How to Start Trading Futures | A Beginners Guide

How Do You Trade Futures?

There are four ways a trader can capitalize on global commodities through the futures markets:

1. Self-Directed Online Trading Self-directed online trading is what most retail futures traders do. It’s “self-directed” because they make their own decisions, execute their own trades, and ultimately take responsibility for the consequences of their own actions, whether such actions result in a profit or a loss. Most of this trading activity happens “online,” meaning that they use a computer-based futures trading platform through which they transmit their orders via internet connection. They trade directly on a futures exchange or through an FCM (clearing firm) that transmits their orders to the exchange. To become a self-directed trader, all you need to get started is to open an account with a futures broker and start trading the futures markets on a platform your broker supports. The trading platform is the application software you run on your computer or mobile device to place the trades. For example, Optimus Futures is a futures broker that provides self-directed traders with trading platforms best suited to their experience level. Even though you choose to trade independently, we, as your dedicated futures broker, are here to provide you with advice and assistance. You have full, free access to our brokers, risk management team, platform technicians, and other supporting personnel around the clock.
2. Broker Assisted Trading If you want a personalized and long-term relationship with a dedicated broker, this program is for you. Broker Assisted Accounts are geared towards understanding your trading objectives, helping you research and monitor the markets, and placing orders in your best interests. As a broker-assisted client, you can work with a licensed investment advisor who can assist you in making trading decisions based on fundamental global macro factors and technical analysis. Your advisor will determine what markets you should trade and what strategies to employ to achieve your expected returns. Each transaction is confirmed on your broker portal and you will receive a statement in your email confirming each futures transaction. Do you have an idea that you want to run by your advisor? No problem, you will receive free feedback and advice on the best possible ways to capitalize on such ideas. Feel free to discuss your futures trading ideas with an Optimus Futures broker. We can objectively evaluate your ideas and coach you on how to best implement them. Using our guided trading management plan, we'll help you place predetermined stop losses to maximize the profit out of any trade.
3. Managed Futures If you trade index funds, mutual funds, or any other managed funds in which a money manager makes all of the decisions allocating your assets and rebalancing your portfolio, then consider having your commodity investment managed. Commodity trading advisors, known as CTAs, are professional money managers specializing in the global futures markets, their primary investment medium. By broadly diversifying across markets, CTAs seek positive returns from price changes in stock indices, currencies, treasury futures, bond futures as well as from various commodity markets. Trading advisors can participate in more than 150 global markets; from grains and gold to currencies and stock indices. Many funds may opt to diversify even more by using several trading advisors with different trading approaches--a strategy known as “system diversification.” Optimus Futures can assist clients with selecting a Commodity Trading Advisor (CTA’s), opening a trading account for the CTA to manage, and monitoring the trading activity of the Managed Futures Program on an ongoing basis. We gather all the information for you based on performance only and deliver to you only those commodity traders who achieved the best results for your financial objectives and risk tolerance.
4. Automated and Algorithmic Systems Automated trading systems are computer programs designed by expert developers to follow a given algorithmic strategy, every minute of the day. Automated Systems are programmed to look for trends, analyze market data, and apply specific mathematical/technical formulas which in turn generate signals--buy and sell orders--to go long or short a given market. The performance--whether hypothetical or live--is tracked in real-time. And best of all, you can subscribe, activate, or deactivate any system at any time. You should consider automation if you want to participate in the futures market but lack the time to monitor, formulate, and implement your own trading plan. Optimus Futures gives you access to a huge database of automated trading systems where you can have the trades placed automatically in your brokerage account.

Why Trade Futures and Commodities?

Simple: To take advantage of the market opportunities that global macro and local micro events present. Issues in the middle east? Trade oil futures! Economy is volatile? Trade gold futures! Drought in the Midwest? Trade corn and wheat futures. Brexit rocks the UK? Trade the British pound currency futures.

Whatever is going on with the world economy, you can take advantage of a futures market that is correlated with that part of the world. You can also do so in a capital-efficient manner since futures traders don’t have to put up the entire amount of capital to “buy” or “sell” a futures contract. Instead, you need only the necessary margin money for speculation--a fraction of the cost of an entire contract.

Since the futures markets provide very high leverage for speculators, it is up to the individual trader to decide the amount of capital he or she wants to place in the account.

Remember, the greater the leverage, the greater the risk. Futures margins posted by the exchange doesn’t necessarily indicate the risk or the volatility that a specific futures contract could potentially encounter. So use leverage wisely, and don’t take on more than you can handle in terms of risk!

For example:

• Let’s suppose the cost of a single contract is $20,000. But to trade that contract, you may only be required to post $1,000, a mere 5% of the contract’s total value.
• If the market moves against you and your position begins taking on an unrealized loss, you can lose more than your initial $1,000, putting you in an under-margined position.
• If the market continues to work against you, you can lose more than you have in your entire trading account, depending on the severity or speed of the negative market move. So, be careful when using leverage

Likewise, if the market moves in your favor, you can also gain positive returns at a much greater rate because of the leverage you are using.

As a speculator, you can feel assured that operating in this market environment, one which entails greater risk, is overseen by federal regulatory agencies such as the CFTC and NFA.

For those of you who are unfamiliar with the latter, the National Futures Association (NFA) regulates Brokers, Introducing Brokers, Futures Clearing Merchants, Commodity Trading Advisors (CTAs), SWAP Dealers and Commodity Pool Operators. The NFA is a self-regulated organization (SRO).

Although these are separate organizations, they both operate together to stop financial fraud and protect the market from “bad actors.” In particular, both organizations are there to make sure that your funds as a speculator (or hedger) are fully segregated. This is key, as it means that your funds are held separately from the clearing firm’s operating capital. Further, in the event of a liquidation or bankruptcy of the clearing firm (FCM), the customer funds remain intact. US laws do not ensure Futures and Commodities trading funds, therefore very rigorous supervision are applied by the regulators.

