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How to Trade Futures – The Complete Step-By-Step Guide

How to Trade Futures
20 minute read
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Learning how to trade futures in theory and doing it in practice are two very different but complementary skills. Contrary to popular belief, futures trading is not an out and out gamble on the future direction of an index. It can actually be incorporated with your traditional portfolio investments. Hedging your bets, limiting your downside while maximizing your upside, these are all phrases that come into play when looking at trading futures. Where do you start?

Table of Contents:

What are Futures?

While Michael J Fox, a.k.a. Marty McFly may have gone “Back to the Future” we are trying to look forward to the future. The goal in futures trading is to try and predict the direction of an index, asset or commodity. Even though we have seen the emergence of different types of futures contracts, futures markets in one form or another have been around for hundreds of years. Yes, hundreds of years!

Let us imagine jumping into a time machine to cast ourselves back a couple of hundred years ago. At the time, merchants had to risk shipping grain across the world without knowing the price when they land. How do you price goods if you don’t know the amount you will be paying for your main ingredient? The ability to sell your product before delivery is a huge help and. On the flipside, guaranteeing receipt of produce at a specific price allows businesses to plan ahead. Even back in the 1800s, the concept of margin was very much a talking point. If you paid upfront in full and the goods didn’t arrive, you have lost everything. So, paying a percentage of the overall value upfront (margin) with the balance on delivery gave everyone an incentive to make the system work.

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What is the Futures Market?

In its most basic form, a futures contract is an agreement to buy/sell a particular asset on a specific date at a particular price. The integrity of futures markets is based upon the participants and in the modern era clearinghouses. The best way to describe a clearinghouse is as an intermediary positioned between buyers and sellers of all types of financial instruments. Their various responsibilities include settling trading accounts, maintaining margin obligations, trade reporting, regulating delivery, and ultimately clearing trades.

The fact that all transactions are completed through a clearinghouse gives investors on each side of the trade confidence. It is this confidence that encourages the immense volume of index futures changing hands regularly. Some investors hedge their bets, some forward buy for their businesses, and others opt for outright speculative investments. Some will buy and sell individual contracts simultaneously to create spread trading strategies. This allows them to maximize their upside while limiting their downside.

How do Futures Work?

The best way to show how futures work is to give you an example. In this instance, we will use the E-mini S&P 500 Index (ES) futures contracts:

As the name suggests, the ES is an electronically traded mini version of the S&P 500 Index. When looking at futures contracts, each contract on the S&P 500 Index is valued at:

Index level x $250

Looking at the above chart, and our entry-level, at 3205.50 each contract has a value of at $801,375

Obviously, few investors could afford to regularly trade several contracts on the S&P 500 index. That’s why the CME introduced the E-mini S&P 500. It was their bid to attract and facilitate the trading of the ES for retail traders. The mini descriptor refers to the fact each contract has a value of 20% of the original index.

Index level x $50

Looking at the above graph, and our entry-level, at 3205.50 each contract has a value of $160,275

For most retail traders, the full value of the reduced E-mini S&P 500 Index is still a stretch. Therefore, as with those traditional futures markets many years ago, investors can trade on margin. This means that you put up a relatively small percentage of the contract value. Any potential adjustments will depend on market movements.

As an example, let us assume that we bought one contract for the E-mini S&P 500 Index when the index was 3205.50 and sold when the index reached 3267.50. The calculation for this transaction is as follows:-

Purchase: 3205.50 x $50 = $160,275

Margin call: Contract value x 10% = $16,027.50

Sale: 3267.50 x $50 = $163,375

Profit: $163,375 – $160,275 = $3,100

Index movement: 62/3205.50 = 1.93%

Investment return: $3,100/$16,027.50 = 19.3%

In this instance, the margin call was only 10% of the value of the index. Therefore is gives you a leverage of 10 times. Although, it will vary between contracts and across different trading environments. As a consequence, a 1.93% shift in the index actually created a 19.3% return on an initial investment of $16,027.50. Imagine if we had traded 5 contracts, 10 contracts or even 20 contracts. This is the power of leverage/gearing!

Risks When Trading Futures

As we have demonstrated above, if you get your timing right and your leverage right, you can make significant profits on relatively small price movements. On the other hand, if you get your timing wrong, and the market moves against you, the leverage will work against you.


When looking at futures contracts the degree of leverage is directly related to the margin required. For example:

Margin callLeverage
5%x 20
10%x 10
15%x 6.7
20%x 5

In simple terms, if your margin call is 10%, then you are only paying $10 for investment exposure of $100. This works perfectly if your timing is right and the markets move as you expect. Unfortunately, if your timing is off and the markets move against you, then a 1% shift in the S&P 500 Index example would lead to a 10% loss. It is essential to you use stop-loss limits when trading futures contracts. Otherwise, your net position can quickly turn against you.


