Trading futures—a primer

Welcome to the futures market—a fast-paced, dynamic, and nuanced world. Futures trading demands a deep awareness of market dynamics—arguably more than traditional stock investing or even options trading. Before you make your first trade, it’s essential to have a plan that covers both the big picture and the finer details—the macro and the micro.

The macro refers to your overall strategy and long-term goals, while the micro focuses on the process itself: selecting a contract, opening and managing positions, evaluating risk, and ultimately closing positions. You'll also need to master various analytical methods including technical indicators, macroeconomic trends, and intermarket correlations, all of which are crucial for successfully navigating futures markets.

If you’re familiar with the fundamental concepts of futures—what they are, how they work, and how they differ from stocks—then this primer is the next logical step. Here, we won’t focus on elementary definitions or beginner-level explanations. Instead, we’ll provide you with best practices to help prepare you to trade futures. In the final analysis, buying or selling a futures contract is a relatively straightforward process. But being successful, avoiding the pitfalls and perils—that’s the real challenge. At the end of the day, successful futures traders are excellent risk managers and have a knack for staying informed, proactive, and above all else, disciplined. Let’s begin.

Futures trading offers several advantages, including direct exposure to underlying assets like commodities, currencies, and stock indexes, providing more precise price movement than stocks or ETFs. There are no pattern-day trading (PDT) rules, and the use of leverage allows traders to control large positions with a small amount of money, increasing capital efficiency. Additionally, futures markets are highly liquid, allow for nearly 24/5 trading, and offer favorable tax treatment in some cases. However, futures trading also involves risk including the potential for significant losses due to leverage, futures margin calls, and the complexity of managing volatile markets.

At the heart of futures trading lies the futures contract—an agreement to buy or sell an underlying asset at a predetermined price on a specific date. Futures contracts come with distinct features, known as contract specs, that every trader must fully grasp before trading. These include:

The underlying asset: The commodity, index, currency, or financial instrument being traded.

Contract size: Each contract represents a standard quantity of the underlying asset. The contract size (and the number of contracts you buy or sell) determines your exposure to the market.

Tick size and value: Prices of futures contracts move in standardized increments called "ticks." The tick size refers to the smallest possible price movement, while tick value measures how much each tick is worth in dollar terms. Both tick size and tick value will vary from one futures contract to the next.

Expiration date: Futures contracts have a set expiration date, at which point they must be settled. Traders can either close or roll their position before expiration or allow it to settle, depending on the settlement type.

Margin requirements: Unlike stock trading, futures traders don’t need to pay the full value of the contract upfront. Instead, they post a margin requirement, which is a fraction of the total contract value, to open a position.

Futures symbols: Each futures contract has a unique symbol, know as a contract code. It represents the underlying asset, delivery month, and expiration year. For example, in the symbol /CLZ24: "CL" represents crude oil, "Z" is December, and "24" is the expiration year. The forward slash (/) signifies it's a futures contract.

Trading hours: Futures contracts typically trade nearly 24 hours a day, Sunday through Friday, unlike traditional stock market hours. Of note: each contract has unique trading hours that can vary.

Before placing your first trade, it's essential to thoroughly learn and understand each contract you plan to trade, as these details often vary from one contract to another.

In the futures market, there are two primary types of participants: speculators and hedgers. Speculators aim to profit from price changes by predicting market movements, buying low and selling high (or vice versa). They take on risk in exchange for potential gains.

Hedgers, on the other hand, use futures to manage risk and protect their business or financial interests. For example, an airline may buy energy futures to lock in fuel prices, while a farmer might sell wheat futures to secure current prices before harvest. Both groups rely on futures brokers to facilitate trades and provide access to futures exchanges like the CME Group.

To begin trading futures you must first have an approved trading account with a futures broker that supports futures. This typically requires a separate application and application review process. The application review ensures that your account is eligible for futures trading. You'll need to provide information about your trading experience, investor profile, and agree to disclosures & agreements to meet the account opening requirements. Having your futures account application approved is a required step before you can place your first futures trade.

