Considerations to Open a Futures Position
Prior to entering a futures position by placing an entry order, you must make several decisions, including:
- What futures contract to trade
- What expiry date to trade
- Whether to buy to open or sell to open
- Number of contracts to trade
- The price at which you wish to execute a trade
1. What Futures Contract to Trade
Traders conduct analysis on the markets to determine whether an opportunity may exist to profit from entering a trade. This can be done using:
- Technical analysis that evaluates price trends and patterns - ACDX’s charts include 110 studies and 38 drawing tools you can use to conduct technical analysis
- Fundamental analysis that examines the underlying economic forces that may factor into futures price movements
- Market-generated information which considers elements such as time, price, and volume traded - ACDX’s chart includes studies such as volume chart, volume profile, and more and the order book displays the number of buy and sell limit orders for each price level
Traders consider things like the typical size of price moves, market volatility, and liquidity when choosing a market to trade. They also must familiarize themselves with the specifics of each contract in order to know important information like trading hours, contract size, margin requirements, and more. More information on contract specifications can be found here.
2. Expiry Date
After selecting the contract to trade, you must select the expiry month.
Most traders choose the contract with the nearest expiry, which typically is the most actively traded or liquid contract. For example, if you were placing a trade in the month of January then selecting the February expiry would typically be better than selecting the December expiry since February would likely have more daily volume being traded, allowing you to more easily enter and exit trades and doing so with better price execution.
3. Buy or Sell
In futures trading, you can sell a contract to open a position just as easily as you can buy to open a position, so once you have determined whether you think the price is going up or down you can take action accordingly.
If you believe the price is going to increase, you can profit by buying a contract and selling once the price has moved higher. If you believe the price is going to decrease, you can profit by selling a contract and buying once the price has moved lower.
4. How Many Contracts to Trade
Position sizing is an important factor when trading futures contracts. Traders will assess individual risk parameters, such as how much loss they are willing to potentially sustain for a given trade, the size of their account, and current market conditions when determining the trade size that is most appropriate for them.
As you make your decision about trade sizing, remember that futures contracts are traded with margin, meaning you only need a portion of the full contract value in order to trade the contract. For example, if you traded a Bitcoin future when the price was $10,000, you may only need to use $1,000 of margin to place the trade. This leverage can increase capital efficiency and improve the return-on-capital from gains, but it can also accelerate losses just as quickly as profits, making it a very important concept to understand when choosing how many contracts to trade.
Each market will have different margin requirements, which can vary per contract. You can view current margin rates in the contract specifications and margin values for your account positions in the account summary.
5. Trading Price
Once the contract, expiry, and the number of contracts have been chosen, one more important element must be determined to complete an order: the price where you would like to execute the trade.
Orders can be placed at market, which will be submitted at the price that the contract is currently trading, or they can be placed above or below the current price in anticipation of the market moving towards a specific price level. Traders use market orders to increase when the certainty of trade execution is a priority over the price at which the trade is executed. Alternatively, traders use price orders, such as limit, stop, and take profit, when trading at or near certain prices is more important than the immediacy of having the trade executed.
How to Place an Order to Open a Futures Position
ACDX’s trading platform offers several different ways to place orders to enter a position, allowing you to use the tools that work best for you.
Here are articles on each way to place trades in the platform: