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FUTURES TRADING FUNDAMENTALS

Master the Derivatives Market - Leverage, Contracts & Risk Management

WHAT ARE FUTURES CONTRACTS?

Futures Basics

Definition:
  • • Agreement to buy/sell an asset at predetermined price
  • • On a specific future date (expiry)
  • • Standardized contracts traded on exchanges
  • • Originally created for commodities (wheat, oil, gold)
  • • Now includes indices, currencies, crypto
Simple Example:
  • Today: Crude oil = $75/barrel
  • You buy: 1 March futures contract @ $75
  • Contract size: 1,000 barrels
  • Total exposure: $75,000
Scenario 1 - Price rises:
  • • March arrives, oil = $82/barrel
  • • Profit: ($82 - $75) × 1,000 = $7,000
Scenario 2 - Price falls:
  • • March arrives, oil = $68/barrel
  • • Loss: ($68 - $75) × 1,000 = -$7,000
Key Difference from Stocks:
  • Stocks: You buy and OWN the asset
  • Futures: You enter a CONTRACT (obligation)
  • • No ownership until settlement
  • • Can close position before expiry (90% do)
  • • Cash-settled or physical delivery

Why Trade Futures?

Advantages:
1. Leverage:
  • • Control $100,000 position with $5,000 margin
  • • 20:1 leverage typical (varies by contract)
  • • Amplifies both gains AND losses
2. Short Selling (Easy):
  • • Profit from falling markets
  • • No borrowing stocks required
  • • Same margin requirements as going long
3. Hedging:
  • • Protect existing stock portfolio
  • • Lock in commodity prices (producers/consumers)
  • • Reduce currency risk for importers/exporters
4. Tax Benefits (US):
  • • 60/40 rule: 60% long-term, 40% short-term
  • • Regardless of holding period
  • • Consult tax professional
5. 23-Hour Trading:
  • • Trade almost 24/7 (except 1 hour daily maintenance)
  • • React to global news instantly
  • • No overnight gap risk (mostly)
Disadvantages:
  • • High risk - can lose more than initial investment
  • • Margin calls (forced liquidation)
  • • Expiration dates (time pressure)
  • • Complex - not suitable for beginners
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FUTURES CONTRACT SPECIFICATIONS

Key Contract Terms

1. Contract Size (Unit):
  • • E-mini S&P 500 (ES): $50 × index value
  • • Crude Oil (CL): 1,000 barrels
  • • Gold (GC): 100 troy ounces
  • • Euro FX (6E): €125,000
  • • CRITICAL: Know your exposure!
2. Tick Size & Value:
  • Tick = Minimum price movement
  • • ES: 0.25 points = $12.50 per tick
  • • CL: $0.01/barrel = $10 per tick
  • • GC: $0.10/oz = $10 per tick
3. Expiration Months:
  • • Quarterly: March, June, September, December
  • • Monthly: Every month (some contracts)
  • • Front month = nearest expiry (most liquid)
4. Settlement Type:
  • Cash-Settled (most common):
  • • Indices (ES, NQ, YM)
  • • Profit/loss credited to account
  • • No physical delivery
  • Physically-Delivered:
  • • Crude oil, gold, agricultural products
  • • Must close before First Notice Day!
  • • Or you'll receive 1,000 barrels of oil!
5. Trading Hours:
  • • Regular (RTH): 9:30am-4pm ET
  • • Electronic (Globex): 6pm-5pm ET (23 hrs)
  • • Sunday open: 6pm ET

Popular Futures Contracts

INDEX FUTURES:E-mini S&P 500 (ES):
  • • Symbol: /ES
  • • Value: $50 × S&P 500 index
  • • Tick: 0.25 pts = $12.50
  • • Margin: ~$12,000 per contract
  • • Most liquid futures contract globally
E-mini Nasdaq 100 (NQ):
  • • Symbol: /NQ
  • • Value: $20 × Nasdaq 100 index
  • • Tick: 0.25 pts = $5
  • • More volatile than ES
COMMODITY FUTURES:Crude Oil (CL):
  • • Symbol: /CL
  • • Size: 1,000 barrels
  • • Tick: $0.01 = $10
  • • Physical delivery (close before expiry!)
Gold (GC):
  • • Symbol: /GC
  • • Size: 100 troy ounces
  • • Tick: $0.10 = $10
  • • Safe haven asset
CURRENCY FUTURES:Euro FX (6E):
  • • Symbol: /6E
  • • Size: €125,000
  • • Alternative to forex spot market

