What are futures and how do you trade them? (2024)

Written by Anzél Killian, Senior Financial Writer. Reviewed by Axel Rudolph, Senior Market Analyst

What’s on this page?

  1. What is futures trading?
  2. Why trade futures?
  3. How to trade futures

What is futures trading?

Futures trading is the act of buying and selling futures. These are financial contracts in which two parties – one buyer and one seller – agree to exchange an underlying market for a fixed price at a future date. Futures give the buyer the obligation to buy the underlying market, and the seller the obligation to sell at or before the contract’s expiry.

What are futures and how do you trade them? (1)

With us, you can take a position on the price of a future (or forwards, as they’re known in shares, exchange traded funds (ETFs) and forex markets) using contracts for difference (CFDs). Many traders find this more accessible because you don’t have to take on the obligation to buy or sell, and you won’t be taking ownership of the underlying asset. Plus, there are possible tax benefits.1

Start trading futures with a live account.

Create live account

Why trade futures?

  1. Avoid overnight funding charges
  2. Access our deep liquidity
  3. Trade with leverage
  4. Go long or short
  5. Hedge your existing positions
  6. Take a position on a wide range of markets

Avoid overnight funding charges

Many of our markets are available with futures (sometimes known as forwards) or spot (sometimes known as cash).

Futures positions have no overnight funding2 charges, whereas charges apply to spot (cash) positions that are left open at the end of a trading day. This means that futures trading is preferred by those who are looking to take a longer-term position on an underlying market – because they won’t incur multiple overnight funding fees.

Bear in mind, however, that futures do have a wider spread than spot (cash) positions.

Access our deep liquidity

The number of trades that we handle every day – coupled with our size, international reach and large client base – means that our futures markets are particularly liquid. This means that if you deal in larger sizes, you’re more likely to have your order filled at your desired price. Learn more about our best execution times and deep liquidity

Trade with leverage

Futures contracts are leveraged. That is, they enable you to receive increased market exposure for a small deposit – known as margin – and your trading provider loans you the rest of the full value of the trade.

What are futures and how do you trade them? (2)
What are futures and how do you trade them? (3)

When trading with leverage, it is important to remember that your profit or loss will be determined by the total size of your position, not just the margin used to open it. This means there is an inherent risk that you could make a loss (or a profit) that could far outweigh your initial capital outlay.

Therefore, it’s very important to manage your risks when trading futures.

Go long or short

When trading futures, you can go both long or short. You’d go long if you believed that the underlying market price will rise, and you’d go short if you believed it will fall.

With our CFD futures, your profit or loss is determined by the accuracy of your prediction, and the overall size of the market movement.

Hedge your existing positions

Hedging with futures enables you to control your exposure to risk in an underlying market. For example, if you own shares in companies on the US Tech 100 and are concerned about their value dropping, you could short a US Tech 100 index future – the profits from which would hopefully offset a proportion of your share position losses.

If you had current short positions on the other hand, you could go long on an index future in case the market rises, with the idea that your long profits would offset your short losses.

Take a position on a wide range of markets

You can trade futures and forwards with us, on indices, shares, forex commodities and ETFs:

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Index futures

Gain exposure to global stock indices including the US Tech 100, Germany 40 and Wall Street.

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Commodity futures

Take a position on both hard and soft commodities including gold, silver, wheat, corn and oil.

What are futures and how do you trade them? (8)

Bond futures

Trade on the value of different bonds rising or falling, including German, UK and US government bonds.

What are futures and how do you trade them? (9)

Share forwards

Take a position on over 17,000+* global shares like Tesla, Amazon and more

What are futures and how do you trade them? (10)

Forex forwards

Go long or short on major currencies like GBP/USD and EUR/USD, plus minor and exotic pairs

ETF forwards

Trade on price volatility in ETFs across indices, sectors, commodities, bonds or currencies

*IG Groups total shares

How to trade futures

To trade futures with CFDs, follow the steps below:

  1. Understand how futures trading works
  2. Pick a futures market to trade
  3. Create an account and log in
  4. Decide whether to go long or short
  5. Place your first trade
  6. Set your stops and limits
  7. Monitor and close your position

Understand how futures trading works

With us, futures trading works by using CFDs to predict on the price of an underlying futures market. CFDs can be used to go both long or short, meaning that you can profit from markets that are rising as well as falling – provided your predictions are correct.

What are futures and how do you trade them? (12)
What are futures and how do you trade them? (13)

Pick a futures market to trade

With various futures markets to choose from, you should establish which one is most-suited to your individual trading style. Some indices – the Germany 40 for example – experience higher volatility than others, and could be better suited to short-term day traders.

Other markets, such as gold or silver commodity futures are often preferred by traders who have lower risk appetites and enjoy markets with lower volatility. Remember, we offer futures and forwards on indices, bonds, interest rates, shares, forex and ETFs.

