Futures are financial products that allow us to trade commodities, financial instruments and more in the future. We have summarized how this works, what opportunities and risks await you and what you need to be aware of, especially in Germany, in the following guide!
The most important in a nutshell
- Futures are contracts for trading in the future. The subject of trading can be, for example, commodities, foreign exchange, share indices, bonds and more.
- The price of the commodity is agreed in advance, making futures very suitable for hedging. However, speculative use is also possible.
- German brokers cannot offer futures trading. You must use an international broker such as CapTrader.
- Future trading offers the chance of high profits, but also enormous losses and is therefore more suitable for advanced traders.
What is futures trading?
Futures are trading contracts ("forward contracts") between two equal partners that are executed at a point in the future. They offer exciting opportunities for traders, as they allow them to hedge against price changes - or profit from them!
The following characteristics must be defined when a futures contract is concluded:
- The commodity to be traded, for example a commodity, a stock index or a currency.
- Who is the buyer and who is the seller of the goods.
- The volume, i.e. how many units of the commodity will change hands.
- The price of the commodity at which the trade is executed.
- The time at which the transaction is concluded.
Futures trading, i.e. trading in such contracts, offers enormous profit potential, but can also result in heavy losses: if the price of the commodity changes during the term, a future can gain or lose value.
Important technical terms:
As futures do not directly trade a valuable asset, but contracts on such an asset, they are classified as "derivatives", i.e. "derived financial instruments". The traded asset is also referred to as the "underlying", as a derivative is based on it or uses it as a basis.
What are futures good for?
Futures trading is an important aspect of our economic and financial system because the contracts bring security and predictability to trading. There are three central purposes:
1. Secure prices
As early as the 16th century, producers and buyers of raw materials came up with the idea of securing the prices for their goods in the future. This allowed traders to regulate the risk of the long transportation times at the time.
For example, a forward contract secured the value of a ship's cargo when it arrived at its destination port. Even if the price of the goods had fallen drastically in the meantime (after all, such a journey could take months!), the seller received the previously agreed value.
Even today, companies, intermediaries and buyers use futures to secure prices. For example, a farmer could hedge the price of his wheat before the harvest. This creates security and makes his business easier to plan.
2. Hedging
A second useful application is hedging, i.e. protection against losses. With futures trading, you can profit from both rising and falling prices of the underlying asset and thus offset unwanted losses. .
For example, if you want to protect yourself against a fall in the price of a share in your Equity portfolio you simply create a future in a short position. If the price of the security actually falls, the short future gains in value at the same time. This makes it easy to offset the financial loss.
Good to know:
With derivatives such as futures or options, short positions are very easy to implement. All you have to do is take the appropriate side of the respective trading contract. However, if you do not want to trade derivatives, you can use a Short sale shorten.
3. Price speculation
If you correctly predict the price development of the underlying asset, you can make handsome profits with futures trading. The contracts are particularly exciting as they are usually traded with leverage: All profits, but also losses, are multiplied by the specified factor.
Futures trading is a popular tool for advanced traders who want to make the right risk and reward decisions. Money management can master the dangers.
Such transactions have also been common for centuries. As early as 1556, futures transactions were temporarily banned in Amsterdam after speculators caused unsustainable increases in grain prices.
This makes futures contracts a double-edged sword: on the one hand, they are essential for the smooth flow of goods and security of supply; on the other, they can cause dramatic damage if there is a lack of the necessary regulation and control.
Price formation in futures trading
Every futures transaction is based on an underlying asset whose price fluctuates. However, it is not always easy to understand how the price of a future is determined!
- The price of futures is calculated from the price of the underlying asset plus additional factors such as the cost of carry for commodities.
- Deviations due to such influences are rather small in futures trading and level out quickly. Nevertheless, the price can deviate from the underlying, especially for a short time!
- Traders should not forget that they are using exchange-traded products here - supply and demand ultimately determine the price!
- The remaining term is also important for the value of such a transaction. The more time available until execution, the more opportunities there are for price fluctuations.
Overall, pricing is easier to understand than with other derivatives. In particular, if you Trade optionsthe prices are more difficult: Here, among other things, the Option Greeks into play and make it more complicated for non-experts to get started.
How risky is futures trading?
Futures trading is a high-risk form of trading. Danger threatens from several sides:
- Market risk: If prices do not develop as hoped, there is a risk of losses.
- Liquidity risk: If a market is not sufficiently liquid, it can be difficult to buy or sell a futures contract.
- Counterparty risk: If the other party is unable to meet its obligations, there is also a risk of losses.
- Credit risk: The broker or clearing house could also run into payment difficulties and put your investment at risk.
- Operational risk: Technical complications can cause costly delays.