Reading Futures Quotes

Contract Symbol Format:
  • ESH25 breaks down as:
  • • ES = E-mini S&P 500
  • • H = March expiration
  • • 25 = Year 2025
Month Codes:
  • F = January | G = February | H = March
  • J = April | K = May | M = June
  • N = July | Q = August | U = September
  • V = October | X = November | Z = December
Sample Quote:
  • ESH25: 5,850.50
  • Change: +12.75 (+0.22%)
  • Volume: 1,234,567 contracts
  • Open Interest: 2,345,678
Calculating Value:
  • 1 ES contract at 5,850.50:
  • = 5,850.50 × $50
  • = $292,525 notional value
Point vs Tick:
  • ES moves 1 full point (4 ticks):
  • • 4 ticks × $12.50 = $50 P/L
Open Interest:
  • • Total outstanding contracts
  • • Higher OI = more liquidity
  • • Stick to front month (highest OI)
  • Always check contract specs before trading!

MARGIN & LEVERAGE - The Double-Edged Sword

How Margin Works

Initial Margin:
  • • Money required to OPEN position
  • • Set by exchange (CME, NYMEX, etc.)
  • • Typically 3-12% of contract value
Example - ES Contract:
  • • ES at 5,850 = $292,500 exposure
  • • Initial margin: ~$12,000
  • • Leverage: ~24:1
  • • Control $292K with just $12K!
Maintenance Margin:
  • • Money required to KEEP position open
  • • Usually ~80% of initial margin
  • • ES maintenance: ~$9,600
  • • Fall below this = MARGIN CALL
Margin Call:
  • What happens:
  • 1. Position goes against you
  • 2. Account falls below maintenance
  • 3. Broker demands MORE money
  • 4. Don't deposit? Position LIQUIDATED
  • 5. You still owe if account goes negative!
Mark-to-Market:
  • • Positions settled DAILY
  • • Profits/losses added to account each day
  • • Win: Money credited immediately
  • • Lose: Money debited immediately
  • • Different from stocks (settle at close)

Leverage Examples

Example 1: Winning Trade
  • • Account: $25,000
  • • Buy 1 ES @ 5,850 (margin: $12,000)
  • • ES rises to 5,900 (+50 points)
  • • Profit: 50 × $50 = $2,500
  • • Return on margin: $2,500/$12,000 = 20.8%!
  • • New account balance: $27,500
Example 2: Losing Trade
  • • Account: $25,000
  • • Buy 1 ES @ 5,850 (margin: $12,000)
  • • ES falls to 5,800 (-50 points)
  • • Loss: 50 × $50 = -$2,500
  • • Return on margin: -20.8%
  • • New account balance: $22,500
Example 3: Margin Call Scenario
  • • Account: $15,000 (minimal buffer)
  • • Buy 1 ES @ 5,850 (margin: $12,000)
  • • ES falls to 5,740 (-110 points)
  • • Loss: 110 × $50 = -$5,500
  • • Account now: $15,000 - $5,500 = $9,500
  • • Below maintenance ($9,600)
  • • MARGIN CALL: Deposit $3,000+ or liquidate!
Leverage Comparison:
  • • Stocks: 2:1 leverage max (Reg T)
  • • Forex: 50:1 typical
  • • Futures: 10:1 to 30:1 typical
  • • Crypto futures: 100:1+ (extremely risky)
  • Higher leverage = Higher risk = Faster wipeout

CONTRACT EXPIRATION & ROLLING

Expiration Rules

Key Dates:
1. First Notice Day (FND):
  • • Physically-delivered contracts only
  • • Date you can be assigned delivery
  • • MUST close before this or risk delivery!
  • • Example: Crude oil, gold, corn
2. Last Trading Day:
  • • Final day to trade the contract
  • • Varies by contract
  • • ES: 3rd Friday of expiry month
3. Settlement Date:
  • • Final price determined
  • • Cash-settled: P/L credited
  • • Physical: Delivery occurs
Horror Story:
  • 2020: Oil traders forgot to roll
  • Crude oil went NEGATIVE (-$37/barrel!)
  • Reason: Nobody wanted physical delivery
  • Storage full due to COVID lockdowns

How to Roll Contracts

What Is Rolling?
  • • Closing expiring contract
  • • Opening next month's contract
  • • Maintains continuous position
Step-by-Step:
  • 1. You hold ESH25 (March 2025)
  • 2. March expiry approaching
  • 3. Sell ESH25 (close position)
  • 4. Buy ESM25 (June 2025)
  • 5. Done in single transaction (spread order)
When to Roll:
  • • 5-10 days before expiration
  • • When volume shifts to next month
  • • Check open interest (should be higher in next)
Roll Cost (Contango/Backwardation):
  • Contango: Next month MORE expensive
  • • Costs money to roll
  • Backwardation: Next month CHEAPER
  • • Earn money rolling

Rolling Best Practices

Pro Tips:
  • ✓ Set calendar reminders:
  • • 2 weeks before expiry
  • • 1 week before
  • • 3 days before (final warning)
  • ✓ Monitor volume migration:
  • • When next month > current = time to roll
  • • Institutional traders roll early
  • • Don't wait until last day (illiquid)
  • ✓ Use spread orders:
  • • Simultaneous buy/sell
  • • Better price execution
  • • Lower slippage
Common Mistakes:
  • × Forgetting to roll entirely
  • × Rolling too late (poor liquidity)
  • × Not understanding delivery risk
  • × Ignoring contango costs
  • Brokers usually send notifications, but YOU are responsible!

