Trading futures successfully

Futures are standardised contracts in which buyers and sellers commit to buying or selling an underlying asset at a predetermined price and date in the future. Futures trading allows traders to profit from price changes on the stock exchange without having to own the underlying asset – known as the underlying – such as commodities or shares. These specialised derivatives offer traders various opportunities in financial markets. But what exactly is futures trading, and how does it work? In this guide, you’ll find an explanation of futures trading, understand the significance of these contracts, and learn how to trade futures in the UK.

• Futures are standardised contracts in which buyers and sellers agree on a future price and date for trading an underlying asset such as commodities, stock indices, or cryptocurrencies

• With futures trading, you can use leverage, allowing you to control larger positions than your capital would normally permit. This can amplify potential profits but also increase losses. The margin acts as collateral that you must deposit

• Futures provide access to various markets, offer hedging strategies and high liquidity, but also involve significant risks such as margin calls

• Key costs include commission fees (e.g. €0.25–€2 per contract), margin requirements, and potential financing costs for leveraged positions

What are futures and what types exist?

Futures are standardised contracts traded on derivatives exchanges such as Eurex. A futures contract is an agreement between two parties to buy or sell a specific underlying asset – such as commodities, stock indices, or cryptocurrencies – at a predetermined price and date in the future. These contracts serve either as a hedge against price risks or as a means of speculating on price movements.

There are different types of futures, categorised based on their underlying asset:

• Commodity futures – Contracts on physical goods such as oil, gold, silver, wheat, or coffee

• Index futures – Contracts on stock indices like the DAX (Deutscher Aktienindex) or S&P 500 (Standard & Poor’s 500)

• Financial futures – Based on assets such as bonds, interest rates, or currencies

• Cryptocurrency futures – Contracts on digital assets like Bitcoin or Ethereum

• Energy futures – Markets for natural gas, crude oil, or electricity

Each type offers specific advantages and risks, depending on individual trading goals and strategies.

What Is futures trading?

The explanation of futures trading shows that this type of trading allows you to speculate on price movements using standardised contracts. This works without owning the underlying asset directly. These contracts specify that the underlying asset – such as commodities, shares, cryptocurrencies, or other financial products – will be traded at a predetermined price and date.

Unlike spot trading, where assets are traded immediately at current market prices, futures trading involves agreements on future transactions. This means that the underlying asset is not directly bought or sold; instead, only the contract is traded.

The goal of trading futures is to profit from future price movements. Futures trading is particularly popular with cryptocurrencies like Bitcoin or Ethereum, as it enables traders to speculate on their often volatile price movements without having to own the digital assets directly. Both private investors and institutional traders use futures trading for speculation and hedging opportunities on the stock exchange.

How does futures trading work?

When trading futures, you speculate on price changes of an underlying asset without owning it. Trading is based on standardised futures contracts, which are traded on derivatives exchanges such as Eurex or the Chicago Mercantile Exchange (CME).

To understand how futures trading works, it’s helpful to know the key mechanisms that determine the trading process:

• Leverage – With leverage, you can trade a significantly larger position with a small capital investment, meaning both profits and losses can be disproportionately high

• Margin – In futures trading, you pay a security deposit (margin), which represents only a fraction of the contract’s value and covers potential losses up to a certain limit

• Settlement – Futures contracts are settled either by cash settlement or by physical delivery of the underlying asset. In most financial markets, cash settlement is standard, while some commodity futures require physical delivery

• Long and short positions – A long position means you are betting on rising prices, while a short position allows you to profit from falling prices

These mechanisms work as follows: traders open a position (long or short), deposit the required margin, and use leverage to speculate on price changes. Profits or losses arise from the difference between the agreed contract price and the current market price.

Here’s an example: You trade Bitcoin futures at a price of €30,000. This means you enter into a contract agreeing to trade Bitcoin at this price at a later date. If the Bitcoin price rises to €35,000, you can sell the contract at a profit. However, if the price falls below €30,000, losses occur as the contract loses value.

What is the significance of futures trading?

Futures are a type of derivative contract, as their value is derived from an underlying asset. A futures contract specifies exactly at what price and on what date a particular asset will be traded. While the seller is obligated to provide the asset at the contract’s expiry, the buyer must purchase it at the agreed price.

The significance of futures trading lies primarily in its versatility. Companies use futures to hedge against price fluctuations, while traders use them to speculate on market movements. For example, a coffee farmer can secure a future selling price for their product through a futures contract, ensuring planning security even if market prices fluctuate. At the same time, investors can use futures to profit from price changes in cryptocurrencies, stock indices, or commodities.

Futures also help make larger markets more efficient by contributing to price discovery and distributing risk among market participants. Particularly in volatile markets, such as cryptocurrencies or energy prices, futures can serve as a tool for hedging against sudden price swings or profiting from them. This makes them strategically important for both professional investors and private traders.

Where can you trade futures?

Futures are traded on specialised exchanges known as derivatives exchanges. These provide standardised contracts and ensure that buyers and sellers fulfil their obligations. In the UK and Europe, platforms like Eurex offer access to markets for stock indices, commodities, and bonds. In addition to traditional exchanges, there are also specialised platforms for cryptocurrency futures.

