What are Futures Trading & How to Get Started with It?

What are futures trading? Speculating on or hedging against the future value of a variety of assets, such as stocks, bonds, and commodities, is possible through futures trading. Trading crypto futures can provide far more leverage than trading equities, allowing the prospect of very big gains but with very high levels of risk.

Futures can add some much-needed diversification to your assets if you know how futures markets operate and how they might fit into your crypto portfolio. That is why we organized this article. Everything you need to know about futures trading is available in one spot.

What are Futures Trading?

You'll run into various words like futures or options when learning about trading. What are futures trading? Futures contracts are a type of financial derivative. They obligate parties to buy or sell a specific asset at a specific price and time in the future.

The term “derivative” describes a particular class of finance contract. The value is based on an underlying asset, a group of underlying assets, or a benchmark. A derivative is an agreement made between two or more parties who can trade over the counter (OTC) or on an exchange.

Futures trade in a huge volume every day, which makes them especially liquid. The constant presence of buyers and sellers allows for the quick placement of future market orders. In addition, prices don't vary much, particularly for contracts that are almost up for renewal. As a result, it is also possible to quickly and without harming the price sell a significant stake.

Understanding Crypto Futures Trading

Traders can fix the underlying crypto asset or commodity's price using crypto futures trading. It is also known as future contracts. These contracts have set pricing that is known upfront as well as end dates. Futures are distinguished by their month of expiration. For instance, a gold futures contract for December expires in December.

There are many financial and commodity-based futures contracts. These contracts can range from indices, currencies, and debt to energy, metals, and agricultural items.

Financial Futures

Financial futures come in two varieties: index contracts and interest rate (debt) contracts. Interest rate contracts are designed to expose investors to a financial instrument's interest rate. Index contracts offer exposure to specific market index values.

Currency Futures

Exposure to a real currency's or virtual currency's exchange rate is provided by currency contracts.

Energy Futures

Futures contracts for energy offer exposure to the price of common energy items utilized by businesses and governments and individuals.

Metal Futures

Metal contracts give investors exposure to the price of specific metals that many businesses use as building and manufacturing materials (e.g., gold for computers or steel for housing).

Grain Futures

Grain futures offer exposure to the prices of processed soybeans as well as raw grain ingredients used for animal feed and commercial processing into other products (such as ethanol and corn syrup).

Livestock Futures

Livestock contracts give customers access to information on the costs of the live animals used in the production, processing, and delivery of meat goods.

Food & Fiber Futures

These contracts give exposure to the costs of dairy products and certain agricultural items that are grown as opposed to extracted or mined (also known as Softs).

Pros

Cons

Commission & Execution costs are low

Futures use leverage, so investors run

the risk of losing more than their initial

margin.

Futures markets are so liquid, investors can quickly enter & exit positions without incurring significant transaction fees.

Purchasing a futures contract could result in a hedged company missing out on beneficial price changes.

Greater leverage than a typical stock brokerage account may be available through futures trading.

Gains and losses can be exacerbated by a margin, making it a two-edged sword.

A simple method for hedging positions.

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Crypto Futures Trading - Uses of Futures

Hedging (risk management) and speculating are two of the main uses of crypto future trading in the investment world.

Future Hedging

A commodity's producer or buyer will hedge or guarantee the price at which the asset will be sold or bought. They hedge against market fluctuations by using futures contracts to make sure they have a buyer and a fair price.

A producer of oil must market their product. When the futures contract ends, they may deliver the oil to the buyer after using futures contracts to lock in a price they will sell at. Similarly, a manufacturing business might require oil to produce widgets. They may also employ futures contracts because they want to plan ahead and always have oil flowing in each month. By doing this, they can predict the price of oil in advance (the futures contract price).

Future Speculating

Trading futures can be profitable even if one has no direct interest in the underlying commodity because many commodity prices tend to move in predictable patterns. Futures are a tool used by traders and fund managers to wager on the value of the underlying asset.

For instance, a trader might purchase grain futures if they anticipate that grain prices would rise before the delivery date. The futures price could increase or decrease if the weather or growth circumstances changed unexpectedly.

Examples of Futures Trading

Let's discuss a crypto future trading example. Imagine a trader who decides to predict the price of crude oil by signing a futures contract in May and hoping that the price will rise by year's end. At the going rate of $50, the dealer buys the December crude oil futures contract.