FUTURES ORDER TYPES

Basic Order Types

1. Market Order:
  • • Execute immediately at best price
  • • Guaranteed fill
  • • Price NOT guaranteed (slippage risk)
  • • Use only in liquid markets
2. Limit Order:
  • • Specify maximum buy / minimum sell price
  • • Price guaranteed (if filled)
  • • Fill NOT guaranteed
  • Example: "Buy ES at 5,850 limit"
  • → Only fills at 5,850 or better
3. Stop Order (Stop-Loss):
  • • Trigger: Price reaches stop level
  • • Becomes market order when triggered
  • • Protects profits / limits losses
  • • Can have slippage on fill
  • Example: Long at 5,850, stop at 5,830
4. Stop-Limit Order:
  • • Trigger: Stop price reached
  • • Becomes LIMIT order (not market)
  • • Controls worst fill price
  • • May not fill in fast markets
  • Example: Stop 5,830, Limit 5,825
5. Market-If-Touched (MIT):
  • • Like limit but becomes market when triggered
  • • Good for entering on pullbacks

Advanced Order Types

6. OCO (One-Cancels-Other):
  • • Two orders linked together
  • • One fills → other cancels automatically
  • • Perfect for bracket orders
  • Example: Stop-loss AND profit target
7. Bracket Order:
  • • Entry + Stop-loss + Profit target
  • • All placed simultaneously
  • • Automatic risk management
  • Example:
  • • Buy ES at 5,850
  • • Stop-loss: 5,830 (-20 pts)
  • • Profit target: 5,890 (+40 pts)
  • • 2:1 reward-to-risk ratio
8. Trailing Stop:
  • • Stop that follows price at fixed distance
  • • Locks in profits as price moves favorably
  • • Never moves against you
  • Example: Trail by 20 points
  • • Enter 5,850, trail activates at 5,870
  • • Stop now at 5,850 (breakeven)
  • • Price hits 5,900, stop now 5,880
9. Fill-or-Kill (FOK):
  • • Fill entire order immediately or cancel
  • • No partial fills allowed
  • • Rarely used by retail
  • Most traders use: Limit entry + Bracket order

Order Execution Tips

Best Practices:
  • ✓ Always use limit orders during RTH:
  • • Tight spreads = minimal slippage
  • • Control your entry price
  • ✓ Market orders overnight = risky:
  • • Wide spreads during Globex
  • • Can get filled 5-10 ticks worse
  • ✓ Place stops as STOP-LIMIT:
  • • Stop-market can gap through badly
  • • Stop-limit controls worst-case fill
  • • Set limit 5-10 ticks away from stop
  • ✓ Use bracket orders religiously:
  • • Forces you to define risk BEFORE entry
  • • Removes emotion from exits
  • • Professional approach
Common Mistakes:
  • × Market orders in illiquid times
  • × No stop-loss at all
  • × Moving stop-loss away from price
  • × Taking profit too early (fear)
  • × Holding losers too long (hope)
Pro Tip:
  • Set alerts 5 ticks before your levels
  • Gives you time to adjust if needed
  • Let automation handle exits (no emotion)

FUTURES RISK MANAGEMENT - SURVIVAL RULES

Critical Rules

Rule #1: Position Sizing
  • Never risk more than 1-2% per trade
  • Example Calculation:
  • • Account: $50,000
  • • Risk: 1% = $500 max loss
  • • Stop: 20 points on ES
  • • 20 pts × $50 = $1,000 per contract
  • • Can only trade 0.5 contracts ($500 risk)
  • • OR use micro E-mini (MES) instead
Rule #2: Always Use Stops
  • NO EXCEPTIONS. EVER.
  • • Set stop BEFORE entering trade
  • • Based on technical levels (not arbitrary)
  • • Don't widen stops "to give it room"
Rule #3: Max 3-5% Total Risk
  • • Total open positions risk ≤ 5% account
  • • Example: 3 contracts @ 1% each = 3% total
  • • Prevents catastrophic drawdown
Rule #4: Know Your Max Loss
  • Before every trade, calculate:
  • "If stopped out, I lose exactly $___"
  • If that number makes you uncomfortable, don't trade
  • Risk management > Strategy. Always.