The good news right up front: Three of these risks, counterparty, credit and operational risk, can be minimized by choosing the right broker. An award-winning international provider such as CapTrader can protect you from these risks thanks to its size and comprehensive security mechanisms.
The choice of broker also plays an important role when it comes to liquidity risk! You should opt for a service provider with a comprehensive range of futures exchanges. This is the only way to gain access to particularly liquid markets and ensure fast and lucrative settlement.
Unfortunately, there is always a market risk. Traders try to predict stock market prices using a wide variety of methods. Of course, there is no guarantee of success. If the price of your futures does not develop as hoped, losses may occur.
Some methods could help you to create forecasts:
- NewstradingStructured evaluation of current news
- Trading signals: Generic term for services and systems that provide trading recommendations.
- Forex SignalsTrading signals specially developed for trading currencies.
- Chart analysisAnalysis of current price trends in order to estimate future developments.
- Market techniquePure mathematical analysis of price and trading volume.
- Technical analysisViewing geometric figures in charts + indicators derived from prices.
- Social tradingYou can copy the strategy of successful traders directly.
- AI tradingAttempts to predict price changes using artificial intelligence.
- TraderfoxExcellent information service that provides useful trading signals.
- Fundamental analysisIntensive analysis of a company and its key figures.
- Volume TradingSpecial attention to the trading volume in order to assess market interest.
Lot size: What do "E-mini" and co. mean?
Futures are standardized, exchange-traded derivatives. This standardization also includes the size of the respective contract. The size of a "normal" futures contract, a so-called standard lot, is very large: for example, it is 100,000 dollars if you want to trade the US currency as the underlying asset!
Even with crude oil (100 barrels) or grain (5,000 bushels), you need to have a lot of capital ready. The large volume of futures transactions has historical reasons: These are contracts that were originally concluded between institutional traders and producers - smaller lot sizes were not necessary here.
However, a lot has happened since then and the interest of private investors in futures trading has increased enormously. The exchanges have reacted accordingly and have introduced several smaller sizes:
- Standard Lot: A standard lot is the starting size for a future. It is generally quite large (e.g. 100,000 euros for currency trading) and is therefore mainly suitable for institutional traders.
- Mini Lot: A mini lot is a significantly smaller variant and therefore more accessible for private traders. The size is not the same for all underlying assets and is, for example, 10 barrels for crude oil (instead of 100 in the standard lot).
- E-mini: The E-mini is a special form of mini lot developed and issued by the CME. It is applied to share indices and other financial products. Its size is, for example, USD 50 multiplied by the current price of the S&P 500.
- Micro Lot (Micro Mini Lot, Micro E-Mini Lot): The micro lot usually corresponds to one tenth of the mini lot or one hundredth of the standard lot. Esc, for example, is 1,000 euros when trading the currency.
- Nano Lot: The smallest available size is generally the nano lot. For example, it comprises € 100 for a future on the euro. It is therefore particularly interesting for traders with small assets.
The lot sizes available depend on the broker used and the trading venue. If you do not have enough capital to trade in 100,000 euro increments, you should therefore make sure you choose a provider with a suitable selection!
You can trade futures on these exchanges
You can trade futures on special futures exchanges. Over-the-counter (OTC) trading is not possible. However, if you want to combine forward transactions with the greater flexibility of over-the-counter settlement, forwards may be suitable for you.
Different futures exchanges offer different contracts. The prices may also differ at the individual trading venues. Before you place a Open an account and start trading futures, you should therefore check the selection of exchanges.
The most important futures exchanges include:
- EUREX: The European futures exchange EUREX ("European Exchange") is the trading venue for futures, options and co. in Europe and Switzerland. It is one of the largest and most important exchanges and is based in Eschborn, Germany. Traders can trade all types of underlying assets here; EUREX is particularly popular for transactions involving shares, share indices and bonds.
- CME: You can also trade futures contracts on commodities, shares and more on the CME, the Chicago Mercantile Exchange. In particular, currency futures and transactions with the S&P 500 as the underlying make up a large part of the activity. It is the largest futures exchange in the world (by volume) and the third largest exchange for futures.
- ICE: The International Currency Exchange is an important contact point for trading agricultural commodities. This exchange is also important for contracts on the energy market.
- LIFFE/ICE Futures Europe. ICE Futures Europe is a futures exchange known to many under the former name "London International Financial Futures Exchange" or LIFFE. The London-based exchange is part of the Intercontinental Exchange Inc. group, which also operates numerous other trading venues.
- National Stock Exchange of India. The most important Indian futures exchange plays only a minor role for most traders in Europe or North America. However, with more than 17 billion traded contracts per year, it is by far the largest trading center (by volume) for futures.