Because crude oil is traded in 1,000-barrel increments, the investor now holds a position worth $50,000 worth of crude oil (1,001 x $50 = $50,000).

The first margin that the trader deposits with the broker will be the sole portion of that sum that must be paid upfront.

The oil price and the value of the futures contract changed from May to December. What if the price of oil becomes excessively erratic? The broker needs to maintain the margin. So he might need to request that extra cash be deposited into the margin account.

The contract's expiration date in December is quickly approaching (the third Friday of the month). The crude oil price is $65 per barrel. Selling the initial contract allows the trader to close the transaction. Cash will be used to cover the net difference. Less any charges owed to the broker ($65 - $50 = $15 x 1000 = $15,000), they make $15,000.

The investor would have suffered a $10,000 loss, nevertheless, if the price of oil had dropped to $40 rather ($50 - $40 = a loss of $10 x 1000 = a loss of $10,000).

Crypto Future Trading - How Does It Work?

Crypto futures trading operates by fixing the price of the underlying asset at the preset price at which it will be traded in the future. The market price will probably be different on or before the contract's expiration date in the future. In that case, the agreed-upon price would either be greater than or less than the new market price.

The buyer gains since they will shell out less money for the underlying item if the new market price is higher than the futures contract price. The seller gains since they will be compensated more than the current price per quantity of the asset if the new market price is higher than that stated in the agreement. Naturally, if one party wins, the other loses.

Crypto futures traders can be divided into three categories:

Speculators, who make up the majority of retail traders, take a position on the direction of an asset's price movement.

By fixing the price of anticipated production, hedgers try to reduce their risk (goods they manufacture such as oil, gold, and wheat)

Holders of positions keep their trades open for a lengthy time (could be anything between weeks and years)

Crypto Future Trading Standardization

A crypt futures trading contract is one in which the buyer and seller agree to a price today for an asset or security that will be delivered in the future. This is how the name “futures” came about. These contracts are typically standardized. That implies that they uphold a standard of excellence.

The underlying asset: the exact asset, e.g. basket of stocks, commodities

Settlement type: cash settlement or physical delivery

Contract unit: the quantity of the underlying asset covered in one contract, e.g. 1,000 barrels of crude oil

Currency: the currency of the futures contract’s price quotation

Quality: the grade of the underlying asset

Date of delivery: when the final cash settlement, or the delivery, will be made

Last trading date: the day before the expiry date of the contract

Tick size and value: the increments by which prices can fluctuate and its worth, e.g. the tick size for crude oil is 0.01 and the tick value is $10

Maximum price fluctuation permitted: price limit that’s allowed within a trading session.

What are Futures Trading - Process of Buying vs Selling

In the world of trading, the fundamental idea of buying and then selling is well-known. Due to this, you can buy futures contracts (or go long on them) in the hopes that the underlying asset they cover value increases, allowing you to sell it for more money. However, you may also go short by selling futures contracts if you believe the underlying asset will decline in value. After that, you would sell it (or cover it) for a profit at a lower price.

In conclusion, the goal of going long is to make money by selling the asset for a higher price. To sell a long position, you would close it. On the other hand, when you go short, you aim to make money by closing your short position at a lower price. You must buy (or cover) a short position to close it.

Crypto Futures - A Type of Derivatives?

Futures contracts are a kind of derivative item. They qualify as derivatives since the value of an underlying asset, such as oil in the case of crude oil futures, determines their value. Futures are leveraged financial instruments with the potential for disproportionate gains or losses, like many derivatives. They are typically regarded as advanced trading instruments. A futures contract, like an options deal, includes a buyer and a seller. The buyer is required to purchase and obtain the underlying asset upon the expiration of a futures contract. The underlying asset must be provided and delivered by the futures contract seller.

What are Futures Contracts?

A futures contract is a binding commitment. Traders will be committed to buying or selling a certain commodity asset, securities, or both if they sign the contract. It will happen at a defined price at a predetermined future date. Futures contracts are standardized for both quality and quantity.

Futures are a type of derivative financial contract that binds the parties to exchange an item at a fixed price and future date. Futures can be utilized for trading speculation or hedging. Hedgers and speculators are two types of market participants who use futures contracts.

Futures Trading vs Options Trading

Both futures and options are financial instruments that can be used as a hedge against or a way to profit from changes in the price of commodities or other investments.