As a new futures trader, finding a market that interests you starts with understanding the different types of futures contracts available and aligning them with your trading goals or personal interests. At Robinhood Derivatives, you have access to a number of markets including:

Stock index futures: S&P 500, Nasdaq 100, Dow Jones Industrial Average, and Russell 2000 futures might be familiar to those with experience trading stock markets. Trading index futures involves assessing the broader market in addition to the individual stocks within the respective index. You’ll want to understand macroeconomic trends, such as interest rates, employment data, and geopolitical events, as these factors can significantly influence index prices. It’s also wise to be aware of earnings reports, volatility, liquidity, and the overall market sentiment, as stock index futures tend to reflect large-scale shifts in market confidence.

Metals futures: Gold, silver, and copper futures offer opportunities to trade precious and industrial metals, which often move in response to economic conditions, inflation, and geopolitical events. A metals trader should have a keen understanding of both macroeconomic factors and supply-demand dynamics. Gold and silver are often seen as safe-haven assets, moving in response to inflation, interest rates, and geopolitical tensions, while copper is closely tied to industrial demand and global economic growth. Metals traders often monitor economic data, central bank policies, and shifts in industrial production.

Energy futures: Crude oil, natural gas, and gasoline futures are useful for traders interested in the global energy market. An energy trader should have a solid grasp of global supply and demand factors, including geopolitical tensions, OPEC decisions, and seasonal demand fluctuations. These markets are highly sensitive to changes in production levels, weather patterns, and even environmental regulations. Crude oil and its derivatives, like gasoline, are influenced by economic growth, transportation needs, and refinery capacities, while natural gas can be more seasonal, driven by heating and cooling demands. Energy traders should keep an eye on global news, inventory reports, and market sentiment, adopting a proactive mindset and strong risk management strategies to navigate the volatility and leverage inherent in these markets.

Currency futures: Currency futures, like the Euro, Japanese Yen, and the British Pound, and others provide exposure to foreign exchange markets. A currency futures trader closely follows global economic events, interest rate changes, and monetary policy decisions, as these factors heavily influence currency values. Understanding the relationships between different economies, such as trade balances and geopolitical developments, is crucial. Currency traders should also pay attention to central bank actions, like the Federal Reserve or European Central Bank, as their decisions can create significant market movements.

Cryptocurrency futures: Bitcoin and Ether futures allow you to speculate on the value of digital currencies without holding the actual coins. A cryptocurrency futures trader should be prepared for extreme volatility and rapid price swings, which are far more pronounced in crypto markets than in traditional assets. Key considerations include staying informed on regulatory developments, technology advancements, and market sentiment, as these factors can significantly impact prices. Cryptocurrency markets are heavily influenced by news, government regulations, and adoption trends.

The best futures traders follow a disciplined daily routine. Their day usually begins early with a review of overnight market activity, a check of the economic calendar for key data releases, and an analysis of any market-moving news. They’re consistently conducting thorough market research, analyzing macroeconomic trends, assessing geopolitical events, and staying on top of sector-specific news that could affect the markets they trade.

Futures traders also may rely heavily on technical analysis, continuously reviewing charts across multiple time frames and asset classes using a variety of indicators, studies, and methods. Like a quarterback scanning the field for an open receiver, they’re closely monitoring charts for trade setups with favorable risk-reward opportunities.

Additionally, reviewing the current state of your account before placing new trades is critical. Assess your capital allocation, review existing positions across all asset classes—stocks, options, and futures–and gauge the health of your overall portfolio. This review helps inform your next steps: should you increase your position size and exposure, reduce it, adjust your positions, or sit tight?

A consistent routine enables traders to collect and analyze market data, assess potential risks, and make informed decisions—whether to buy, sell, or hold a position. This systematic approach ensures traders make strategic, well-informed decisions. By preparing thoroughly, futures traders are better equipped to handle the high-stakes and fast-moving nature of the market once their trades are executed.

Futures traders monitor market data continuously, using a combination of real-time price feeds, charting platforms, and technical indicators to stay in tune with market movements. They often start by tracking key metrics such as price trends, volume, and volatility to gauge the current state of the market. Traders may rely heavily on charting tools to visualize these movements across different time frames—from minute-by-minute fluctuations to longer-term trends. Scalpers or day traders will focus on short-term price fluctuations, while swing traders might take a more strategic, longer-term view. By comparing current prices against historical patterns and support/resistance levels, traders can quickly assess whether a potential trade setup is emerging.

