Stock Market: FUTURES INTRODUCTION

The class project is simple…

• Find three products you are interested in trading futures on.
  
  • Examples include:
    • Gold (/GC)
    • Crude Oil (/CL)
    • Wheat (/ZW)
    • S&P 500 (/ES)
• For each product, make a directional price assumption based on your judgement.
  • If you think the price of gold will increase, for example, your directional price assumption would be bullish.
  • If you think the value of the S&P 500 is too high and will decrease, your directional price assumption would be bearish.
• Identify the price points where you want to enter and exit your positions.
  • For example, if gold is currently trading at $1800.00 per ounce, you may be totally fine with buying a /GC contract at that price, or you may want to wait for the price to drop a bit before entering. Limit orders can help with this by allowing you to set the price at which you want to enter a position.
  • Similarly, knowing when to cut losses or take profits is also crucial. 
    • Perhaps you enter a bullish futures position on gold at a price of $1800.00 per ounce. But if the price actually falls to $1750.00, will that be your signal to get out and cut losses? Maybe $1780.00? Or $1795.10? This is for you to decide based on your risk tolerance and overall opinion on the price of gold.
      • Keep tick size and notional value in mind! A $50.00 drop in the price per ounce of gold translates to a $5,000 loss for your position.
• In your trading platform of choice, (I recommend TD Ameritrade’s ThinkOrSwim if you don’t have one yet), buy or sell futures on the products you have chosen based on your directional price assumption. 
  • If you are bullish on gold, then you’ll be buying a /GC contract.
  • If you are bearish on the S&P 500, then you’ll be selling a /ES contract.
  • Stick to trading contracts in the nearest 3 expiration cycles. This is where the most liquidity exists. 
  • NOTE: I highly recommend you do this in a paper trading (fake money) account for the following reasons:
    • The initial margin for some of these products can still be quite large. Entering into three futures positions may require more capital than you currently have in your (real money) account.
    • Leverage can be dangerous for beginners, so if something goes wrong in one of your positions, you’ll be able to simply reset your account balance back to where you would like and learn from what happened. 
• Observe your trades periodically each day to monitor how the gains and losses fluctuate (based on tick size and notional value). 
  • Be ready to cut losses or take profits when those price points are reached.
  • You can set alerts to notify you when this happens, or you can use GTC limit orders to take profits and stop loss orders to cut losses automatically for you.
  • NOTE: To close out of a trade, do the opposite of what you did to open the trade.
    • If you initially bought a gold futures contract to open a new position, then you will sell a gold futures contract (with the same expiration) to close out.
    • If you initially sold a gold futures contract to open a new position, then you will buy a gold futures contract (same expiration) to close out.

Once you are out of all three trades (hopefully for profits!) you should have some newfound confidence in your futures trading skills! And if not, don’t be discouraged! Starting with a paper trading account will allow you to keep trying until you finally get the hang of things.

Feel free to share screenshots of your trades to give other students ideas or if you would like some feedback!