Futures are another financial tool that we as traders can use to profit off the fluctuations of the market. Regardless of what it is that you're focusing on trading, it's essential to understand what futures are in order to become a well-rounded trader. So the goal of this video is to provide you with a complete working knowledge of the futures work and how it is that people make money off futures contracts and how we as day and swing traders can use them to understand what's going on within our own market. I'm also going to be discussing the pros and cons of focusing on trading futures such as the fact that there's no PDT role it's generally more affordable as well as a major con, which is that you're open to a lot more risks and thus need better risk management skills, which isn't super common with novice traders.

Also, if you're interested in futures and options and would like more content related to those two topics, make sure to let us know in the comment section below. As always, all I ask for in return for this video is that you hit that beautiful like button. And also if you C value subscribe for more short sweet simplified videos on how to trade the stock market. So futures also known as a futures contract is an agreement to buy and sell a specific amount of something at a future date for a predetermined price.

This transaction is actually pretty common throughout our economy, but we are obviously going to be focusing on financial instruments in this video. so in the stock market, this could be an agreement to buy shares, indices, or commodities like natural gas. So the value behind this transaction is intuitive. Price fluctuates massively in the short term, but in the long term, converges closer to its true value.

So in order to provide a way to escape the fluctuations within the market, this financial instrument known as the Futures contract was created. And this is an agreement and acknowledgment between the buyer and the seller of the contract that says, hey, this is going to fluctuate in one way or the other. So instead of gambling on which way it's going to fluctuate in the future, let's just agree to meet somewhere in the middle at this predetermined price. So since prices are always changing, futures allow investors to lock in future purchases at a certain price.

In the present, it actually received the thing that they're locking in at a later date. A good analogy of this would be reserving a plane ticket in advance since you aren't sure where the price will be if you wait until the last minute. And the reason both buyers and sellers change features contracts is because they know that the price action can fluctuate massively either for them or against them, so it can make sense for both buyers and sellers to settle on a certain amount. This limits the profitability of both parties, but it also limits lost potential.

But anyways, much like regular stock trading, you have the opportunity to go long or short on a contract. So if you are familiar with options, the difference between this type of contract and an options contract is that with futures, you are obligated to buy or sell at a specific date, while with options, it's you guessed it, optional. So since there are contracts to buy at a certain date, that naturally means that there is a certain date where these contracts expire. In the case of options, that expiring contract just means that you no longer have the contract.

But in the case of futures and expiring, future contract means that the obligation of the contract must be fulfilled. And thus it's never a good idea as traders to hold a futures contract to expiration date. But these contracts are traded in an electronic marketplace that looks much like trading regularly with in the stock market. Baker Swim, for example, has an easy function to access this and to access the charts and data along with it.

But let's go ahead and dive into analyzing what makes up a futures contract. The best way to do this is by pulling up the specs on a website such as CME Group comm. So the first important part of a spec sheet is to look at the contract unit. Now multiplying the number given times the current trading value gives you the nominal value of the contract.

If you were looking at this contract, for example, the contract unit is $250 times the underlying asset, which is the Sp500. You can then go and look at how much the Scp-500 is trading at and multiply it by that and that's the total nominal value of the contract. Of course, this is not ideal for us as individual traders, so we focus on trading things such as a Minis, which are basically smaller versions of these future contracts that don't require us to have as much leverage. These allow you to take a futures contract out at a unit size of $50 instead of something crazy like $250 But again, this isn't the price that you paid to get the contract, but rather the contracts nominal value itself.

The nominal value is the position that you're taking. So for example, if you have a nominal value of a hundred thousand in the stock, next goes up 1% That means that you profited as though you had invested $100,000 in it. So contracts are set up at certain nominal values for certain delivery months. March June September December You'll see these dates here as well.

They are reflected in the actual ticker with a alphabetical code. You'll also find the minimum price fluctuation of the future. but I Want to take a minute to talk about the settlement method. Every single feature has a settlement method Now, like I said earlier.

while I don't recommend holding until settlement which is aka holding until expiration of the future contract. still important to understand what happens if you do accidentally hold it or you get stuck in a contract that's not really liquid, which you shouldn't because you should know what you're doing first, but whatever. So because a futures contract is a promise to buy or sell depending on which party you are at a specific date, that means that if you hold, you're going to have to fulfill the obligation of the contract. This is called the contract settlement and you want to make sure that your contract is financially settled so that you don't have to provide some sort of weird item or commodity.

This means if you hold the futures contract until expiration, that it must be settled financially in terms of a monetary value of some sort in terms of a monetary value instead of the actual instrument or commodity. That means that the person settling the contract B that you or the other party depending on if you went long or short on this position pays the holder of the contract the current market price and monetary value instead of the actual stock or commodity. The reason this is important is because if the settlement method is set at deliverable or something of that nature and you were trading something like crude oil futures, that means that if you let the expiration date expire, you will then be legally obligated to buy or sell the actual literal oil barrel specified in the contract. The reason for this is because a lot of companies that need these commodities use features to lock in a specific price so they don't risk losing a lot of money if the price fluctuates against them.

