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Futures: Contracts & Trading Explained ⏱🔮

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

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this video is that you hit that

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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