factors:

Education and Research

Futures trading demands a deep understanding of market dynamics, technical analysis, risk management strategies, and the specific characteristics of the contracts being traded.

In that sense, education is key to success in future trading. Some might even say that futures are the most sophisticated form of trading that requires a deep understanding of how the economy works and how financial instruments are being used for real-life basic needs, and not just to raise capital like stocks. Additionally, learning concepts like contango and backwardation is essential to understanding how futures trading works.

To further enhance your understanding, we suggest exploring these highly recommended books on the subject.

Capital

Futures trading involves substantial risk, and it is crucial to only trade with capital that you can afford to lose. Additionally, the use of leverage in futures trading amplifies both potential profits and losses. This makes futures a form of trading that often requires a fairly high substantial trading capital requirement. 

To start trading futures, you are advised to make an initial deposit of at least $2500, although some brokerage firms allow users to start trading futures with as little as $100. 

Brokerage Account

Selecting a reputable brokerage firm that offers futures trading is paramount. Key considerations include:

Trading Platform: The platform should provide a user-friendly interface, real-time market data, advanced charting tools, and order entry capabilities specifically designed for futures trading.

Commissions and Fees: Brokerage fees, exchange fees, and data fees can significantly impact trading costs, particularly for high-volume traders.

Margin Rates: The margin requirements set by the broker determine the amount of capital needed to hold a futures position.

Customer Support: Responsive and reliable customer support is crucial for addressing any trading-related issues or inquiries.

Trading Plan

Developing a well-defined trading plan is essential for success in making a living in futures trading. This plan should encompass your:

Trading Style: Scalping, day trading, swing trading, or position trading.

Risk Management Strategy: Stop-loss orders, position sizing, maximum drawdown limits.

Entry and Exit Signals: Technical indicators, chart patterns, fundamental analysis.

Seasonality: learning the seasonality of commodity products and other financial instruments. 

trading plan

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Discipline and Emotional Control

Futures trading can be emotionally demanding, largely due to the high volatility in the futures markets. Maintaining discipline, adhering to your trading plan, and controlling emotions is paramount for consistent profitability.

Top Platforms for Futures Trading

As mentioned, choosing the right futures trading platform is crucial for a seamless and successful trading experience. Often, it can be a key differentiator between success and failure. 

As an individual trader, you might want to start with some of the most reputable and widely used trading platforms that are used by many traders. 

Here’s a comparison of the top platforms:

PlatformRating (Out of 5)ProsCons
Interactive Brokers Futures4.5Advanced trading platform with a wide range of order types and analytical tools.Higher margin requirements and fees compared to some competitors.
TradeStation Futures4.5Robust platform with advanced charting, backtesting, and automated trading features.Steep learning curve for novice traders.
TD Ameritrade Futures4User-friendly platform with a comprehensive suite of trading tools and research.Higher margin rates for some contracts.
E*TRADE Futures4Intuitive platform with a strong mobile app and access to futures options.Limited educational resources compared to other platforms.
Charles Schwab Futures3.5Reputable broker with a solid platform, but futures trading features are less advanced.Fewer advanced trading tools and order types compared to some competitors.

Tips for Futures Trading

Navigating the complexities of futures trading requires not only a firm grasp of the fundamentals but also the adoption of proven strategies and techniques. Consider these tips to enhance your trading prowess:

  1. Avoid Physical Delivery: Unless you are actively involved in the physical commodity market, it is generally advisable to close out your futures positions before the expiration date to avoid the complexities and costs associated with physical delivery.
  2. Understand Trading Hours: Futures markets have specific trading hours, often extending beyond regular market hours for stocks. Familiarize yourself with the trading hours of the contracts you are trading to effectively manage your positions.
  3. Manage Margin Carefully: Leverage is a double-edged sword. While it can amplify profits, it can also magnify losses. Closely monitor your margin levels and be prepared to meet margin calls from your broker to avoid forced liquidation of your positions.
  4. Define Your Trading Style: Identify a trading style that aligns with your personality, risk tolerance, and time commitment. Whether you are a scalper seeking quick profits from small price movements, a day trader closing all positions before the market closes, a swing trader holding positions for several days or weeks, or a position trader taking a longer-term outlook based on fundamental analysis, adhering to a defined trading style is crucial.
  5. Start Small: If you are new to futures trading, it is prudent to start with a small account size and gradually increase your position size as you gain experience and confidence.
  6. Use Stop-Loss Orders: These are essential risk management tools that automatically exit a trade when the price reaches a predetermined level, limiting potential losses.
  7. Stay Informed: The futures market is constantly evolving, influenced by a myriad of factors, including economic data releases, geopolitical events, and supply and demand dynamics. Stay abreast of market news and analysis to make well-informed trading decisions.
  8. Practice with a Demo Account: Most reputable brokers offer demo accounts that allow you to practice trading futures in a risk-free environment using virtual money. This provides an invaluable opportunity to test your trading strategies, familiarize yourself with the trading platform, and gain confidence before committing to real capital.

Conclusion

In conclusion, trading futures for a living is an attainable but demanding endeavor. It requires dedication, discipline, continuous learning, and a comprehensive understanding of market dynamics and risk management.

Yet, by arming yourself with the right knowledge, tools, and strategies, you can navigate the complexities of futures trading and potentially achieve your financial goals. Remember, thorough preparation is key to embarking on a successful journey in this dynamic and rewarding market. Like anything else, it takes time and effort, but the reward can be huge, especially for those who plan to build a career in trading. 


Disclaimers:

For this article, we used AI for research and drafting, with human editors finalizing to ensure accuracy and coherence. We encourage readers to critically evaluate the content and consult additional sources as needed.

Audio generated by NotebookLM.

This article is for educational purposes and should not be considered professional financial advice. Always perform your own research and consult a qualified advisor before making investment decisions, as all investments involve risks.