Nickel Futures Trading Basics

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Futures Trading Systems

Last updated on November 6th, 2020

Many traders I come across seem to start off by trying to day trade stocks or Forex and for many years this concept was pretty alien to me.

If you want to be an active day trader, futures are really the way to go. But to some, the world of futures trading is a dangerous business – a world where fast money and blown up accounts often go hand-in-hand.

The simple fact is that this is not an unusual reality in the industry. But there’s another reality for those who understand the risks involved and maintain appropriate safeguards: trading futures markets is one of the most efficient ways to use your capital.

LEVERAGE In The Futures Market

Leverage certainly has the potential to be a case of Dr. Jekyll and Mr. Hyde. I don’t think it’s too hard to find horror stories of traders being over-leveraged and blowing up their accounts. It’s not uncommon for a trader who has taken a few “bad beats” to go “on tilt”, trade erratically and double up (or perhaps worse) on their losing positions.

But even without this very real aspect of trading, many traders just don’t realise what the odds of them having a sustained period of draw down are and so they are less likely to fully appreciate the need to address how much capital they should risk over how much capital they can risk.

Let’s look at some figures to put into perspective just how much leverage you can get as a trader of futures.

The E-mini S&P 500 (ES) trading at a level of 1600 gives a trader control of $80,000 of product (index level x $50 per point for this product). Current CME exchange margin is $3,850 per contract which equates to a leverage of roughly 20:1.

Whilst that’s pretty high it’s not exceptionally so. Enter the brokers.

For day trading, brokers offer a much lower intraday margin rate. In theory a low intraday margin is useful for a well-capitalized account if you don’t want to leave all of your capital sitting in your account.

However, in practice many traders will use these low margins to trade with much less capital than is realistically required. Typically a broker will offer you $500 intraday margin and I’ve seen as low as $400 per contract for the ES.

At the same 1600 level that’s a leverage of 200:1.

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That’s 8 points to zero or a 0.5% move in a product that typically has a primary session range of 10-20 points. And it’s important to note that margined accounts can fall below zero, meaning that if the market moves sharply against you and losses are greater than the capital in your account, you will be liable for the difference.

But just like everything else in trading, it’s an individual’s responsibility to ensure that they fully comprehend the risks involved and act in their own best interests. If you take account of the risks, the ability to highly leverage your trading capital can be a powerful ally.

If you have a genuine edge in the market that has demonstrated will make money over time, then being able to trade more contracts than you would normally with the capital you have is a distinct advantage. If you stick to a 1-2% risk per trade with a 2-3 point stop in the ES, you only need $5,000-15,000 per contract for example.

Clearly there’s the opportunity to turn a relatively small amount of capital into a great return.

Futures Markets Have Great LIQUIDITY

In fairness, there are plenty of futures instruments that have poor liquidity just as anything else could that you might look to trade. But there are reasonably high numbers of really great products to trade, with a variety of different behavioral features and risk profiles that also have fantastic liquidity.

Many instruments don’t even have a bid-ask spread in the front month contract.

An important point is that futures contracts are agreements to deliver (or take delivery of) the underlying product at a certain date and therefore they expire. So if you hold a long (buy) position in Crude Oil into expiry, you will be expected to take delivery and pay for a whole load of barrels of Crude Oil.

Some products are cash settled instead like the ES for example. It’s for this very reason that a futures trader will never normally want to hold a position into expiry. The front month is the nearest expiring futures contract (except when approaching the expiration date) and this is where the liquidity for an instrument is normally found.

The main point about liquidity though, is that you’ll never really have a problem getting into or out of a position in the markets.

CENTRALIZED REGULATED EXCHANGES

The futures industry is highly regulated and whilst there are those who try to get away with nefarious activities, they are often identified swiftly and dealt with appropriately. Regulatory requirements are stringent and are there to protect traders.

And because the exchanges are centrally cleared, effectively meaning that all trades goes through the exchange (although this isn’t 100% accurate it is true for the most part), there is accountability for all trades that take place. Simply put, you get what you see in most cases when you trade. Direct market access means no funny business from your broker too. Your trading platform links into the exchange.

Because of this, the quality of futures markets is high.

The bottom line is that if you are a sensible, responsible trader who treats this as a business, futures markets offer a fantastic way to trade. They are efficient, cost effective and properly regulated. Sure, like any other product there are a few nuances to learn.

But if you’re serious about trading and day trading in particular, you should seriously consider trading futures.

