Futures Trading 1 - Introduction

I'm Familiar with Stocks, but How do Futures Work? - by John Carter

This is the question I get asked most often by other traders who are not familiar with the futures markets. I started off as a stocks and options trader, so I know what you are thinking. They're scary, right? Yet in my experience, once you understand and then trade futures, you never go back to stocks.

Think of this as a "quick blurb" that will help you better understand the futures markets. This is by no means comprehensive—there are entire books written on the subject. However, if you have traded only stocks, the futures markets are probably a mystery and maybe even a little menacing. Yet if you have already learned the importance of strict money management, you will really appreciate what futures trading has to offer. Typically, once people try trading futures, they simply stop trading stocks. The ease of entry on both the long and the short sides and the ability to focus on a few markets instead of hundreds of stocks makes them a refreshing change to the world of stocks. Here is how they work:
First off, there are many types of futures contracts. You can trade anything from Copper to Coffee, from Stock Indexes to Silver, or from Pork Bellies to Palladium. Don't worry about most of these for now. At some point, after you become comfortable with trading a handful of these, you may want to look at more of them. But I know many traders who have traded one market all of their trading lives and are doing quite well, thank you. These are the main futures markets that I follow:

• CBOT mini-sized Dow (YM)
• E-mini S&P (ES)
• E-mini Nasdaq (NQ)
• Full-sized 100 oz. Gold (ZG)
• Full-sized 5,000 oz. Silver (ZI)
• 30-year U.S. Treasury Bond (ZB)

Note that some of these are "mini" and some of these are "full-sized." There are full-sized contracts on the Dow (DJ), S&P 500 (SP) and Nasdaq (ND), but these are pit traded and I prefer to trade the smaller "mini" electronic contracts. Why? Because of the transparency and immediacy of electronic trading. The new full-sized 100 oz. Gold and 5,000 oz Silver electronic contracts are a refreshing change from the old pit traded Gold (GC) and Silver (SI) contracts. Again, I much prefer to trade the electronic version of these contracts over the pit traded versions. There are also CBOT mini-sized Gold (YG) and mini-sized Silver (YI) electronic contracts which are good to trade. The fact that CBOT has both full and mini-sized Gold and Silver futures simply means you have a choice to trade the contract more appropriate for your account size. The important thing to remember for the off floor (as in the Exchange's trading floor) trader is to focus on electronic contracts instead of pit traded contracts. Electronic fills are instantaneous and the markets fully transparent, leveling the playing field for all participants.

In addition, the trend in volume appears to be flowing out of the pit contracts and into the electronic contracts. The electronics are where the action is, and that is where you want to be trading. To get charts on the above contracts, you will have to tell your quote vendor that you want to add quotes from the CME (for the ES and NQ) and the CBOT (for the Dow, Bonds, Gold and Silver). CBOT Advantage, CBOT's data product, offers a two-week free trial for quotes and charting that you can use to check out both markets without plunking down any money. By the way, the word "E-mini" is branded by the CME (Chicago Mercantile Exchange), which is why you see "mini-sized Dow" instead of "E-mini Dow" because it trades on the CBOT (Chicago Board of Trade), which is a different exchange.
Although I follow YM, ES and NQ, I prefer trading YM. I will talk about why I prefer trading it in the next section. Here is a video that shows you how to find additional information regarding the futures contracts you want to trade. This will help you leap frog ahead of any other beginning traders.

Profitable Futures Trading.