Ultimate Futures Trading Guide: Beginner to Expert

Futures trading is a career as old as computers themselves. You know the floor traders that would be screaming at each other in the pits of Chicago, that is the epitome of futures trading, you may have seen that all over the world in movies and films however the reality is. NOW futures trading is done behind the computer screen, where traders need to be both mental athletes and psychologists to succeed. It’s a very rewarding career if you understand the IMPORTANT aspects of futures trading before getting into futures trading.

Throughout this post, we are going to break down EVERYTHING futures to get you started on your journey. This is the most extensive and comprehensive guide and futures traders could look for.

What Are Futures?

Futures are derivative assets that are leveraged products. To simplify it the derivative asset is derived from another asset. Whether financial or physical. Having a leveraged asset means that there are margin requirements in accounts to trade futures. Depending on your broker you may have higher margin requirements or lower margin requirements to trade.

Futures are denoted in contracts, each contract is at a specific time a financial product or holds X amount of a physical product. For example, ES is 50X the index. So that means someone has control of 50 x 4400 (current index price). So you control $220,000 of buying power. Then you have oil where 1 contract controls 1,000 barrels of oil.

Every one contract has different specs. Which means that not any contract across assets has to have the same dollar denomination for a specific move. Nor will they have the same tick size.

These are the most common contract specifications:

1. Size (how many times the index, or how many products are contained in the contract)
2. Tick value (the lowest increment of movement and the dollar amount associated with the move)
3. Margin/ Maintenance (what your broker requires you for day trades/ what your broker require you for overnight margin (when futures are closed 5 PM EST to 6 PM EST and weekends)

Let’s look at an example of the S&P 500 futures (E-mini) Ticker symbol ES

1. Size: 50 x Index Value
2. Tick Value: 0.25 increments, each worth $12.50.
3. Margin/Margin requirement (dependent on the broker) EG. AMP Futures: Day trading margin: $400 & Maintenance Margin: $11,400.

There are a lot of futures out there, much less than there are stocks, but still a lot. That can be most commonly broken down into three categories.

• Equities/Financials
• Commodities
• Softs (Products)

Within equities/financials you have index futures. Some stocks have futures but they’re not very liquid. People would rather trade options in that case.
The most liquid futures are bond futures the 10 years and the 5 years notes (ZN and ZF respectively).
Then we have the S&P 500 futures (ES), the main index futures traders use. There are also other bond futures but the most traded (commonly traded) are those in the equities, the Nasdaq 100 futures, the Russell 2000 futures as well. These equity futures are called “E-mini” futures. They also have an “E-mini Micro” counterpart. Which are 1/10th of their Mini friends. (More on these later)

Commodity futures have a long-winded list of participants; we won’t be going through them all. However, the largest are:

1. Crude Oil (CL)
2. Gold (GC)
3. Natural Gas (NG)
4. Silver (SI)
5. Corn (ZC)
6. Wheat (ZW)
7. Soybeans (ZS)

There are a few main categories of commodities, there are metals, products, and agricultural commodities. Crude oil is typically the most traded out of the commodities, it’s a really common product and very profitable.

The others are not as commonly traded, however, they do get a lot of volumes, like Gold and Nat Gas. A lot of the commodity futures are used for hedges because they have physical delivery, which means that these products are ON expiry.

The final group of commodities is “SOFTS” which are agricultural commodities. The top 6 heaviest traded are:

1. Sugar (SB)
2. Cocoa (CC)
3. Coffee (KC)
4. Cotton (CT)
5. Orange Juice (OJ)
6. Lumber (LS)

They are derivative assets of a basic concept of product, meaning they are leveraged instruments. Futures are different because they don’t require $X to buy a contract. Rather the loss or profit of a position is calculated when the position is closed. This means you need to have a margin account. (mentioned above).

 

How to Trade Futures?

The theory and the basics of trading futures is always important, we need to understand what asset we’re trading and how they work.
After that, we would need to know exactly what it is that we need to trade futures?

1. A broker
2. Charting
3. Trading Plan
4. Risk Management

It seems like a very simple list of things that we need and to work on, however, it’s a little more complex as you dive into each of these.