Due to this high level of regulation, many institutions feel comfortable placing funds in clearing firms, and their high volume of trading creates the liquidity for the speculators, both large and small, to trade and speculate in the futures market.

Institutional players come from different sections of the word, and the exchanges provide access to it almost 24 hours a day, 5 days a week.

Profit From the Rise AND Fall of Futures Contract Prices

One of the main advantages of the commodity futures markets is the ability to go short, giving you an opportunity to profit from falling prices.

Therefore, it’s possible to gain from both the upside and the downside of the markets. Let’s take a step back and get some terminology out of the way here:

• Going long means that you are buying a futures contract to seek profit from its potential price increase.
• Going short means that you are “selling” a futures contract to seek profit from its potential price decline (after which you have to “buy” what you had sold in order to close your position).

Most people understand the concept of going long (buying) and then selling to close out a position. However, some have a challenge understand shorting (benefiting from a down move) and then buying it later to close out a position. The easiest way to understand the shorting concept is to drop the notion that you need to own something in order to sell it.

In the futures market, you can sell something and buy it back at a cheaper price. Think of this logically, if you buy something at $1 and sell it at $10, you have a $9 dollar profit. But, in futures and commodities you can sell something at $10 and buy back at $1. Either way, it is a gain of $9.

Let’s expand on the shorting side a bit, just in case you can’t wrap your head around it. How do you sell something you do not own?

When you buy a futures contract as a speculator, you are simply playing the direction. To be clear:

• When a commercial buyer purchases a futures contract, they are “locking in a buying price” with the intention of buying the actual commodity at a later time.
• When a commercial seller is going “short” a position (as in the case of a farmer selling short corn or wheat futures), they actually intend to sell the physical commodity at a specified delivery date, using the short position as a means to “lock in” a sales price.
• But when a speculator buys or sells a futures contract, they are simply playing the direction for potential profit with no intention of actually buying or selling the physical commodity.

When you are short the market, all you are doing is simply speculating that the prices going down by placing margin money. All you have to do is click the “sell” button when you think the market is going down. From there the market can go in your favor or not. Either way, after a “sell” you must “buy” the contract back. If the market went up after the sell transaction, you are at a loss. If you buy back the contract after the market price has declined, you are in a position of profit.

Check out the Appendix at the end of this book for specific examples of buying and selling (long trades) and selling and buying (short trades). All examples occur at different times as the market fluctuates.

No Pattern Day Trading Rule

Since we were talking above about stock indices, it is important to be aware that the Pattern Day Trading Rule for stocks doesn’t apply to the Futures markets.

1. You do not need a balance of $25,000 in order to day trade.
2. You can short the Market in Futures if you meet the margin requirement.
3. You can trade as frequently as you wish.
4. When you short you do not need to pay interest on any short sale.

Liquidity

Since the futures market concerns the global macroeconomic environment, it is trading nearly 24/5. Worldwide events are happening around the clock and the futures markets must allow speculators, hedgers and commercial players around the globe to adjust their positions at virtually any time of choosing.

As a futures trader you can choose your preferred trading hours and your markets. One thing that you should keep in mind is that even though futures markets offer almost 24/5 access, their liquidity may be different during different periods of the trading day.

For example: The stock indices on the CME are typically most active between 9.30 AM EDT and 4.00 PM EDT as it coincides with New York Stock Exchange hours. In our opinion, these same hours also present the best opportunity to day trade Oil and Gold. This is not a rule, because during certain periods these markets could be very volatile depending on economic releases and events across the globe.

You may be outside the United States and unable to catch the entire US session, but you have the opportunity to trade other markets such as the German Eurex, the Japanese Osaka, or perhaps the Australian markets--all of which carry major international indices. Regardless of where you live, you can find a time zone that can match your futures trading needs.

Diversification

Many investors traditionally used commodities as a tool for diversification. Futures can indeed help you diversify your portfolio as different commodities have varying correlations to the securities markets.

Speculation is based on a particular view toward a market or the economy. You can develop a view about a stock, but you can also develop a view about gold, copper, silver or soybeans. You can have a negative view or a positive view about any commodity, and you can go long or short any market depending on your view.

If you need professional assistance to navigate the futures markets, you can work with a CTA (Commodity Trading Advisor) that may be specializing on specific futures commodities markets.

Hedging

Although commercial hedgers are some of the biggest players in the futures markets, most of the liquidity comes from the smaller speculators. For instance, the rough rice market may be traded by “commercials,” but because of the lack of smaller speculators, it is not liquid enough to trade, particularly in the short term.

Chances are that you are not a hegder, otherwise you wouldn’t be reading this document. Although you may have next to zero interest of need for a hedging account, it’s important to know what hedgers do, and that because of their size, they have a greater capacity to move illiquid markets such as dairy, lumber, rice, and sugar.

Futures vs Stocks, Forex and Options

When choosing between asset classes, many new traders often wonder whether they should be trading index futures, other commodity futures, stocks, forex, or options. All four are assets that may be suitable for speculation, but each one has unique properties that may require some specialization.

Let’s cover the pros and cons of each one, starting with forex

Forex

Stocks

Options

Commodities (other than indexes)

Index Futures

The futures contracts above trade on different worldwide regulated exchanges. For example, contracts such as the Emini DAX, Euro Bubl, and Euro Schatz are traded on the Eurex markets.

Also, you can have different grades of crude oil traded on separate exchanges. For example, the Brent Crude is traded on the ICE exchange, and “sweet crude” is traded on the CME exchange. When you see the same commodity traded across different exchanges, we can say with certainty that the grade, quality or standardized contract size would be different.

CLICK HERE for a complete listing of the Futures Exchanges we offer along with contracts you can trade on each.

Understanding Futures Contracts

All futures and commodities contracts are standardized. This means they trade at a certain size and quantity.

