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Futures Trading 101
This is a comprehensive introduction to futures trading. Use the table of contents to jump to any section.
I. Disclaimer
The material on this page gives an introduction to futures trading. It is not trading advice or a recommendation. Seek additional information from your broker or advisor, the U.S. Commodity Futures Trading Commission (CFTC), and the National Futures Association (NFA). We include links to the CFTC and NFA as well as our own education section.
II. Overview
i. Risk
Futures involve risk, and only risk capital should be used. Losses can be significant and may exceed your initial investment when trading on margin.
ii. Futures Contracts
A futures contract is a standardized agreement to buy or sell a specific asset (e.g., crude oil, gold, wheat, stock index) of defined quantity and quality at a future date and price. Contracts are traded on exchanges.
Buyers (long) and sellers (short) take opposite positions. Prices reflect supply and demand for the underlying asset and order flow on the exchange.
iii. Market Process
In this article, commodities trading and futures trading are used interchangeably.
Each exchange has a clearinghouse that stands between buyers and sellers, sets margin requirements, guarantees trades, and provides daily settlement. This structure reduces counterparty risk.
iv. Contract Month Codes
Each ticker has a symbol, a month code, and a 2-digit year.
| Month | Code |
|---|---|
| January | F |
| February | G |
| March | H |
| April | J |
| May | K |
| June | M |
| July | N |
| August | Q |
| September | U |
| October | V |
| November | X |
| December | Z |
Examples: CLZ25 = WTI Crude Oil Dec 2025, ESH26 = S&P 500 E-mini Mar 2026.
v. Settlement
Contracts specify how they settle:
Physical delivery: The exchange facilitates delivery of the specified quantity and grade from the seller to the buyer.
Cash settlement: The parties exchange the cash difference per contract terms (common for indexes and rates).
vi. Margin Requirements (Performance Bond)
Futures use margin as a performance bond-not a down payment. Margin is collateral deposited in a margin account.
| Term | What it means | What to watch |
|---|---|---|
| Initial Margin | Minimum equity to open a position (set by the exchange). | Varies by contract and volatility. |
| Maintenance Margin | Minimum equity to keep a position open. | Falling below triggers a margin call. |
| Margin Call | Request to restore equity to initial margin. | Can be intraday during high volatility. |
vii. Characteristics of a Contract
Futures contracts are standardized to maintain liquidity. A contract specifies:
- Underlying asset or instrument (e.g., barrel of crude oil, troy ounce of gold).
- Type of settlement - cash or physical.
- Units per contract.
- Quoted currency.
- Deliverable grade and delivery terms (or eligible instruments for financial futures).
- Delivery month.
- Last trading date.
- Tick size - the minimum price fluctuation.
viii. Futures vs Options
Futures: Obligation to deliver or take delivery per contract terms.
Options on futures: Right, but not the obligation, to buy (call) or sell (put) a futures contract; exercised if financially beneficial.
ix. Futures Trading Regulation
Commodity Futures Trading Commission (CFTC): U.S. federal regulator of futures and options markets. The CFTCs mission is to protect market users and the public and to foster open, competitive, and financially sound markets. See www.cftc.gov.
National Futures Association (NFA): Industry self-regulatory organization. NFA develops rules, programs, and services to safeguard market integrity and protect investors. See www.nfa.futures.org.
III. Market Intermediaries
Intermediaries include Futures Commission Merchants (FCM), Introducing Brokers (IB), Commodity Pool Operators (CPO), and Commodity Trading Advisors (CTA). Registration and compliance obligations depend on activities.
| Role | What they do | Regulator |
|---|---|---|
| FCM | Accept orders and customer funds to margin, guarantee, or secure trades. | CFTC / NFA |
| IB | Solicit or accept orders, but do not accept customer funds. | CFTC / NFA |
| CTA | Provide compensated advice about futures or commodity interests. | CFTC / NFA |
| CPO | Operate or solicit funds for pooled vehicles trading futures. | CFTC / NFA |
i. Introducing Brokers (IBs)
An IB solicits or accepts orders for futures but does not accept money, securities, or property to margin, guarantee, or secure any trades.
ii. Futures Commission Merchants (FCM)
FCMs may solicit or accept orders and accept money, securities, or property (or extend credit) to margin, guarantee, or secure trades.
IV. How to Get Started
1) Read the Risk Disclosure and be sure you understand margin and daily settlement.
2) Practice with a free demo or speak with a broker about contract specifications, margin, and order types.
3) When ready, open an account and begin with small position sizes relative to risk capital.
V. Frequently Asked Questions
Trading commodity futures and options involves substantial risk of loss. The recommendations contained are of opinion only and do not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results. This is not a solicitation of any order to buy or sell, but a current futures market view. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!