1. A broker is fairly easy to understand and find. There are a lot of futures brokers out there. Some of the top futures brokers are as follows:

a. AMP Futures (used by TPA)
b. Ninja Trader (have their own platform)
c. Optimus Futures
d. TradeStation
e. Interactive Brokers

2. Charting is a concept that may seem simple however when it comes to trading futures there are few that have all the tools.

a. Sierra Chart (by far the best, has all the tools and customization)
b. Jigsaw (used mainly for the order book (DOM))
c. NinjaTrader (has a lot and its own broker access, however, lacks a lot of order flow tools)
d. Motivewave

3. The trading Plan. This is one of the two of the hardest parts of the process. The first part is, traders, don’t really know what they need to be learning or focusing on. Then it’s a development of a plan from that knowledge.

Below is what I would focus on if I were a new trader:

a. The volume profile charts
b. The market profile charts
c. The DOM (Depth of Market)
d. Understanding market structure

If you can learn all of these very well and have an understanding of actual market auction theory you will understand how to trade these markets. This post will break down the starting points for understanding how to ACTUALLY trade the futures markets with success.

4. Risk Management

This is the part where traders seem to ignore… Everyone looks at day trading as the potential money that can be made, however people don’t realize that it is the MOST IMPORTANT THING IN TRADING. As a trader, you are a risk manager first than anything else. If a trader learns how to manage their risk. I.e how much they risk per trade, how much they risk per day, and so on and so forth. When to take the risk and when to avoid risk, they will trade better.

Futures trading isn’t as simple as other assets when it comes to risk management. Realistically being such a leveraged asset it doesn’t make too much sense to consider the account in a percentage risk per trade. Like we would for options and stocks. I.e each trade is 2% of the account. With futures, you have a smaller account and larger risk.
Consider this: 1 contract of S&P 500 E-mini futures (ES) with a 2-point stop is -$100. Meaning if you use the 2% rule. You would need $5,000 to trade 1 lot, $10,000 to trade 2 lots, etc. Which I think maybe a little bit of overkill.

Trading futures with a smaller account brings out the appeal of the asset.

To trade 1 contract of the S&P 500 E-minis, you can do it with as little as $3,000 in your account.

Rather thinking: 2-3% of the account per trade.
Think: I have MAX $X loss daily, based on that how many trades can I take? (more on this later)

 

What Software Do You Need to Trade Futures?

Traders often wonder what kind of software is the best? What software is the cheapest? Especially if a trader is at the beginning of their journey they don’t want to be incurring a heavy cost when they’re not even sure what they’re doing to start.

There are two competing futures software systems that traders usually gravitate towards.

1. Sierra Chart
2. Ninja Trader

We will focus on Sierra Chart because that is what we mainly use and what we would prefer regardless.

Below, there will be an outline of the general comparisons of the products.

	Sierra Chart	Ninja Trader
Price	USD $36/mo (have tiers)	USD $720/year (lifetime)
Tools available	Footprint, Order Flow, All charts, DOM	Price charts, DOM. (Lacks a lot of order flow)
Customizability	Full customization, coding	Coding, partial customization
Aesthetic	Can be changed, overall medium tier.	Medium tier.
Ease of use	Fairly difficult for new traders. Unsavvy computer people.	Easier to use, a lot of templates.
Popularity	High	Medium

 

Here is an image of Sierra Chart:

 

Here is an image of Ninja Trader:

Futures Charting

Charting, is one of the most important aspects of futures trading. What is useful and what is useless? Often traders leap frog from chart to chart looking for the holy grail without understanding which charts they need and which aren’t useful.

There are a SET amount of charts that are important. Not all have a place in trading futures. Do you need a chart full of indicators? RSI, STOCHS, the answer is NO!

After years of trading and figuring out which charts are the most important and which are the least important. Here is a list of charts you NEED to have, the rest are not necessary.

 

1. Depth of Market (DOM)

This is the MOST fundamental aspect to futures trading that all traders need to be accustomed to and understand on a DEEP level. The depth of market is where all trades are taken, seen, and executed. This is the CORNERSTONE and the most FUNDAMENTAL aspect to order flow trading. Cannot stress this enough.

The depth of market shows two main things for traders:

1. The contracts sitting at different levels (limits, or interest)
2. The contracts traded at different levels (actual price movers)

There are other things on the DOM that you can add, they’re secondary.

Here is a full display of the TRADEPRO Academy’s DOM.
There are 6 main columns/areas you need to keep an eye on.