The main distinction between the two is that with futures, the contract holder must purchase the underlying asset on a predetermined date in the future. While options provide the contract holder with choices to choose whether to carry out the agreement.

Future

Option

The owner of the contract must acquire ownership of the underlying asset.

The owner of the contract has the option, but not the duty, to buy the underlying asset.

The future purchase price will be based on the current market value.

In the contract, the purchase price is established.

The price may drop to 0.00.

Price can never drop to zero.

Less abrupt swings in pricing.

Value swiftly depreciates over time and varies more broadly in response to changes in the value of the underlying asset.

You must first decide how long you intend to retain the contract before you can purchase a gold futures contract. Although futures contracts are frequently exercised on the third Friday of each month, this is not always the case. As an illustration, the price of gold futures at the time of writing is approximately $1,800. No matter how much gold fluctuates in price between now and June 2022, you may purchase a gold contract that matures in that month and pay around $1,800 per ounce.

Options operate quite differently. For instance, a call option (the right to buy) on Apple (NASDAQ: AAPL) shares with a strike price of the current price expiring in a month costs around $4, but one with the same price expiring in a year costs $17. In a similar vein, a lower strike price raises the premium.

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Crypto Futures Trading - Step-by-Step Guide

Before beginning to trade futures, you should be aware of the risks and investment options. You should familiarize yourself with the following four crucial areas.

Step 01

Understand how futures work and the potential risks involved. Futures trading offers both advantages and disadvantages. To understand more, do your research. We sincerely hope that our information will be useful to you.

Step 02

Select a futures contract type and trading market. There are various futures contract types to pick from. A futures trader often concentrates on one or two markets because they might all be so different from one another, just like a chef could choose to specialize in baking or sweets. This enables the trader to comprehend the market more deeply and could guide their trading choices.

Step 03

Select an investment plan. There are numerous investing methods available. Going long or short in a position and calendar spreads, which can be bullish or bearish, are common futures trading tactics.

Going long: Buying the contract with the expectation that the underlying asset will increase

Going short: Selling the contract in the hope that the value of the underlying asset would decline is known as going short.

Calendar spreads: A trader takes both a long and a short position on the same asset, but with two different expirations. The spread produces the profit. It is the profit difference between the sold and the acquired contracts.

Step 04

Place and manage your futures trade. Understanding the risks and price targets before entering a trade is a solid practice. Contracts should be closely watched because trading futures carries higher risks. The various buy and sell order types may be used in this situation to help control the trade. The entry and exit prices can be controlled with a limit order. These limit orders, along with a stop loss, can help traders execute their ideas more effectively if they are aware of the levels at which to enter and leave a trade.

Why Trade Futures?

Now that you know what are futures, you should think about if it is the right choice for you. Futures are most frequently used by individual investors and traders. They make predictions about how the price of the underlying asset will change in the future. By speculating on the future direction of the market for a certain commodity, index, or financial product, they hope to make money. Additionally, some investors utilize futures as a hedge, usually to lessen the impact of potential future market changes in a particular commodity on their portfolio or company.

• The initial margin amount needed for futures contracts is normally set between 3 and 10% of the value of the underlying contract. You can create greater profits compared to your initial investment because of this leverage.
• In contrast to secondary market items like equities, they might give you direct market exposure to the underlying commodity assets.
• They give you access to particular assets that aren't frequently available in other marketplaces.
• The margin requirement for long and short positions in futures is the same, allowing for a bearish posture or position reversal without the need for additional capital.

Mark-to-Market in Futures Trading

Since we discussed what futures are, now we’ll talk about mark-to-market. Every day, futures, and options on futures are marked-to-market following the settlement price for the trading day. The IRS refers to these as Section 1256 products as a result.

Mark-to-market is a word used in finance, not just trading. Marking-to-market is the process of pricing assets concerning futures contracts after each trading day, when gains and losses are resolved between long and short positions.

With this method of determining fair value under market price, a settlement will be made to account for the daily change in the contract's worth.

Mark to Market Examples

A lower price at the end of the day would represent a loss for the long position and a gain for the short position because a buyer is essentially optimistic and selling is bearish. Based on this, the buyer and seller's accounts are updated every day (cumulative gain or loss) until the position expires or is closed.

Gains and losses are based on the value deviation from the futures price as well as the direction. After each day, the party with the position that corresponds to the value change's direction will collect the difference in value (from the futures price), while the other incurs a loss equal to the value change. Unrealized losses won't be taken into account until the position is closed, though.

