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Futures Trading for Dummies: Your Quick Start Guide

In this post I want to discuss futures trading and focus mostly on Emini futures which is a very popular futures contract among traders globally. So read on below for a quick guide to ‘futures trading for dummies’ so that you can get a succinct overview and understand all that’s involved should you wish to dig deeper and jump into futures trading.

Let me add that day trading futures, stocks, crypto or Forex all need to be grounded in day trading fundamentals and market movements in order to see success. And with these fundamentals ingrained in your trading knowledge you can find success day trading no matter the financial market you choose.

But for this post, let’s focus on futures contracts and get started with this guide on futures trading for dummies

What are Futures?

Let’s start off this ‘futures trading for dummies guide’ with explaining what futures contracts are.

Futures contracts are standardized agreements to buy or sell a specific asset at an already agreed upon price on an agreed upon date. These contracts are traded on organized exchanges and serve as important financial instruments for hedging, speculation, and risk management in various markets.

Basically futures trading is where investors can speculate on future price movement of assets without actually owning them. Futures contracts are based on an underlying asset, which can include commodities (such as gold, crude oil, agricultural products) or financial instruments (like stock indexes, interest rates, currencies).

Each futures contract has standardized specifications, including the quantity or size of the contract, quality of the underlying asset, delivery date, and the tick size (minimum price movement).

Futures contracts have expiration dates when the contract must be settled. Settlement can occur through physical delivery of the underlying asset (for commodities) or cash settlement based on the contract’s value at expiration.

Businesses and investors use futures contracts to hedge against price fluctuations in the underlying asset. For example, a farmer can use futures contracts to lock in prices for crops before the harvest season.

trading futures for dummies; your quick start guide
Futures contracts are standardized agreements to buy or sell a specific asset at an already agreed upon price on an agreed upon date.

What are Emini Futures?

Emini futures stands for electronic mini. Mini contracts.

E-mini futures contracts are basically scaled down versions of standard futures contracts which we covered above. By scaling them down they are more accessible to individual investors. E-mini futures have benefits that include lower costs, smaller contract sizes and high liquidity.

The evolution of the futures markets went from having physical products such as: soy, sugar, crude oil, etc… where you buy actual full contracts and usually get the product once the contract expires. With day trading, even if you were to trade these particular goods, chances are you will be long out of the contract to ever have it delivered to your door.

Nowadays, the futures markets are opened up to indexes such as the S&P 500, Dow Jones, Russell 2000, Precious Metals, Currencies, etc… These trading instruments are E-minis. You can buy mini contracts of these. Since you’re not buying any physical objects, what we are buying is the virtual permission to hold the index in order to sell it to someone else at a different price – ideally with a profit.

Futures Trading for Dummies: Key Concepts

In order to engage effectively in futures trading, it’s essential to grasp key concepts that form the foundation of this dynamic market. These are the key terms and concepts you need to understand.

Contract Size: This refers to the quantity or units of the underlying asset that the futures contract represents. For example, a standard S&P 500 futures contract may represent 250 times the value of the index, while an E-mini S&P 500 contract represents a smaller fraction, typically 50 times the index value.

Expiration Date: Futures contracts have a predetermined expiration date, indicating when the contract ceases to exist. Traders need to be aware of expiration dates to manage their positions and avoid unwanted deliveries.

Tick Size: The tick size is the minimum price movement allowed for the futures contract. It determines the smallest increment by which the contract’s price can change. Understanding tick sizes is essential for determining profit and loss levels and setting precise entry and exit points.

Margin Requirements: Futures trading involves using margin, which is a fraction of the contract’s value that traders must deposit as collateral. Margin requirements vary based on factors like contract size, volatility, and exchange rules. It’s crucial for traders to understand margin requirements to manage risk and avoid margin calls.

Long Position: Taking a long position involves buying a futures contract with the expectation that the price of the underlying asset will rise. If the price indeed increases, the trader can sell the contract later at a higher price, realizing a profit.

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Short Position: Conversely, a short position involves selling a futures contract with the anticipation that the price of the underlying asset will decline. Traders profit from a short position if the asset’s price falls, as they can buy back the contract at a lower price to cover their position.

Leverage: Margin trading provides leverage, which magnifies both potential profits and losses. While leverage can amplify gains, it also increases risk. Traders must use leverage judiciously and consider risk management strategies to protect their capital.

Initial Margin: This is the minimum amount of capital required to open a futures position. It’s a fraction of the contract’s value and acts as a security deposit against potential losses.

Maintenance Margin: Maintenance margin is the minimum amount of equity required to keep a futures position open. If the account’s equity falls below the maintenance margin level due to losses, the trader may receive a margin call, requiring additional funds to meet margin requirements.

Futures/E-Mini Futures: Quick Start Guide

Step 1: Choose a Broker

This is the initial step for trading futures and you should look for well established brokers with a good track record.

Step 2: Open an Account

After selecting your broker you will need to open an account and the process will include providing personal information; funding the account i.e putting funds into it and completing verification, which can include providing photo ID.

Step 3: Start Trading!

With your account set up and funds deposited, you’re ready to start trading E-mini futures contracts. Begin by analyzing market trends, identifying trading opportunities, and executing trades based on your trading plan and risk management strategy.

futures trading for dummies
Follow the 3 step quick start guide and with your account set up and funds deposited, you’re ready to start trading E-mini futures contracts.

Related Read: Advantages Of Trading Futures: Is Futures Trading Worth It?

Futures Trading for Dummies Guide: Wrap Up

So there you have it a quick start guide to futures trading including what futures are and their significance as well as what E-mini futures are and how they are more accessible for individual traders.

We have also covered the most important conepts you need to understand to get started in futures trading.

And we have provided a very simple 3 step guide to get started with trading futures.

ES futures are strictly speculative. But this really is part of the game of trading with higher risk and higher reward. And we understand the risk involved.

If you are looking for a more focussed guide, start here for how to trade E-minis specifically.

Let`s get to know each other. You can learn more about my journey and how I started here.

After that, if you have any questions you can always ask me at traderchick.com. Come to my Facebook group and introduce yourself, let me know your experience with trading.

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Related Read: Understanding Contract Roll Over Day for ES Minis

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