Major futures trading venues and platforms

• Eurex – The largest derivatives exchange in Europe, offering futures on stock indices, bonds, and other financial products

• Chicago Mercantile Exchange (CME) – A global leader in futures trading, covering commodities, indices, and cryptocurrencies

• Intercontinental Exchange (ICE) – Specialised in energy and commodity futures

• Brokers – Many brokers provide access to global derivatives exchanges, allowing retail investors to trade futures

The choice of platform depends on the underlying assets you wish to trade, as well as factors like fees, leverage options, and user-friendliness.

What are the most well-known futures?

Some of the most widely traded futures include commodity, index, and cryptocurrency futures. These serve as benchmarks for their respective markets and provide key insights into global trends and investor sentiment.

• Commodity futures – Examples include crude oil and gold, which are often used to hedge against price fluctuations in energy and precious metals

• Index futures – The S&P 500 and DAX are among the most important contracts, reflecting the performance of the US and European stock markets

• Cryptocurrency futures – Particularly Bitcoin and Ethereum futures provide access to volatile crypto markets and are popular among both retail traders and institutional investors

Pros and cons of futures trading

Futures trading presents many opportunities but also comes with risks that investors should be aware of before entering the market. The combination of leverage, diverse trading options, and hedging strategies makes futures attractive. At the same time, trading requires strong risk management to avoid losses from volatility and margin calls.

Advantages of trading futures

• Leverage – Enables trading larger positions with a smaller capital investment, potentially maximising profits

• Risk management – Companies and investors can use futures to hedge against unexpected price movements (e.g. commodity prices or exchange rates)

• Variety of assets – Access to markets like commodities, indices, currencies, and cryptocurrencies, often without needing to own them directly

• High liquidity – Many futures markets are highly liquid, allowing for quick entry and exit of positions

Disadvantages of trading futures

• High risk due to leverage – Losses can increase just as quickly as profits when using leverage

• Volatility – Markets such as cryptocurrencies can experience extreme price swings

• Margin calls – If the margin is insufficient due to adverse market movements, a margin call may occur. This requires additional capital to be deposited; otherwise, the position may be automatically liquidated

• Complexity – Trading futures requires a deep understanding of concepts like margin, leverage, and settlement

Successful futures trading requires traders to understand the risks, apply effective strategies, and be aware of the volatility of their chosen markets.

Which is better: futures or options?

Whether futures or options are the better choice depends on your goals, risk tolerance, and knowledge of the markets. Both instruments are derivatives but differ in their mechanics and risk profiles.

Futures:

• Obligation – Buyers and sellers are contractually bound to trade the underlying asset at the agreed price and date

• Simplicity – Futures have a straightforward structure, focusing only on the agreed trade price and expiration date

• Risk – Losses can be unlimited, as both parties must fulfil their obligations regardless of market movements

Options:

• Flexibility – The buyer has the right, but not the obligation, to trade the underlying asset, while the seller must deliver if the buyer exercises their right

• Controlled risk – Option buyers can only lose the premium they paid, limiting their risk

• Complexity – Options offer various strategies (e.g. calls and puts) but require a deeper understanding

Whether futures or options are better depends on your preferred strategy and risk appetite. Futures are ideal for those looking to capitalise directly on price movements and who understand the associated risks. Options, on the other hand, provide more flexibility and limited downside risk but require a stronger grasp of market strategies. While futures trading is often used for straightforward speculation or hedging, options are better suited for traders employing targeted strategies.

What does it cost to trade futures?

Futures trading involves several costs that you should be aware of to plan your trades effectively. These include trading fees, margin requirements, and potential financing costs.

Typical costs in futures trading:

Commission fees

Most brokers charge a fee of around €0.25 to €2 per contract per side (buying or selling). For day traders with frequent transactions, these fees can add up quickly.

Margin requirements

The margin is usually a fraction of the nominal value of a futures contract. For example, a DAX futures contract with a nominal value of €25,000 may require a margin deposit of between €1,000 and €5,000, depending on the broker and leverage used.

Financing costs

For leveraged positions, financing costs may apply (e.g. 0.01–0.1% per day), especially if the position is held overnight. These costs vary depending on the trading platform and underlying asset.

Example cost breakdown:

If you trade a Bitcoin futures contract worth €30,000, your broker may require a €1,500 margin (assuming 5% of the contract value). Additionally, you would pay a €2 commission per contract and potentially incur financing costs if you hold the position overnight.

Conclusion: is futures trading worth it?

Trading futures can be a valuable addition to an investment strategy, allowing you to speculate on price movements in a wide range of assets – from commodities and stocks to cryptocurrencies – or to hedge against risks. The leverage and high liquidity make futures particularly attractive for experienced traders.

However, the risks should not be underestimated. The combination of leverage, margin, and potential margin calls can lead to significant losses if the market moves against your position. Additionally, futures trading can be complex and fast-paced, making it challenging for beginners.

Whether futures trading is worthwhile for you depends on your experience, risk management, and trading goals. By understanding how futures work, applying the right strategies, and carefully calculating costs, you can expand your trading opportunities effectively.

More topics on trading

Would you like to explore more topics related to futures trading and investing? The Bitpanda Academy offers insightful content on cryptocurrencies, spot trading, blockchain technology, and various trading strategies. From fundamental knowledge to practical tips, you’ll find everything you need to enhance your understanding and navigate the financial markets with confidence