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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 happens in two locations. First, futures are traded on the floor of a Futures exchange, such as the Chicago Mercantile Exchange (CME), where trading occurs in the open outcry pit. Futures trading also can happen “electronically,” over the internet, where individual investors submit their buy/sell orders from their desktop platforms.

Not only can Futures be traded in 2 places, the traders themselves can be broken into 2 groups, hedgers and speculators. A farmer is a hedger, as is a manufacturer, exporter or importer. The goal of a hedger is to be in futures positions that reduce the risk that the price of the commodity they are selling/manufacturing may fall. For example, an oats farmer believes that his oats will be harvested in August. He sells an oats futures contract in June at the current price to be delivered in September. In June, the price of oats is high because of short supply. Even if the price of oats drops by September (the contract expiration date), the farmers’ price has already been secured. The farmer assumes a risk with this trade. What if there is a drought and many bushels of oats are lost before September. The price of oats would rise higher, but the farmer is still obligated to deliver oats at the May price negotiated. The farmer would lose even more money. On the other hand, September might produce a bumper oats crop and the price ends up being far lower than his May price. In this case he wins the trade.

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.

But since organizing exchanges, the job of the exchange became to validate quality, delivery and payment. Exchanges regulations were enacted to require good-faith money with a third party to certify contract performance, thereby reducing the number of contract defaults. Exchanges were finally able to ensure standardized contracts, stipulating each contract term, like commodity product grades and delivery dates.

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.

The CME also created futures contracts whose underlying asset is a currency index. For smaller investors, the Currency Futures Market exists for the smaller number of contracts that individual investors are able to trade. With currency trading, individual investors can buy/sell the exact same dollars/euros that are being traded in the Forex market, but trade on the CME with a centralized and organized exchange.

Shadowtraders specializes in training individual investors in Trading Futures. Most other Futures education companies are limited to training only the S&P 500 Futures Contract, and specifically the Emini, earmarked to individual traders. Shadowtraders is far more interested in introducing its clients to a variety of different Futures, including energies, currencies, treasuries, etc. We trade assets with liquidity and volatility. We know the days of the week that a particular Futures contract trades, the times of day it trades best, how many contracts are traded for that, whether or not you can it at all, etc. That is Shadowtraders specialty.

If you are tired of just trading the S&P 500 Emini, or you are new at the Futures trading game and want to find out more, attend a Shadowtraders Webinar 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 seminar. Before you purchase any trading course, make sure you attend Shadowtraders Monday Night Webinar, and hosted by Barbara Cohen

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