Introduction to Futures

Welcome to the world of futures trading!

Futures are a powerful part of the global financial system. They’re standardized contracts that let traders agree today to buy or sell an asset at a set price on a future date. The name says it all — these contracts are about managing or speculating on prices in the future.

At MetroTrade, we believe futures shouldn’t be intimidating. With the right education and tools, anyone can learn how they work and potentially use them to grow their portfolio or hedge risk.

In this article, we’ll provide you with an introduction to futures, including:

• Why futures exist, how they work, and what makes them unique
• How futures differ from options, and the whole goal of trading futures
• What benefits and risks come with trading futures

Why futures exist

The original purpose of futures was to create certainty in an uncertain world. A corn farmer, for example, might agree to sell their crop at a fixed price months before harvest. This protects them from falling prices. On the other side of that contract could be a buyer, like a food company, that wants to lock in supply costs. That’s hedging.

Today, while large commercial players still use futures to hedge, individual traders also use them to speculate on price moves in everything from oil and gold to bitcoin and stock indexes.

How futures trading works

If you’ve traded stocks or ETFs, some things about futures might feel familiar. Like stocks, futures are listed on regulated exchanges, have real-time prices, and can be bought and sold. But there are key differences too.

• Futures are leveraged: You can control a large contract with a smaller upfront deposit (called margin).

• Futures expire: Unlike stocks, each contract has a set expiration date.

• Futures can be sold short easily: You don’t need to borrow anything since short selling is baked into the system.

Most traders aim to buy low and sell high (or vice versa), but they’re not trying to take physical delivery. In fact, most traders close their positions before expiration.

A quick history of futures

Futures trading isn’t new. It dates back centuries:

• Ancient markets: Early versions of futures existed in Mesopotamia and later Japan, where rice futures helped merchants lock in prices.

• Chicago’s role: The modern market started in the 1840s with the founding of the Chicago Board of Trade (CBOT), which let farmers and buyers agree on prices before harvest.

• CME Group: Today, most U.S. futures trade through the CME Group, which formed in 2007 from the merger of CBOT, CME, NYMEX, and COMEX. It now includes contracts on oil, gold, interest rates, bitcoin, and more.

Over time, futures markets evolved from a tool for commodity producers to a global platform for traders and institutions to manage price risk. Whether it’s agriculture, energy, metals, or financial instruments, futures continue to provide efficient pricing and liquidity.

What makes futures unique

Futures offer a range of features that set them apart from traditional securities:

Unlike some other derivatives, futures don’t offer the option to buy or sell, they’re a commitment. That means more accountability, but also more transparency and efficiency.

What are you actually trading?

Each futures contract represents an agreement to buy or sell a specific amount of an asset. That asset could be physical (like wheat or oil) or financial (like an S&P 500 index). These contracts are standardized so traders know exactly what they’re dealing with.

For example, a crude oil futures contract might represent 1,000 barrels of oil. If the price is $80 per barrel, the full contract represents $80,000 in value. But thanks to margin, a trader may only need a fraction of that amount to enter a position.

Most traders don’t want to take delivery of oil or wheat or bonds. They’re interested in the price movement. They open a position, monitor the trade, and close it before the contract expires. Delivery is avoided, and the trader either profits or loses based on the price change.

A comparison to options and stocks

It’s easy to confuse futures with other assets, especially options.

• Stocks give you ownership in a company.

• Options give you the right, but not the obligation, to buy or sell an asset.

• Futures are binding contracts to buy or sell at a set price on a future date.

Unlike options, futures don’t have strike prices, implied volatility, or time decay. They also don’t offer voting rights, dividends, or equity. But they do offer powerful tools for speculation and hedging.

The goal of trading futures

At its core, trading futures is about predicting price movement. Traders enter positions with the aim of making a profit by closing the trade at a better price. You can:

• Buy low and sell high (a long position)

• Sell high and buy low (a short position)

This works whether you’re trading oil, gold, soybeans, or bitcoin. Futures give you the ability to play both sides of the market with flexibility and speed.

Unlike long-term stock investors, futures traders usually focus on short- to medium-term moves. They rely on technical analysis, chart patterns, news events, and macro trends to guide decisions.

Why trade futures?

Here are some of the top reasons traders choose futures:

• Direct exposure: Futures can provide more direct market or price exposure than ETFs or related stocks.

• Leverage: Small upfront costs let you control larger positions.

• Liquidity: Many contracts have tight spreads and high volume.

• Access to global markets: Futures span oil, metals, indexes, crypto, currencies, and more.

• Regulated environment: Futures markets are overseen by the CFTC and NFA.

• Tax treatment: Many futures are taxed under the 60/40 rule (60% long-term, 40% short-term).

• Efficiency: Standardized contracts make trading smoother and less ambiguous.

The risks of futures

Of course, there are downsides. Futures aren’t for everyone. Key risks include:

• Leverage risk: Just as you can make large gains, you can lose more than your initial investment.

• Margin calls: If the market moves against your position, you may need to deposit more funds.

• Volatility: Some futures markets are highly volatile and move quickly.

• No ownership: Unlike stocks, you don’t own anything tangible when you hold a futures contract.

• Complexity: Each market has unique specs, trading hours, and risks.

Managing these risks requires discipline, planning, and a clear understanding of your trades.

Getting started with futures

Want to trade futures? Here are your first steps:

1. Learn the basics: Read through this Learn series to build your foundation.

    

2. Choose a market: Focus on one area first, like energy, metals, or indexes.

    

3. Open a trading account: MetroTrade offers easy access to U.S.-regulated futures markets.

    

4. Understand contract specs: Know the tick size, margin, expiration, and trading hours.

    

5. Build a trading plan: Define your entry rules, exit strategies, and risk limits.

    

6. Start small: Use micro or mini contracts to reduce risk as you learn.

    

7. Track performance: Review trades regularly and adjust your approach.

    

8. Keep learning: Markets evolve. Stay curious and informed.

Final thoughts

Futures markets offer powerful tools for traders who want to manage risk, hedge positions, or speculate on price movement. With nearly 24-hour access, high liquidity, and broad exposure to global markets, futures attract everyone from individual traders to institutional pros.

But these advantages come with responsibility. Futures are leveraged, complex, and fast-moving. The more you understand before you trade, the better positioned you’ll be to succeed.

At MetroTrade, we’re here to support your learning journey. This article is just the beginning of your education. Up next: a closer look at how the futures market operates and what makes it different from other trading venues.

Next lesson: The Futures Market: An Overview →

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