Here is what we need to understand from the image:

1. Volume Profile (based on trades on when the DOM was open)
2. Volume Profile (based on overnight session + morning session)
3. The asset price
4. The blue: bids on the price ladder. The red: offers on the price ladder.
5. Actual quantity traded (most important piece on the DOM)
6. The bid/ask traded as a volume profile

 

2. Volume profile

The volume profile is still very high on our list in terms of importance. The volume profile is a chart that displays the volume traded at each level. You can find a breakdown of the volume profile HERE.

Volume profiles in futures can be divided into the evening session (ETH or GLOBEX) and the day session (RTH or regular trading hours).

As a quick tip, use the prior session volume profile in futures to identify levels for the coming session on the volume profile.

The volume profile is best used for levels.

Here is a breakdown of the VP for March 08 2022 on the S&P 500 futures.

Each session is split up by a volume profile. The blue area is the value area for the session.
Each level is drawn based on the volume profile ledges (where high volume meets low volume) as well as the value area high and low edges.

 

3. Candlestick Chart

This chart is important, however, it is less so than the prior two charts. We have to understand where price is going and price structure does tell us how the market is moving and where we can see strength (in terms of trends).

Overall people choose many different price charts to look at. There isn’t 1 right answer in this case. Here are some of the charts that are good and some that we use at TRADEPRO Academy:

1. The time chart (day trading with a 3,5,10,15-min chart)
2. The range bar chart (5,10,20 tick a new candle is created by the movement of the X number of ticks)
3. Renko chart (this is a combination of the time chart and the range chart. This is based on price movement and time)

Below is a 10tick chart (range bar chart) on the S&P 500 ES future. Where there is a lot of movement this chart looks like it’s moved a lot and really busy. In comparison to the time chart (the right chart) this is a 5-min chart on the SPY for a full day. The range bar is for an hour time period.

 

4. Market Profile (TPO-Time Price Opportunity)

The final chart used, that is important, but maybe at the bottom of our list. This is the market profile chart, commonly known as the TPO chart. This chart is very similar to the volume profile. However, it’s based on time. Each period is based on a specific time.

The TPO is split up into letters, which represent a period, each period is a 30-min period. Each move up and down creates a distribution of the TPO lines. The main benefit is that traders understand how the market moves, backfills, and fill areas of the chart where there is interest and unfinished auctions.

Here is the TPO of the S&P 500 E-mini.

 

How to Start Trading Futures?

Now that the foundation is laid, the question is, how should a trader start trading futures? And how can a current futures trader get better? There are a few things to focus on and a few things to disregard. Not everything is going to be useful. Trading is a dangerous place where less is more. This is the case for futures trading.

Understand this first, in the 1990s to early 2000’s we had the boom of the proprietary firms. Prop trading became a huge thing in the markets where traders would come together in a company and trade the companies money. This pool of money would be divided and the traders would take portions of the earnings. The main products traded were Eurodollar futures. Futures were the main focus until the S&P500 futures became more liquid. The reason behind this story is that these prop traders traded almost SOLELY with the DOM (depth of market).

The first part that traders should dive into is ORDER FLOW.

a. Futures Order Flow

A futures trader should start with the DOM, understanding the importance of the DOM and how to trade with it. This is the foundation of order flow. Invest time in learning how this works and you will understand where the market flows and how it will move.

Let’s break this DOM down a little more. Using the example above.

1. Volume Profile (based on trades on when the DOM was open)
Volume Profile (based on overnight session + morning session)

This volume profile piece on the DOM starts when you open the charts. So it can be blank and reset. That is fine too. Like the volume profile on a chart, you have a value area, low volume nodes, and high volume nodes. In this case, you don’t want to get stuck playing in the large volume areas. Look to find levels that price reacts for quick rejection where you have volume profile ledges. Those areas that are rejected become areas where there is potential to play longs and shorts.

Take a look at the example below, we have the ledge at the 25 areas. Where there is 4X the volume that falls off. That is where price held for the support, where price popped off 4 points. These are areas that you want to identify. The larger the ledges you have, the more you anticipate rejection from that area.

2. The asset price (this area is self-explanatory. Where is the current price of the asset).

3. The blue: bids on the price ladder. The red: offers on the price ladder.

These areas are where we find bids (buyers waiting to get into the market) however when this fills, these are known as aggressive sellers. It does get a little confusing to newer traders. These are important columns in terms of interest for the longs and shorts, however not the be-all and end-all.