The anatomy of a futures contract breaks down like this:

• Contract Size: Each contract has a certain size associated with the contract. For example, crude oil has 1,000 barrels, gold has 100 oz, and silver is sized at 50 oz, etc. The size of the contract is determined by the exchange that it is traded on.
• Contract Month: Each commodity futures has a specific contract month associated with it. For example, the E-mini S&P trades during the months of March, June, September and December. Commodity futures contracts may differ with regards to trading months.
• Contract Value and Tick Size: Each commodity has a certain point value and tick value. Tick is the minimum increment that a commodity futures contract moves. Each commodity will differ as to the dollar value for each tick. For example, the E-mini S&P contract minimum tick is $12.5 and a full point consists of four ticks which makes each point worth $50.
• Deliverable: Each futures contract is either settled in cash or physical delivery. Deliveries are very rare, and some futures brokers will alert you if you are nearing a delivery period. In light of this, Optimus Futures recommends you become familiar with the active months of your futures commodities market so as to avoid the hassle of taking or cancelling delivery.
• Currency: Each futures contract is denominated to a specific currency. For example, CME contracts are denominated in US dollars, but Eurex contracts, in contrast, are denominated in euros.

A few other things to note. Each commodity futures contract has a certain quality and grade. This is what they call “standardization”. For example, a gold contract is 99% pure gold. Often you will see the same contract traded on different exchanges, for example you may see the crude oil traded in the CME (NYBOT) and the crude oil on the ICE exchange. However, these contracts have different grade values. The CME trades “sweet crude” while the ICE exchange is trades Brent crude oil.

Common Futures Terminology

Physical Versus Non-Physical Commodities and Deliverable Versus Cash-Settled

This is important, so pay attention. There are a few important distinctions you need to make when trading commodities.

Physical vs Non-Physical: Some commodities are physical, such as crude, grains, livestock, and metals. Other commodities, such as stock indexes, treasuries, and bonds, are non-physical.

Deliverable vs Cash-Settled: Similarly, some commodities are deliverable in their physical form. This process is used mainly by commercial producers and buyers. Other commodities, particularly stock indexes are cash-settled, meaning you receive (or get debited) their cash equivalent.

Note that just because a commodity is a physical commodity doesn’t mean it’s deliverable. Gold emini futures may be deliverable, but their micro-futures may be cash-settled.

When trading deliverable products, you must exit before a certain date otherwise you’ll be at risk of delivery. Most futures and commodity brokers will attempt to send you an email alert or phone call or may have to exit you from the market. Make sure you discuss the exits dates with your brokers and methods he uses to roll over to the next month.

Although you don’t need to exit a cash-settled position in a cash settled prior to expiry, Optimus Futures recommends to exit positions as the contract’s liquidity might dry up, it’s price is vulnerable to extreme swings up or down.

Last Trading Day and First Notice Day

These are two terms and abbreviations you should know: LTD and FND.

One thing for certain is that you’ll want to avoid delivery notices and the cost of retendering (reversing delivery).

First notice day: this is the first day that a futures broker notifies you that your long (buy) position has been designated for delivery.

Last trading day: the last trading day is literally the “last day” to close out a futures contract before delivery. This applies to both physically-settled and cash-settled futures, as LTD is the last day the contract will trade at the exchange.

For cash-settled contracts, like the E-Mini S&P 500 or E-Mini S&P 500 micro, traders who hold long or short futures contracts into the LTD close will have their positions cash-settled--meaning credited to or debited from your account. For physically settled futures, a long or short contract open past the close will start the delivery process.

What Contract Month Should I Trade?

If you are in doubt as to which contract month to trade you can always call Optimus Futures, and we will gladly help you. However, as a general guideline, you should always choose the contract that has the highest volume of contracts traded. Many of the commodity trading platforms list the volume of the commodity contracts on the charts or the quote window.

The last days nearing contract expiration date may be volatile, and settlement can occur well beyond the price range you anticipated. Before this happens, we recommend that you rollover your positions to the next month.

For example, on April 20, 2020, the U.S. benchmark price for crude dropped below zero for the first time. The futures contracts for May delivery of West Texas Intermediate fell to negative $37.63 a barrel. So now, traders who trade physical commodities must be aware that physical commodities can potentially go negative, and it is best not to trade in a deliverable month on the last day of trading. Whether a day trader, swing trader, or a trend follower, make sure you trade in the most liquid month (high volume and open interest).

Each commodity month has its own symbol as follows:

• January: f
• February: g
• March: h
• April: j
• May: k
• June: m
• July: n
• August: q
• September: u
• October: v
• November: x
• December: z

What Does it Mean to Rollover a Position?

Rollover means to close a position in the expiring month’s contract so as to initiate a position in the new month’s contract. There is no automated way to rollover a position. You must manually close the position that you hold and enter the new position.

What Are Price Limits?

Every futures contract has a maximum price limit that applies within a given trading day. There’s a maximum upside limit and downside limit. These limits help ensure an orderly market by limiting both upside and downside risk. Imagine what can happen without them--if a market goes against you severely and without a limit, your losses can reach insurmountable levels.

If a given price reaches its limit (limit up or limit down) trading may be halted. Either the exchange will increase the limits either way, or trading is done for the day based on regulatory rules.

Each futures contract has its own unique band of limits. Each has a different calculation. Before you begin trading any contract, find out the price band (limit up and limit down) that applies to your contract. It’s better to know than to be unaware.

What Does Mark-to-Market Mean?

Futures gains and losses are taxed via mark-to-market accounting (MTM). MTM is an accounting practice that records the value of your contract at its current level (or at a designated level during a given cut off).

For example, at the end of the tax year, any open positions you have on futures may be taxed as a capital gain, or deductible as a capital loss, depending on its closing price at the end of December. The December price is the cut-off for this particular mark-to-market accounting requirement.