Hold a Future Contract Until Expiration?

The futures contract will have to enter a settlement if you retain it until it expires. You, as the buyer, might need to accept delivery of the asset, depending on the nature of the underlying asset and the terms of the contract. In general, there are two ways to settle a futures contract that has expired:

Cash Settlement

After expiration, certain futures contracts are settled in cash. Equity index futures, single stock futures, volatility index futures, and other futures with non-physically deliverable underlying assets are typically paid in cash.

Physical Delivery

The underlying asset must be exchanged by the parties to physically delivered futures contracts when they expire. Frequently, the futures market where the transaction takes place will see to it that the seller delivers the goods to the buyer.

Crypto Future Trading - FAQ

• What are the best platforms for futures trading?

Bybit:

• Best user experience
• Maker Fees 0.01%, Taker Fees 0.06%
• Best overall security

Binance:

• Over 300 trading pairs
• Provides up to 25x leverage on all derivatives contracts 
• Maker order fees 0.02% per trade

Kraken

• Maker fees 0.02%, taker fees 0.05%
• Maximum leverage up to 50x
• Customizable interface

Phemex

• Over 200 crypto assets
• Fees 0.02%
• Highly-rated mobile app

Rollbit

• Offers over 20 cryptos
• Zero up-front trading fees 
• Advanced order types - Stop Loss, Take Profit, and Trailing Stop

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• What are futures in stocks?

Commonly, when you hear the phrase “futures in stock,” you're talking about futures contracts on stock indices like the E-mini S&P 500. Stock futures, in contrast to other futures contracts, are not delivered; instead, they are paid in cash or are carried over to the following expiration date.

Futures contracts for stock indexes expire four times a year: in March, June, September, and December. These expiration months are denoted, successively, by the letters H, M, U, and Z. Stock futures can be used by investors for hedging or to make predictions about the course of the underlying asset.

• What are Dow futures?

Dow Futures is an investment strategy. On a specific date, two parties adopt opposing stances on the direction of the Dow Jones Industrial Average. This day is called the “final settlement date.” An options exchange is your go-to place if you want Dow futures contracts. The exchange acts as a go-between for two people or institutions. The agreement is legally binding. Whoever is wrong, is obligated to compensate the other. You can establish the owing amount. Just multiply the DJIA's growth or drop by a known factor, often 10.

• What are futures options?

Options are derivatives that give traders the option to buy or sell an asset at a set price at a later time. However, unlike futures, holders of options contracts have the choice of not purchasing or disposing of the underlying asset at expiration.

To put it another way, cryptocurrency options give the holder the opportunity, but not the responsibility, to buy or sell a particular asset at a specific price and date. With options, traders can often lower their risk of loss and prevent potential liquidation that comes with futures contracts. The buyer gives the option writer an up-front payment known as the premium in exchange for this right.

• What are S&P futures?

S&P 500 futures are a U.S. stock measure. It is based on the share prices of 500 U.S. companies with large market capitalization. Investors and analysts track the S&P 500 futures as a performance gauge on the U.S. stock market after-hours. Because the S&P 500 Index functions only during normal trading hours on weekdays. The S&P 500 futures reflect predictions for the index's future value. This makes it a leading indicator for the U.S. stock market outside normal trading hours.

• What are crypto futures?

Cryptocurrency futures contracts represent the value of a specific cryptocurrency at a specific time. In these agreements, traders promise to buy or sell a specific good at a specified cost at a specified future date. A traditional futures contract obligates the position holder to buy or sell the underlying asset at the contract price when the contract expires.

Traders may profit or lose depending on their holdings, such as long or short positions, and the futures price. You can go long when you anticipate the asset's price to rise and short when you anticipate a decline.

Stay Updated with Your Futures Trading

Crypto futures trading carries significant risk. Anyone thinking about trading futures should reconsider because the vast majority of them fail to consistently turn a profit. If, after careful thought, you decide to move forward, do so with the understanding that you are starting an exciting journey that will put your trading discipline to the ultimate test. You should therefore keep up with futures trading. View the daily and recurring updates. To be ready for everything, The most successful traders never allow their emotions to affect their decisions. They pause until the feeling passes when they believe their heart is taking precedence over their thinking. It benefits them and can benefit you in the same way.