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What Is the Futures Market?

Updated: Mar 7

The is the market for commodity and futures contracts. Any auction market where futures contracts are traded is a futures market, including markets such as the New York Mercantile Exchange (NYMEX). Futures are exchange-traded derivatives contracts that promise the future delivery of a commodity or security at the current price. Although futures markets were once conducted in trading pits in major financial hubs, they are largely electronic today. In the US, most futures markets are regulated by the commodities futures clearing Commission (CFTC).

How Futures Contracts Work

Producers and suppliers of commodities use futures contracts to help manage market volatility. By negotiating contracts with investors, they pass the risk of the volatile market to the investor, as well as the reward. When futures contracts are exchanged on a futures market, they are sold with an agreed delivery date in the future and a price that's fixed at the time of the deal. In addition to commodities futures, stock futures are also an option. There are also futures contracts for bonds and even for cryptocurrencies like bitcoin.

Futures contracts are standardized and outline a number of different terms for the contracts. These include specifics such as the unit of measurement, how the trade will be settled, currency, quality of goods, and more.

Trading on the futures market comes with a lot of risk, but it also potentially delivers a lot of reward. Many use it to capitalize on small price movements in a more significant way, and may even borrow money to allow them to do so.

How do Futures Contracts Work?

Futures contracts are available to buy and sell over exchanges. Each futures contract will typically specify all the different contract parameters:

  • Measurement of the Unit.

  • Settlement of the Trade – either with physical delivery a cash settlement.

  • The quantity of goods

  • The currency unit that is utilized

  • The currency that is quoted

  • Quality considerations of the goods. Example: The quality of the corn or is the pork organic or feed raised

If you plan to begin trading futures, be careful because you don't want to have to take physical delivery. Most casual traders don't want to be obligated to sign for receipt of a trainload of swine when the contract expires and then figure out what to do with it.

How to trade futures

It's simple to get started trading futures with an open account. A broker, that supports the futures markets, will likely ask about your experience with investing, income and net worth.

This is all designed to determine the amount of risk the broker will allow you to take on, in terms of markets, margin and positions. Some provide a good deal of research and advice, while others simply give you a quote and a chart.

Some brokers, known as prop brokers, allow you to obtain a funded pro account. You would enter a simple evaluation period that would be guided by some simple rules:

  • Minimum days to show consistency in trading

  • Daily minimum loss levels

  • Overall account loss levels known as "Drawdowns"

  • and hitting a specified profit target

These evaluation accounts, similar to simulation accounts, are great before you commit real dollars into your first trade. This is an invaluable way to check your understanding of the futures markets and how the markets, leverage and commissions interact with your portfolio.

After you complete your evaluation and hit all targets determined by the prop broker then a LIVE funded Pro Account is established. Meaning, you can actually trade like a REAL PRO TRADER with broker funding that establish the margin minimums allowing you to trade a large variety of markets and contract sizes.

Looking for further details on what it takes to become a successful Day Trader? Check out our entire resource guide on best equipment, typical new trader questions, and even how to get funded as a trader!

Published by Day Trader Resources  | Contributor / Editor: Laura | Date: September 2, 2021 ©2021 Day Trader Resources is a ™ of Vigor Media LLC | All Rights Reserved