The red area is where the offers sit, these are interested sellers. They do not make the market until they’re traded. At that point, they become market buyers.

The concept is that for each buyer there is a seller, so the offers have to lift a bid. In return the bids have to fill offers, that is why they seem to become the “opposite” of what you think.

4. Actual quantity traded (most important piece on the DOM)

This portion is the most important aspect of the DOM, where buyers and sellers battle it out. You can see the aggression of buying/selling in specific areas. This allows traders to understand who is in control, who has been leading the market, and what side you should jump on.

These middle columns should be understood in terms of bids vs offers, which side is showing “larger” orders flying through the market. You can find stuck shorts, stuck longs, continued longs/shorts as well.

Take a look at the example below, we have the two middle columns, red (beside bids are aggressive sells) while blue (beside offers are aggressive buys).
We get into the 4237/38 area on the S&P500 futures and we begin to see a battle. There are a few hundred buyers and sellers trying to get into this area. This is where we want to see if the price is “reoffering” (sellers trying to take control by filling bids) or “rebidding” (buyers trying to take control by filling offers).

What we see in this area is an attempted bid at the tops, met with reactive sellers (easier to see in real-time). The sellers that come into these areas are seen with hundreds of bids getting hit and pushed back under the 37. This is then met with larger sell numbers as the price slips lower. The speed and aggression at which this happens are important to watch on the DOM.

5. The bid/ask traded as a volume profile

This area on the DOM shows us clearly how many bids and offers have traded in the market, these reset when you reopen the charts as well. This outside area where there are bids greater than offers or offers greater than bids traded.

Here is a cheat sheet:

1. Offers TRADED (market longs) > Bids TRADED (market shorts): expect to see the upside continue. Should this not continue the upside (we have STUCK longs, this is a short signal).
2. Bids TRADED (market shorts) > Offers TRADED (market longs): expect to see the downside continue. Should this not continue the upside (we have STUCK shorts, this is a long signal).

This works like the volume profile, careful where there are large volume profile areas, and look to play the edges and the clear discrepancies.

Take a look at the example below, over a few levels we have buyers that are trying to push prices higher, they fail and create stuck longs. This results in a turnaround in the market back to the downside. These are the discrepancies traders want to see, a large difference. 2, 3, 4 times more than the other part of the DOM.

b. Futures Volume Profile

The next aspect a new trader needs to learn is the Futures Volume Profile and how these areas are decided and traded. We could go into a full-on rabbit hole about this. However, we’re trying to keep this quick and concise. The basics are the best things that traders can learn.

The volume profile allows us to see where price is attracted to and where it can reject.

The key areas a trader needs to know in the volume profile are:

1. The value area (70% of the volume trades in this area. Price is usually attracted to prior value areas where there is “balance”)
2. The value area high/low (these areas want to keep price within balance. If price escapes, price will look for another balance).
3. The volume profile ledges (these are areas where the high volume node drops off into a low volume node. Making it a strong support or resistance) We use these areas to play off and look for breaks into new areas of volume)
4. POC (point of control) This the largest area of volume where price is attracted to and loves to rotate around.

Traders can use the volume profile in a very simple way. Use the value area highs and lows from prior sessions to find areas to play as support and resistance. Along with the value areas and POC as attractions. Understanding that the market wants to find “balance” when imbalanced.

Take a look at the example below.

c. Futures Risk Management

As a trader, regardless of asset, you are a risk manager first, you then are rewarded for the management of your risk.

A trader needs to implement risk management in their plan. This is how you survive and how you can grow your account.

Risk management can be done by:

1. Max risk per trade
2. Max risk per day
3. Not averaging into losers
4. Trailing and extending winners
5. Keeping winner larger than losers

Overall this is not the easiest thing in the world, easier said than done for sure.

A trader needs to identify their risk for each trade as well as the overall risk on the day, week, and so on. Traders often just take positions left right and center and end up with large downdays due to emotion, then their up days are really small.

A trader can manage emotions by having a hard stop (systematically planted) in their broker. For example, if you risk 2% of your account on a trade, maybe you want to cap risk at 6% of your account daily. This is an example because these are large amounts. Futures is really heavily leveraged so traders have smaller accounts and should be risking dollar amounts.

Meaning for example on the S&P500 ES micros, you may want to risk $20 per trade, and size accordingly, then $60 a day, which is 2 trades. On the ES minis, you will be 10x that amount.

