Popular questions about Futures Trading

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Popular questions about Futures Trading

What is a Futures Contract?

A futures contract is a legal agreement to buy or sell a specific asset at a predetermined price on a future date. Futures contracts are commonly used to trade commodities, stock indices, interest rates, currencies, and other financial instruments.

What is Contract Size?

Contract size refers to the amount of the underlying asset represented by a single futures contract. Each futures market has its own standardized contract size set by the exchange.

What is the Tick Size?

The tick size is the smallest price movement a futures contract can make. For example, the E-mini S&P 500 futures contract has a minimum tick size of 0.25 index points.

What is Tick Value?

Tick value is the monetary value of one minimum price movement (tick) in a futures contract. The tick value varies depending on the contract being traded.

What is the Front Month Contract?

The front month contract is the futures contract with the nearest expiration date that typically has the highest trading volume and liquidity. Most active traders focus on trading the front month.

What is Contract Expiration?

Contract expiration is the date when a futures contract expires. After expiration, traders usually close their positions or roll them into the next available contract month.

What is Rolling a Futures Contract?

Rolling a futures contract is the process of closing a position in a contract nearing expiration and opening a new position in a later contract month. This allows traders to maintain market exposure without holding an expiring contract.

What is Initial Margin?

Initial margin is the amount of money required to open a futures position. It acts as a performance bond rather than a down payment and is determined by the exchange and your broker.

What is Maintenance Margin?

Maintenance margin is the minimum account balance required to keep a futures position open. If your account falls below this level, your broker may issue a margin call requiring additional funds.

What is a Margin Call?

A margin call occurs when your account balance falls below the required maintenance margin. To continue holding your position, you may need to deposit additional funds or reduce your exposure.

What is Open Interest?

Open interest is the total number of active futures contracts that remain open and have not been closed or settled. It is commonly used by traders to measure market participation and liquidity.

What is Trading Volume?

Trading volume is the total number of contracts traded during a specific period. Higher trading volume often indicates greater market activity and can contribute to tighter spreads and better trade execution.

What is Settlement?

Settlement is the process that occurs when a futures contract reaches expiration. Depending on the contract, settlement may be completed through the physical delivery of the underlying asset or by cash settlement.

What is Cash Settlement?

Cash settlement is a method of settling a futures contract where no physical asset is delivered. Instead, the profit or loss is calculated and credited or debited to the trader's account.

What is Physical Delivery?

Physical delivery occurs when the actual underlying commodity or financial instrument is delivered at contract expiration. While most retail traders close their positions before expiration, some commodity contracts allow or require physical delivery.

What is Market Depth (DOM)?

Market Depth, also known as the Depth of Market (DOM), displays the current buy and sell orders waiting to be executed at different price levels. Many futures traders use the DOM to evaluate liquidity and monitor order flow.

What is Order Flow?

Order flow is the analysis of buying and selling activity within the market. Traders use order flow tools to identify where large market participants are entering or exiting positions and to better understand short-term market behavior.

What is the Continuous Contract?

A continuous contract is a chart created by combining multiple futures contract months into a single continuous price history. It allows traders to analyze long-term trends without interruption from contract expirations.