The cost of acquiring your initial futures investment position is known as the initial margin. When you have a live position your broker will also calculate what is known as a maintenance margin. This is the minimum balance required to keep your position open. It includes the value of your futures contract investment and any additional funds held on deposit. In the above example, the initial margin call was just over $16,000. So, give or take a few dollars, the maintenance margin could be set at around $14,400. That is 10% less than the initial margin. If the value of your futures contract fell to $14,000, you would need to inject additional funds to take it back up to $16,000. Failure to deposit additional funds would likely lead to the position being closed and the loss booked against your account.

Let us assume that your long-term prediction about how the market will move is correct. However, you still need to ride out the short-term volatility. What happens if you cannot afford to inject the additional margin payments? This is where stop/loss limits come into play. Traders need to be very focused on the financial resources required to run futures positions in volatile markets.

Liquidity risk

If you deal with futures markets such as the E-mini S&P 500 Index, then liquidity will not be an issue. This is a market that trades futures contracts worth more than $100 billion a day. Doing so not only ensures liquidity but also creates tight pricing on the buy/sell quote.

Although the ES was created with retail investors in mind, many institutional investors also trade it actively. Their number only increased as the value of the original futures contracts ballooned. When dealing in index futures with reduced liquidity while holding a relatively high position, you can sometimes struggle to sell. Even if you can execute the sale, you may have to sell in smaller packages. In those cases, each transaction can cause a drop in the index value. If you want to ensure a liquid market, and ready buyers and sellers, then stick to liquid futures contracts.

Operational risk

Operational risk is best described as human error. In theory, this type of risk exists with any kind of investment or business. Now, if we dig a little deeper, we may find that this human error occurred as a consequence of inadequate staff training or placing personnel in positions they didn’t have the necessary experience for. The best way to mitigate operational risk is to stick with well-funded brokers with a good reputation. That way, you will reduce, although never eliminate, operational risk.

What to Know Before Trading Futures?

You will no doubt hear about very exciting returns on futures contracts. Stories about day traders turning just a few thousand dollars into hundreds of thousands of dollars using margin. Remember, when investors tell you about their trades they will only tell you about the good ones!

There are numerous issues to consider before you begin trading futures:

Expiry dates

Acquiring a futures contract is very different from buying stocks and shares. The latter two, you can hold forever and a day until they “come right.” All futures contracts have an expiry date. That means you have a limited investment timescale. The majority of futures contracts will have three monthly series. For example, futures contracts might expire in March, June, September, and December. This means that if you buy the March series in January, then at the end of March, the contract will expire, and settlement will be required.

Leverage works both ways

It is all well and good to have a leverage of 10 to 20 times the trade value. At least as long as the trade’s going your way. Not so much when the market decides to go against you. Then, the leverage will disproportionately increase your losses, even with minimal market movements. The best way to address relatively considerable swings in your net position is to consider strategies such as stop-loss limits.


We often only focus on outright futures contract purchases as pure speculation on the short to the medium-term direction or an index. However, let’s not forget you can also use them as a tool for hedging. This means that you can protect an existing investment portfolio from market fluctuations by selling a futures contract. Alternatively, if you are expecting significant investment funds over the next couple of months but believe the market will have moved ahead before you have time to invest, you could hedge your bets and acquire futures contracts. Therefore, if the market was to push forward before you received your investment funds, you will benefit from the increase in the value of the futures contracts.

Trading strategies/liquidity

As we touched on above, when looking to trade futures contracts, you need to have a trading strategy in mind. This will be related to your long-term goal and also your current financial position. There is no point in overstretching yourself for one trade and potentially risking your whole future. The requirement to focus on liquid futures contracts should go hand-in-hand with your trading strategy. The benefit is that you can buy and sell relatively quickly without disrupting the market.


Diversification is also essential when it comes to investment. You should never put all of your eggs into one basket. Turnover for futures contracts dwarfs that of traditional stock markets. It also offers an instant way of introducing diversification into your portfolio. Whether you are looking for specific indices, countries, or even sectors, there will be a futures contract somewhere! 

Futures trading is a full-time job

When it comes to futures trading, you need to have your eye on the ball 24/7 (or 24/5 if you give yourself the weekend off). That’s very unlike traditional stocks, where you can literally buy today, tuck away and review at the end of each trading day. Many futures markets offer after-hours trading. This means that the futures contracts are traded outside of the traditional index trading hours. By the time the market reopens, you will already have a very accurate idea of the overnight change based upon the futures contract prices. You either take a professional approach to your futures contracts and trading or, if you can’t spare the time, should you be doing it?

