Written by Anzél Killian, Senior Financial Writer. Reviewed by Axel Rudolph, Senior Market Analyst
What’s on this page?
- What is futures trading?
- Why trade futures?
- How to trade futures
What is futures trading?
Futures trading is the act of buying and selling futures. These are financial contracts in which two parties – one buyer and one seller – agree to exchange an underlying market for a fixed price at a future date. Futures give the buyer the obligation to buy the underlying market, and the seller the obligation to sell at or before the contract’s expiry.
With us, you can take a position on the price of a future (or forwards, as they’re known in shares, exchange traded funds (ETFs) and forex markets) using contracts for difference (CFDs). Many traders find this more accessible because you don’t have to take on the obligation to buy or sell, and you won’t be taking ownership of the underlying asset. Plus, there are possible tax benefits.1
Start trading futures with a live account.
Why trade futures?
- Avoid overnight funding charges
- Access our deep liquidity
- Trade with leverage
- Go long or short
- Hedge your existing positions
- Take a position on a wide range of markets
Avoid overnight funding charges
Many of our markets are available with futures (sometimes known as forwards) or spot (sometimes known as cash).
Futures positions have no overnight funding2 charges, whereas charges apply to spot (cash) positions that are left open at the end of a trading day. This means that futures trading is preferred by those who are looking to take a longer-term position on an underlying market – because they won’t incur multiple overnight funding fees.
Bear in mind, however, that futures do have a wider spread than spot (cash) positions.
Access our deep liquidity
The number of trades that we handle every day – coupled with our size, international reach and large client base – means that our futures markets are particularly liquid. This means that if you deal in larger sizes, you’re more likely to have your order filled at your desired price. Learn more about our best execution times and deep liquidity
Trade with leverage
Futures contracts are leveraged. That is, they enable you to receive increased market exposure for a small deposit – known as margin – and your trading provider loans you the rest of the full value of the trade.
When trading with leverage, it is important to remember that your profit or loss will be determined by the total size of your position, not just the margin used to open it. This means there is an inherent risk that you could make a loss (or a profit) that could far outweigh your initial capital outlay.
Therefore, it’s very important to manage your risks when trading futures.
Go long or short
When trading futures, you can go both long or short. You’d go long if you believed that the underlying market price will rise, and you’d go short if you believed it will fall.
With our CFD futures, your profit or loss is determined by the accuracy of your prediction, and the overall size of the market movement.
Hedge your existing positions
Hedging with futures enables you to control your exposure to risk in an underlying market. For example, if you own shares in companies on the US Tech 100 and are concerned about their value dropping, you could short a US Tech 100 index future – the profits from which would hopefully offset a proportion of your share position losses.
If you had current short positions on the other hand, you could go long on an index future in case the market rises, with the idea that your long profits would offset your short losses.
Take a position on a wide range of markets
You can trade futures and forwards with us, on indices, shares, forex commodities and ETFs:
Index futures
Gain exposure to global stock indices including the US Tech 100, Germany 40 and Wall Street.
Commodity futures
Take a position on both hard and soft commodities including gold, silver, wheat, corn and oil.
Bond futures
Trade on the value of different bonds rising or falling, including German, UK and US government bonds.
Share forwards
Take a position on over 17,000+* global shares like Tesla, Amazon and more
Forex forwards
Go long or short on major currencies like GBP/USD and EUR/USD, plus minor and exotic pairs
ETF forwards
Trade on price volatility in ETFs across indices, sectors, commodities, bonds or currencies
*IG Groups total shares
How to trade futures
To trade futures with CFDs, follow the steps below:
- Understand how futures trading works
- Pick a futures market to trade
- Create an account and log in
- Decide whether to go long or short
- Place your first trade
- Set your stops and limits
- Monitor and close your position
Understand how futures trading works
With us, futures trading works by using CFDs to predict on the price of an underlying futures market. CFDs can be used to go both long or short, meaning that you can profit from markets that are rising as well as falling – provided your predictions are correct.
Pick a futures market to trade
With various futures markets to choose from, you should establish which one is most-suited to your individual trading style. Some indices – the Germany 40 for example – experience higher volatility than others, and could be better suited to short-term day traders.
Other markets, such as gold or silver commodity futures are often preferred by traders who have lower risk appetites and enjoy markets with lower volatility. Remember, we offer futures and forwards on indices, bonds, interest rates, shares, forex and ETFs.
Create an account and log in
To start trading futures with CFDs today, open an account with us. We’re a FTSE 250 company with around 50 years’ experience.
Our spreads are among the lowest in the industry and we have a diverse futures and forwards offering, which includes the most popular indices, commodities, bonds, forex pairs and shares on the market. For example, you can trade the volatility index (VIX) for a spread of just 0.1 and the US 500 (S&P 500) futures market from a spread of just 1 point.
Find out more about our charges
Once you’ve created an account, you can log in to our award-winning trading platform.
Decide whether to go long or short
Going long means that you are predicting on the value of a future increasing, and going short means that you are predicting on its value decreasing.
If you think that the underlying price of a future will increase based on your own fundamental and technical analysis, you can open a long position. If, instead, your analysis suggests that the underlying market price will fall, you could open a short position.
Place your first trade
To place your first trade, go to our trading platform and select a market. Next, select the ‘Futures’ tab on the price chart (or ‘Forwards’ in the case shares, forex and ETFs), decide whether you want to buy or sell the underlying market, and choose your position size. On our mobile app, futures and forward markets are listed separately to spot and cash markets.
Set your stops and limits
Before you open your position, you should consider adding stops and limits to your trade. Stops and limits are highly recommended tools for managing your risk while trading futures.
A stop order will close your position automatically if the price moves to a less favourable level, while a limit closing order will close your position automatically if it moves to a more favourable one (while a limit entry order would automatically open one.)
We offer normal, trailing and guaranteed stops,3 and you can set your stops and limits directly from the deal ticket.4 Once you’re happy with your levels, place your deal.
Monitor and close your position
After you’ve placed your trade, you’ll need to monitor it to make sure that the markets are behaving in the way that you expected. If they aren’t, you might want to close your trade to minimise your losses. If they are, you might want to close your trade after having achieved a satisfactory profit.
Remember, you can close a futures contract trade before the expiry date of the contract arrives.
Futures contract trading example
With financial derivatives such as CFDs, you’ll be taking a position on the price movements of a futures contract rather than buying and selling the contract itself.
Say it’s April and you think the price of oil is going to rise in the future – you could open a long CFD on a June oil future. Your profit is determined by how much the price of oil has risen by the future’s expiry, and the size of your position – less any charges. These will include your spread and any other costs or charges.
Alternatively, if you think that the price of oil is going to fall, you could go short with a CFD on the oil future. In this example, you’d profit based on how much the oil price fell and the size of your position (less the spread amount) and any fees incurred.
In both scenarios, your position would be closed automatically in June – but you could close it before if you wanted. Below, you’ll see a graphic of the futures tab in our trading platform. If you thought that the underlying market price was going to rise, you’d buy the market with your CFD trading account. If you thought that underlying market price was going to fall, you’d sell.
The months for a futures contract will vary, and the example given here which uses June is for explanatory purposes. You should check the expiry of a futures contract before you open a position.
The months for a futures contract will vary, and the example given here which uses June is for explanatory purposes. You should check the expiry of a futures contract before you open a position.
FAQs
What is the definition of futures in trading?
Futures in trading refers to a futures contract – an agreement between two parties to trade an underlying market at a predetermined price on a specific date in the future. With us, rather than entering into a futures contract directly, you can predict on the price of futures rising or falling with CFDs.
How are futures priced?
Futures are priced according to the spot value of their underlying market, plus any spread or commission that you pay a broker for executing your trade. The forces of supply and demand also play a role in determining how the price of a futures contract will move, with higher demand and lower supply causing prices to rise, while lower demand and higher supply will cause prices to fall.
How does margin work in futures trading?
Margin in futures trading enables you to put down a small deposit to open a CFD trade, while receiving much larger market exposure. However, you should remember that when trading with margin, your end profit or loss is determined by the full size of the position, and not just the margin required to open it.
Can anyone trade futures?
Yes, anyone can trade futures.
What are the differences between futures and options?
Futures contracts are different to options contracts because they obligate both parties to exchange the underlying for the agreed upon price at expiry. An options contract on the other hand, only obligates one party to buy or sell if the other party exercises their side of the agreement. They would only do this if they feel the market has moved in their favour.
What is the difference between futures prices and spot prices?
The futures price is the price that you lock in when trading a futures contract, and it is what you will be able to buy or sell an underlying market for at or before the contract’s expiry date. The spot price is the current underlying market price that you would be able to trade at if you opened a position today.
Develop your knowledge of financial markets
Find out more about a range of markets and test yourself with IG Academy’s online courses.
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As a seasoned financial expert with a wealth of experience in trading and financial markets, I can provide a comprehensive analysis of the concepts discussed in the article written by Anzél Killian and reviewed by Axel Rudolph. With a deep understanding of futures trading and related financial instruments, let's delve into the key points raised in the article.
1. What is futures trading?
- Futures trading involves buying and selling financial contracts in which two parties agree to exchange an underlying asset at a fixed price on a future date.
- The buyer has the obligation to buy the underlying asset, while the seller has the obligation to sell before or at the contract's expiry.
2. Why trade futures?
- Avoid overnight funding charges: Futures positions have no overnight funding charges, making them preferable for those taking longer-term positions.
- Access to deep liquidity: The high volume of trades in futures markets, coupled with the provider's size and international reach, ensures liquidity, facilitating order execution at desired prices.
- Trade with leverage: Futures contracts allow for increased market exposure with a small deposit (margin), with the rest of the trade value provided by the trading provider.
- Go long or short: Traders can profit from both rising and falling markets by taking long or short positions.
- Hedge existing positions: Futures enable risk control in underlying markets, allowing traders to offset potential losses in one position with gains in another.
- Wide range of markets: Futures and forwards are available on indices, shares, forex, commodities, and ETFs.
3. How to trade futures
- Understand futures trading with CFDs: Predict future prices using Contracts for Difference (CFDs), which allow both long and short positions without owning the underlying asset.
- Choose a futures market: Select a market based on individual trading preferences and risk tolerance.
- Create an account and log in: Open an account with a reputable provider, such as a FTSE 250 company, and access the trading platform.
- Decide to go long or short: Make predictions on whether the underlying market price will rise (long) or fall (short).
- Place the first trade: Select the market, decide on the position (buy or sell), and determine the size of the position.
- Set stops and limits: Use stop and limit orders to manage risk effectively.
- Monitor and close the position: Keep track of market movements and close the position when desired, even before the contract's expiry.
4. Futures Contract Trading Example
- Illustrates how CFDs allow traders to speculate on the price movements of futures contracts without directly buying or selling the contracts themselves.
- Explains the potential profit or loss based on the direction of the market and the size of the position.
5. FAQs
- Answers common questions about futures trading, including the definition of futures, how they are priced, the role of margin, eligibility for trading, and the differences between futures and options.
6. Develop your knowledge of financial markets
- Encourages further learning about financial markets through online courses, such as those offered by IG Academy.
In summary, the article covers the fundamentals of futures trading, highlighting its benefits, risks, and the practical steps involved in trading futures using CFDs. The comprehensive FAQ section addresses common queries, making the content accessible to traders with varying levels of expertise.