Opening an Account

If you’re interested in opening a futures account, know that there are several different types of accounts you can open:

1. Individual Account: This means that you plan on trading under your name and are making 100% of your trading decisions. This is the simplest form of futures account to open.
2. Joint Account where you and your spouse for example could both have access to the account. Some traders prefer this method in the event that a sudden unfortunate circumstance occurs to one of the spouses.
3. Corporate Account: This is for a person who runs a business in which trading is part of the operation. It can also be for traders who aim to make a business out of trading.
4. Trust Accounts: If your funds are part of a trust, you can open a futures account under a trust. Your trust must allow futures contracts or have no provisions against leveraged trading.
5. IRA Accounts: You can trade futures under an IRA account. Make sure you are set up with a custodian that allows derivatives trading.
6. LPAO: These are limited power of attorney accounts that you may grant someone trading authority (and trading authority only) over your accounts. Please use the NFA (National Futures Trading) association site to check on the background of the person you are giving this authority to. https://www.nfa.futures.org/basicnet/

Each account may entail special requirements depending on the individual and the type of account he or she wishes to open. Each circumstance may vary. Since Optimus Futures is an IIB (Independent Introducing Broker), we have access to many clearing firms (FCMs) and can help you place your funds in a firm that best meets your needs. Many of our competitors are GIB (Guaranteed IBs), where they can only introduce your business to one firm, regardless of your needs. Legally, they cannot give you options.

How might different FCMs matter? Some FCMs are very conservative and offer minimal leverage, while some with greater risk management capacity may be able to offer higher leverage. Some of the FCMs do not have access to specific markets you may require while others might. Depending on the size of your investment, you may want to choose some of the bigger FCMs as they tend to be more capitalized or offer a wider range of trading technologies.

Futures Trading Margins

Futures and commodities are traded on margin. What is “margin”?

Margin is like “earnest money,” in which you are required to set aside a certain portion of funds in order to trade a futures contract by borrowing money from your FCM. It’s almost like a “down payment,” but for holding an open speculative position rather than a sale.

Is the margin taken out of my account?

Yes, and it’s given back to you once you close the transaction.

If I still have money left in my account left after I post the margin, can I use the rest to trade other futures and commodities?

Yes, you can. Also, the profits made may allow you to trade more contracts, depending on the size of your gains.

What is the maintenance margin?

This is the amount of capital that your account must remain above. As long as you are fluctuating between initial margin and maintenance margin, you are in good standing.

What is the difference between day trading margins and overnight margins? Are they different?

Yes, totally different.

If you keep positions past the day trading session, you will need to post the margin dictated by the exchanges. Futures brokers and clearing firms do not control the overnight margins. You must post exactly what the exchange dictates.

Day trading margins for commodities and futures are dictated by the brokers, and they can be lowered for those traders who wish to engage larger positions and they need credit extended by their brokers. Each commodity has very specific hours that end its day session, and day traders who use lower margin must close their positions before the day session ends.

So, what is a margin call?

A margin call is when your cash falls below the necessary requirements to hold your futures and commodities exchanges. You must either liquidate all or partial positions. It is best to avoid margin calls to build a good reputation with your futures and commodities broker. Also, many brokers no longer give “margin calls” -- they often liquidate enough of your position to keep you above the required margin level.

Fees and Commissions

Traders pay brokers’ commissions on a per contract basis. Other fees include:

• Exchange fees: The exchange charges per futures contract, and the amount varies from one commodity to another.
• Clearing fees
• Routing fee (technology fee for execution)
• NFA Fees

Today’s commissions are also very low relative to the leverage that you get as a trader. For example, consider when you trade crude oil you trade 1,000 barrels. When trading gold, it’s 100 ounces. The same goes for many other commodities, and that is why big traders overlook the cost because many times it is not material. (please discuss with your broker the specific commissions you are trading because frequency if trading such as day trading may impact your bottom line).

Example:

John is a swing trader who sees a trading opportunity in the ES (S&P 500 futures). He places a market order to buy one contract. His total costs are as follows:

• Commissions: $1.25
• Exchange Fees: $1.18
• NFA fees: $0.02

After his ES trade had risen by five points, yielding an unrealized gain of $250, John decides it’s time to close the trade. His cost to close the trade is as follows:

• Commissions: $1.25
• Exchange Fees: $1.18
• NFA fees: $0.02

John’s Net Cost: $4.90 (buy cost $2.45 + sell cost $2.45)

Futures Trading Platforms

Order Entry Screen

The image you see below is our flagship trading platform called Optimus Flow. Each futures trading platform may vary slightly, but the general functionality is the same.

(A) This field identifies the futures contract you are trading.

• This field often accompanied by relevant price information.
• Futures commodity symbol is often included
• Contract month symbol, year, and expiration date are also typically included. and Each futures contract has a unique symbol that differentiates it from all other products.

For a list of all product codes by data feed, go to: https://support.optimusfutures.com/trading-platform-guides#futures-symbol-product-codes

(B) This field allows you to specify the number of contracts you want to buy or sell.

Specify the Type of Order

The market order is the most basic order type. It essentially tells the platform to “get me into a position now.” When you place a market order, you agree to either buy or sell at the best available price. Your objective is to have the order executed as quickly as possible. In other words, with a market order you often do not specify a price. The only information you need to provide is

1. The name of the contract to trade;
2. The number of contracts to trade; and
3. Whether you are buying or selling.

Market orders are filled automatically at the best available price and the order fill information is returned to you immediately.

(C) This column shows the price and the number of contracts that potential buyers are actively bidding on. Notice that only the 10 best bid price levels are shown.

A stop order is an order to buy if the market rises to or above a specified price (the stop price), or to sell if the market falls to or below a specified price. When the market reaches the stop price, your order is executed as a market order, which means it will be filled immediately at the best available price. Stop orders are often used as part of a risk or money management strategy to protect gains or limit losses. For example, a trader who is long a particular market might place a sell stop below the current market level. Then, if the market moves lower and reaches the stop price, the trader’s order will be triggered and the position will be offset, limiting further losses.

