In my last article, I briefly discussed how Futures work. In this article, let’s go into the technicals But let’s just focus on the details that are useful in helping us make money

Let’s use Emini S&P500 for our learning (this is what I was taught anyway :-p ).

From the books I read, trading commodity (eg, corn, wheat etc) futures requires good understanding of the demand and supply seasonal drivers for the commodity. Trading index futures (such as Emini S&P500) requires good knowledge of the stock market. The Emini S&P500 basically tracks the movement of the S&P500 index. Let’s go through the Emini S&P500 contract specifications to understand it better.

Moving down the “FUTURES” column, we have:

• Ticker Symbols -  for Emini S&P500, its futures contract is called “ES”
• Minimum Price Fluctuations - when the Emini S&P500 moves by $0.25, we would have made $12.50 with 1 futures contract (if we are in the right direction, of course). It is 50x (ie, the contract size).
• Trading Hours - basically is the US stock market opening and closing hours
• Contract Month - there are Emini S&P500 futures contracts expiring on these months. For commodities such as cattle, when the futures contract expires, it means the cattle would physically delivered to your home!. Emini S&P500 is cash-settled futures contract, so we just settle everything in cash. It is recommended not to trade expiring futures contract anyway because volume is lighter.

1 important thing to note. To buy/sell a Emini S&P500 futures contract, it takes US$300-US$700 of margin, depending on individual broker. What it means is, we have got to set aside that amount of money in our brokerage account to purchase 1 futures contract. BUT if we did not close the futures contract before the end of the trading day, we are to pay the up the full margin which is in the region of US$5000!!! So…let’s just stick to day trading futures

Choosing a futures broker is another subject altogether, but I have not tried enough brokers to talk about this in detail. Mainly, watch out for:

• the broker’s Net excess capital > Net capital requirement from the latest financial data of the brokers. Some guarantee that it will not collapse soon
• the margin required to purchase 1 futures contract. I have seen brokers going as low as US$300 or US$500.
• ease of use of trading platform. Daytrading futures is a totally different ball game altogether. We need trading and charting platforms that are agile.

Next, I shall discuss why I feel futures trading is not suitable for beginning aspiring traders.

Go on to read “Why Not Trade Futures? Part 3“.

Image by Larsz

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