Learn about our markets

Create an account and log in

To start trading futures with CFDs today, open an account with us. We’re a FTSE 250 company with around 50 years’ experience.

Our spreads are among the lowest in the industry and we have a diverse futures and forwards offering, which includes the most popular indices, commodities, bonds, forex pairs and shares on the market. For example, you can trade the volatility index (VIX) for a spread of just 0.1 and the US 500 (S&P 500) futures market from a spread of just 1 point.

Find out more about our charges

Create live account

Once you’ve created an account, you can log in to our award-winning trading platform.

Decide whether to go long or short

Going long means that you are predicting on the value of a future increasing, and going short means that you are predicting on its value decreasing.

If you think that the underlying price of a future will increase based on your own fundamental and technical analysis, you can open a long position. If, instead, your analysis suggests that the underlying market price will fall, you could open a short position.

Place your first trade

To place your first trade, go to our trading platform and select a market. Next, select the ‘Futures’ tab on the price chart (or ‘Forwards’ in the case shares, forex and ETFs), decide whether you want to buy or sell the underlying market, and choose your position size. On our mobile app, futures and forward markets are listed separately to spot and cash markets.

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What are futures and how do you trade them? (15)

Set your stops and limits

Before you open your position, you should consider adding stops and limits to your trade. Stops and limits are highly recommended tools for managing your risk while trading futures.

A stop order will close your position automatically if the price moves to a less favourable level, while a limit closing order will close your position automatically if it moves to a more favourable one (while a limit entry order would automatically open one.)

We offer normal, trailing and guaranteed stops,3 and you can set your stops and limits directly from the deal ticket.4 Once you’re happy with your levels, place your deal.

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What are futures and how do you trade them? (17)
Learn more about managing your risk

Monitor and close your position

After you’ve placed your trade, you’ll need to monitor it to make sure that the markets are behaving in the way that you expected. If they aren’t, you might want to close your trade to minimise your losses. If they are, you might want to close your trade after having achieved a satisfactory profit.

Remember, you can close a futures contract trade before the expiry date of the contract arrives.

Futures contract trading example

With financial derivatives such as CFDs, you’ll be taking a position on the price movements of a futures contract rather than buying and selling the contract itself.

Say it’s April and you think the price of oil is going to rise in the future – you could open a long CFD on a June oil future. Your profit is determined by how much the price of oil has risen by the future’s expiry, and the size of your position – less any charges. These will include your spread and any other costs or charges.

Alternatively, if you think that the price of oil is going to fall, you could go short with a CFD on the oil future. In this example, you’d profit based on how much the oil price fell and the size of your position (less the spread amount) and any fees incurred.

In both scenarios, your position would be closed automatically in June – but you could close it before if you wanted. Below, you’ll see a graphic of the futures tab in our trading platform. If you thought that the underlying market price was going to rise, you’d buy the market with your CFD trading account. If you thought that underlying market price was going to fall, you’d sell.

The months for a futures contract will vary, and the example given here which uses June is for explanatory purposes. You should check the expiry of a futures contract before you open a position.

The months for a futures contract will vary, and the example given here which uses June is for explanatory purposes. You should check the expiry of a futures contract before you open a position.

FAQs

What is the definition of futures in trading?

Futures in trading refers to a futures contract – an agreement between two parties to trade an underlying market at a predetermined price on a specific date in the future. With us, rather than entering into a futures contract directly, you can predict on the price of futures rising or falling with CFDs.

How are futures priced?

Futures are priced according to the spot value of their underlying market, plus any spread or commission that you pay a broker for executing your trade. The forces of supply and demand also play a role in determining how the price of a futures contract will move, with higher demand and lower supply causing prices to rise, while lower demand and higher supply will cause prices to fall.

How does margin work in futures trading?

Margin in futures trading enables you to put down a small deposit to open a CFD trade, while receiving much larger market exposure. However, you should remember that when trading with margin, your end profit or loss is determined by the full size of the position, and not just the margin required to open it.

Can anyone trade futures?

Yes, anyone can trade futures.

What are the differences between futures and options?

Futures contracts are different to options contracts because they obligate both parties to exchange the underlying for the agreed upon price at expiry. An options contract on the other hand, only obligates one party to buy or sell if the other party exercises their side of the agreement. They would only do this if they feel the market has moved in their favour.

What is the difference between futures prices and spot prices?

The futures price is the price that you lock in when trading a futures contract, and it is what you will be able to buy or sell an underlying market for at or before the contract’s expiry date. The spot price is the current underlying market price that you would be able to trade at if you opened a position today.

Develop your knowledge of financial markets

Find out more about a range of markets and test yourself with IG Academy’s online courses.