Leave your ego at the door

Futures contracts move so quickly, flipping your investment from positive to negative, negative to positive, in just a few seconds. Follow the money, protect your funds, and leave your ego at the door. Fear and greed are the two most dangerous emotions traders, especially those looking towards futures contracts, can ever face.

How to Trade Futures

If you want to know how to trade futures, we have created a step-by-step guide. It covers everything from finding a brokerage/prop trading firm to technical analysis indicators, building a trading plan to practicing with money, and the final step, the settlement date of your order.

Choose a Brokerage or a Prop Trading Firm

There are two main ways to trade futures. These are either via a brokerage or a prop trading firm. There are some significant differences between these two methods of trading futures, which we have covered below.

Investing via a brokerage

The concept behind using a broker is very simple; to open an account an investor approaches a broker, places money on deposit and then invests in futures. All transactions are carried out by the broker on the instruction of the client, who benefits from the resulting profit/loss.

Investing via a prop trading firm

Proprietary trading, or prop trading for short, involves a trader remunerated by a prop trading firm either via salary, commission or mixture of the two. Trades are carried out for internal personal/house accounts and the trader is employed for the benefit of the company.

Here at Earn2Trade, we provide an array of lessons on technical analysis, trading strategies, and an exciting opportunity in the form of The Gauntlet Mini. Sign up to a 60-day test of your trading abilities, prove your credentials in a virtual world, and secure funding from a proprietary trading firm to put your skills to the test. 

Learn about Economic Events

When trading contracts such as E-mini S&P 500 Index futures very often you are trading on economic events as opposed to the individual fundamentals of each component company. You will find out various economic events can have a huge impact on indices and by definition futures contracts. Some of the main economic events include:

  • GDP figures
  • Employment numbers
  • Interest rate movements
  • Changes in government
  • International trade deals/conflicts
  • Economic policy changes

Learn Technical Analysis Indicators

The power of futures trading will soon hit you when you start looking in-depth at what moves markets, technical analysis, and different trading strategies. You might think that futures contracts track the market. However, in reality, it can be futures contracts that lead markets higher and lower.

Buying into an index

Whenever there is a positive announcement on the economy, then it should create a better environment for businesses, employment, and overall GDP growth. As a consequence, you decide to invest in the S&P 500 index as a broad indicator of business and economic prospects going forward. Rather than buying a share in every component of the index, you simply buy an S&P 500 index futures contract, the more affordable and highly liquid E-mini S&P 500 Index futures contract. Effectively you purchase exposure to the underlying components of the S&P 500 index in one trade.

Futures contracts can be volatile and fast-moving. There are numerous technical analysis indicators that can help you focus on overbought and oversold markets. One such indicator is the Relative Strength Index (RSI). It compares the strength of an index, stock or commodity on the up days versus the down days. This comparison is translated into an index rating of between 0 and 100 with 50 reflective of a balanced value. An RSI rating of 70 could reflect a short-term overbought position, potentially as part of a new bullish phase. Meanwhile an RSI rating of 30 suggests an oversold position or an emerging bearish phase.

Different traders will look at different types of technical analysis indicators and take the appropriate action. However, as we have shown above, taking one indicator in isolation can still leave a lot open to individual interpretation.

Learn about Risk Management

To be a successful futures trader (or any type of trader), you need to appreciate and put into place a risk management strategy. In essence, this ensures that your heart never rules your head: It helps you look towards maximizing your profits; you are also able to minimize your losses. It is as essential to minimize your losses as it is to run your winners!

Let’s jump back our earlier time machine example and go back to 1800s. As a grain producer shipping your goods halfway around the world it makes sense to know the selling price before you actually deliver. You can then work out your costs and profit. This way the buyer is able to add a degree of stability to their business pricing structure. The alternative is to load your ship, sail halfway around the world only to find the price of grain has collapsed and you are losing money!

There are numerous risk management strategies you can put in place when trading futures. These include setting stop-loss limits, using futures contracts to protect an underlying investment portfolio, and putting in place maximum exposure limits. That moment you let your heart rule your head can be very dangerous for a trader/investor, especially for those exposed to the fast-moving world of futures contracts. 

Build a Trade Plan

Building your very own trade plan is vitally important. If you don’t have a destination point then how can you plan how to get there? Individual trade plans will be very different, very personal and are not necessarily set in stone – you always need to be flexible. There are numerous issues to taking into consideration such as:-

  • What is your motivation and what are your goals?
  • What level of risk are you willing to consider?
  • How much investment capital is available?
  • Do you have an investment timescale?
  • Which markets are you looking to trade?

If you visualise your trade plan as the roots/foundations of a tree, we then have individual trading strategy branch offshoots. Everything is supported by and built upon the concept of your trade plan. 