Nickel Futures Trading Basics

A futures contract is an obligation to buy or sell a commodity at or before a given date in the future, at a price agreed upon today. While the term “commodity” is usually used when referring to contracts like corn, or silver, it is also defined to include financial instruments and stock indexes. One of the benefits to the futures industry is that contracts are traded on an organized and regulated exchange to provide the facilities to buyers and sellers.

Exchange-traded futures provide several important economic benefits, but one of the most important is the ability to transfer or manage the price risk of commodities and financial instruments. A simple example would be a baker who is concerned with a price increase in wheat, could hedge his risk by buying a futures contract in wheat.

Not all futures contracts provide for physical delivery, some call for an eventual cash settlement. In most cases, the obligation to buy or sell is offset by liquidating the position. For example, if you buy 1 S&P500 e-mini contract, you would simply sell 1 S&P500 e-mini contract to offset the position. The profit or loss from the trade is the difference between the buy and sell price, less transaction costs. Gains and losses on futures contracts are calculated on a daily basis and reflected on the brokerage statement each night. This process is known as daily cash settlement.

US futures trading is regulated by the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). The CFTC is an independent federal agency based in Washington, DC that adopts and enforces regulations under the Commodity Exchange Act and monitors industry self-regulatory organizations. The NFA, whose principal office is in Chicago, is an industry-wide self-regulatory organization whose programs include registration of industry professionals, auditing of certain registrants, and arbitration.

If you are new to futures trading, be sure to check out our tips for futures traders & watch our FAQ video below. Get answers to common questions such as the role of commission in overall trading costs and learn how leverage can impact margin requirements.

For a free educational guide to “Trading Futures and Options on Futures”, provided by the National Futures Association (NFA), please click here.

Copyright © 2020. All rights reserved. NinjaTrader and the NinjaTrader logo. Reg. U.S. Pat. & Tm. Off.

NinjaTrader Group, LLC Affiliates: NinjaTrader, LLC is a software development company which owns and supports all proprietary technology relating to and including the NinjaTrader trading platform. NinjaTrader Brokerage™ is an NFA registered introducing broker (NFA #0339976) providing brokerage services to traders of futures and foreign exchange products.

Futures, foreign currency and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing one’s financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results. View Full Risk Disclosure.

The Basics of U.S. Treasury Futures

INTRODUCTION

CBOT Treasury futures are standardized contracts for the purchase and sale of U.S. government notes or bonds for future delivery. The U.S. government bond market offers the greatest liquidity, security (in terms of credit worthiness), and diversity among the government bond markets across the globe. The U.S. government borrows through the U.S. bond market to finance its maturing debt and its expenditures. As of December 2020, there was $15.6 trillion of U.S. government bonds and notes outstanding as marketable debt.

The U.S. government borrows money primarily by issuing bonds and notes for a fixed term, e.g. 2-year, 5-year, 10-year, and 30-year terms at fixed interest rates determined by the prevailing interest rates in the marketplace at the time of issuance of the bonds. Strictly speaking, U.S. Treasury bonds have original maturities of greater than 10 years at time of issuance, and U.S. Treasury notes have maturities ranging from 2-Yrs to 10Yrs (2, 3, 5, 7 and 10yr). For the purpose of this note, U.S. Treasury bonds and notes are applicable for general references to the U.S. bond market or U.S. bonds unless described otherwise.

U.S. Treasury bonds trade around the clock leading to constant price fluctuations. In general, bond prices move in inverse proportion to interest rates or yields. In a rising rate environment, bondholders will witness their principal value erode; in a declining rate environment, the market value of their bonds will increase.

IF Yields Rise ▲ THEN Prices Fall ▼
IF Yields Fall ▼ THEN Prices Rise ▲

U.S. Treasury futures and options contracts are available for each of the Treasury benchmark tenors: 2-year, 5-year, 10-year, and 30-year. Additionally, CME Group offers Ultra 10-Year Note and Ultra T-Bond futures which offer greater precision for trading the 10-year and 30-year maturity points on the yield curve respectively..

Each of the bond and note future contracts has an associated delivery bond basket that defines the range of bonds by maturity that can be delivered by the seller to the buyer in the delivery month. For example, the 5-year contract delivers into any U.S. government fixed coupon bond that has a remaining maturity of longer than 4 years and 2 months and an original maturity of no more than 5 years and 3 months. The delivery mechanism ensures the integrity of futures prices by ensuring that they are very closely tied to the prices of U.S. government bonds and their yields (interest rates). In practice, most participants trade U.S. Treasury futures contracts with the intent of either closing out the futures position or rolling them into longer expiry futures contracts. U.S. Treasury futures are listed on the March, June, September, and December quarterly cycles. Since 2000, only about 7% of Treasury futures positions result in physical delivery at expiration.

