What are futures in the stock market? How can it help your trading? Futures kind of try to predict the Future. It's a great way to look at the potential movement of a stock.
Who wouldn't want to predict what a stock will do? As great as Futures is, it's not a crystal ball. But you can both trade it and use it to set up other trades.
What Are Futures in the Stock Market?
- Futures are exchange-traded derivatives contracts that lock in the delivery of a commodity or security in the future at a price set today. A futures market is an auction market where commodity and futures contracts are bought and sold. With this comes a promise of delivery of the underlying instrument on a pre-determined future date. The future date is also referred to as the delivery date, while the pre-set price is called the futures price. Finally, we call the price of the underlying asset on the delivery date the settlement price.
1. What Happens on the Final Settlement Date?
Both parties of a futures contract must fulfill the contract on the settlement date. Usually, the settlement price converges toward the futures price on the expiration or delivery date.
However, regardless of the price at expiration, the buyer must buy, or the seller must sell at the pre-determined price.
At this point, one of two things happens. Either the seller delivers the commodity to the buyer, or, if it's a cash-settled future, then the cash is transferred from the futures trader who sustained a loss to the one who made the profit.
Can you identify which scenario you fit into? Likely, it's scenario two as most of us don't want barrels of oil showing up at our doors. Which brings me to the next commonly asked question:
2. What Are the Commodities or "Underlyings" I Can Trade Futures On?
Pigs, oil, corn, soybeans, the world is your oyster when it comes to trading futures contracts on physical commodities.
Luckily if you're a stock trader, you can stick to what you're comfortable with. You have the option to trade futures on financial instruments like the S&P 500. How great is that?
3. Where Is the Futures Stock Market?
Well, we have a few:
- New York Mercantile Exchange (NYMEX)
- Chicago Mercantile Exchange (CME)
- Kansas City Board of Trade
- Chicago Board of Trade (CBoT)
- Minneapolis Grain Exchange.
- Chicago Board Options Exchange (CBOE)
Before electronic trading networks, trading took place in the very loud pits of NYC, Chicago, and London. Now, we can calmly trade futures from the comfort of our bed.
What Do Stock Market Futures Mean?
- If you want to know what are futures in the stock market and what do they mean, we have a basic answer for you. They follow a specific market. For example, the ticker /ES follows the S&P 500 market. It's a lead indicator for trading. So if you're into trading indicators, make sure to use futures in your trading. Take our trading courses to help you with futures trading.
1. What Are Futures in the Stock Market and the Best Ones for Day Trading
Without a doubt, the market of choice for many day traders is the E-mini S&P 500. Because the E-mini S&P futures trade electronically, the trade executions very fast and liquid.
Beyond even that, futures traders can control around $75,000 worth of stock for about $3,500 in the margin.
However, you don't need to stick with the E-mini S&P 500. Indeed, the Dow futures, E-mini Nasdaq futures, and E-mini Russell futures are very popular to day trade.
Other good candidates for day trading include soybean, crude oil, the Japanese yen, and Euro F.X. All of these have the daily volume and volatility in their futures prices.
A pivotal point to keep in mind is that each futures market differs. Because of this, you need to take time, study the markets before day trading to uncover and optimize techniques and develop a plan.
2. Micro E-Mini Futures: A Solution for Those With a Small Account
Meet Micro E-mini futures on the S&P 500, Nasdaq-100, Dow Jones Industrial Average and Russell 2000 indices.
At 1/10th the size of their classic E-mini counterparts, Micro E-mini futures make it easier for new traders to access the futures market.
3. What I Love About Trading Micro E-Mini Futures
- Access To Deep Liquidity: Micro E-mini Futures enable traders to more easily access the futures market and reap the benefits of its deep liquidity
- Consistency: They're designed to manage exposure to the 500 U.S. large-cap stocks tracked by the S&P 500 Index, widely regarded as the best single gauge of the U.S. stock market.
- Capital Efficiency: When trading Micro E-mini futures, you tap into the powerful leverage the Futures markets provide. The MES allows you to control a considerable contract value with a small amount of capital.
- Reduced Tick Value (means less risk): The Micro E-mini S&P 500 futures contract is $5 x the S&P 500 Index and has a minimum tick of 0.25 index points. The point value of the Micro E-Mini futures is 1/10th of the size of the regular E-Mini futures. For the MES, 0.25 index points = $1.25
- No Pattern Day Trading Rule: To day trade stocks, you need $25k in your account; otherwise, you'll fall under the PDT rule.
- Low Account Size To Get Started: Luckily with the micro E-mini, you can get started with as little as $400.
- Market Availability: You can pretty much trade the e-minis 24/7. Here's the CME Globex's specific breakdown: Sunday - Friday 6:00 p.m. - 5:00 p.m. Eastern Time (E.T.) with trading halt 4:15 p.m. - 4:30 p.m.\
- Trading Tick Charts. Read this post to find out what is a tick chart
Do Futures Predict Stock Market?
- What are futures in the stock market and can they predict what the market will do? They're not a prediction of the market and what it will do. It's much more like a bet. It's basically a tell for where investors think the market is heading. And they're not always right.
1. An Inspiring Story
I just finished reading the book "The Complete Turtle Trader" by Michael W. Covel. In a nutshell, it's a story of how one trader Richard Dennis believed that we could reduce a successful trader's skills to a set of rules.
With that, he and his partner, William Eckhardt, taught 23 students everything they needed to know about trading bonds, currencies, corn, oil, stocks and all other markets in only two weeks. All by making them follow a simple set of trading rules.
Their students or "Turtles," came from all walks of life: kitchen worker, teacher, waiter, messenger, "unemployed" and security guard. Each student got $1 million to trade with after their two weeks in the classroom.
And no, the classroom was not on the loud trading floor with traders widely waving their hands around, but rather a quiet office with no TV's or computers.
The results were shocking. Within four years, many of the students made over 100% or more. Which, in case you didn't know, is monster money-making.
Even more impressive is the record of two of their pupils, Jerry Parker and Paul Rabar. By 2007, both managed to earn over $3 billion. To this day, they still trade in a very similar fashion.
All I want to say is get the book, get inspired and nail your plan down!
2. Do You Have the Right Set of Rules?
People do have a chance to win in the market game, but they need the right rules and attitude to play by. Unfortunately, those right rules and attitudes collide head-on with basic human nature of fear and greed.
However, anyone can learn how to trade if taught properly. Everything about the markets is teachable. In fact, charting, analysis and risk management are quite easy.
Quite frankly, the skills of a successful trader can be reduced to a simple set of rules. It's your emotions that are going to get the best of you.
Let Bullish Bears take away the fear of the unknown by helping you set up your set of trading rules. Once you have your specific set of rules in place, your emotions won't have a place in your trading game.
Final Thoughts on What Are Futures in the Stock Market
I'll leave you with the words of Richard Dennis: "Trading was more teachable than I ever imagined. Even though I was the only one who thought it was teachable...it was teachable beyond my wildest imagination."