Overview of Futures
What is futures?
This video summaries it well.
Watch for about 90 seconds.
There are a few things you NEED to know.
S&P futures contracts trade by POINTS, not price.
This IS KEY to know! Points.
When the S&P Contract is trading at 4500. That is “4500 POINTS”. When it moves up to 4505, that is “FIVE POINTS” of movement, not ‘five dollars’.
So.. HOW do we get this into DOLLARS?
First, you have to pick a contract SIZE.
There are TWO Options.
$50 per point
$5 per point
ES is 10X the size of MES.
So.. if price moves 5 POINTS…
ES price moved $50 X 5 = $250.
MES price moved $5 X 5 = $25.
ES is for traders with years of experience and over $50K in their trading account IN MY HUMBLE OPINION. MANY experienced traders ONLY trade MES.
Think about it.. you can trade 10 MES which equals 1 ES. Or trade 5 MES, which is like HALF an ES. You have WAY more control over RISK with MES.
There is NO NEED to trade the ES contract.
Lean in and hear me on this.
**MES IS MORE POWERFUL AND ES**
Yes, it is MORE powerful!
I promise to explain why here in a bit. I already mentioned one reason, RISK CONTROL.
You need to drill this into your head early. MES ONLY.
We will talk about risk management A LOT and THIS is where it starts. Knowing WHICH contract to trade.
Let me say it again for the hard of hearing and for those sitting in the back. MES ONLY.
MES is the contract to choice. Hence the NAME of my website and Discord Group, “Micros Trader”.
Did I drive that point home?
Now, which contract?
MES or ES?
Thats right, MES. Good answer.
This is a great overview of “futures in general”.
NOTE: That entire video is fascinating about the life of Floor Traders in Chicago.
Basics of Futures
**BASICS OF FUTURES: Video Recommendations**
This guy does a great job talking about the BASICS OF FUTURES. I highly recommend.
In finance, a futures contract is a standardized legal agreement to buy or sell a specified asset of standardized quantity and quality for delivery at a specified future date at a price agreed upon today between the buyer and seller, making it a type of derivative product. The asset transacted is usually a commodity or financial instrument. The predetermined price the futures contract is bought or sold at is known as the futures price. The price of the futures contract is determined by the supply and demand for the underlying asset, as well as the expected future value of the asset.
Futures trading is the act of buying and selling futures contracts. Investors or traders can use futures to speculate on the direction of prices of the underlying asset or to hedge the price risk of that asset.
For example, a farmer might enter into a futures contract to sell a certain amount of wheat at a fixed price on a specific date in the future. This allows the farmer to lock in a price for their wheat today, rather than having to wait until the crop is ready to be sold and hoping that prices are favorable at that time. On the other side of the contract, an investor or trader might buy the wheat futures contract as a way to speculate on the future price of wheat or to hedge against the risk of rising wheat prices.
Indices futures are financial derivatives that allow traders to speculate on the future price movements of a stock index, such as the Dow Jones 30 or S&P 500. These futures contracts can be used by traders to speculate on price movements or to hedge their positions in an attempt to reduce risk. Indices futures are also available in electronic form as “E-minis,” which are smaller futures contracts based on equities. Unlike commodities futures, which require the delivery of a physical asset upon expiration, indices futures are settled in cash, with the amount of cash being determined by the difference between the entry and exit prices of the contract.
Quick and Easy Summary
The futures market is a place where people can make bets on what they think the stock market will do in the future. It was started so that people doing business together could protect themselves from changes in the market. This means that both people in the trade have to follow the rules of the contract. This is different from options contracts because you don’t have to follow the rules with options. Futures contracts are also about things like oil, gold, and other things you can touch, not just stocks or companies.
Nowadays, people use the futures market to trade things like stock prices, different kinds of money, and even how much interest you get paid on your money. People don’t actually want to take the things they are trading, they just want to make money if they guess right about how the prices will change. If you think the price of something will go up in the future, you want to buy the futures contract. If you think the price will go down, you want to sell the futures contract.
Futures contracts are not just worth a certain amount of money. They are based on points and ticks. Each futures contract is different and you need to know how much each point and tick is worth for the contract you are trading. Some common contracts are the /ES E-Mini S&P 500.
Futures contracts also have a name that tells you when they will expire. The name has a letter for the month and numbers for the year. For example, a contract might be called “ESZ23” which means it expires in December of 2023.
Futures margin is the money you need to have in your account to make a new bet on the futures market. You don’t need to have the whole amount of the bet, just a part of it. You borrow the rest from your broker. There are different rules for margin depending on what time it is. During the day you only need a certain amount of money. But after the stock market closes, you need more money in your account to keep your bet. If you don’t have enough money, your broker will ask you to close your bet or put more money in your account. There are also different rules for how much money you need during the night. Each broker also charges a different fee for making bets on the futures market.
One thing people don’t always talk about is that you can save money on taxes when you trade futures instead of stocks, options, or other kinds of bets. If you make money on your futures bets, most of it will be taxed as a long-term gain which is better than the short-term gain you would have to pay on other kinds of bets. But you should always talk to a tax expert to find out what is best for you.