Table 1: CBOT Treasury Futures Contract Details

2-Year T-Note Futures

5-Year T-Note Futures

10-Year T-Note Futures

Ultra 10-Year T-Note Futures

Ultra T-Bond Futures

1 3/4 to 2 years

4 1/6 to 5 1/4 years

6 1/2 to 10 years

9 5/12 to 10 Years

15 years up to 25 years

25 years to 30 years

March quarterly cycle: March, June, September, and December

Electronic: 5:00 pm – 4:00 pm, Sunday – Friday (Central Time)

Last Trading & Delivery Day

Last business day of contract month; delivery may occur on any day of contract month up to and including last business day of month

Day prior to last seven (7) business days of contract month; delivery may occur on any day of contract month up to and including last business day of month

In percent of par to one-eighth of 1/32nd of 1% of par

In percent of par to one quarter of 1/32nd of 1% of par

In percent of par to one-half of 1/32nd of 1% of par

In percent of par to one-half of 1/32nd of 1% of par

In percent of par to 1/32nd of 1% of par

In percent of par to 1/32nd of 1% of par

Minimum Tick Value

Each U.S. Treasury futures contract has a face value at maturity of $100,000 with the exceptions of 2-year and 3-year U.S. Treasury futures contracts which have face value at maturity of $200,000. Prices are quoted in points per $2000 for the 2-year and 3-year contract and points per $1000 for the all other U.S. Treasury futures. The fractional points are expressed in 1/32nd in line with the convention in US government bond market. The minimum tick size for the 30-year (T-Bond) and Ultra T-Bond contracts is 1/32nd of one point ($31.25), 10-Year and Ultra 10-Year is half of 1/32 nd of one point ($15.625), 5-year is one-quarter of 1/32nd of one point ($7.8125), and 2-year is one-eighth of 1/32 nd of one point ($7.8125).

Treasury futures are standardized, highly liquid, and transparent instruments. In 2020, CBOT U.S. Treasury Futures traded an average of 4.2 million contracts daily. In addition, futures are a neutral security, which can be easily traded from the long or short sides. Treasury futures positions provide the security of facing CME Clearing, which acts as the counterparty to every trade*. Finally, U.S. Treasury futures provide easy access to leverage and both capital and operational efficiencies. These are among the reasons U.S. Treasury futures have a broad and diverse mix of customer types including Asset Managers, Banks, Corporate Treasurers, Hedge Funds, Insurance Companies, Mortgage Bankers, Pension Funds, Primary Dealers, & Proprietary Traders. The vast hedging and speculative activity in U.S. Treasury futures create nearly constant price fluctuations providing excellent opportunities trading for individual traders in addition to institutional trading accounts.

Trading Examples – U.S. Treasury futures:

Historically, when the economy strengthens, interest rates are likely to rise for a number of reasons such as:

  • increased demand for loans
  • asset allocation out of bonds (typically considered a safe asset class) into stocks (typically considered a risky asset class)
  • increased likelihood of interest rate increases by the Federal Reserve Board

When interest rates rise, U.S. Treasury futures prices fall.

Similarly, when the economy weakens, interest rates are likely to fall for reasons such as:

  • decreased demand for loans
  • asset allocation out of stocks into bonds
  • increased likelihood of interest rate cuts by the Federal Reserve Board

The US economy is more like a cruise liner than a speed boat in that it often stays on a path of strengthening or weakening for several months to a few years. This causes broader moves in interest rates that are spread over considerable time periods as opposed to very short periods. Nevertheless, U.S. Treasury futures produce short term trading opportunities, as demonstrated in the following examples.

Example 1: A trader believes that the U.S. economy is strengthening and intermediate Treasury yields will increase (5-Yr and 10-Yr).

This trader sells 10 contracts of March 2020 5-year T-Note futures at 114 25/32.

The trader’s view proves correct. The economic numbers continue to show that the US economy is strengthening. 5-Yr Treasury yields rise, and the March 2020 5-year T-Note futures price declines. The trader buys back the 10 March 2020 5-year T-Note futures contracts at 114 03/32.

Profit on this example trade = 10 * (114 25/32 – 114 03/32) * $1000 = $6,875

(Profit or Loss = Number of contracts* Change in price * $1000)

The profit calculation in this example can also be expressed in terms of minimum ticks or simply referred to as ticks. The tick size for 5-year contract is ¼ of 1/32nd of 1 point.

The $ value for minimum tic of the 5-year contract is $7.8125.

