At its core, the trading of a futures contract is no different than prognosticating on any subject; a hypothesis is formed and tested, and a result is observed. In its simplest form, a futures contract is an agreement between a buyer and seller to trade an underlying asset at an agreed upon price on a specified date. There are four basic components to a futures contract: Assets come in various types, ranging from traditional to exotic. Agricultural commodities, precious metals, foreign currencies, energy products and interest rates are the categories of traditional futures products.

Exotic futures contracts such as region-specific snowfall, temperature indexes, hurricanes, and even box office receipts for a motion picture release are examples of unconventional contracts.

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Each futures contract is given a code for identification. The code includes information regarding the underlying asset along with contract month and year. On expiration day, cash accounts are squared using the final settlement price as the basis for valuation, and buyers of the actual physical asset if there is one present may begin arrangements to take delivery.

It is important to remember that a current futures contract addresses the potential value of an underlying asset at a future date. For instance, a contract offered on a monthly basis, such as crude oil, commonly has a front month contract one month removed from expiration; the front month contract for active trading in May is dated June, for June is dated July, etc.

However, it is possible that the front month contract is several months away. The price of a futures contract is the current amount of money needed for an individual to buy or sell the underlying asset ahead of expiration day.

For instance, one contract of WTI Crude Oil is priced according to the total value of 1, barrels of oil. The current price of the futures contract is based upon its projected value at expiration.

One of the key principles of futures trading is the employment of leverage upon the marketplace. There are two types of margin requirements: Margin requirements vary greatly depending on position size, brokerage firm, client account size and futures product being traded. The trading of futures contracts in the modern electronic marketplace is a fast-paced endeavour, with an abundance of liquidity and volatility.

Regulatory bodies, exchanges, brokerage firms and individual traders all play separate roles in the trading of futures. The characteristics of a futures contract afford the individual an opportunity to limit risk through proper investment, or to capitalise on a prediction of coming events.

Two types of individuals participate in the buying and selling of futures contracts:. No matter which type of market participant one is, the bottom line of futures trading is profit and loss. Where there is uncertainty, there is opportunity; and where there is opportunity, there are always individuals looking to prosper. Numerous futures exchanges exist around the globe providing speculators and hedgers alike the opportunity to actively trade futures contracts based on a number of asset classes.

If one is interested in conducting trading operations involving futures, then one of the following exchanges is likely facilitating the trade.

For the year end , listed below are the top-five futures exchanges in the world, according to total volume of contracts traded 4 Retrieved 23 May http: Each exchange has a specific country in which it is based, but due to the global nature of futures trading, most operate separate branch offices around the world.

Although futures trading was once exclusive to the open outcry trading system, modern trading practices have evolved into a largely digital marketplace. For instance, in the United States, the CME Group functions as a self-regulatory body. In addition to the CME Group, the Commodities Futures Trading Commission oversees the entire futures trading industry in the United States. The process of placing a trade is standard no matter which exchange or type of futures contract is involved in the transaction.

Currently, the active trading of futures is a digital, exchange-based endeavour with trading operations being conducted by the trader online via internet connection with the exchange. As the trader closes the position, an offsetting order is processed, and a profit or loss is realised. Trading futures is not like investing in real estate, precious metals or a retirement account.

In futures, asset values fluctuate rapidly, nearly 24 hours a day, five and a half days a week. To successfully navigate the sometimes-turbulent waters any futures market can bring, one must define and mitigate as many elements of risk as possible. The use of proper money management techniques, stop-loss orders and adequate trading equipment are all necessities when trading futures. The active trading of a futures contract provides the individual many unique financial opportunities, while also presenting the potential for financial hazard.

Hedging practices and short-term speculative endeavours can be wealth preserving and profitable ventures. However, the volatility and financial leverage present in the modern futures marketplace is capable of producing severe drawdowns of capital in relatively short periods of time.

As in any trading activity, one must possess an understanding of the basic tenets governing money management and the mechanics of trade applicable. If approached from an educated and financially responsible standpoint, an excursion into the arena of futures trading can become a rewarding experience.

