Trading futures contracts is one of the ways to add additional leverage to your portfolio and hedge positions with minimal capital. It enables one to speculate on financial markets and hedge against market-induced risks to open positions.
This guide explores futures contracts and how you can open your first futures trade.
1. What Are Futures?
Futures are legally binding contracts that enable traders to purchase or sell an asset at a predetermined future date and price.
They are derivatives traded on highly regulated exchanges standardized to ensure the same quantity and quality per contract.
Each futures contract is assigned a code for identification purposes. This code includes information related to the underlying asset with contract month and year.
2. How Are Futures Priced?
How the price of the futures contract will move depends on various factors such as:
The spot value of their underlying market
Any commission or spread paid to a broker to execute a trade
The forces of demand and supply as lower supply and higher demand cause futures prices to rise and vice versa.
3. How Do Futures Contracts Work?
Trading Futures works on speculating on asset performance. It involves tracking the spot price of an underlying market and considering numerous factors, such as volatility, interest rates, the time until delivery, and the costs of maintaining a position.
When trading futures, you can go either long (buy) or short (sell). You would take a long position if you believe the underlying market price will increase, and if you think it will fall, you go short. Your profit or loss depends on your prediction and the size of the market movement.
After paying close attention to the market and speculating, traders sign a futures contract and lock in their shares at a specific price. By locking assets at a current price and selling them when their value increases over time, they make a profit from the sale.
When a futures contract expires, its value will be the same as the spot price. You can opt to roll your contract and continue holding the position at expiry. Else, you can settle your futures contract using either physical or cash settlement.
There is no denying that the necessity of speculation makes the futures market extremely liquid and volatile. Rapid price movements can lead to risks, and that is where it becomes necessary to have a risk management strategy in place.
Thus, the Futures market is a liquid market involving buyers, sellers, hedgers, speculators, and others, all working with the same goal to realize a profit from market fluctuations, such as rising and falling.
Identifying key trends and having good insight into the future performance of companies is key to successful and profitable future trading.
4. Components of Futures Trading
Before learning the steps to trade futures contracts, it is necessary to learn the basics components:
Underlying Asset Of Futures Contract
You can trade in futures in a variety of assets ranging from traditional to exotic.
Traditional futures products - Agricultural commodities, valuable metals, foreign currencies, interest rates, and energy products
Exotic futures contracts - region-specific snowfall, hurricanes, temperature indexes, cryptocurrencies, and box office receipts for a motion picture release
The current futures contract price is the amount of money required for an individual to purchase or sell the underlying asset before the expiration day. It is based on its projected value at expiration.
Each contract has an expiration date that depends on the specifications of the contract. It is the last day where you can trade the contract.
Brokers generally provide “leverage” to enable traders to trade multiple quantities at a smaller price. It is extra capital that traders borrow to take larger positions. Traders use it to amplify their profits with the lowest capital investment. Leverages, when used wisely, can significantly amplify profits and vice versa.
The brokerage firm determines the Margin requirements to govern the maximum number of tradable lots. There are two types of margins:
Margin requirements vary significantly based on position size, client account size, brokerage firm, and futures products traded in the market.
You can settle Futures contracts in the form of both physical and cash settlements.
Not every Futures trader wants to exchange the underlying asset at expiry. Some may want to settle in cash.
Mostly hedgers and speculators do this when they wish to take a position on whether the market price will fall or rise without owning the asset.
Futures contracts online trading is fast-paced with massive volatility and liquidity. Exchanges, Regulatory bodies, brokerage houses, and individual traders play separate roles in executing these trades.
5. Pros And Cons Of Futures Trading
Like all investments, trading in Futures also has its advantages and drawbacks. Understanding them will help traders calculate their risks and decide whether futures trading suits financial goals.
Affordable to traditional stocks as you require investing a percentage (approx. 10%) instead of paying for the full stock price.
Low or Zero Commission. You don’t lose your investment in trading.
Leverage trading to take larger positions.
Access a broad range of markets
Capitalize on rising and falling prices
The abundance of liquidity leads to better trade execution.
Facility to hedge existing exposure
Avoid overnight funding charges.
