From Theory to Execution: How Future Trading Works

On average, tens of millions of futures contracts are traded each day worldwide. For example, the CME Group reported a global average daily volume (ADV) of 30.2 million contracts in the second quarter of 2025, with record activity in regions like EMEA and APAC across interest rate, equity index, energy, agricultural, and metals futures.

The idea is simple yet powerful. Traders lock in a price today for something that will be exchanged later. What happens between now and that future date can create meaningful opportunity. That’s why understanding how future trading works is essential for anyone stepping into this field.

This guide is designed for beginners. It keeps the explanations clear, accessible, and practical while still offering advanced insights where needed. By the end, you will not only know how does futures trading work on paper but also how to approach your first trade with confidence.

Introduction to Futures Trading

Futures are standardized financial contracts that allow two parties to agree on a price today for an asset that will be exchanged at a set date in the future. These assets can be commodities, stock indexes, currencies, interest rates, or even digital assets. Although futures were originally created for hedging, they are now widely used for speculation, risk management, and diversified exposure.

What Are Futures?

Futures represent an agreement between a buyer and a seller. The buyer agrees to take delivery or settle financially at a fixed price, while the seller agrees to deliver or settle under the same terms. These contracts are standardized by the exchange, meaning every detail, expiration date, contract size, tick size, settlement method and quality specification is predefined.

Most futures positions do not end in physical delivery. Instead, traders close or roll over their contracts before expiration. The purpose for most retail traders is not to store crude oil or tons of wheat but to profit from price movement.

How Future Trading Works

Understanding how future trading works means understanding the relationship between contract price, market movement, and leverage. Traders lock in a price now, but the market will almost certainly be different at expiration. The difference between the agreed price and the future price is what generates a gain or loss.

For example, if you buy a crude oil futures contract and the market rises, your contract becomes more valuable. If it falls, your contract loses value. This is the core mechanism behind how does future trading work in practice.

Buying vs Selling Futures (Long and Short Positions)

Going long means buying a futures contract because you expect the price to rise. You profit if the price increases above your contract level. Going short means selling a futures contract because you expect the price to fall. You profit if the price drops and you can buy it back at a lower price. This flexibility is one of the strongest advantages of futures trading.

Futures Contracts Standardization

Standardization ensures liquidity. Every futures contract includes:

• Underlying asset
• Quantity (e.g., 1,000 barrels per crude oil contract)
• Expiration date
• Settlement method
• Tick size and tick value
• Quality specification (for commodities)

Mark-To-Market in Futures Trading

All futures accounts are updated daily. This process is known as mark-to-market. Profits and losses are settled at the end of each trading day. That means traders see real-time changes in account equity as the market moves. If the market moves in your favor, your cash balance increases. If it moves against you, it decreases.

Tick Size, Tick Value, and Price Movement

A tick is the minimum movement in a futures price. Its value is predetermined. For crude oil, the tick size is 0.01 and the tick value is USD 10. Even small movements can translate into meaningful profit or loss.

Why Traders Use Futures

Speculation

Speculators aim to profit from price movement. They do not intend to take delivery of assets. Instead, they open positions, track market direction, and close trades based on opportunities. Speculators add liquidity and help markets function efficiently.

Hedging and Risk Management

Hedgers enter futures contracts to protect their financial positions. A crude oil producer might sell futures to lock in a price months before delivery. Likewise, a portfolio manager might hedge equity exposure using stock index futures during volatile periods. In both cases, the goal is stability rather than profit.

Advantages and Disadvantages of Futures Trading

Futures offer several benefits and risks:

Regulation of Futures Markets

Futures markets are regulated by bodies such as the Commodity Futures Trading Commission (CFTC). These agencies oversee trading activity, prevent market manipulation, and ensure transparency.

How to Trade Futures in Practice

What Beginners Should Know Before Placing Their First Futures Trade

Before opening a futures position, beginners benefit greatly from understanding a few core principles that often separate successful traders from those who struggle. The first is volatility. Futures markets, especially contracts like crude oil, can move quickly. Prices react to global news, economic data, unexpected supply shifts, and even political tensions. A small change can create an outsized effect on your account because of the leverage built into futures.

The second principle is discipline. Every futures trade needs a predefined plan that outlines where you will enter, where you will exit if wrong, and where you will take profit if right. Having this structure in place reduces emotional mistakes, especially when trades move fast against you.

