The Basics of Futures Trading

Are you interested in Futures Trading?

If so, start by learning the basic definition of futures as shared by Investopedia:

Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. Here, the buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.

While there are many types of futures, all of them share the following characteristics:

  • Contracts that trade on an exchange
  • Settlement by cash
  • Backed by commodities or another type of asset

Now that you understand the basics of futures, let’s turn our attention to futures trading. Here are some related terms to help you get started:

  • Contract size: This is the quantity behind a futures contract, such as ounces of gold for CME gold futures.
  • Notional value: You can’t calculate the notional value of a futures contract until you know its size. From there, you can determine how much the contract is worth. This is as simple as multiplying the current price of the contract by its size.
  • Tick: Futures contracts move in small increments known as ticks. These vary from one futures product to the next, so make sure you know the tick size before investing.
  • Tick value: Many people are confused by tick value, as they assume that each tick is worth a penny, which is the case with stocks. The tick size for futures depends on the product, so the actual amount will vary.

Futures trading isn’t for everyone, and this definitely holds true of those who don’t understand the basics. However, as you learn more, you may come to find that this type of investment is exactly what you’ve been looking for.

About Futures Radio Show

Futures Radio is a weekly talk show hosted by 20-year futures veteran and CME member Anthony Crudele, an ex-pit trader and one of the first to trade the E-Mini S&P. Each week Anthony talks with traders, CEOs, and other proven market participants about relevant trading and investing information. Subscribe on iTunes and YouTube.

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