Futures trading often plays an important part in many trading strategies. What may seem a complicated concept to beginners helps seasoned traders diversify their portfolios in a new way. In this article, we’ll explain what futures are, how they can benefit you and how you can trade them with ThinkMarkets.

What are futures?

Futures are derivative contracts between a buyer and a seller to exchange an underlying asset at a specified future date at a fixed price. This means that a buyer has the right to buy, and a seller has an obligation to sell. These contracts are traded on their own local or a global futures exchange, governed by regulatory bodies like the Commodity Futures Trading Commission and functioning similarly to a regular stock exchange.

The most common underlying assets in futures trading are commodities (commodity futures) and indices (financial futures). Futures contracts are especially popular among agriculture and energy producers, letting them lock in and secure the future price of their goods. On the other side of the deal are usually large consumers, such as transportation and food processing companies, as they are equally interested in a fixed price, hoping it will be in their favour.

Besides participants interested in the actual physical exchange of an underlying commodity, the futures market also has speculative traders interested solely in a cash settlement and not seeking to receive or own the underlying assets.

How do futures work?

Futures contracts usually track the price of an underlying asset closely. For example, here is the price chart of the SPX 500 index (on the left) and SPX index futures contract (on the right):

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As you can see, the price movements are nearly identical. This happens because the price of futures is essentially a speculation of traders based on the current market (spot) price. It may sound very familiar to you if you know how CFD trading works. Futures and CFD trading are indeed very similar; however, there are also significant differences.

Futures vs CFDs

It is possible to trade on futures exchanges directly and gain exposure to commodities. However, it is more complicated to open a futures trading account, and the trading costs are higher, as are the margin requirements. Instead, the typical retail trader will opt for CFD trading, as CFDs follow the underlying futures but avoid some of the complexities.

Futures and CFDs differences

Contract size
To facilitate futures trading, every contract is standardised to a set quantity known as a lot. For example, a standard oil futures contract, such as WTI crude on the NYMEX, is for 1,000 barrels, while a standard gold futures contract on the COMEX is for 100 troy ounces. CFD brokers will create their own “lot”, and it is usually smaller than the exchange lot to allow investors with small amount of capital to gain access to the markets.

Expiry date
Futures contracts always have an expiration date. Upon expiration, a futures contract is closed, and you take the delivery of the commodity or need to supply it if you are short. The CFD contract is usually closed just before the expiration date to avoid taking delivery of the product, but this also means realising a profit or loss on the trade.There is no additional fee for holding a futures contract open all the way until its expiration date. With CFDs, traders are charged a fixed swap fee to hold their position overnight.

Range of markets
Futures are mostly traded on commodities and indices. Other markets can be traded with futures too, but they are not as popular and, as a result, less liquid. CFDs are widely traded on any market – forex, indices, commodities, crypto, stocks, ETFs and even futures themselves.

Futures trading with CFDs

As we have established, both futures and CFDs are derivative contracts, where the former tracks future price expectations within a set timeframe, and the latter tracks the future’s price. These two prices move independently, although in coherence.

Why trade futures with CFDs?

No physical exchange required

In regular futures trading, buyers and sellers are obliged to exchange the underlying asset upon the contract expiration or settle (close) the contract before it expires to prevent it. Trading futures with CFDs does not imply any ownership.

No swap fees

Unlike CFDs on all other financial markets, CFDs on futures do not have swap fees and can be held open throughout the duration of the contract with no overnight charges.

No hidden fees

Futures trading usually comes with commission, exchange, regulatory or insurance fees set by a broker. When you trade futures CFDs with ThinkMarkets, there are no extra fees.

Hedging

CFDs on futures can be an excellent tool to reduce the risk of CFD positions on other instruments. For example, if you happen to have an unsuccessful CFD trade on the SPX500 index, you can open a position in the opposite direction on the SPX 500 futures contract.

Keep in mind that futures contracts on any financial instrument have their own ticker symbols. When you trade a CFD on the S&P 500 index, the ticker symbol is SPX 500, and when you trade a CFD on S&P 500 futures contract, its ticker symbol is ES*3. This may vary from broker to broker. Check out our Contract specification page to see ticker symbols of futures offered by ThinkMarkets, along with their respective contract sizes, leverage and expiration dates.

How to trade futures with CFDs

When you trade futures contracts with CFDs, all you need to do is predict the direction of the futures price movement and open a buy or sell position accordingly. Let's see how it works on the SPX 500 futures (ES*3) example, trading at USD 4,140 at the moment of writing.

If you think the price will increase, you open a buy position or go long. If your prediction is correct and the price moves to USD 4,150, you get USD 10 profit. If the price moves against your prediction and drops to USD 4,130, you acquire a USD 10 loss.

If you think the price will go down, you open a sell position or go short. If the price drops to USD 4,130, you get a USD 10 profit. Should it go up to USD 4,150 instead, the USD 10 is your loss.

It is very important to remember that both futures and CFDs are traded with leverage; hence futures CFDs are leveraged instruments too.

This means that to open the position we described above, you only need to put down a margin amount instead of the full price of USD 4,140. It also means that your potential profit (as well as a potential loss) will be multiplied. That's why it's crucial to use risk management tools, such as stop loss and take profit to prevent bigger than expected losses or lock in profits.

If you are not sure how to use them or just want to sharpen your futures trading skills, go ahead and create a demo account on the MT4 or MT5 platforms, where you can practise trading with virtual funds in a simulated risk-free market environment.

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