If you are a trader that cannot STOP at a certain loss amount, then you’ll have to get your platform to shut down if that is exceeded.

Futures contracts move fast and you can be up or down a lot of money in a blink of an eye, the worst thing that a trader can do is keep averaging into a losing position. Where you have a large deficit the odds of it coming back are low. Understand taking the loss, moving on, and looking for a better trade.

Trailing and extending winners are done in different ways. Trading execution is a personal thing and some people do it differently. Trailing too tight will take you out. Trailing based on the market structure, i.e new stops under prior lows can help you keep in the trade based on the structure.

The final aspect is the importance of having larger winning days than losing days. The worst part of trading is death by 1000 paper cuts. The point is, if you have max loss days, make sure you don’t settle for a smaller green day or an equal green day. Traders shouldn’t push what’s not there, take advantage of the opportunity.

Make a risk management plan and make it really evident in your trading.

 

Futures Trading As a Career

Trading is a very lucrative career path, it is something that is EXTREMELY difficult, possible, and very rewarding. So what are some of the steps traders can take to make this a reality?

This is the HARSH TRUTH about futures day trading as a career. Day trading as a career in general.

First, it won’t be easy. You will have to learn the hard way. Make rules for yourself, and you need to be able to follow them. Discipline, diligence, and patience are the three mantras to trading. There will be times where you are frustrated, and you have to circle back to why you started.

Develop a plan, a routine, and a habit to help you become a better trader, which is done outside of the markets. Make sure that you review your trading journal to learn from your mistakes and do more of what you do well.

It is also imperative that you learn the right things when you start, rather than getting lost in the weeds of indicators and whatnot. Learn the aspects that are displayed in this blog and learn them well. These areas of futures trading come from years of learning what really works in this market and what really makes a futures trader profitable.

The final piece of information, which is considered a harsh truth of futures trading, is that you need to hone your psychology. This is pivotal to being able to execute. A trader needs to be calm, aggressive when the time is right and one of the most important things. DO NOT BE IN THE MARKETS AT ALL TIMES. Hone your psychology and you will see how clearly you can read the markets. Markets and money are generally an emotional topic and can really push people to do things that they wouldn’t agree with. Understanding this is the first aspect of honing psychology.

As a futures trader, one of the most common questions that are usually asked. How much money do I need to start trading futures? Or what kind of account size do I need to trade futures? There are traders on all ends of the spectrum. Some that have A LOT of money and are eager to put it to work. As a newer trader, if undisciplined, the more money you have the more dangerous it is.

So what account size should a newer trader start with and which futures should a new trader start with?

First, the most liquid and understandable movement and order flow is in the S&P500 E-mini futures. Whether it’s the micro or the mini. These futures are the most popular to trade and easiest to learn for newer traders. There is also the Nasdaq futures market which is very volatile and can be fun, some traders like diving into this market as well. The third most popular is the crude oil futures market.

a. Account sizing

We can divide this into two main categories:

1. E-mini futures
2. E-mini Micro futures

The E-mini futures are 10 times in dollar denomination to the E-mini micros, meaning that you can have a much smaller account. Maybe not 10X smaller.

Taking the S&P500 futures into consideration for this portion.

The E-minis, each point is $50, if you have a 2 point stop for 1 contract you risk $100 per trade. Meaning if you take 3 trades a day and lose all, the max daily loss is $300.

Let’s say you risk 4% of the account on a daily basis. Meaning you can lose 25 trading days in a row before blowing the account. You will have a $7,500 account. Trading 1 contract. Which you can adjust max risk on the account.
Now this isn’t 25 clean red days. Usually after 3 max loss days, the week is over.

Using the same math with the E-mini Micros. Each point is $5, if you have a 2 point stop for 1 contract, the max risk is $10 per trade. 3 trades if you take all losses, the daily loss is $30. You can increase with 2 lots for a $60 daily max loss.

4% risk on a daily basis of the account is $1,500 total account size, which is substantially lower than the $7,500 account needed to trade the minis, and you have the freedom of multiple contracts.

These are general rules that traders can manipulate to find their risk management criteria.

 

Growing an Account With Futures Trading

What better way to show you or tell you how to grow a small account than TRADEPRO Academy doing it:

Futures Trading Course >>

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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO Academy^TM is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.