Choose a Contract to Trade

There is a temptation to become a “jack of all trades, master of none.” However, most of the time, it is better to focus on one market and one type of futures contract (at least in the early days). In time you will very often find that the skills/experience gained are actually transferable to other markets and other investments. For this case, let us look at the S&P 500 Index, where we have both the original futures contracts and the E-mini S&P 500 Index futures. The value of these futures contracts is very different:-

S&P 500 Index futures contract: 3272.97 x $250 = $818,242.50

E-mini S&P 500 Index futures contract: 3272.97 x $50 = $163,648.50

It also makes sense to take the margin requirements on different futures contracts into account. This will determine your investment outlay and overall strategy. So, choose an investment market that interests you and futures contracts that you can afford. Now for the fun part…..

Practice with Paper Money

So, you have considered the individual characteristics of brokerage/prop trading firms, researched economic events that will impact your investments, looked into technical analysis, risk management and eventually built yourself a trading plan. First, choose your market and the type of contracts which interest you/fit with your investment strategy. After that, it is time to practice with paper money!

The key to maximizing the benefits of practicing with “paper money” is to stay true to your trade plan, trading strategies, and attitude to risk. The moment that you consider this is “just paper money” is the moment you need to walk away from futures trading; rethink your outlook and suitability for investing/trading futures contracts. This is the perfect environment to learn from your mistakes. Learn to read markets and feel the connection with a profit as well as a loss.

If you decide to run The Gauntlet, it will monitor your performance as if these were market trades. This is not the environment to take one huge risk for the sake of one huge return. Contrary to popular belief, futures trading is not all about taking these major risks. There is an obvious balance between a conservative and a speculative trader. There are times to be cautious and other times to be more adventurous. Ultimately whatever decision you make, you need to be in control.

Place and Monitor your Order

When you consider that futures contracts such as the E-mini S&P 500 Index are also tradable “after hours,” it will soon become clear that futures contract trading is not a part-time pastime. The key to futures contracts such as the E-mini S&P 500 Index is the fact they are tradeable online. You can place your order and monitor prices on your laptop, desktop, and even via mobile phone apps. Set limit alerts, regular updates, whatever it takes to keep an eye on your open positions. Never turn your back on open market positions!

Watch for the Expiration and Settlement Date

The way in which futures trading works is relatively simple, each futures contract has a three-month expiry/settlement date upon launch. Therefore you may have March expiry, June expiry, September expiry and December expiry contracts. There is obviously the daily adjustment for margin calls but that is something different. 

So, while the vast majority of futures contracts are closed before expiration/settlement date, there may be occasions where a contract may be held until expiry. Futures contracts tend to have physical settlement (commodities, metal, etc.) or cash settlement dependent upon the proper setup. In the example of the E-mini S&P 500 Index futures contract, this would be a cash settlement. The amount is based on the value of the index on the contract settlement date.

It is very important to watch expiry/settlement dates for futures contracts. Mainly because if you hold them for the full term there will be additional costs to take into consideration. Also, your investment funds will be tied up until settlement has been concluded.

Who Uses Futures?

The E-mini S&P 500 turns over in excess of $100 billion in daily trades. That is solid evidence that futures contracts are a very important part of the investment landscape. There are numerous different types of parties active in the futures market. These include speculators, hedge funds and those dealing with physical commodities such as grain, oil, etc. The cumulative impact of these various parties ensures that the more popular futures markets are extremely liquid.

The introduction of the E-mini S&P 500 Index was a stroke of genius. It quickly rocketed to becoming the most popular futures contract on the market. It is essentially a slimmed-down version of the original S&P 500 Index. The E-Mini S&P 500 Index futures contract is a mere 20% of the full contract. That fact makes it much more affordable to the average retail investor. Other popular types of futures contract include Treasury notes, crude oil, gold and various currency exchange rates.

Then we have the commodities markets covering agriculture, energy and various precious metals. These take in coffee to corn, gasoline to natural gas, silver to copper and much more!


How much do you need to trade futures?

You can begin trading futures on just a few thousand dollars although it will depend upon the margin per individual futures contract. As margin calls can vary between 3% and 12% of the value of the underlying contract, there is potential for huge leverage. However, leverage works both ways, it will multiply your profits but also multiply your losses.

Where else can you learn to trade futures?

Check out our beginner’s crash course which takes in an array of educational videos, in-depth webinars and also involves continuous testing to monitor and strengthen your market knowledge. The course will give you a sound grounding in the basics of futures trading, expanding and growing your knowledge base all the way to professional topics including technical analysis, trading strategies and risk management. There is a lot to learn, what better time to start?

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