Once they’ve identified a potential opportunity, futures traders dive deeper into the data. They may use technical indicators like moving averages, Moving Average Convergence/Divergence (MACD), Relative Strength Index (RSI), pivot points, and others to confirm market momentum and gauge the strength of the trend. They also pay close attention to volume and open interest, which can provide insight into the liquidity and strength behind a price movement. By cross-referencing these technical signals with macroeconomic data or sector-specific news, traders can develop a well-informed strategy. Whether they’re looking for breakouts, reversals, or trend continuations, futures traders combine market data with technical analysis to spot trades with favorable risk-reward ratios.

Popular futures trading strategies based on technical analysis include trend following with moving averages to capture market direction, and breakout trading using support and resistance levels to identify price moves outside of established ranges. Reversal trading utilizes tools like Fibonacci retracements and the RSI to spot potential market turnarounds, while scalping and momentum trading focus on short-term price movements and indicators like MACD and volume. Mean reversion strategies, such as using Bollinger Bands, aim to trade when prices deviate significantly from the mean, expecting them to revert. Pivot point trading helps identify key levels for potential reversals or entry points based on previous price data.

Futures traders must execute orders with precision to avoid costly mistakes, and understanding the various order types is key to doing so effectively. The three most common orders—market, limit, and stop—each offer different levels of control over how trades are executed. A market order provides fast execution at the best available price, but it risks slippage in fast-moving or less liquid markets. Limit orders, on the other hand, give traders control over entry and exit points by allowing them to specify the price at which they are willing to buy or sell. However, if the market never reaches the limit price, the order may go unfilled. Stop orders are useful for managing risk, as they trigger trades when the market reaches a certain price. Once the stop order is triggered, it tries to execute at the best available price up to a specific level called a protection point. Like market orders, stop orders are also vulnerable to slippage in volatile markets.

Executing futures orders properly is crucial because mistakes—such as placing an order on the wrong side of the market or using the wrong order type—can lead to unintended outcomes. For instance, placing a buy stop order below the market price will cause the order to be rejected by the exchange. Similarly, in volatile markets, even stop orders intended for protection may not execute if the market moves beyond protection points. This is why futures traders must not only understand the mechanics of each order type but also have a clear plan, including stop-loss orders and profit targets, to ensure their strategy is executed correctly. Proper execution helps traders avoid unnecessary risks and improve their chances of success.

Opening a futures position requires careful planning and execution. Before diving into a trade, it’s essential to understand the fundamentals and how to structure your trade properly. Opening a futures position involves deciding whether to go long or short, which translates to either buy to open or sell to open.

• When you buy to open, you are taking a long position, expecting the price of the underlying asset to rise with the intention to sell it later at a higher price.
• When you sell to open, you are taking a short position, anticipating that the price will fall, hopefully allowing you to buy it back later at a lower price.

Both types of positions require careful consideration of the market and the use of the correct order type to enter the trade (see the previous section).

When opening a futures position, strategy considerations, risk-reward analysis, and timing are critical factors. The chosen strategy dictates the conditions under which a position will be opened. Traders carefully assess the potential risk-reward ratio before executing a trade. This involves setting clear price targets and stop-loss levels to define how much they are willing to gain or lose on the trade.

Timing is also a key element, as futures markets are highly dynamic, with price movements often influenced by economic reports, geopolitical events, or market sentiment. Entering a position too early or too late can significantly impact the profitability of the trade. Therefore, traders may use technical analysis and market signals to time their entries effectively, looking for moments when the market presents the most favorable risk-reward scenario based on their strategy.

A typical futures order ticket includes several key components. Quantity refers to the number of contracts you wish to trade, with each contract representing a specific amount of the underlying asset. Price is the level at which you want to buy or sell, particularly relevant when placing limit or stop orders. Time in force specifies how long the order remains active—whether it's just for the current trading day (DAY) or if it’s good until it’s canceled (GTC). The order type (market, limit, stop) dictates how the order will be executed. Lastly, the margin requirement refers to the amount of capital you need to have in your account to open the position, typically a small percentage of the contract’s total value. Understanding and correctly filling out these components is critical for executing your trades smoothly and aligning with your overall trading strategy.