24*7 market operation provides numerous opportunities for Aussie investors to hop in and execute orders instantly.
Diversification helps you lower the possibilities of risks.
A Futures Contract is an advanced investment strategy used for short-term trading strategies to ‘predict’ market trends. However, leverage available through margin and the short-term time horizons make them riskier than investing in quality companies.
You can lose all your money quickly if you are unsure what you are purchasing or how your trading account works in terms of minimum margin requirements.
Over time, your selected asset could decrease in value and may drive down your return.
Possibility for Loss (Both Small and Big)
Not Recommended for beginners
6. How Do I Start Trading Futures?
You can start trading in Futures in just three simple steps:
Once you place a trade in a futures contract, you must uphold your side of the deal until its expiry date. After it reaches the expiry date, you can decide to settle or roll over the contract.
7. Steps To Become A Futures Trader In Australia
Follow the below steps to trade in futures:
Step 1: Understand How Futures Contracts Work
Before placing your first trade in Futures, you must learn its key terminologies and strategies. Some Important things listed in a futures contract include:
The unit of measurement
Underlying assets of Futures Contract
Cash or Physical Settlement of the trade
Quantity of goods
The currency where the contract gets executed
Get a good understanding of the market you want to trade in so that you get your predictions correct and make profits from both rising and falling markets.
Step 2: Understand The Risks
Just like getting the conceptual knowledge of Futures contracts, it is equally important to understand the associated risks. Compared to other investment instruments, Futures are riskier as it involves dealing with larger investment sums.
Though the initial investment can be small, leverage can lead to more losses if your strategy fails.
That’s the reason why it is vital to be knowledgeable of the common risks that come along with futures trading. Good market research in the companies you are considering for investment will give you confidence in the behaviour and direction of the market and help lower the risks.
Step 3: Choose A Futures Market To Trade
Futures are tradable in various markets, such as indices, interest rates, shares, forex, bonds, and ETFs. You have to find the one that best suits your trading style. Indices experience higher volatility and are ideal for short-term day traders.
After choosing your market, find industries and companies you are familiar with. In addition to their current performance, check their past performance, future demand, growth potential, and financial data given by the company and analysts.
Only when you are a hundred per cent convinced, go ahead and plan your entry, purchase, trade, and exit strategy in case things don’t go as planned.
Step 4: Decide The Type Of Trade
Once you have decided what Futures markets and companies to trade in, the next step is to choose whether to go long or short.
Going long implies that based on your fundamental and technical analysis, you believe the value of a future contract will increase over time. If your analysis suggests that the underlying market price will fall, you can open a short position.
Step 5: Find an Online Futures Trading Broker
When you feel confident trading futures, find an online trading platform to place your trades. Take some time and compare different broking platforms based on various factors to select the best one for you.
Reputation in the market
Years of Establishment
Round-the-clock customer care
Safety and Security
Access to advanced market analysis tools
Ease of use
Types of trading platforms offered
Payment modes support
Level of Customer satisfaction
Based on these factors, our best picks for Online Trading of Futures are:
Step 6: Check Requirements
After having created an account, the first thing you need to do is to look at the margin requirements. It will give you an idea of how much you need to invest initially to place a Futures trade and how much you will lose in fees when withdrawing your funds.
Another important thing worth noting is to learn how to create an exit strategy to save your investment when the market starts to get unpredictable. Futures are for short-term trading options where you don’t intend to hold your position for the long term.
Some exit strategies include normal, trailing, guaranteed stops and limits when added to your trades, helping manage the risk.
While a stop order closes your position automatically when your contract price moves to a less favourable level, a limit closing order closes your position automatically when your contract price moves to a more favourable one.
Step 7: Place Your First Trade
After checking the margin requirements and understanding the trading platform, you are ready to execute your order. Choose a Futures market that interests you, decide the type of trade you wish to take (long/short), choose your position size, and set Stop loss and limits.
Step 8: Monitor And Close Your Position
After placing the trade, you must regularly track it to ensure that the markets behave as you expected.
If they go by your predictions, you might wish to close your trade after gaining a satisfactory profit. In other cases, you might have to close your position earlier to trim your losses. You can settle a futures contract trade before its expiry date.