Limit orders are conditional upon the price you specify in advance. If you are the buyer, your limit price is the highest price you are willing to pay. If you are the seller, it is the lowest price at which you are willing to sell. The advantage of a limit order is that you are able to dictate the price you will get if the order is executed. However, unlike a market order, placing a limit order does not guarantee that you will receive a fill. If the market does not reach your limit price, or if trading volume is low at your price level, your order may remain unfilled. Only the 10 best offer or ask price levels are shown. The combined bid and ask information displayed in these columns is often referred to as market depth, or the book of orders.

(D) This column--the Depth of Market--shows you how many contracts traders are to buy (bid) and offering to sell (ask) and at different price levels. Bids are on the left side, asks are on the right.

(E) This field shows the price of the last completed trade.

Connect your platform to the commodity futures exchange

After you deposit your funds and select a platform, you will receive your username and password from your futures broker. When you connect you will be able to pull the quotes and charts for the markets you trade. This process applies to all the trading platforms and brokers.

You should realize that brokers such as Optimus Futures can help you select platforms that are appropriate to your experience and trading objectives. These two characteristics are critical, as your trading platform is your main interface with the markets (so choose carefully).

We accommodate all types of traders. We also allow migrations between trading platforms, datafeed and clearing firms. The main point is to get it right on all three counts. We're dedicated to making sure you are happy with your trading conditions, as we believe you have the right to choose which tools might help you best succeed.

Datafeeds

You’ve just opened your Futures account for review, you now have options on most platforms to select a data feed and routing. How important is this decision?

Datafeed is a term that signifies the raw market data that goes directly into your computer from the data provider. This is a digital equivalent of a ticker tape feed scrolling across your screen, posting price details of different commodities as their prices fluctuate at any given moment. If there is even a slight time delay with this data, serious repercussions can occur.

Practically speaking, delayed data is relatively “false” depending on the importance of time in your trades. Time delay for one trader can give other traders a timing advantage. Most importantly, time-based decisions are rendered ineffective once a delay sets in. Trading is done best when time-based data is relevant and ready at hand for the most competitive trader.

Let’s visualize the routing network needed to transmit your trade order. For any serious trader, a quick routing pipeline is essential. Placing an order on your trading screen triggers a number of events.

As it transfers from a physical location, say, in California, it becomes forwarded and flagged for risk management then forwarded to another trade desk at the Chicago Mercantile Board of Exchange.

Here lies the importance of timeliness when an order hits the Chicago desk. Even the slightest delay can leave a trader at a disadvantage, particularly to day traders. Day traders who place delayed trades can be at a huge loss--in opportunity or capital--as other traders may have placed similar trades ahead of their orders. The phrase “a day late and a dollar short” applies here.

Hence, the importance of a fast order routing pipeline. In other words, you don’t want to be the last trader in line for an order fill. To be a competitive day trader, speed is everything. Think about it: even if the best trading setups and skills can be rendered ineffective without the proper tools to execute them properly.

Next, let’s talk about how data feed and order routing connects to your trading platform.

Generally, there are two types of platforms

• Platforms that come with their own data feed. Examples are R | Trader Pro, Firetip, TT® Platform and CTS T4.
• Platforms that connect to data feeds from 3rd party source: Sierra Chart, MultiCharts and other third-party platforms that are able to connect to multiple datafeeds such as Rithmic and CQG.

Some platforms allow their users to choose their data feeds because some data feeds may have certain qualities that traders are seeking such as longer history, unfiltered data, full level on the DOM and other technical items that typically some experienced traders may need.

Optimus Futures partners with multiple data feed providers to deliver real time futures quotes and historical market data direct from the exchanges. This gives you a true tick-by-tick view of the markets. Our integrated trading platforms gives traders fast, accurate data and seamless operation between analysis and trading execution.

Putting It All Together

Let’s get down to the brass tacks of how futures trading actually works. We’ll take a POV look at a hypothetical person who trades futures. Let’s call him John (as in our previous example).

John is bullish on the broader stock market, so he decides that he wants to go long the ES (S&P 500 futures) to capitalize on the larger market movement.

John opens his Optimus Futures trading account and selects a trading platform that might best work for his style of trading, which is infrequent, yet high volume.

With access to the CME Group’s centralized matching engine and an appropriate high-volume trading platform, John is able to place trades on larger positions, say, averaging 100 contracts at a time, while being able to reduce his “slippage.” The reason for this is threefold:

1. A faster data feed allows John to see the market action in real time, allowing him to respond to market data with minimal delay.
2. A fast and intuitive platform allows John to execute his trades seamlessly and with minimal inconvenience.
3. Fast order routing helps place John’s trades toward the front of the order line, beating other order entries that are routed much slower.

Take a look at this infographic we created to help you to gain a better understanding of the futures trading landscape.

Best Markets for Day Trading Futures

So, once you’re up and running with a funded futures trading account, what might be the best markets to trade? If you’re new to the futures markets, here are three key factors to consider when choosing a particular market to trade:

Volume

First on the list is volume. Why volume? The higher the volume, the higher the liquidity. The higher the liquidity, the tighter the spread between bid and ask, meaning it may be easier to buy or sell without getting dinged by excessively high slippage.

Contracts trading upwards of 300,000 in volume in a single day tend to be adequately liquid. Ultimately, when you trade, you’ll want to rest assured that there’ll likely be another trader to buy from or sell to you.

Examples of a few heavily traded futures contracts are the E-Mini S&P 500 (ES) and Crude Oil WTI (CL).

Margin

We’ve already briefly touched upon margins. Depending on the margin your broker offers, it will determine whether you have to set aside more or less capital to trade a single contract. Crude oil, for example, will often demand high margins. In contrast, the E-mini S&P 500 contract, popular among day traders, will often have smaller day trading margins.