Account Management

Minimum Account Sizes:Micro Futures (Beginner):
  • • MES, MNQ, etc. (1/10 size)
  • • Minimum: $2,000-$5,000
  • • Recommended: $10,000+
Standard Futures (Intermediate):
  • • ES, NQ, CL, etc.
  • • Minimum: $10,000-$15,000
  • • Recommended: $25,000-$50,000
  • • Under $25K = very risky
Daily Loss Limits:
  • Set a hard stop for the day:
  • • Down 2-3% = STOP TRADING
  • • Come back tomorrow fresh
  • • Prevents revenge trading
Drawdown Management:
  • Max drawdown thresholds:
  • • -10%: Review strategy, reduce size
  • • -20%: STOP. Take break. Reassess.
  • • -30%: Major problem. Seek help.
Recovery Math:
  • • Lose 20% → Need 25% to recover
  • • Lose 50% → Need 100% to recover

Risk/Reward Ratios

Minimum 1.5:1 R:R
  • Never take trades worse than 1.5:1
  • Target: 2:1 or better
Example Trade:
  • • Entry: 5,850
  • • Stop: 5,830 (risk 20 pts = $1,000)
  • • Target: 5,890 (reward 40 pts = $2,000)
  • • R:R = 2:1 ✓ GOOD
Win Rate Requirements:
  • At 2:1 R:R:
  • • Need only 40% win rate to profit
  • • 10 trades: 4 wins, 6 losses
  • • 4 × $2,000 = $8,000
  • • 6 × -$1,000 = -$6,000
  • • Net: +$2,000 profit
Position Scaling:
  • • Take 50% off at 1:1 (risk-free)
  • • Move stop to breakeven
  • • Let 50% run to 2:1+ target
  • • "You can't go broke taking profits"
Never Average Down:
  • • Losing trade? Exit and reassess
  • • Don't add to losers (disaster recipe)

FUTURES TRADING BEST PRACTICES

Start with Micros: MES, MNQ, M2K = 1/10 size of standard. Learn with $100 risk instead of $1,000. Graduate to full size after 6+ months profitable.
Paper Trade First: Minimum 3 months simulated trading before risking real money. Prove you can be profitable with fake money first. 90% skip this step and blow up.
Trade Liquid Contracts Only: ES, NQ, CL, GC = safe. Obscure commodities = wide spreads, low volume, slippage nightmares. Stick to the majors.
Trade RTH When Starting: 9:30am-4pm ET = tightest spreads, best fills. Overnight = for experienced traders only. Weekend trading = avoid entirely.
Keep a Trading Journal: Document EVERY trade. Entry/exit, reasoning, emotions, outcome. Review weekly. Winning traders journal. Losers wing it.
Understand Greeks (Options Only): If trading options on futures, learn Delta, Gamma, Theta, Vega. Otherwise stick to straight futures. Complexity kills accounts.
Respect News Events: FOMC, NFP, CPI = massive volatility. Either stay out or use very tight stops. Pros make money, amateurs get stopped out both ways.
Leverage Is A Loan: 20:1 leverage = borrowing $20 for every $1 you have. Amplifies gains AND losses equally. Most traders would be better with 5:1 or less.
Futures trading is not gambling - it's risk management with an edge. Master the risk, profits follow. - TradeHive
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FUTURES TRADING RISK DISCLAIMER

Futures trading involves substantial risk of loss and is not suitable for all investors. You can lose more than your initial investment due to leverage. Past performance is not indicative of future results. Margin calls can force liquidation of positions at unfavorable prices. The high degree of leverage can work against you as well as for you. Physical delivery of commodities is a real risk if positions are not closed before First Notice Day. Contract specifications, margin requirements, and trading hours are subject to change by exchanges. This material is for educational purposes only and does not constitute trading advice or recommendations. Examples provided are for illustration only and do not represent actual trading results. Market conditions can result in rapid losses. Stop loss orders do not guarantee execution at the stop price during volatile markets or gap moves. Options on futures are complex instruments requiring specialized knowledge. Only trade with risk capital - money you can afford to lose entirely. Futures trading is not suitable for retirement accounts, emergency funds, or borrowed money. Most traders lose money. Brokerage firms may have different margin requirements than stated. You are responsible for understanding all contract specifications before trading. TradeHive and its affiliates are not registered investment advisors and accept no liability for trading losses. Consult with licensed professionals before trading. This is not a recommendation to trade futures. You trade at your own risk.

© 2025 TradeHive. All rights reserved. For educational purposes only. Not financial or investment advice.