- B3. The "Brasil, Bolsa, Balcão" is Brazil's most important trading center. With almost 9 billion futures contracts traded per year, it is the second-largest futures exchange in the world - almost double the trading volume of the third-placed CME.
- NYBOT and NYMEX. The New York Mercantile Exchange and the New York Board of Trade are two other important US futures exchanges. They are the hub for many millions of contracts per year, but differ in their selection of underlying assets.
You should know these futures
The most important futures can be easily determined by the trading volume. There is always an interesting mix of different underlyings among the top placements. Commodities, currencies as well as financial products such as bonds can be found here.
We will introduce you to the most important futures, as there is a reason why they are so popular and often very suitable for getting started in futures trading.
U.S. Bonds
Bonds issued by the US government almost invariably occupy the top position in futures trading. The trading volume here is generally very high. Various maturities are available, with 10 and 5 years experiencing the greatest demand.
S&P 500
The S&P 500 is the most popular stock index for futures trading. With its trading volume, it always achieves a top position. The NASDAQ and the DWIA - also important US indices - are also very popular.
US dollar, euro and yen
Forex (currencies) is the most frequently traded underlying asset. They account for more than three quarters of the total volume.
The most popular currency for futures trading is the US dollar, followed by the euro and the Japanese yen. The British pound and the Australian dollar are also comparatively popular. These strongest currencies are supplemented by numerous smaller means of payment.
If you want to start trading foreign exchange - whether through options or futures trading - we recommend taking a look at our Foreign exchange trading guide.
Crude oil
The most frequently used commodity for futures contracts is crude oil. A distinction is made between different "types": WTI ("US oil"), Brent ("North Sea oil") and Shanghai oil account for a large proportion of the trading volume.
Due to its high importance, oil is also suitable for beginners: Not only will you find extensive teaching materials on the subject of futures trading with commodities, but you will also benefit from excellent liquidity. Alternatively, you can also trade crude oil through Commodity options handeln.
Advantages and disadvantages of futures trading
Before you start futures trading, you should be aware of the specific advantages and disadvantages. They differ significantly from other financial vehicles.
Advantages:
- Ideal for hedging: You can hedge your assets against losses as you receive a guaranteed price through futures contracts.
- Very high profits possible: If used successfully, you can achieve high returns with futures products. In particular, the possibility of using very high leverage massively improves your results in the event of success.
- Important for the producers of raw materials: Through futures contracts, producers and traders of crude oil, wheat, pork bellies and other commodities secure an advantageous price. This makes futures an important financial vehicle that creates price stability and protects companies from financial losses.
- Große Auswahl: You can use thousands of different underlyings for futures trading. So there is something for every type of investor and every strategy. In addition, dozens of trading venues and lot sizes are available to you, offering further flexibility.
Disadvantages:
- Guaranteed implementation: Futures are always exercised (there is no right of choice as with options), so that traders must realize losses or close positions prematurely in the event of an unfavorable price development.
- Prizes foregone: Companies and traders who hedge their goods using futures are tied to the price agreed in the contract. If prices rise during the term of the contract, they lose out on this additional profit.
- Complexity: Futures trading is a highly complex discipline and therefore difficult to learn, especially for non-experts.
- High stakes: Despite micro and mini contracts, you need a comparatively large amount of capital to start trading. The potential losses are also correspondingly high.
Our recommendation: Due to the high capital investment and the considerable risks involved, we strongly recommend trading futures initially on a Paper Trading Account to try out. Here you can test your strategy in a realistic environment with play money and gain your first experience!
Learning futures trading: how trading works in practice
If you are interested in trading the popular futures, the next step is to put it into practice. There are various aspects to consider, such as the choice of broker, capital requirements, legal framework and more.
We have therefore put together a step-by-step guide for you.
Broker for Future Trading
To begin with, you only need a suitable broker for trading:
- Only a few brokers offer the "professional tool" futures.
- Service providers from Germany do not provide futures for legal reasons; you must use an international broker such as CapTrader instead.
- When comparing the individual providers, be sure to pay attention to the choice of trading venues and the quality and size of the broker.
- You can only trade futures successfully if you have access to the most important futures exchanges and contracts.
- A large, international broker offers you additional security and minimizes default risks.
With some service providers, you will search in vain for the important mini and micro contracts. In this case, you would have to trade standard lots worth hundreds of thousands of euros - an order of magnitude that is hardly worthwhile for private traders, even with high capital reserves.
Once you have decided on a broker, you will need to create a Open an account. Futures trading is particularly useful when trading on margin: the broker lends you additional capital so that you can trade more effectively.
However, this service places high demands on the service provider. They must fulfill their duty of care and ensure that the trader does not incur a greater loss than the capital they have invested.