Movement

Some instruments are more volatile than others. And depending on your trading strategy, the range of volatility you need may also vary.

So, how might you measure the relative volatility of an instrument? One suggestion would be to measure an instrument’s daily True Range.

To measure True Range, follow these steps:

1. Find an instrument’s daily high.
2. Find the daily low.
3. Subtract the high from the low, and that will give you it’s True Range in ticks or points.

Now here’s the thing: you will want to do this for a series of days to get a clearer picture of an instrument’s volatility. You can also plot an Average True Range (ATR) on a chart which can average an instrument’s volatility over a predetermined time period (e.g. from 2 days to 30 days or longer).

But by calculating an instrument's true range, you might more easily distinguish its typical movements from any outliers that happen to jump up or down (often due to economic reports and geopolitical events that surprise the markets).

Getting the Big Picture

Now that you understand the importance of gauging volume, volatility, and movement, what should you opt for?

For new traders, the E-Mini S&P 500 futures might be a good starting point. Margins can often be as low as $500 and the ES has more volume than crude oil. And because it is so widely traded, you the ES might have just the right amount of market movement, it may provide plenty of market opportunities throughout the day.

Crude oil might be another good choice. It also has plenty of volatility and volume to trade intraday. But don’t neglect the risks. Both the ES and CL are subject to big moves, particularly during periods of “event risk” as in surprise economic reports or geopolitical events.

If you’re not careful, you can lose a lot in a short amount of time. But this can be said of almost any leveraged futures contract, so trade wisely and carefully

Futures Trading Strategies

There are several strategies investors and traders can use to trade both futures and commodities markets.

The Fundamental Analysis Approach

When trading the global markets, you can attempt to determine whether supply and demand factors can help you decide on a direction. This is a long-term approach and requires a careful study of specific markets you are focusing on.

With today’s abundance in financial news and media, you can choose to follow the resources you consider to be reliable. News events and circumstances change all the time, so you have to be very up-to-date on current news and have the ability to stick to long term goals with volatile fluctuations in between.

Check out Optimus News, a free trading news platform, which helps traders stay on top of the financial markets with real-time, relevant analysis of key economic events and custom-tailored notifications for the markets they trade at the exact time of release.

Fundamental analysis requires a broad analysis of supply and demand. Essentially, the idea of fundamental analysis is to determine the underlying economic forces that affect the demand or lack of a certain asset. The challenge in this analysis is that the market is not static. Yet, we are trying to look at the market from a macroeconomic angle to determine a specific value that the future or commodity should be trading at.

Let’s use some specific examples of the demand side of the equation. Suppose you are attempting to trade crude oil. What factors would contribute to the demand of crude oil? One factor is the amount of consumption by consumers. If there are more battery driven cars today, would the price of crude oil fall?

Another example would be cattle futures. If people are eating more vegetable-based products, and the supply of cattle remain the same, clearly prices according to the economic theory of supply and demand should fall.

On the supply side, we can look for example at producers of ag products. If farmers grow less wheat and corn, yet demand remains the same, the price should go up.

Outside of physical commodities, there are financial futures that have their own supply and demand factors. For example, during recessions, money managers and CTAs may be buying less stocks and going long on index and bonds for the safety of their customers.

If you are about to engage in trading the futures market from a fundamental side, you must have access to very reliable information and evaluate the information you come across. In our opinion, this is suited for people with a stronger bent toward economics, perhaps even investor types with large accounts, or as we call it in the futures brokerage world, “deep pockets”.

Supply and demand is a long-term approach but the noise level associated with daily and long term fluctuations could be high. The drawdowns of such methods could be quite high. Typically, beginners get into the commodities markets with an “opportunity” that they perceive to be fundamental. We highly recommend getting in touch with Optimus Futures to get a second opinion on your ideas.

Options on Futures

There are simple and complex ways to trade options. The simplest way to trade is to buy a call option if you forecast a given market to rise, or to buy a put if you think a market will fall. Options trading is a very specialized approach, yet it can pay off well if such an approach suits your financial goals, capital resources, and risk tolerance.

One thing we urge you not to do, however, is to “sell” calls or puts without any positions to offset risk--what we call “selling naked.” More accounts have been destroyed by selling options than by taking small losses buying them. Options present asymmetric opportunities, meaning that the payoff (for buying calls and puts) can sometimes be much greater than the actual risk of losing premium. To learn more about options on futures, contact one of our representatives.

The Technical Analysis Approach

Technical analysis focuses on the technical aspects of charts and price movements. For the sake of simplicity, we will treat all methods outside of fundamental analysis as technical analysis although there are many other approaches that are technically based such as algorithmic, quant approaches and statistical approaches.

Day Trading Futures (Scalpers and Short-Term Traders)

Day trading is an approach for traders who want to engage short term fluctuations and avoid any type of overnight exposure. Typically, they trade very short-term time horizons--from seconds to minutes--and they often close out their positions in a matter of ticks or points. Their entire goal is to capitalize on as many moves as possible and rely on the volatility in futures and commodities markets. Hence, they tend to trade more frequently within one trading day.

Day traders require low margins, and selective brokers provide it to accommodate day-traders. Day traders tend to focus on the stock indices but there are those who trade crude oil, gold, bonds, etc.

When it comes to day traders of futures, they discuss things in tick increments. For example, an E-mini S&P futures day trader may say my target per day is 20 ticks. This means the traders is focused on generating $250 per day for his daily income target.

Don’t be fooled, however, by the short-term and short-distance targets. Day trading can be extremely difficult. Those who attempt it at first may find their accounts hemorrhaging money from multiple strings of small losses. Day trading is a specialized field, one in which you trade not meaningful supply-demand fundamentals, but “market noise”. Hence, you are closest to engaging randomness when you day trade. If you want to become a day trader, you will have to overcome these hurdles--and the only way to get a real feel for micro-fluctuations is to trade in a live setting (demo accounts can’t simulate a real day trading encounter).

