Trading Futures For Ninjatrader Traders

Futures trading is all about trading Futures Contracts. Just what is a Futures Contract and how does it trade? A Futures Contract, also known as a “Forward” Contract, or even a cash forward sale, is a contract between a buyer interested in a specific product, and a seller intent on supplying the product on a future date for a specified price. Futures Contracts are formal agreements, obligating both the buyer and seller. Futures Trading is known as a zero sum game. Every dollar made by the buyer is a loss to the seller and vice versa. Prices that are too high or too low…either the buyer or the seller profits, but at the expense of the other. For example, if soy prices rise, the farmer benefits but the soy milk manufacturer suffers. If soy prices fall, the farmer suffers, but the soy milk manufacturer’s bottom line does better.

Futures trading takes place in two ways. First, commodities are traded on the floor of a Futures exchange, such as the Chicago Mercantile Exchange (CME). There trading takes place in an open outcry pit. But Futures trading can also take place “electronically,” over the internet, where individual traders put in their buy/sell orders from their desktop trading platforms.

Not only can Futures be traded in 2 places, the traders themselves can be broken into 2 groups, hedgers and speculators. A farmer is a hedger, as is a manufacturer, exporter or importer. The goal of a hedger is to be in futures positions that reduce the risk that the price of the commodity they are selling/manufacturing may fall. For example, an oats farmer believes that his oats will be harvested in August. He sells an oats futures contract in June at the current price to be delivered in September. In June, the price of oats is high because of short supply. Even if the price of oats drops by September (the contract expiration date), the farmers’ price has already been secured. The farmer assumes a risk with this trade. What if there is a drought and many bushels of oats are lost before September. The price of oats would rise higher, but the farmer is still obligated to deliver oats at the May price negotiated. The farmer would lose even more money. On the other hand, September might produce a bumper oats crop and the price ends up being far lower than his May price. In this case he wins the trade.

Speculators want to be trading Futures because they want to gain a profit, They do not have a commodity to protect. Speculators actually embrace the majority of traders in almost every market. Speculators are readily positioned to assume risk. They expect to buy low and sell high by going long. They also expect to sell high and later buy back low, when they go short. As an example, say the oats speculator knows that there has been a drought and oats will be in limited supply in September. The speculator is happy to buy oats Futures contracts in May at the current price. He is wagering that the price of oats will soar and he will make a small fortune in September after the harvest. Speculators give the Futures Market the liquidity needed to offset the hedger’s contracts. Without speculators, there would be no traders to accept the risk of the hedger’s contracts. As in the example above, the farmer sells the oats to the speculator in May for the current price. The speculator assumes risk, hoping that by September, the expiry date, the price of oats has risen back up and he can make a profit at the farmer’s expense. What he never wants to happen is that in September, the price of oats goes down, meaning that he paid too much in June, as he would be the loser.

Prior to organized Futures exchanges, like the Chicago Mercantile Exchange (CME), Futures trading was a far more risky proposition. Contracts were drafted between one farmer and one speculator, and signed wherever the farmer happened to be selling his produce, for example, in farmers markets. There were a lot of problems with these personal contracts. First and foremost, either the farmer or the speculator was allowed to default on the contract. Who would enforce payment or delivery? If the speculator was going to lose his shirt, he would not complete his side of the contract. If the farmer realized that the price of pork bellies had risen dramatically, he would default and sell the pork bellies in the open market. Since these contracts were drafted between 2 parties, the speculator could not sell his contract to another speculator. Here’s another problem…there was no one who would certify the quality of the delivery. Farmers could fill their side of the contract with lower grade pork bellies, and the speculator could not do much about it.

Since the coming of organized exchanges, it became the responsibility of the exchange to certify delivery, quality, and payment. Exchanges now require good-faith money with a third party to ensure contract performance,thereby reducing the number of contract defaults. Exchanges were also able to standardize contracts, stipulating terms, such as commodity delivery dates and product grades.

Since their initial organization, exchanges have taken Futures trading beyond mere buying and selling of commodities like corn, ricek soy, wheat, or pork bellies. Today, futures contracts exist for many different asset classes, including treasuries, energies, currencies and especially equities. Futures belong to the asset class “derivatives,” those securities with prices derived from one or more underlying assets. One example is the S&P 500 Futures Contract, with the underlying asset being the New York Stock Exchange’s (NYSE) S&P 500 Index. The S&P 500 Index is one of the most closely watched equity indexes around the world. This index represents the top 500 well recognized companies now traded on the NYSE. Unfortunately, there is a problem with the S&P index, however…you cannot trade an Index. The CME, therefore, initiated the S&P 500 Futures Contract that you can trade. Just like the S&P 500 Futures Contract, as the value of the S&P 500 Index increases, the S&P 500 Futures Contract increase with it, and vice versa.

There are also future derivatives whose underlying asset is a currency index. For smaller investors, the Currency Futures Market is created for the few contracts that individual investors intend to trade. Trading with Currency Futures, individual investors can trade the exact same dollars/euros that are being traded in the Forex market, but trade them on the CME.

Shadowtraders specializes in training investors in Futures Trading. Most other Futures trading education companies are engrossed in training only the S&P 500 Futures Contract, and specifically the Emini version of that earmarked to individual traders. Shadowtraders is much more interested in introducing its clients to many different Futures, including currencies, energies, treasuries, etc. We trade assets with volatility and liquidity. We know the days of the week that a particular Future trades, the times of day it trades, how many contracts are traded of that Future, whether you can or can’t trade it, etc. That is Shadowtraders specialty.

If you are tired of just trading the S&P 500 Emini, or you are new at the Futures trading game and want to find out more, attend a Shadowtraders Webinar on Monday nights.

Barbara Cohen has been a professional day trader for over 10 years and is the CIO of Shadowtraders. She has trained hundreds of students to trade the Futures Market with Shadowtraders trading system. Before you purchase any trading seminar, make sure you attend Shadowtraders Monday Night Webinar, and hosted by Barbara Cohen