A big advantage when trading futures is that you can sell a commodity before you buy it, so that makes it possible to make money whether prices are going up or down. The key to making money trading futures is to take your profits and limit your losses. In the futures markets, you can potentially make or lose a substantial amount of money in the time it takes to have lunch, due to the high leverage that is available when trading futures contracts.
Determine whether you believe the price of your particular commodity will go up or down over the next few months in order to place an order. If, for instance, you believe the price of wheat will rise in the next few months, you then determine the price at which you would like to buy a contract of wheat. Find out the tick value of the commodity to determine how many ticks it will take to reach your profit goal and how many ticks would cause you to hit your stop-loss limit.
Set your profit and loss limits at the same time you place your order to either buy or sell a futures contract. For instance, let's assume its September and you buy a standard contract for 5,000 bushels of December Soybean Oil at $44.50 per bushel, believing the price will rise. If the the tick value is $6 and the broker requires you to deposit $2,000 in margin for the trade, and you only wanted to risk $300 to make a profit of $600, your order would look like this: Buy December wheat at $44.50. Limit order to sell at $45.50. Stop-loss order at $44.00 per bushel.
Sell the futures contract before it reaches your target profit if the price rises and you are satisfied with making less than than you originally had planned. You can close the contract at any time and cancel any previously set price limits. It's easy to see the enormous leverage that is used in the futures market when the Soybean Oil contract in the last example is worth $222,500 and the broker only requires you to put up $2,000 and a price move down of only 50 cents could result in a $300 loss. You may also close a losing contract before it reaches your stop-loss order if you become convinced that it is a bad trade. This could save you money if you are correct.
Always use stop-loss orders when trading.
You need to liquidate your futures position prior to the expiration date of the contract to prevent delivery.
Trading futures is risky and it's not for everyone.
Never risk more than 3 percent of your total trading capital on a particular trade.
If a trade goes against you and your account falls below the margin requirements, your broker will call you to request that you deposit more money into the account. This is known as a margin call.
- Commodity Futures Trading Commission. "Basics of Futures Trading." Accessed June 25, 2020.
- FINRA. "Security Futures—Know Your Risks, or Risk Your Future." Accessed June 25, 2020.
- CME Group. "E-mini S&P 500 Futures Quotes." Accessed June 25, 2020.
- CME Group. "Understanding Futures Expiration & Contract Roll." Accessed June 25, 2020.
- CME Group. "Tick Movements: Understanding How They Work." Accessed June 25, 2020.
- CME Group. "The Benefits of Day Trading Futures." Accessed June 25, 2020.
- Always use stop-loss orders when trading.
- You need to liquidate your futures position prior to the expiration date of the contract to prevent delivery.
- Trading futures is risky and it's not for everyone.
- Never risk more than 3 percent of your total trading capital on a particular trade.
- If a trade goes against you and your account falls below the margin requirements, your broker will call you to request that you deposit more money into the account. This is known as a margin call.
Tim Grant has been a journalist since 1989 and has worked for several daily newspapers, including the Charleston "Post & Courier," the "Savannah News-Press," the "Spartanburg Herald-Journal," the "St. Petersburg Times" and the "Pittsburgh Post-Gazette." He has covered a variety of subjects and beats, including crime, government, education, religion and business. He graduated from The Citadel with a Bachelor of Science in business administration.