Leverage can work against you. Be aware and fully understand all risks associated with the market and trading. Prior to trading any products offered by Forex Capital Markets Limited , inclusive of all EU branches, FXCM Australia Pty.

Limited , any affiliates of aforementioned firms, or other firms within the FXCM group of companies [collectively the "FXCM Group"], carefully consider your financial situation and experience level.

If you decide to trade products offered by FXCM Australia Pty. Limited "FXCM AU" AFSL , you must read and understand the Financial Services Guide , Product Disclosure Statement , and Terms of Business. The FXCM Group may provide general commentary which is not intended as investment advice and must not be construed as such. Seek advice from a separate financial advisor. The FXCM Group assumes no liability for errors, inaccuracies or omissions; does not warrant the accuracy, completeness of information, text, graphics, links or other items contained within these materials.

The FXCM Group is headquartered at 55 Water Street, 50th Floor, New York, NY USA. Forex Capital Markets Limited "FXCM LTD" is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England and Wales with Companies House company number Limited "FXCM AU" is regulated by the Australian Securities and Investments Commission, AFSL FXCM Markets Limited "FXCM Markets" is an operating subsidiary within the FXCM Group. FXCM Markets is not regulated and not subject to the regulatory oversight that govern other FXCM Group entities, which includes but is not limited to, Financial Conduct Authority, and the Australian Securities and Investments Commission.

FXCM Global Services, LLC is an operating subsidiary within the FXCM Group. FXCM Global Services, LLC is not regulated and not subject to regulatory oversight. Market Insights Currency Markets Commodities Trading Glossary. Introduction To Futures Trading. What Is A Futures Contract? Pricing The price of a futures contract is the current amount of money needed for an individual to buy or sell the underlying asset ahead of expiration day.

Leverage Leverage is a double-edged sword as it can significantly increase profits as well as losses. Market Participants The trading of futures contracts in the modern electronic marketplace is a fast-paced endeavour, with an abundance of liquidity and volatility.

Classifications Of Futures Traders The characteristics of a futures contract afford the individual an opportunity to limit risk through proper investment, or to capitalise on a prediction of coming events. Two types of individuals participate in the buying and selling of futures contracts: A hedger participates in a futures market with the goal of wealth preservation, through eliminating unknown risk.

Farmers, bankers and producers are examples of hedgers. A speculator looks to gain financial reward from capitalising on pricing volatility. Investors and traders are examples of speculators. Global Futures Exchanges And Regulatory Bodies Numerous futures exchanges exist around the globe providing speculators and hedgers alike the opportunity to actively trade futures contracts based on a number of asset classes. Top To Bottom The process of placing a trade is standard no matter which exchange or type of futures contract is involved in the transaction.

Upon arrival at the brokerage firm, the order undergoes liquidity tests to ensure that margin requirements are met. If so, the brokerage firm relays the order to the exchange. The exchange receives the order and acts as a clearinghouse. The order is accepted, filled and a confirmation including the details of the transaction is returned to the brokerage firm.

The brokerage firm forwards confirmation to the trader. Potential Hazards Trading futures is not like investing in real estate, precious metals or a retirement account. Key risk factors present in the trading of futures are as follows: Depending on the product and contract, periods of extreme pricing fluctuation are likely to occur every trading session.

Unexpected news, geopolitical issues and economic data releases are a few occurrences that can send a futures market into chaos.

By nature, a futures contract is a leveraged financial product. The ability for an individual to engage in a trade with disproportionate risk is easy. Often, large moves in price occur at near light speeds. Without adequate equipment and proper trade strategy, entering and exiting the market can be costly.

At no fault to the trader, an order price may be filled with a vastly different price than desired. Large losses can be sustained when participating in an irrational market. Summary The active trading of a futures contract provides the individual many unique financial opportunities, while also presenting the potential for financial hazard. How To Make Money In The Stock Market. What Is The Difference Between Forex And Futures? What Is Rollover In Futures Trading?

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FXCM Financials Regulation Code of Conduct. Past Performance is not an indicator of future results. Retrieved 21 May http: Retrieved 22 May http: Retrieved 23 May http: