Beginners Guide To Trading Futures

In order for you to be evaluated for the TopstepTrader Combine and earn a funded account you have to trade Futures.

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This guide is to make you become familiar with what Futures are and how to trade them.

Message to my newsletter subscribers: If you are reading this post because of my direction from the newsletter then congratulations on taking a step closer to achieve the goals you are working the reach!

Trading For Beginners

What are Futures?

Most of us just starting out are pretty familiar with Stock/Equity trading. For the most part, technical analysis is pretty much the same.

Where the confusion and the difference needs to be pointed out is the difference between a Share in Stocks and a Contract in Futures.

In stocks we buy and sell shares. If we buy one share of FB (facebook) at $50.00/share and sell it at $50.01/share what did you profit? One cent.

Futures work a bit differently, but in a big way.

For one, you don’t trade shares, you trade contracts. It is important to understand the contract specifications of each product you may decide to trade.

Let me explain…

Tick Size vs. Tick Value

Futures don’t move by the penny. Futures move by the tick. A tick’s size, or the minimum move it can make varies from market to market.

The E-mini S&P 500 minimum tick size is .25 cents. So the E-mini will move from $24000.00/contract to $24000.25/contract.

Similarly if trading the 30 Year Bond. The minimum tick size is a fraction, 1/32nd. So the bonds would move from $150 0/32nds per contract to $150 1/32nds per contract.

That is about as complicated as that gets. But here is what really sets Futures apart.

Tick Value is the amount of money you can make or lose if the contract price moves.

If the E-mini S&P 500 moves one tick (.25 cents) and you sell, you will make $12.50.

Similarly, if the 30 Year Bond moves one tick (1/32nd) and you sell, you will make $31.25.

The Value of one tick depends on the market you want to trade. These are leveraged, derivative markets. A lot of math and paperwork goes into the figuring of these values, nothing I am familiar with, and for our purposes, nothing for us to cover here.

Below is a list of the more popular markets to trade and their tick values.

In Some Real Terms

If you traded the 30 Year Bond market today, you can expect the market to move somewhere around 32 ticks (one point) a day. On a good day two points. So everyday that you trade the 30 Year Bond you have to potential to win or lose $1000 per contract.

$1000 = ($31.25/tick X 32 ticks).

Can you begin to see the reason futures are awesome?!

There is a lot of money to be made using the leverage that each tick value has to offer.

For this reason Futures are fantastic for Day Traders.

Contract Expiration and Rollover

Another concept you need to understand and be aware of is Contract Expiration.

The 30 Year Bond is one market. But the 30 Year Bond allows you to trade different contracts based on their time of year.

Every quarter, for Bonds, their current contract expires. This means that that contract will be closed by the expiration date. So if your are trading the December 30 Year Bond contract, by the time December comes around you will have to stop trading December and move on to the March contract.

The easiest way to not get caught in this “rollover” period is to only trade the contract the has the most volume. You can easily determine this on your platform or at CMEGroup.com.

Depth of Market

The DOM, Depth of Market, or price ladder is like “Level 2” data in stocks, but for Futures.

Futures only trade on one marketplace. So you don’t have to track what the NSDQ is bidding compared to ARCA’s offer. So on and so on.

There is one market. And a much simpler data feed to read of just Bids and Offers of the product you are trading.

This is the DOM for the 30 Year Bond.

Please note, I took this photo during a very low volume period.

The specific contract, March 2016 is shown at the top.

In the middle of the ladder you can see the contract price. The current price is $15307. This really translates to $153 7/32nd’s like we talked about earlier.

The Blue on the left will show you the amount of Bids at each price point.

The Red on the right shows you the amount of Offers at each price point.

Typically the low of the day, the open and the high of day is highlighted on the ladder.

The name of the game is Bulls against Bears.

Will the big Buyers win or will the big Sellers.

Of course the trick is to get on the right side at the right time.

It is worth further reading to learn to read the DOM and order flow.

Futures Never Sleep

While stock trader’s markets fizzle down and close at 4pm, futures traders are still making money.

The majority of futures products trade all day and through the night even when the stock market is closed. Futures markets will typically only choose for about one hour a day between 4pm and 6pm eastern time.

Although, the best, highest volume times to trade the majority of domestic futures markets is between 8am and 4pm eastern time.

But the possibility of an overnight trade in futures is always possible. Just know what you are doing first. These markets act very differently overnight.

Reading Charts and Technical Analysis

Compared to Stocks and using Basic Technical Analysis Techniques, reading Futures charts are basically the same. Read more about Technical Analysis here.

End Note

This is the very basic premise and explanation on the way Futures trading works. As always, I suggest continuing your own research until you feel ready to take the Combine and get evaluated for a funded account.

Good Luck Team.