Number of ticks made on the trade = (25/32 – 3/32) * 4 = 88 Ticks

Profit on this example trade = 10 Contracts X 88 Ticks X $7.8125 = $6875

Example 2: The monthly U.S. non-farm payroll number on the first Friday of a month comes out significantly weaker than expected. This indicates a surprisingly weakening economy. As a result,

Treasury yields decline, and U.S. Treasury futures prices rise. A trader notices that the March 2020 10-year T-Note futures have responded to the report by posting modest rally from 121 05/32 to only 121 15/32. He believes that the weakness in the number was a significant surprise and more participants will soon need to buy notes.

This trader buys 10 contracts of March 2020 10-year T-Note futures at 121 15.5/32.

The trader’s view proves correct. Intermediate Treasury yields continue to fall, and the

10-year T-Note future price rises further. An hour later the trader sells back the 10

March 2020 10-Yr T-Note futures contracts at 121 23/32.

Profit on this example trade = 10 * (121 23/32 – 121 15.5/32) * $1000 = $2344 (rounded to nearest dollar)

Similar to the previous example, let us recalculate the profit in this example using ticks. The tick size for 10-year contract is 1/2 of 1/32nd of 1 point. The $ value for minimum tic of the 10-year contract is $15.625.

Number of ticks made on the trade = (23/32 – 15.5/32) * 2 = 15 Ticks

Profit on this example trade = 10 Contracts X 15 Ticks X $15.625 = $2344 (rounded to nearest dollar)

What are the basics of futures trading?

Not sure if futures trading is right for you? In this article, we’ll help you find out by taking a close look at what futures are and how they work.

What are futures?

To start, here’s a quick definition: Futures are contracts for the delivery, or cash settlement, of many things you may encounter every day, like materials, products, or even the stock market itself. But what does that really mean? Let’s break it down by exploring a few key traits that make futures unique.

All futures share the following three characteristics:

  1. Easy contract trading. Futures are contracts that trade on an exchange. That means if you buy or sell them, closing your trade is as easy as it would be for a stock. The futures market is relatively deep and liquid.
  2. Settlement by cash or physical delivery. Like stocks, most futures—including the CME E-mini S&P 500 and other equity index futures—settle in cash. There’s no exchange of physical goods or shares of stock. The only thing that changes hands is money.

However, some commodity futures, like corn and soybeans, are physically settled, meaning each party to the trade is expected to deliver or receive the actual commodity at expiration. But very few futures contracts are settled this way, and at E*TRADE, while you should be sure to close your positions on time, there are mechanisms in place to minimize this risk.

  • Backed by commodities or other assets. Futures contracts represent the pricing of essential things that affect our daily lives, including agricultural products (like wheat and cattle), energy products (like crude oil and gasoline), and financial products that facilitate international trade (e.g., those involving interest rates and currency exchange).
  • Equity index futures are one of the most popular, providing another way for investors to trade on price movement in the stock market. These include the CME E-mini S&P 500 mentioned above, plus the CME E-mini Nasdaq and CME E-mini Russell 2000.

    What are the basic terms used in futures trading?

    Now that we’ve seen what futures are, let’s explore how they work by defining and illustrating some essential futures terms.

    • Tick . Futures contract prices move in minimum increments called “ticks.” These are different for each futures product and can usually be found by checking the futures page. As an example, the CME E-mini S&P 500 has a tick size of a quarter of an index point.
    • Tick value. Unlike stocks (where each tick is worth a penny), tick size for futures is product-dependent, and as a result, the dollar value will vary. The tick value of the CME E-mini S&P 500 is $12.50, so if you buy a contract and end up selling it, say, two ticks higher, you’d make $25.00, assuming no commissions or fees.
    • Contract size. The specified quantity behind each futures contract (i.e., how much of a commodity or financial instrument is backing that contract) is called its contract size. For example, the CME gold futures contract represents 100 troy ounces of gold.
    • Notional value. Knowing the size of a futures contract enables you to determine its notional value—i.e., how much each contract is worth. You can figure this out by multiplying the contract size by the current price of the futures contract.

    Consider gold: If gold futures are trading at $1,300 per ounce and the size of the CME gold futures contract is 100 ounces, the contract’s notional value would be $130,000 ($1,300 x 100). In dollar terms, that’s how much one gold contract is worth.

    If a contract’s notional value ever seems too big for your wallet, check to see if there’s a contract with a smaller size. With gold, there is. It’s the CME E-micro gold, which has a contract size of 10 ounces—and a notional value of $13,000 ($1,300 x 10). That’s one-tenth the size of the bigger contract.

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