What Is Futures Trading And What Skills Do You Need To Have?

Futures trading is emerging as an accessible way to speculate on the financial market with the potential for lucrative returns. It is increasingly open to non-specialist individual traders who may be able to access instant funding with a prop firm. Here’s a look at what futures trading is all about and how you can get started.
What is futures trading?
Futures trading involves trading, buying or selling futures contracts. It’s essentially an agreement between two parties to buy or sell an asset at a future date at a fixed price. This means that the buyer can purchase the asset even if prices rise, so there’s an opportunity for all parties to make profits.
The most common type of assets you will find in futures trading include commodities such as gold, wheat, oil, coffee, soybeans, corn, or livestock. It may also include bonds, individual stocks, cryptocurrencies, or exchange-traded funds (ETFs), which are converted into cash equivalents.
Who takes part in futures trading?
Producers of commodities, such as farmers, mining companies or manufacturers, may use futures contracts as a way of locking in a price for their products, and therefore protect themselves from any volatility that might cause the value to fall.
Commercial buyers also utilise futures trading to lock in a price for a commodity, in an attempt to hedge against any potential price rises. Typically, these buyers will be acting on behalf of a manufacturer who requires a commodity to make their products, such as a baked goods company that needs to buy large quantities of wheat.
Speculators also take part in futures trading, not in order to acquire physical deliverable commodities, but to make a profit by speculating on future price movements. The speculators may be financial professionals working with hedge funds, but increasingly they are also solo traders who may be working independently, or through a prop firm.
What are the benefits of futures trading?
Access to a wide range of markets
Futures trading is a way of speculating on a wide range of markets with relatively small amounts of upfront capital. This diversity allows traders to take advantage of a range of market conditions, giving more potential for profitable trades.
For example, it’s possible to trade commodities such as agricultural produce, metals, and energy; currencies and cryptocurrencies; financial indices such as Dow Jones; and interest rates and bonds. This means that traders can also diversify their portfolios, which reduces risk by balancing investments across multiple markets.
High leverage
It is possible to trade futures with a high degree of leverage. This means using borrowed funds (such as those supplied by a prop firm) to increase buying power and to amplify the potential for return on the investment.
Typically, a trader will need to put in a margin of the contract value of about 10 per cent, allowing them to control much larger positions than they could otherwise afford. This maximizes the profit potential, but also significantly widens the scope for making losses, so stringent risk management strategies are required.
High liquidity
A very large volume of future contracts are traded every day, which is described as having ‘high liquidity’. This means that buyers and sellers are always readily available, so orders can be placed quickly and prices are more stable with minimised slippage.
Furthermore, futures markets are often active above and beyond regular trading hours, allowing traders to respond quickly to any changes in market conditions.
Fair and transparent trading
The futures market is a fair and transparent playing field, because no one can predict future price action with complete certainty, so they are protected from insider trading. The futures markets are also well-regulated by government authorities to ensure fair trading and pricing practices, so you can be confident that your trading strategies will not be undermined.
Suited to speculators
Futures trading is particularly suited to speculators, because high leverage and high liquidity means that there are plenty of opportunities to take advantage of rising and falling prices to make quick profits. It usually does not involve physical ownership of the underlying asset, which reduces costs and administrative tasks, and often associated fees are lower.
A wide range of trading styles
Futures contracts lend themselves to both long-term and short-term trading strategies, so there is more flexibility for an individual trader to find a trading style that suits them.
What are the drawbacks of futures trading?
As with all types of trading, futures trading carries the potential to make losses as well as profits. Because of the high leverage involved, it is important to use stop losses and always stick to your risk management strategy when making trading decisions.
The futures markets can also be complex, so it is necessary to carry out some learning and research before entering the live markets to ensure that you are a confident and well-informed trader.
How do you get started as a futures trader?
It’s possible to create your own portfolio to trade futures, or employ a futures and commodity advisor to manage a portfolio on your behalf. However, both these methods involve an investment of a reasonable amount of your own capital. If you do not have a large amount of capital to invest, then you may wish to explore trading via a prop firm.
This means that you will have access to a world-leading trading platform and tools, and you will be able to join a ready-made online support network for advice and learning opportunities. If you pass the evaluation phase, you will be given access to a fully funded account with scaling leverage and profit share.
Research the prop firm carefully to ensure a good match for your aims and experience level. For example, you may prioritise the quality of educational resources; competitive fees; or access to particular markets or trading styles.
If you have little or no experience, the best way to get a taste of live futures trading with zero personal financial risk is to look for a prop firm that offers a free trial. This will give you access to a simulated account with virtual funds to trade on a platform of your choice.
It’s a chance to test out your strategy and familiarize yourself with the platform interface without the pressure of needing to hit profit targets. It’s a way to gain confidence and flex your trading muscles without being thrown in at the deep end. If all goes well, you can opt to pay a fee and undertake an evaluation test.
If you are successful, you will have access to a fully funded traded account, and you will be able to keep a percentage of any profits you make. Usually, the entry level will be a 50:50 profit share between you and the prop firm.
As you develop your skills and prove that you can operate within the firm’s risk management policy and consistently hit your targets, many firms will increase your profit share and account size.
The importance of being well prepared
As we have seen, futures trading offers excellent potential for individual traders to make money. However, there is also the risk of making heavy losses, so it’s essential that you understand clearly how futures trading works, and what skills are involved.
If you decide to trade with a prop firm, any losses that you make will be covered by the firm, but if you do not meet your profit targets then your account may be closed. Prop firms naturally want to work with competent traders who will not make risky trades and expose them to excessive losses. This is why you will need to pass an evaluation stage.
How to prepare for futures trading
First of all, familiarize yourself with the basic concepts of futures trading, and the key terms such as margin, leverage, and contracts. Learn about the various futures markets, and consider which ones suit your aims and objectives the best, such as commodities, indices, or currencies.
Make use of learning resources
Futures trading is increasingly popular with individuals, and you will find supportive online communities that offer advice, the chance to exchange ideas, or even mentorships. There are also online courses, podcasts, webinars, and print materials available.
These resources will equip you with necessary knowledge such as technical analysis (the study of price charts, graphs and patterns) and fundamental analysis (the study of economic data, news and global events). Both these techniques will help you to predict price movements.
When you have built up sufficient knowledge, put together a trading strategy and risk management plan, and test them out with a demo account.
If you are willing to put in the time and effort to learn and cultivate your trading skills, then futures trading can be an exciting and rewarding way to supplement your income, or even be the stepping stone to a new career.