And again, these are always labeled as deliverable or something of that nature Depending on where you're looking. The certain futures are settled in actual items because the whole point is to buy at a certain price now and delay the actual delivery point to some point in the future where the price might be a different level. Another example of something that would be deliverable is like corn. A lot of corn futures are deliverable.

Most of them. This type of futures contract has actually been around for like 200 years and was sort of the original idea behind futures. Corn growth comes in cycles, and thus the price of corn can fluctuate massively. It doesn't make sense for companies to buy all of their corn when prices are cheap, nor farmers to sell only when the corn is plentiful.

So companies and farmers devised a plan to settle on a certain price and delivery date in some point in the future, and that was the founding of the futures contract. This way, both parties get to reap the benefits and minimize their losses. However, as retail traders I don't think it makes sense to be part of this transaction. A lot of people do, in fact trade deliverable futures, but that's not a good idea because if you get stuck in one of these futures contracts, you risk having to pay to ship or store thousands of bushels of corn to your home or the other party's location.

If you were going into corn trading instead of contracts trading or stock trading, this might make sense, but I'm by no means an expert on trading corn bushels, but if you want to know more about corn trading and not stock trading, you may want to consult the folks over at FarmersOnly. So the point here is, make sure your security is financially settled and not deliverable. Okay, so before we can go into some of the practical ways that you can use features to grow your account, let's talk about some of the pros and a few cons. So Pro number one is that unlike stocks, the trading hours are a lot more flexible with futures.

Generally speaking, most features are traded around the clock, but the futures that I focus on also known as the E Minis are open from Sunday at 6 p.m. through Friday at 5 p.m. Which means that if you have a 9:00 to 5:00 or other commitment, you can trade before or after. It's also great for people who day trade stocks during the regular market open and then want to trade futures at night.

So Pro number two is that it's very affordable. There are attractive margin rates. that means that you can enter positions with a relatively small trading account depending on the broker that you have. This is even more applicable in the E-mini futures market, which we're going to talk about more in a bit.

Obviously there are margin requirements and different brokers have different rules, but you'll find that the up margin requirements are much better and there's not as much in terms of fees and whatnot. Pro Number three is that features contracts are a lot less open to manipulation and are a lot more fair and predictable. That's not to say they're pretty, or there isn't any manipulation. it's just that with the fact that futures are much less impacted by the insider trading and height manipulation that happens on the regular market, so that allows us as traders to focus on what we do best.

And that is technical analysis. Pro Number four is that they are generally taxed at a much more favorable rate as compared to regular equity trading, at least in the United States Emini X' for example, fall under what's called the 6040 rule where 60% of the gains are taxed at the favorable rates and only 40% of them are taxed at the short term capital gain rates. Short-term capital gains are taxed the same as regular ordinary income, whereas longer-term gains are taxed at a much more favorable rate unless you want to get them in that category. As you know, trading regular equities is 100% short-term capital gains.

Okay, so by this point, you should have a working knowledge of what futures contracts are and the point of them. But I Understand that a lot of my viewers aren't avid traders of futures and I'm not trying to convince you to trade futures I Just want you to be well-rounded and understand what they are. And the reason for this is because now you'll understand what is being referred to when people write about the futures market and how it's trading and how that impacts the overall company. In terms of the actual equities that we're trading, the price direction of futures contracts can give us sort of a macro idea of how and where analysts are predicting indices and commodities to be valued at in the upcoming quarter or in terms of the day-to-day basis when we're looking at the macro economical scale.

To take it a step further, though, I'd like to explain a direct way for the retail trader to profit off futures. The best instruments for us as traders are something that I already mentioned and that is the E-mini contract. These are a lot less leverage than regular futures and thus open us up to a lot less risk. Still have risk.

Of course, the most popular one in the world is Es, which is the E-mini S&P 500. This also has high volume and thus higher liquidity than a lot of other contracts. Since these are also basically smaller versions of regular futures, we don't have to leverage our positions quite as much as with regular futures. This could be beneficial to smaller accounts with smaller margin and whatnot.

Obviously, extremely leveraged features such as the ones that we've talked about earlier aren't going to be practical for smaller retailers such as us, as they would for say, hedge funds or larged equity account or whatnot. But just like with regular equity trading, it's essential to practice everything you learned and always be hungry to gain more knowledge. Paper trading or simulated back-testing trading also known as rewind trading are ways to do this. Since this was an intro video and I know that a lot of our viewers are less focused on futures I Don't want to dive into how to actively trade these just yet, but if you are interested in hearing more about futures and strategies that I and other traders employ, go ahead and comment below as time goes on.

I've grown more and more engaged in the futures market, but it's still not the majority of my positions, but because of the risks associated with it inherently. I've been hesitant to introduce the common strategies as well as my tips and tricks to our viewership on the channel, but as always I hope this video was helpful for you and that you now have a working and pretty foundational knowledge of the futures market and the ways that people make money off it. If you have any questions, comment below or reach out to us on our free Facebook group Zip Trader Circle. Have a good day folks and I'll see you in the next video.