Futures margin is the amount of money a trader needs to open and maintain a futures position, serving as a good-faith deposit to ensure both parties can meet their contractual obligations. The margin required is typically a small percentage (roughly 3% to 12%) of the contract’s total value, or notional value, and varies depending on the asset's volatility. Futures margin differs from stock margin, as it’s not borrowed money, but rather a ‘good-faith deposit’.

Once a position is opened, if your account value falls below the required margin due to losses, a futures margin call may be issued. Traders can meet futures margin calls by adding funds or reducing their positions to avoid forced liquidation. Understanding how futures margin works and managing risk properly is crucial to trading success if you intend to open futures positions.

You’ll pay commissions and fees when trading futures. Costs include commissions to your broker, exchange fees, and regulatory fees. Commissions are paid to your broker for executing trades and can vary depending on the broker. Exchange fees are charges imposed by the futures exchange, for example, the CME, and these fees vary depending on the futures product. Lastly, NFA fees are small regulatory fees set by the National Futures Association. Together, these costs comprise the total costs of trading futures contracts Traders must account for trading costs when calculating net profits and losses. Of note: commissions and fees are charged per contract not per trade, and are charged upon receiving a filled order (partial or full).

Managing a futures position is an active process that requires constant monitoring and adjustments from the moment you open it until it's closed. You’ll need to track real-time price movements and market conditions using your trading platform to keep an eye on price charts, volume, and key market data.

Technical indicators like moving averages, support and resistance levels, and momentum indicators can help signal potential changes in market trends. For example, if you're long crude oil futures and the price approaches a key resistance level, you might adjust your stop-loss to lock in profits or prepare to exit the position. It's also essential to follow news feeds and economic reports, as events like central bank decisions or geopolitical crises can have a significant impact on your trades.

A key element of managing futures positions is effective risk management through stop-loss and profit-target orders. Once you've opened a position, placing a stop-loss order below the current price (or above for short positions) helps protect against losses if the market moves against you. Profit-target orders allow you to secure gains once the price reaches a set level. For example, if you buy gold futures at $1,800 and set a stop-loss at $1,780, you potentially limit your losses while allowing for market fluctuations. If the price rises to $1,850, you can move your stop-loss higher to potentially protect your gains while still benefiting from further upward movement.

It's also crucial to manage your margin requirements and monitor account balance changes. Keep track of your Day P/L (daily profit or loss) and Open P/L (total profit or loss since the position was opened) to ensure you have enough equity. If the market moves against you and your account falls below the required margin, you may be issued a margin call. To avoid forced liquidation, you might want to maintain extra funds in your account and avoid over-leveraging. Having a buffer can help you stay in the trade even when short-term volatility occurs.

Exiting a futures position requires just as much attention and strategy as entering one. One of the best practices is knowing when to get out—whether the trade is winning or losing. If the market moves against you, you may want to cut your losses quickly. This is where stop orders can come into play. For example, if you’re long crude oil futures (/CL) at $75 per barrel and the market drops, a pre-set stop-loss at $74 could limit your losses to $1 per barrel, or $1,000 (plus commissions and fees) on one standard /CL contract, which is for 1,000 barrels. Sticking to your stop-loss plan is key to avoiding larger, more damaging losses. Futures markets can be highly volatile, and holding onto a losing trade in the hope of a rebound can lead to a rapid escalation of losses.

On the other hand, if your trade is profitable, knowing how to manage your exit can help maximize gains. One effective technique is to move your stop-loss as the market moves in your favor. For instance, if you’re long gold futures at $1,800 and the price rises to $1,850, you could raise your stop-loss to $1,840 to lock in a portion of your profits while still allowing the trade to run higher. This strategy helps you capture gains if the market reverses, but also gives you the flexibility to let a winning position continue moving in your favor.

Timing is crucial when exiting futures positions. In a losing trade, you may want to get out fast and reassess rather than hope for a turnaround. For winning trades, you may not want to exit too soon out of fear, but don’t let greed make you hold on too long either. Balancing the ability to cut losses quickly while letting profits run is a skill that comes with experience and discipline. Having a clear exit strategy in place, whether based on technical signals, price targets, or risk management rules, ensures you’re always prepared to close a trade at the right time, whether it's to secure gains or to minimize losses.

