Futures trading for Tradestation traders is concerned about trading Futures Contracts. What does a Futures Contract mean? How can Tradestation traders benefit from learning to trade it? A Futures Contract, a cash forward sale, or a “Forward” Contract, is a contract between a buyer who wants to purchase a specific product, and a seller who supplies that same product. It’s a forward contract because it must be delivered by a specific date. Futures Contracts are actually formal agreements. That means that each contract obligates the buyer and the seller; neither may default. Trading Futures is characterized as zero sum, every dollar made by the buyer is a dollar lost to the seller and vice versa. When prices are too low or too high, then it is either the buyer or the seller that profits, and the one that profits does so at the expense of the other. Let’s see an example. Say oats prices rise, the farmer benefits but the oatmeal manufacturer suffers. If oats prices fall, the farmer suffers, but the oatmeal manufacturer’s bottom line goes higher.
Futures trading takes place in two different ways. Commodities are traded at a Futures exchange, on the floor like at the Chicago Mercantile Exchange (CME), where there are open outcry pits. But Futures trading can also be done “electronically,” with an internet connection, where individual investors place their buy and sell orders straight from their desktop trading platforms, like Tradestation.
Futures traders can be broken into 2 groups, hedgers and speculators. An example of a hedger would be a farmer, manufacturer, exporter or importer. The goal of the hedger is to create futures positions that reduce the risk that the price of their commodity may fall. For example, a pork belly farmer believes that his pigs will be grown by August. He signs a pork belly futures contract before the slaughter at the current price in May for delivery in September. In May, the price of pork bellies is high because of reduced supply. Should the price of pork bellies drop by September (when the contract expires), the farmers’ price has already been ensured. Mind you, the farmer is assuming a risk. What if there is a virus and many pigs die before September. The price of pork bellies would rise even further, but the farmer is already obligated to deliver pork bellies at the price negotiated in May. The farmer would lose additional profit. Conversely, in September there might also be a huge number of pigs and the price of pork bellies ends up being lower than his May price. In this case he wins.
Speculators, on the other hand, are trading Futures for the sole purpose of earning a profit, not for protecting the price of their crop. Speculators actually comprise the majority of traders in most markets. Speculators are willing to assume risk in the hope that if they buy low, they can sell high (going long), or by selling high, they can later buying back low (going short). For example say the soy speculator knows that the weather has been a problem for months and the soy crop will be limited in September. The speculator is happy to buy the soy Futures contracts in July at the current price. He is betting that the price of soy will skyrocket and he will make a killing in September after the small harvests in August. Speculators provide the liquidity needed to fuel the Futures market. Without speculators, no one would take the other side of the hedgers contract. As in the example above, the farmer sells the soy to the speculator in July for the current price. The speculator assumes risk, hoping that by September, the delivery date, the price of soy has risen and he can make a profit at the farmer’s expense. What he prays doesn’t happen is that come September, the price of soy goes down, meaning that he over paid.
Prior to organized Futures exchanges, like the Chicago Mercantile Exchange (CME), Futures trading was a far more risky proposition. Contracts were drafted between one farmer and one speculator, and signed wherever the farmer happened to be selling his produce, for example, in farmers markets. There were a lot of problems with these personal contracts. First and foremost, either the farmer or the speculator was allowed to default on the contract. Who would enforce payment or delivery? If the speculator was going to lose his shirt, he would not complete his side of the contract. If the farmer realized that the price of pork bellies had risen dramatically, he would default and sell the pork bellies in the open market. Since these contracts were drafted between 2 parties, the speculator could not sell his contract to another speculator. Here’s another problem…there was no one who would certify the quality of the delivery. Farmers could fill their side of the contract with lower grade pork bellies, and the speculator could not do much about it.
Since the start of organized exchanges, it became the job of the exchange to validate quality, payment and delivery. Exchanges regulated that now good-faith money was required with a third party to make sure of contract performance. This reduces the number of contract defaults. Exchanges were finally able to standardize contracts, stipulating the terms of each contract, like commodity delivery dates and product grades.
Organized exchanges have taken Futures trading far beyond buying and selling of just commodity contracts like corn, wheat, rice, soy or pork bellies. Today, there are futures contracts for several different asset classes, including energies, treasuries, currencies and equities. Futures belong to an asset class called “derivatives,” securities whose prices are derived from one or more underlying assets. As an example, the S&P 500 Futures Contract underlying asset is the New York Stock Exchange’s (NYSE) S&P 500 Index. The S&P 500 Index is one of the most intensely watched equity indexes around the world. The index represents the top 500 well recognized stocks that are now traded on the NYSE. Here is the difficulty with the S&P index, however…you cannot trade the Index. The CME devised the S&P 500 Futures Contract that you are able to trade. As with the case of the S&P 500 Futures Contract, when the value of the S&P 500 Index inflates, the S&P 500 Futures Contract inflates with it, and vice versa.
Now, Futures can also have a currency index as its underlying asset. For individual investors, the Currency Futures Market is designed for the small number of contracts that individual investors intend to trade. With Currency Futures, individual investors can trade the exact same currencies that are being traded in the Forex market, but trade on the CME.
Shadowtraders specialty is in training individual investors how to be Trading Futures. Most of the other Futures education companies can only train investors in trading the S&P 500 Futures Contract, and in particular, the Emini, earmarked towards individual traders. Shadowtraders is much more interested in presenting to its clients a variety of different Futures, including energies, treasuries, currencies, etc. We trade many assets, all of which have liquidity and volatility. For example, we know the days of the week that a particular Future trades, the times of day it is easiest to trade, how many contracts are traded for that, whether or not you can even trade it, etc. That is Shadowtraders expertise.
If you are a Futures trader and experiencing losses, if you are stuck trading just the S&P 500 Emini and you want to expand your horizons, or if you are new to Futures trading and want to get more information, attend Shadowtraders Webinars held on Monday nights.
Barbara Cohen has been a professional day trader for over 10 years and is the CIO of Shadowtraders. She has trained hundreds of students to trade the Futures Market with Shadowtraders trading course. Before you purchase any trading course, make sure you attend Shadowtraders Monday Night Webinar, and hosted by Barbara Cohen