Position Trading

Position traders are those who hold positions overnight, trading long term positions fundamentally or as trend followers.

Let’s discuss these what position trading is all about.

Some positions traders are “swing traders” who may hold a position for hours to several days. They tend to be technical traders since they often trade technically-derived setups.

Some position traders may want to hold positions for weeks or months. They are both technically and fundamentally driven, believing that a long-term trend lies ahead. Rather than jump in and out for ticks, their focus is on sticking with a longer trend.

Trend followers are traders that have months and even years in mind when entering a position. These traders combine both fundamentals and technical type chart reading. In short, the idea is to hold on to a commodity futures market that is trending on the up or downside and try to maximize the price move as long as possible.

Spread Trading

In commodities, a spread is the distance between the value of two separate contracts.

Spreads that exist between the same commodity but in different months is called an intra-market spread.

Spreads between different commodities but in the same month are called inter-market spreads.

It’s assumed that spread traders trade spreads that are somewhat correlated (or negatively correlated) to a certain degree. For instance, when the S&P 500 goes up, the Russell 2000 tends to go up as well.

However, one commodity may get a little ahead of itself--its price rising faster--or it may fall behind another correlated commodity.

In such cases, the “spread” widens, and one strategy that spread traders implement is to take advantage of “imbalances” in correlation, often going long one contract and short the other, anticipating that the spread will return to its average correlation.

Let’s use a bunch of examples for spread trading:

1. Long the e-mini Nasdaq futures and short the E-Mini S&P futures. In this example the trader may want to capitalize on the fact in the short term there is technical divergence between the two contracts whether for technical or fundamental reasons. The fundamental trader may see more flow into the technology sector represented by the Nasdaq index, and the technical trader may base it on the divergence that exists between the charts. This is an example of inter-market spread on futures.
2. Long the gold futures and short the silver futures. Although both futures commodities are correlated to a certain degree, you may see higher flow into the gold market versus the silver market. This is also an inter-market spread.
3. Short the June crude oil futures and long October crude oil futures. Because the crude oil market is deliverable, there could be divergence based on the supply and demand changes in different periods as dictated by things such as travel for example. This is an example of an intra-market spread.

Note: whatever method you use to trade--whether trading a spread or trading an “outright” position-- keep in mind that one method is not better than another and that one (particularly spreads) may not “safer” than an outright position. Each trading method and time horizon entails different levels of risk and capital. Typically, anything that is beyond day trading would require higher levels of capital as longer term strategies can be extremely volatile, and the fluctuations in your account may reflect that.

Chart patterns

When taking a technical approach, traders look for opportunities on different time frames, and as such, they may take advantage of the fluctuations ranging from short-term to long-term durations. What most look for are chart patterns.

Chart patterns can help traders anticipate potential price moves.

For example, you could have heard terms such as head and shoulders, ascending triangles, descending triangles, triple tops, triple bottoms, etc. There are more advanced chart patterns such as harmonic figures, gartley patterns, bullish cypher and bearish cypher.

Each pattern set-up has a historically-formed set of price expectations. Chart patterns don’t always work out, as they are not to be taken as surefire predictions. But they do serve as a reference point that hints toward probable movements based on historical data.

Let’s go through a few charting examples that would help a beginner trader navigate through the price analysis: All charts follow the basics of elements in showing time on the horizontal X axis and price on the vertical Y axis we show the price.

Charts below are courtesy of Optimus Flow.

Line Charts

Bar Charts

It’s important to choose a charting method that you feel most comfortable with. Once you find the chart type that best matches your style, you can then develop a method to identify and trade the patterns you see on your chart.

Candle Charts

Point and Figure Charts

External Factors Affecting Futures

Geopolitical Events

Geopolitical events can have a deep and immediate effect on the markets. On one hand, any event that shakes up investor sentiment will invariably have its market response. On the other hand, geopolitical shocks can also affect institutional algorithmic trading systems, prompting them to buy or sell a massive volume of futures contracts in an instant.

Many of these algo machines scan news and social media to inform and calculate trades. They can open or liquidate positions instantly. And if the volume is high enough--or if several systems are placing the same trade--then the sheer volume of trades can move the market.

Whether you are a technical or fundamental trader, these types of events can have a major positive or negative impact on your account, as geopolitical events often disrupt the balance of the markets.

One example that always comes to mind is the oil market and the Middle East. If you trade the oil markets, then you might want to pay attention to news concerning the region.

Another example that comes to mind is in the area of forex. The “Brexit” issue has tremendously affected not only GBP (British pound), but also other currencies such as the euro, swiss franc and others. Flow of “good news” and “bad news” move the currency markets.

Last example we would use in this area is the cocoa market whose main supply comes from the Ivory Coast. This area is prone to political instability and the slightest concerns of “revolution” would send the price gapping up.

The examples above tell us that it doesn’t matter whether the news reflects fundamental changes to market structure or just mere market sentiment. Both can move the markets. And place your positions at significant risk.

Final note on this issue is to pay attention to a contract’s liquidity. The less liquid the contract, the more violent its moves can be.

Economic Cycles

You’ve probably heard the term “economic cycle” or “business cycle.” Both terms are synonymous, and they refer to the economy’s fluctuation between expansion and contraction; growth and recession.

Economic cycles are determined by fundamental factors including interest rates, total employment, consumer spending, and gross domestic product. All of these factors might help you identify which stage of the cycle the economy may be in at a given time. Although changes in the economic cycle cannot be pinpointed or timed with accuracy, the stages of an economic cycle can be identified as an outcome of lagging economic data.

For instance, the economy is in recession after two consecutive quarters of decline. Although we can confirm, by looking back, that the economy is in a recessionary period, it’s much harder if not impossible to predict when a recession will begin.