In futures trading, at least in Germany, there is no "margin call obligation": losses on futures transactions can theoretically be unlimited. Due to the prohibition on margin calls, brokers have been obliged since 2023 to cover these losses in good time through the so-called Margin Call to be limited.
Understanding contango and backwardation
Contango and backwardation are two basic forms of the price curve of a futures contract. They provide us with information about the status and potential of a contract and are extremely important for both hedging and speculative transactions.
- The end of such a price curve is always the execution date of the future - after all, you are trading a value in the future with such contracts.
- The start of the curve, on the other hand, is the current price of the underlying (spot price).
- If the price of a future is above the current spot price, the contract is in contango - the price curve rises.
- However, if the current price of the underlying asset is higher than the price of the future, the latter is in backwardation - the curve is falling.
A contango curve often occurs with commodities, for example, as storage costs ("cost of carry") ensure that the future price is higher than the spot price. It is considered a standard situation. A development towards backwardation should attract your attention: Market participants' opinion of the contract may have changed and price changes may follow!
We encounter backwardation, for example, when a commodity is in short supply - owning it now is then more attractive than a contract with execution at a future date. The spot price is then higher than the futures price. Here too, however, a change to a contango curve is possible.
Don't forget the fuse!
Future trading almost always involves the use of leverage, which multiplies profits and losses. As a result, you can theoretically lose even more money than you originally invested!
Good risk and Money management is therefore essential. This includes the Stop-loss order. It is the standard protection that can save you from catastrophic losses.
If the price reaches a value specified by you, the stop-loss order is triggered. The position is closed at the next possible point in time and further losses are prevented.
A Stop-loss order you should open a position immediately after buying or selling a futures contract. The position is typically slightly below the current price - a small loss is generally considered acceptable.
Attention!
There may be a delay between the triggering of the stop-loss order and the actual closing of the position! Execution may be delayed, especially if liquidity is low. You should therefore trade on exchanges with the highest possible liquidity!
Use a paper trading account
Hardly any other factor is as decisive for the long-term success of a trader as know-how. Even in futures trading, it is essential to understand how contracts, markets, pricing and more work.
Before you start active trading, it is therefore essential that you delve deeper into the subject matter and internalize the intricacies of these financial vehicles. We therefore strongly recommend that you start by trading on a Paper Trading Account to test.
Here you can practise safely with real data in a realistic environment without putting your capital at risk. Once your strategy has proven itself, you can easily switch to a "real" CapTrader account change!
In addition, coaching, seminars, textbooks and similar offers are particularly useful for future trading. They can help you to better understand the complex field and improve your chances of making a profit.
Futures or options: Which is right for me?
Both options and futures are forward contracts and are therefore closely related. The most important difference, however, is the exercise:
- In the case of option transactions, the option buyer has the option of letting an unfavorable transaction expire. In this case, he only has to recognize the premium paid as a loss.
- An option seller (writer) must comply with the decision of the counterparty. However, he receives a premium as compensation.
- Futures, on the other hand, are always executed: Both sides must execute the trade at the end of the term.
- This can lead to negative results for both sides.
As a result, futures are generally considered to be riskier than the Trade optionswhen it comes to price speculation. If, on the other hand, you plan to hedge your assets, futures contracts are often the method of choice.
Overall, options offer enormous strategic opportunities, coupled with good profit potential, but also an enormous degree of complexity. They are therefore recommended for traders who already have previous knowledge of the financial market or would like to acquire it.
Futures, on the other hand, are often better suited for simple and reliable hedging. People who want to achieve high profits through price speculation and have sufficient capital are also well advised to use futures trading.
Conclusion: Significant opportunities and risks in futures trading
Among the numerous forms of futures transactions, futures trading is particularly lucrative. However, due to the high capital requirement, it is also associated with a corresponding level of risk! With such a contract, two parties agree to trade a commodity, index, currency or other underlying asset in the future.
Unlike options, with which they have many similarities, trading always takes place. If the price of the underlying asset has changed in the meantime, buyers and sellers can achieve high profits or losses.
Futures contracts are particularly well suited to hedging, i.e. protecting against risks. Commodity producers and traders use them to protect themselves against fluctuating prices. As a private market participant, you can use futures to hedge securities in your portfolio, for example. Equity portfolio secure.
The considerable risk, combined with the usually quite high capital outlay, limits the practical application of futures contracts as a pure financial product. However, a broker such as CapTrader offers you the opportunity to engage in futures trading even without large assets thanks to offers such as mini futures and low fees.
Nevertheless, alternatives such as options can often be more suitable for small accounts and little prior knowledge. In any case, we recommend that you start trading on a Paper Trading Account before you put real money at risk.
