What are futures and how do you trade them?
Futures are contracts which enable you to agree a price for an asset in the present, to be exchanged in the future. Discover everything you need to know about futures, including how to trade them and which markets are available.
What are futures?
Futures 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.
With us, you can speculate on whether the price of a futures contract will rise or fall with CFDs. Since these products are financial derivatives, you don’t have to take on the obligation to buy or sell, and will not be taking ownership of the underlying asset. Instead, you will gain exposure to the underlying futures contract by speculating using CFDs. This means that your futures trades will be leveraged.
Leverage can magnify both your profits and losses as they’ll be based on the full exposure of the trade, not just the margin required to open it. This means losses as well as profits could far outweigh your margin, so always ensure you’re trading within your means.
Start trading futures today with an IG account.
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.
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.
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.
Avoid overnight funding charges
Overnight funding charges will apply to cash positions that are left open at the end of a trading day. However, with futures, the overnight funding charge is included in the spread.
This means that futures trading is preferred by those who are looking to take a long-term position on an underlying market – because they won’t incur multiple overnight funding charges.
Go long or short
When trading futures with CFDs, you can go 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 CFDs, 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 FTSE 100 and are concerned about their value dropping, you could short a FTSE 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.
Speculate on a wide range of markets
You can trade futures on indices, commodities and bonds with us:
Understand how futures trading works
Futures trading works by using CFDs to speculate 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.
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.
Create an account and log in
To start trading futures with CFDs today, open an account with IG. Our spreads are among the lowest in the industry and we have a diverse futures offering, which includes the most popular indices, commodities and bonds on the market.
Once you’ve created an account, you can log in to our award-winning trading platform1.
Decide whether to go long or short
Going long means that you are speculating on the value of a future increasing, and going short means that you are speculating on its value decreasing.
If you think that the underlying price of an index, commodity or bond future will increase based on your own fundamental and technical analysis, then open a long position. If instead, your analysis suggests that the underlying market price will fall, then open a short position.
Place your first trade
To place your first trade, go to the IG trading platform and select a market. Next, select the ‘Futures’ tab on the price chart, decide whether you want to buy or sell the underlying market, and choose your position size.
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 order will close your position automatically if it moves to a more favourable one.
IG offers normal, trailing and guaranteed stops2, and you can set your stops and limits directly from the deal ticket. Once you’re happy with your levels, place your deal.
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 speculating 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 IG’s trading platform. If you thought that the underlying market price was going to rise, you’d buy the market on 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.
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 IG, rather than entering into a futures contract directly, you can speculate 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 spot price is the current underlying market price that you would be able to trade at if you opened a position today. 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.
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1 Best Finance App, Best Multi-Platform Provider and Best Platform for the Active Trader as awarded at the ADVFN International Financial Awards 2022.
2 A premium is incurred if a guaranteed stop is triggered.