Futures Basics — Complete Guide
Learn futures trading from scratch. Understand contracts, expiry dates, margin, leverage, and how to trade futures on commodities, indices, and currencies.
What Are Futures Contracts?
A futures contract is a legally binding agreement to buy or sell an asset at a predetermined price on a specific future date. Unlike spot trading where you buy the actual asset, futures let you speculate on price direction with leverage.
In spot trading, you own the asset. In futures trading, you own a contract that represents the asset. This allows trading with much less capital through leverage.
How Futures Work
Contract Specifications
Every futures contract has standardized specifications:
| Specification | Example (E-mini S&P 500) |
|---|---|
| Underlying Asset | S&P 500 Index |
| Contract Size | $50 x Index value |
| Tick Size | 0.25 points = $12.50 |
| Expiry Months | March, June, Sept, Dec (quarterly) |
| Trading Hours | Nearly 24 hours (Sun-Fri) |
| Margin Required | ~$12,000 per contract |
The Two Sides
- Long (Buy) — Profit when the asset price rises
- Short (Sell) — Profit when the asset price falls
- Every futures trade has a buyer AND a seller
- Total open interest tracks total outstanding contracts
Key Futures Concepts
Contract Expiry
- Futures contracts have expiration dates
- At expiry, contracts are settled (cash or physical delivery)
- Most retail traders roll over — close current contract and open the next one
- Quarterly contracts: March (H), June (M), September (U), December (Z)
Margin and Leverage
Initial Margin — The deposit required to open a position Maintenance Margin — Minimum equity required to keep the position open
| Futures Market | Contract Value | Margin Required | Effective Leverage |
|---|---|---|---|
| E-mini S&P 500 | ~$250,000 | ~$12,000 | ~20:1 |
| E-mini NAS100 | ~$350,000 | ~$16,000 | ~22:1 |
| Crude Oil | ~$75,000 | ~$6,000 | ~12:1 |
| Gold (GC) | ~$230,000 | ~$10,000 | ~23:1 |
| Euro FX | ~$125,000 | ~$3,000 | ~40:1 |
Mark-to-Market (Daily Settlement)
- Futures accounts are settled daily
- Profits are credited and losses are debited every day
- If your account falls below maintenance margin, you receive a margin call
- You must deposit more funds or your position is liquidated
Contango and Backwardation
Contango — Futures price is higher than the spot price
- Normal in most markets (storage costs, interest)
- Each successive contract month is more expensive
Backwardation — Futures price is lower than the spot price
- Indicates strong current demand
- Common during supply shortages
Types of Futures Markets
Index Futures
| Contract | Exchange | Tick Value |
|---|---|---|
| E-mini S&P 500 (ES) | CME | $12.50/tick |
| E-mini NASDAQ (NQ) | CME | $5.00/tick |
| E-mini Dow (YM) | CBOT | $5.00/tick |
| Micro E-mini S&P (MES) | CME | $1.25/tick |
| Micro E-mini NAS (MNQ) | CME | $0.50/tick |
Commodity Futures
| Contract | Exchange | Contract Size |
|---|---|---|
| Crude Oil (CL) | NYMEX | 1,000 barrels |
| Gold (GC) | COMEX | 100 troy oz |
| Silver (SI) | COMEX | 5,000 troy oz |
| Natural Gas (NG) | NYMEX | 10,000 MMBtu |
| Corn (ZC) | CBOT | 5,000 bushels |
Currency Futures
| Contract | Exchange | Contract Size |
|---|---|---|
| Euro FX (6E) | CME | 125,000 EUR |
| British Pound (6B) | CME | 62,500 GBP |
| Japanese Yen (6J) | CME | 12,500,000 JPY |
Futures vs Forex vs Stocks
| Feature | Futures | Forex | Stocks |
|---|---|---|---|
| Market Hours | ~23 hours (Sun-Fri) | 24/5 | Limited hours |
| Leverage | High (regulated) | High | Low-Moderate |
| Regulation | CME/CBOT (highly regulated) | Varies by broker | Highly regulated |
| Commissions | Per contract | Spread-based | Per share/trade |
| Short Selling | Easy (equal to going long) | Easy | Restrictions apply |
| Transparency | Centralized exchange | OTC (decentralized) | Centralized exchange |
Micro Futures for Beginners
Micro futures are 1/10th the size of standard contracts — perfect for learning:
| Micro Contract | Symbol | Margin Required | Tick Value |
|---|---|---|---|
| Micro E-mini S&P | MES | ~$1,200 | $1.25 |
| Micro E-mini NASDAQ | MNQ | ~$1,600 | $0.50 |
| Micro Gold | MGC | ~$1,000 | $1.00 |
| Micro Crude Oil | MCL | ~$600 | $1.00 |
If you are new to futures, always start with micro contracts. They provide the same market exposure at 1/10th the risk. Graduate to E-mini contracts only after consistent profitability.
Futures Trading Strategies
1. Trend Following
- Identify the prevailing trend on daily/4H charts
- Enter on pullbacks to key levels
- Use trailing stops to capture large moves
2. Mean Reversion
- Trade reversals when price is extended from moving averages
- Use RSI or Bollinger Bands for overbought/oversold conditions
- Best in ranging markets
3. Spread Trading
- Trade the price difference between two related contracts
- Example: Long September crude, short December crude
- Lower risk than outright directional trades
4. Scalping the DOM
- Use the Depth of Market (order book) for ultra-short-term trades
- Read order flow to identify buying/selling pressure
- Requires fast execution and deep market knowledge
Common Mistakes
❌ Ignoring contract expiry — Holding through expiry can result in physical delivery obligations or forced liquidation.
❌ Underestimating leverage — A 1% move on a $250,000 contract = $2,500 gain or loss. Leverage amplifies everything.
❌ Trading full-size contracts too early — Start with micro contracts. Your ego does not need E-minis.
❌ Not understanding tick values — Each market has different tick sizes and values. Know them before trading.
❌ Ignoring margin calls — If you receive a margin call, your position is at risk. Always maintain adequate margin.
Summary
| Aspect | Key Points |
|---|---|
| What | Contracts to buy/sell assets at future prices |
| Leverage | Significant — both opportunity and risk |
| Settlement | Daily mark-to-market |
| Expiry | Quarterly (roll to next contract) |
| Best Start | Micro contracts (MES, MNQ) |
| Key Concept | Understand margin, tick value, and contract specs |
| Risk Rule | Never trade without understanding the contract you are in |
Related Topics
- Perpetual Futures — Crypto futures without expiry
- Forex Basics — Currency market fundamentals
- Indices Trading — Stock index trading
- Risk Management — Capital protection
- Position Sizing — Sizing futures positions