Seasonality

Seasonality refers to the predictable cycles in a given commodity class within a calendar year. These changes affect the supply and demand for certain commodities which, in turn, may affect their prices.

For instance, the demand for heating oil tends to increase during the Winter months, and so heating oil prices also tend to rise. Similarly, the demand for gasoline tends to increase during the summer months, as vacationing and travel tends to ramp up. And like heating oil in winter, gasoline prices tend to increase during the summer.

Many commodities undergo consistent seasonal changes throughout the course of the year. Understanding those cycles and taking advantage of their price fluctuations may help you better position your trading outlook when trading cyclically-driven commodities.

How Is Futures Trading Taxed?

What we are about to say should not be taken as tax advice. It’s important for you to talk to a tax professional to learn more about the tax implications of futures trading.

However, we can mention a few important points of which you should be aware.

One of the biggest tax advantages for futures traders is that unlike stocks:

1. Your reportable profits or losses come in one lump sum--no reporting on every single trade you make.
2. Profits are subject to capital gains taxes.
3. Losses can be reported as a capital loss, in most cases, up to $3,000 per year.
4. Should your losses exceed $3,000, you can carry over your losses to the next tax year.
5. Your day trades are not subject to the wash sale rule.
6. All open positions are reportable as marked-to-market at the end of the calendar year.

Let’s talk about this last point. If your open position is at a loss at the end of December, it can be reported as a capital loss, even if your open position rises at the beginning of the following January. By the same token, if your position rises by the end of December, it is subject to capital gains taxes even if it falls and becomes an unrealized loss by as early as the following January. So be careful when planning your positions in terms of taxes.

Again, taxable events vary according to the trader. To learn more, or to get accurate tax advice as it pertains to your situation, please talk to a tax professional.

How to Trade Futures Successfully

There isn’t just one way to succeed in trading. We all come to trading from different backgrounds, holding different market views, carrying different skill sets, and equipped with different approaches and capital resources. We’re also wired differently as people.

One thing that all of us will have in common, however, is that trading will never be an “easy” experience. Trading requires discipline. It’s a mental game that is often rife with uncertainty and noise (that’s why it’s called “speculation”). Humans seem wired to avoid risk, not to intentionally engage it. Hence, trading is always a difficult endeavor.

Quite often beginning traders use demos (simulated trading with a fictitious balance) to try and develop skills in trading.

But our experience at Optimus Futures has shown that demo trading does not help much in gaining an edge or skill in trading futures. Demos do provide a good understanding of the functionalities of futures trading platforms, but not much beyond that.

In fact, there is a tendency of paper traders to go back and forth between demo and live trading, but again we find that this “cycle” does not contribute much in the way of trading growth.

It’s as easy to make thousands in a demo account as it is hard to make even a few hundred dollars in a live account. So, many beginners end up in a simulated trading limbo. They’re better off playing a money game app on their mobile phone.

Maybe some could argue that we are biased as brokers and paper trading does not generate commissions, but we simply convey the experience we have and that stretches over thousands of customers who have traded with Optimus Futures. If you disagree, then try it yourself.

Spend a year perfecting your strategy on a demo and then try it in a live market. In most cases, you may find that you’ve wasted an entire year when you could have learned how to practice real trading in a real market.

What are the most important skills of a futures trader?

The “mental game” of trading--the discipline, stamina, and patience required to trade--is the most important and foundational skill to achieve. Suppose you want to become a successful day trader. You need to be goal-driven. And your goals have to be realistic. Pursuing an overnight fortune is out of the question.

You have to see every trading day as an opportunity to learn things about the markets while taking risks. You can’t afford to view every day is an imperative to “earn”. Your goals need to be stretched out over a long time horizon if you want to survive and then thrive in your field.

The market has the ability to “filter-out” those who approach the market with fear and greed. Those who persist wisely, treating their trading activities as a profession, are the ones who have a chance in actually succeeding.

What are the biggest challenges of futures trading?

The information above presents the basic “rules of the game” but the real challenges lie in developing a consistent, coherent and guided plan to trade the futures commodities market.

Risk management is key, not only to surviving but thriving

Quite often futures day traders will ask “what is the best method to trade with?” Wrong question. You can’t force a win, but you can prevent massive losses, enough to remain solvent enough to pursue a winning opportunity.

It’s not the method that wins, it’s the risk management strategy you employ that makes a critical difference.

What is the risk management? It’s the ability to cut your losses short and admit that you are wrong. By the way, you will be wrong many times, so get used to it. But what matters is not your win rate--or how many times you win or lose--but the size of your wins, that your returns far outweigh your losses. Get it?

Risk management also entails following your system, but only if you are certain that your method can produce more favorable than unfavorable results. If you’re not sure about it, then test it, but give it ample time to prove itself or expose its weaknesses. Short of that, don’t trade a method haphazardly.

Quite often, beginning traders will look back at “what if” once they are stopped out, or once they take a profit, they will wonder why they did not stay when the market went so much higher/lower whether they were long/short. This thinking can cause you to rewrite your trading rules which, in turn, can lead to inconsistent results (to say the least).

Simplicity is the ultimate sophistication

You should be able to describe your method in one sentence. If you can’t, or if your description takes you on a long drawn-out narrative about the markets, then it’s simple: you don’t have a method.

A simple method has two components: entry and exit. And there’s a reason for both.

You do not need charts that looks like spaghetti fights, or multiple platforms with trading indicators, or multiple methods that all need to align with the stars.

The more conditionals in your method, the more opportunities for errors and indecision

Sophistication of method has nothing to do with the number of variables it contains, but rather, the effectiveness and efficiency of the process to produce positive results.

The ability to adjust your trading and method to volatility

Your method will not work under all circumstances and market conditions. You have to decide which market conditions may be ideal for your method.

Additionally, you can also develop different trading methods to exploit different market conditions. Whatever you decide to do, keep your methods simple.