Use specific tools on your platform to monitor your investments, and set up alerts to get notifications for any significant changes.
8. What Are The Best Futures Broker In Australia?
Here are the best-rated Future Brokers in Australia:
eToro (Our Recommendation)
Established in 2007
Regulated by: ASIC
Minimum Deposit: $200
Deposit Fees: USD 0
Withdrawal Fees: $5 – minimum withdrawal $30
Inactivity Fee: Yes. $10 per month if your account has been inactive for 12 months
Access to advanced trading tools
Copy-trading to create the same product portfolio and make the same trades.
Availability of several orders to protect investments if the market suddenly dips.
Ideal for beginner investors
Get access to shares of Australian and international markets, including US shares
Comparatively Low fees
The currency is in USD
Doesn’t offer support for advanced integrations like MT4
Established in 1977
Regulated by ASIC
Minimum Deposit: $0
Withdrawal Fees: $0
Deposit Fees: No
Inactivity Fee: Yes, after 12 months of no activity
Ideal for more active investors and first-time investors for a higher number of trades
Facility to track portfolios of top professionals
Markets include ASX and Forex
Abundant market content
Accessible from mobile phones and PC
Besides Futures, you can access fixed income, mutual funds, and more in ASX and across the globe. It makes it an ideal opportunity to diversify your portfolio, reduce risk and enhance your investment.
Charges Inactivity fee
Regulated by: CFTC
Minimum Deposit: $0, $25,000 for non-US accounts
Withdrawal Fees: $0
Deposit Fees: $0
Inactivity Fee: No
Quick and Easy Sign Up
Free stock trading
Ample tools ideal for in-depth research
Good Customer support
Access to several markets
Tons of advanced tools help investors make better investments and track them via mobile.
Automatic alerts to stay updated and make fast decisions.
The abundance of complex research tools and data interactive charts
Limited global markets
Mutual funds come with high fees
Established in 1982
Regulated by: FCA
Minimum Deposit: $1000
Withdrawal Fees: $0
Deposit Fees: No
Inactivity Fee: No
Relatively low fees
Tons of products to select from
Access to the best features and several of the top markets worldwide
Amazing customer support
No fees for deposits and withdrawing earnings
Well-organized Mobile app with inbuilt tools and features
Customizable dashboard where investors can stay informed of the latest news, make trades, create watchlists, and more.
Limited options for deposit
Cumbersome account opening process
Established in 2003
Regulated by: ASIC
Minimum Deposit Required: $400
Withdrawal Fees: $40
Deposit Fees: No
Inactivity Fee: Yes. $25 per month for inactivity
The platform offers plenty of research opportunities.
Loaded with educational tools and other advanced features
Low trading fees
The multitude of market options
Investors can set up automated trading and add protective stop losses to lower risks and improve their trading ability.
Solid customer care via live chat, email support, phone support, and more.
High withdrawal fee
Charges Inactivity fee
Established in 2017
Uniquely designed active trader interface for fast entry and exit of trade orders
Variety of Futures products: SMFE Futures, CME Futures
Low Futures Trading Commission Rates: Futures: $1.25 per contract, E-micros: $0.85 per contract, and Smalls: $0.25 per contract
9. Frequently Aksed Questions (FAQs)
Can You Trade Futures In Australia?
Yes. You can trade Futures in Australia. ASX’s New Trading Platform (NTP) provides unmatched access to futures markets in Australia. Some of the exchanged markets on ASX futures include:
Equity futures and options
Interest rate futures and options
Energy futures and options
Grain futures and options
Can You Trade Futures on The ASX?
Yes. Australian Stock Exchange’s New Trading Platform lets you access Australia’s futures markets.
This futures trading platform provides significant benefits to customers for rich functionality, improved latency, pre-trade risk management, and technical enhancements for all products traded on the ASX 24 market.
Does Australia Have a Futures Market?
Yes. Australia has a New Trading Platform that stays open 21 hours and 50 minutes on each trading day and provides unparalleled access to highly rated and globally traded products in Australia’s futures markets.