What are futures and how do you trade them? (18)
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What are futures and how do you trade them? (2024)

FAQs

What are futures and how do you trade them? ›

Futures are derivatives, which are financial contracts whose value comes from changes in the price of the underlying asset. Stock market futures trading obligates the buyer to purchase or the seller to sell a stock or set of stocks at a predetermined future date and price.

How do you trade futures? ›

How to trade futures
  1. Understand how futures trading works.
  2. Pick a futures market to trade.
  3. Create an account and log in.
  4. Decide whether to go long or short.
  5. Place your first trade.
  6. Set your stops and limits.
  7. Monitor and close your position.

What is futures trading with an example? ›

Let us assume that you have purchased a futures contract for 100 shares of XYZ company at a value of Rs. 50 per share at a certain date. When the contract expires, you will receive those shares bought at Rs. 50, the same price at which you agreed to buy them, irrespective of the present price prevailing.

Is futures trading good for beginners? ›

Futures investing is found in a variety of markets, such as stocks and commodities, but it's not for beginners.

How much money do you need to trade futures? ›

To apply for futures trading approval, your account must have: Margin approval (check your margin approval) An account minimum of $1,500 (required for margin accounts.) A minimum net liquidation value (NLV) of $25,000 to trade futures in an IRA.

How do futures work for dummies? ›

Futures are financial contracts obligating the buyer to purchase, and the seller to sell, an asset at a predetermined future date and price. They are standardized contracts traded on futures exchanges.

Are futures hard to trade? ›

Remember that futures trading is hard work and requires a substantial investment of time and energy. Studying charts, reading market commentary, staying on top of the news—it can be a lot for even the most seasoned trader.

What is a real life example of futures? ›

Narrator: Suppose a crude oil futures contract is trading at $50. At this price, 1,000 barrels of crude oil would cost $50,000. But a trader doesn't actually have to come up with this amount. With a futures contract, a trader could take a position in $50,000 worth of crude oil with just a small deposit.

What are futures in simple terms? ›

Futures are derivatives, which are financial contracts whose value comes from changes in the price of the underlying asset. Stock market futures trading obligates the buyer to purchase or the seller to sell a stock or set of stocks at a predetermined future date and price.

Is it better to trade options or futures? ›

Futures have several advantages over options in the sense that they are often easier to understand and value, have greater margin use, and are often more liquid. Still, futures are themselves more complex than the underlying assets that they track. Be sure to understand all risks involved before trading futures.

Can you start trading futures with $100 dollars? ›

Futures do not have a day trading capital requirement.

You can open your account with as little as a few hundred dollars and start trading any of the available Micro futures contracts.

Which futures is most profitable? ›

What futures are most profitable? Trading in futures markets such as the Micro E-Mini Russell 2000 (M2K), Micro E-Mini S&P 500 (MES), Micro E-Mini Dow (MYM), and Micro E-Micro FX contracts can be highly profitable due to their distinct market characteristics.

What is the average income of a futures trader? ›

How much does a Futures Trader make? As of May 22, 2024, the average annual pay for a Futures Trader in the United States is $101,533 a year. Just in case you need a simple salary calculator, that works out to be approximately $48.81 an hour. This is the equivalent of $1,952/week or $8,461/month.

Can I trade futures with $500? ›

This will ultimately determine how much money you will need to have in your account for each contract you trade. The range varies from as little as $500 to $5,000 USD per contract for the mini products. But if you are brand new, you can start trading micro futures for as little as $50 to $400 per contract.

What is the 80 20 rule in futures trading? ›

80% of your portfolio's returns in the market may be traced to 20% of your investments. 80% of your portfolio's losses may be traced to 20% of your investments. 80% of your trading profits in the US market might be coming from 20% of positions (aka amount of assets owned).

Can I trade futures with 200 dollars? ›

For instance, micro contracts on foreign-exchange futures can carry margins of as little as $200 to $400. If your margin falls below the minimums required, then you'll have a limited amount of time to make up the difference in additional deposits.

What are the requirements to trade futures? ›

An individual or retail investor who wants to trade futures must typically open an account with a futures commission merchant and post the initial margin requirement, which, in turn, is held at the exchange's clearinghouse.

Can you trade futures without 25k? ›

A pattern day trader who executes four or more round turns in a single security within a week is required to maintain a minimum equity of $25,000 in their brokerage account. But a futures trader is not required to meet this minimum account size.

Can you make money trading futures? ›

Trading futures for a living is a compelling idea — but to do it successfully, you'll need sufficient startup capital and a well-designed trading plan. You'll also need a trading platform that offers fast, reliable access and the right technological tools.

Can I trade futures without a broker? ›

In order to trade futures, you must have an account with a registered futures broker who will maintain your account and guarantee your trades. In the futures business, brokerage firms are known as either a futures commission merchant (FCM) or an introducing broker (IB).

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