Lastly, it’s critical to be mindful of key dates, such as the last day to trade (LDTT) and expiration date. Futures contracts have a finite lifespan, and as they near expiration, traders need to decide whether to exit the position, roll their position, or hold it to final settlement (if cash-settled). The expiration date is when the contract officially terminates, but many traders choose to close their positions prior to the LDTT, especially with commodity products or other physically settled products. The LDTT is the final opportunity to close out the position before expiration, and is usually determined by your broker. Missing these deadlines can lead to unintended consequences, such as the broker closing the position on your behalf or the trader being obligated to take physical delivery of the asset. Bear in mind, however, that Robinhood Derivatives doesn’t allow the physical delivery of commodities such as crude oil or gold; all positions must be closed prior to expiration or will be closed for you.

Risk management is the foundation of successful futures trading, helping you minimize losses and protect your capital. It starts with building a systematic approach that includes setting stop-loss orders, managing position sizes, and controlling leverage to navigate market volatility. The best traders understand that asking "what's my risk?" is just as important, if not more, than considering potential profits. By focusing on minimizing losses, you set yourself up for long-term success. Managing margin requirements and maintaining a balanced portfolio are also critical aspects of this process.

The most effective risk management strategies combine mechanical tools, like stop-losses and position sizing, with mental discipline. You need the emotional strength to stick to your plan, even during periods of significant volatility. It’s easy to fall into the trap of emotional decision-making when fear, greed, or frustration take over. For example, letting a winning trade run by adjusting stop-losses to lock in profits, while cutting losing trades early, can prevent small losses from turning into major setbacks. Maintaining a favorable risk-reward ratio and keeping your exposure balanced helps manage risk more effectively.

In addition to technical risk management, futures traders need to stay informed about market conditions. Futures markets are particularly sensitive to macroeconomic events, news reports, and shifts in sentiment, so being aware of these factors may help you adjust your exposure accordingly. Diversifying your portfolio across different asset classes or market sectors can further help mitigate risk. Combining mechanical tools with emotional discipline and a broad understanding of market conditions allows you to manage risk and maximize your trading potential over the long term.

Futures traders evolve and improve over time through continuous education, experience, and self-reflection. At the start of their journey, many traders focus on learning the basics of technical analysis, market behavior, and strategy development. As they gain experience, they often supplement this foundational knowledge by staying updated on new trading techniques, macroeconomic trends, and technological advancements in trading platforms. A key part of a trader’s evolution is building a deeper understanding of both the markets they trade and their own trading psychology. The most successful traders often invest in their growth by educating themselves through reading books, attending webinars, analyzing past trades, and adapting their strategies based on market conditions.

A crucial element in improving as a futures trader is learning from both good and bad trades. It’s important to treat every trade as a learning experience, whether it resulted in a profit or loss. After a profitable trade, rather than becoming overconfident, analyze what factors led to your success and how you can replicate them consistently. For losing trades, reflect on what went wrong—did you misread the market, ignore risk management rules, or let emotions like fear or greed influence your decisions? Keeping a trading log where you record your trades, strategies, and emotions can be an invaluable tool for identifying patterns and areas for improvement. Over time, this practice helps you fine-tune your approach and avoid repeating the same mistakes.

To set yourself up for long-term success, it's essential to develop and maintain a disciplined mindset. This means sticking to your trading plan regardless of short-term results, managing risk on every trade, and avoiding impulsive decisions driven by emotions. When a trade goes well, don’t chase additional profits recklessly; when it goes badly, don’t seek revenge by doubling down. Stay focused on the big picture and understand that success in futures trading is a long game. Implementing best practices like reviewing trades regularly, setting realistic goals, and continuously educating yourself ensures you evolve as a trader and are better equipped to navigate the markets over the long term.

Futures traders may become successful by utilizing a blend of strategic planning, technical knowledge, and disciplined risk management. More than just understanding the mechanics of futures contracts, traders must navigate the fast-paced and volatile nature of the markets, all while managing leverage and margin requirements. Key to this is a well-defined routine, ongoing market analysis, and a clear approach to both entering and exiting positions. Ultimately, futures trading is a long-term game of continuous learning, where mastering both market dynamics and emotional discipline can set you apart from the crowd.