Another important factor is understanding margin behaviour. Many beginners assume the initial margin is the maximum risk, but this is not the case. Because the entire notional value is in play, losses can exceed margin if the market moves aggressively. Monitoring your equity, available margin, and the impact of mark-to-market updates becomes crucial.

Futures reward preparation. The more a beginner understands these mechanics, the smoother the transition becomes from theory to actual execution.

Step 1 – Understand How Futures Trading Works

You start by grasping how the contract structure, leverage, margin, and settlement function together. This foundation helps you make responsible decisions.

Step 2 – Choose a Futures Market

Beginners often start with crude oil, S&P 500 futures, or gold. Crude oil is a popular choice because it reacts strongly to global news, supply reports, and economic data.

Step 3 – Decide Whether to Go Long or Short

Use technical analysis, news flow, and market structure to determine whether the price is likely to rise or fall. When learning how does futures trading work, understanding market direction is crucial.

Step 4 – Place Your First Trade

Choose the contract month, select buy or sell, specify your size, and confirm the order. Most trading platforms also label futures clearly to avoid confusion with spot markets.

Step 5 – Set Stops and Limits

Stops protect you from significant losses. Limits help you secure profits automatically. Leverage makes risk management essential.

Step 6 – Monitor and Close the Position

You can close a futures position anytime before expiration. If you hold until expiry, the exchange will cash-settle or deliver based on the contract rules.

Examples of How Futures Trading Works

Futures Contract Example

Imagine a September crude oil contract priced at USD 75.72. Each contract covers 1,000 barrels. The notional value is USD 75,720. A small price movement, such as a rise to 75.97, generates a USD 250 change because of the USD 10 tick value.

Trading Example for Long and Short Positions

If you go long and price rises, you profit. If you go short and price falls, you profit. This dual-direction flexibility is one reason many traders learn how future trading works early in their careers.

How Does Futures Trading Work With an Example?

Consider a fictional beginner trader named Daniel. He believes crude oil will rise due to a supply shortage. Daniel buys one September crude oil futures contract at USD 75.72. If oil climbs to USD 76.72, the price has moved 100 ticks. Each tick is worth USD 10. Daniel earns USD 1,000. If the price drops, he loses the same amount.

Special Concepts in Futures Trading

Futures Options and Their Role

Options on futures provide the right, but not the obligation, to buy or sell a futures contract at a strike price. They allow strategic flexibility but require additional learning.

The Role of a Hedger

Hedgers include energy producers, farmers, metal miners, and manufacturers. They use futures to lock in prices and reduce uncertainty.

The Role of a Speculator

Speculators actively trade movements in futures markets. They open and close positions based on market analysis rather than ownership needs.

Long Futures

Traders expect rising prices and buy to open.

Short Futures

Traders expect falling prices and sell to open.

Common Rules and Market Principles

What Is the 80 Percent Rule in Futures Trading?

The 80 percent rule states that when price enters a value area and remains there, it has an 80 percent chance of moving across the entire range. It’s used primarily by index futures traders.

What Is the 60 40 Rule for Futures?

The 60 40 rule is a tax principle in the United States. Sixty percent of futures gains are taxed as long term, and 40 percent as short term, regardless of how long the trade was held.

Frequently Asked Questions (FAQs)

How does futures trading work with an example?

A trader buys a crude oil contract at USD 75.72 and closes it at USD 76.72. The 100 tick move equals USD 1,000 in profit because each tick is worth USD 10.

How do traders make money on futures?

They profit from price differences between entry and exit. Going long profits from rising prices. Going short profits from falling prices.

What is the 80 percent rule in futures trading?

It predicts that price will often cross an entire value area once it re-enters and holds within it.

What is the 60 40 rule for futures?

It’s a tax rule specific to the U.S. where futures gains get a blended long-term and short-term tax treatment.

Conclusion

Learning how future trading works gives beginners the clarity they need to step confidently into futures markets. Futures offer flexibility, powerful leverage, and the ability to profit in rising and falling markets. With the right approach, proper risk management, and a strong understanding of margin and contract structure, futures become a valuable tool for speculation, hedging, and diversified exposure. The goal is simple: build a clear, structured process from theory to execution and trade with discipline.