Your Complete Guide To Futures Contracts: Basics, Costs, and Players

Welcome to the fast-paced world of futures contracts. Learn about the basics, costs, and key players in this market. Discover the benefits of algorithmic trading and unravel the calculations involv...

DEALING.

6/23/20233 min read

futures
futures

Welcome to the fast-paced world of futures.

These contracts, where you agree to buy or sell something (commodities, currencies, stocks, etc.) at a fixed price in the future, can be complex, but understanding the basics is key. Imagine agreeing to buy a bushel of wheat six months from now for $5, regardless of market fluctuations. That's a futures contract in action!

Fees to Factor In

While futures offer exciting opportunities, they come with inherent costs:

  • Commissions: Brokers charge fees for executing your trades, similar to buying stocks.

  • Margin: You generally need to deposit a percentage of the contract's value (margin) to act as collateral, protecting the exchange and broker.

Pricing Puzzle: Unveiling the Players

Several key players determine the price of a futures contract:

  • Supply and demand: Like any market, the balance between buyers and sellers dictates the price.

  • Underlying asset's value: Futures track the expected future price of the underlying asset (e.g., oil, gold).

  • Interest rates: The time value of money plays a role. Investors might pay more for a future contract promising a valuable asset later compared to holding cash now.

Giants of the Game: Major Futures Brokers

Many reputable brokers facilitate futures trading, including:

  • Interactive Brokers: Renowned for its wide range of markets and platforms.

  • TD Ameritrade: Offers various educational resources and platforms for futures trading.

  • NinjaTrader: Popular among active traders with advanced features and tools.

Algo Advantage: Automating Futures Trades

Algorithmic trading, using computer programs to execute trades based on predefined rules, has revolutionized futures markets. Here are some popular strategies:

  • Trend Following: Algorithms identify and capitalize on trends in price movements.

  • Mean Reversion: These strategies buy when prices are low and sell when they're high, based on historical averages.

  • Arbitrage: Exploiting price discrepancies between different markets or futures contracts.

Math Made Clear: Unraveling the Formulas:

Futures still involve calculations, but mostly basic arithmetic:

  • Contract value: Multiply the price per unit by the contract size (e.g., 100 barrels of oil).

  • Margin requirement: Multiply the contract value by the margin percentage set by the exchange.

  • Profit/loss: Track the price difference between your entry and exit points, considering margin and commissions.

A Historical Glance: From Roots to Revolution

The concept of futures contracts dates back centuries, with early examples found in agricultural trade. However, standardized futures exchanges emerged in the 19th century, revolutionizing risk management and price discovery for various assets.

Ready to Dig Deeper?

Remember, futures trading involves inherent risks and requires careful research and understanding before diving in. Consider starting with educational resources, paper trading simulations, and consulting a financial advisor before risking real capital.

Bonus Tip: Explore resources like the CME Group (https://www.cmegroup.com/company/cme.html) and Investopedia (investopedia.com) for in-depth explanations and educational tools on futures contracts and algorithmic trading strategies.

With practice and knowledge, you can navigate the exciting world of futures contracts and leverage the power of algorithms to potentially maximize your opportunities!

Francisco F. De Troya

Algorithmic trading & derivatives professional.

Executive Chairman, Blockmas

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