What Is The Code For ASX Futures?
Whenever placing a buy/sell order, investors and traders need to know the ASX code for the instrument they wish to trade.
ASX uses a variety of codes (of different lengths) that help identify each tradeable instrument in an abbreviated form. It makes it easier to track them throughout trading, price reporting systems, and settlement. Click here for the complete list of ASX 24 commodity codes.
Founded in 1960, Sydney Futures Exchange is a Capital market/Institution in Australia that focuses on trading in both derivative and cash products.
It covers financial market community trading products, investment and risk management, stock trading, clearance, facility, institution, real-time and historical trading market, settlement, depository, services, and globally centralized clearing.
What Time Do ASX Futures Open?
ASX 200 futures contract functions nearly 24 hours a day, 5 days a week in a year.
What Are The ASX 200 Futures?
Futures contracts, like ASX 200 futures, are a form of derivative used for the objective of prediction or hedging. The ASX 200 Futures Index helps traders monitor the returns made from the investment in the front-month futures contract in the ASX 200.
How Much Money Do You Need To Trade In futures?
To start trading in futures, you need money to open a Futures account (minimum deposits), execute the futures contracts (initial margin minimum), and keep the account active (maintenance margin).
The amount of money you need will depend on the broker in Australia you choose to open your Futures account and the type of futures you want to trade.
The margin minimum for futures contracts defines how much money you will need in your futures account to start trading contracts. It is determined based on the contract value and the volatility. Futures contracts with a low value and less volatility have relatively minimum margin requirements.
Can I Trade Futures With 100 Dollars?
Yes, you can start with as little as USD 100 to $400 per contract if you trade the micro futures. Considering the minimum deposits, initial, and maintenance margins the broker charges, you should have between USD 500 to USD 5,000 per contract to trade in the mini product range.
Can You Get Rich Trading Futures?
The simple answer is Yes. Future offers plenty of trading opportunities to Aussie investors around the market 24*7 daily.
Futures are an affordable trading instrument with the potential to make large profits. Unlike traditional stocks, it allows you to use high leverage to take larger trades with a smaller investment.
How To Trade Futures Fidelity?
You can’t trade Futures on Fidelity as it currently doesn’t offer futures trading, forex, and crypto trading. However, you can buy other investments using this trading platform, such as stocks, OTC stocks, options, mutual funds, fractional shares, and bonds.
How To Trade Futures on Thinkorswim?
Thinkorswim provides a “Futures Trader” tool that makes Futures trading a breeze. Follow the steps below to execute your Futures Contract order on this platform:
Download the Thinkorswim App from TD Ameritrade for trading.
Log in to the app
Click on the “Trade” tab, then the “Futures Trader” tab option.
Click the “Trade” button to place trades and track your open trades.
You will also see a “Dashboard” button that shows the tick value of the asset and the initial margin requirement for specific futures contracts.
Confirm your trade information, including quantity, price, commission fee, exchange cost, etc.
Once confirmed, click “Send” to complete the order. The position will open.
Click on the trade button in the dashboard’s first panel to find your open Futures Contract position.
To close your position, click on it at the bottom of the window and place a closing order.
The app provides various advanced trading tools to help make effective trades. You can customize the dashboard per your needs and follow the underlying asset.
How To Trade Futures in Crypto?
Crypto futures contracts can help hedge price risk and speculate on price direction, which makes it attractive. Like other markets, trading futures in crypto provides the benefit of leverage to add more to your trade.
If you want to trade Futures in Crypto, here are the best Crypto Futures Trading Platforms for Aussie investors:
Here is the comparison of the top two crypto futures trading exchanges:
|Trading Fees||0.01% Maker | 0.02% Taker||
0.1% Maker | 0.04% Taker
|Leverage Limit||100 x Leverage||20x Leverage|
|Requires KYC (Verification)||No||Yes|
|5% Off Fees||5% Off Fees|
While there are opportunities to make profits in futures trading, there are also ways to lose it. That’s why it takes an in-depth understanding of the market and a decent initial investment.
If you think you are ready to enter the futures trading game, follow the above steps to start a successful future trading career.
Useful Links to Explore: