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The most-often used trading strategies in the futures markets are pretty simple. Youbuy if you think prices are going up or sell if you think prices are going down. And, in futures trading, selling first is just as easy as buying first—the positions are treated equally from a regulatory point of view.
The following two strategies are just a starting point. For more advanced futures-trading strategies, request the RJO Futures guide “Introduction to Spread Trading.” Or, learn sometrading strategies for options on futures with the RJO Futures guide “Introduction to Options on Futures Trading.”
Buy Futures
If you expect a futures market’s price to behigher in the future than it is today, you wouldbuy a futures contract, or “go long.” If you areright about both market direction and timingand the price indeed rises, you can then sellthe same futures contract to collect your profit(minus commissions and other fees).
However, if you are wrong about the market’sdirection or your timing is off and pricesultimately fall, then you will take a loss whenyou exit the position. And, because of theleverage in futures, that loss could be greaterthan your initial margin deposit.
Here’s an example, using July 2014 soybeanstrading at $13.00 per bushel in January 2014.In January, you think soybean prices are likelyto rally into the summer, so you put up $4,000in initial margin and buy a July 2014 soybeanfutures contract.
Four months later, soybean prices have rallied$1 per bushel and you decide to take yourprofits and close out your long position byselling a July 2014 soybean futures contract.That generates a profit of $5,000 (minuscommissions and fees*), or return on initialmargin of 125%.
| Price Per Bushel | Value of 5,000-bu. Contract | ||
| January | Buy 1 July Soybean Futures Contract | $13.00 | $65,000 |
| April | Sell 1 July Soybean Futures Contract | $14.00 | $70,000 |
| Gain | $1 | $5,000 | |
Example: July 2014 Soybeans Trading at $13.00 per Bushel
Of course, there’s always the possibility thatprices don’t behave as you expect. If soybeanprices dropped $1 per bushel from January toApril and you exited your initial long positionat a loss, you would have lost your initialmargin of $4,000 plus an additional $1,000 (pluscommissions and fees*).
| Price Per Bushel | Value of 5,000-bu. Contract | ||
| January | Buy 1 July Soybean Futures Contract | $13.00 | $65,000 |
| April | Sell 1 July Soybean Futures Contract | $12.00 | $60,000 |
| Loss | $1 | -$5,000 | |
Example: If Soybean Prices Dropped $1 per Bushel from January to April
Sell Futures
The concept of selling something you don’town is often a stumbling block for tradersnew to futures. But it’s easy to overcome.Just remember that a futures contract simplyrepresents the commitment to either sell orbuy an asset at a future date. So when you sellto initiate a position, all you’re committingto is selling at that price in the future. Inthe meantime, you don’t need to own theunderlying commodity or financial instrument.
Selling a futures contract as your initial positionis just as simple as buying a futures contract.You believe the price will go down, so you sell.If you ever traded stocks, you’ll be glad to knowthat no borrowing or loan fees are involved withshorting futures. You simply sell as easily as youbuy.
If you are correct in your market direction andtiming and prices decline, then you can profitfrom your short position by simply buying thesame contract. However, if the market movesagainst your position and rallies, then youwould suffer a loss when exiting—and the losscould be more than what you put up to makethe trade.
As an example, you believe in January thatsoybean prices will fall into the summer. So,you put up $4,000 in initial margin to take ashort July soybean futures position. By April,the market has fallen $1 per bushel, whichequates to a $5,000 decline in the value of thecontract. Because you shorted the market whenthe contract value was higher, you can buy itback at the lower price and make $5,000 (minuscommissions and fees*).
| Price Per Bushel | Value of 5,000-bu. Contract | ||
| January | Sell 1 July Soybean Futures Contract | $13.00 | $65,000 |
| April | Buy 1 July Soybean Futures Contract | $12.00 | $60,000 |
| Gain | $1 | $5,000 | |
However, if soybean prices rally$1 from January to April, yourshort position will show a $5,000loss (plus commissions andfees*) if you buy July futures toexit the position.
| Price per Bushel | Value of 5,000-bu. Contract | ||
| January | Sell 1 July Soybean Futures Contract | $13.00 | $65,000 |
| April | Buy1 July Soybean Futures Contract | $14.00 | $70,000 |
| Loss | $1 | -$5,000 | |
Get Comfortable with Futures
Here is a comprehensive list of some of the terms used in both futures and stocks trading, and what they mean in each.
| Futures | Stocks | |
| Represents | A commitment to buy or sell something in the future at an agreed-upon price | Ownership of a corporation |
| Trading | Traded on a regulated exchange | Traded on a regulated exchange or through a dealer association |
| Issued By | A futures exchange writes the terms of each contract and makes it available for trading | A corporation |
| Max Number Outstanding | No limit to the number of futures contracts that can be traded | Set by the company’s charter; issuance regulated by filings with the SEC |
| Margin | Requires deposit of about 5%-20% of the value of the futures contract, depending upon price level and volatility | If purchased in a margin account, requires minimum initial deposit of 50% of the value of the security; the remaining 50% is considered a loan from the broker who charges interest |
| Selling Short | As easy as buying | Requires borrowing stock, if available, and selling when price is rising |
| Timing | Fixed expiration date, usually less than one year | Stocks are perpetual instruments as long as the underlying company remains solvent |
| Fundamental Analysis | For commodities, research analysts provide views of supply/demand and other economic factors or physical conditions (e.g., weather) that could affect values For financial futures, the same stock research applies | Research analysts provide views of micro and macro economic factors that could affect values |
| Technical Analysis | Traders chart price movements to analyze patterns and support/resistance levels; this generates buy/sell signals | Traders chart price movements to analyze patterns and support/resistance levels; this generates buy/sell signals |
| Risk of Loss | Because the purchase or sale of a futures contract requires only a small percentage deposit of the total value of the contract, a client can lose more money than the initial deposit | In terms of potential loss, a stock bought on margin works the same as a futures contract A non-margined stock purchase requires a 100% deposit and therefore represents the total potential loss |
| Chart Info from CME Group | ||
More Futures Trading Resources
RJO FuturesCast Newsletter
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RJO Futures Learning Center
We believe that knowledge makes better traders. In the RJO Futures Learning Center you’llfind educational tools for every level of experience. We offer a library of guides and articlesthat help you learn about futures and futures on options from the basics to technicalanalytics. For an interactive experience, join us for our regularly scheduled live webinars.
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RJO Futures Brokers
The RJO Futures brokers provide the experience and background to help you with your tradingneeds, and assist you with reaching your investment goals. We invite you to review each broker’sprofile, experience, and techniques to help you select a partner that best fits your trading needsand style.
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