What Is Futures Trading

What futures trading is

Futures trading lets you buy or sell a contract that represents an asset at a fixed price for a future date. These contracts trade on regulated exchanges and cover assets such as stock indices, commodities, interest rates, and currencies.

You do not trade the asset itself. You trade the contract that tracks its price.

How futures contracts work

A futures contract defines the price, quantity, and expiration date of the asset. When you enter a trade, you agree to buy or sell that contract at the specified price.

Traders use futures to speculate on price direction or to hedge existing exposure.

Long and short positions

You can profit in rising or falling markets. Buying a contract benefits from higher prices. Selling a contract benefits from lower prices.

Leverage in futures trading

Futures markets use margin instead of full payment. You control a large position with a relatively small deposit called initial margin.

This structure gives futures traders high capital efficiency.

How leverage changes risk

Leverage increases both gains and losses. Small price movements can create meaningful profit or loss in a short time.

Because of this, futures traders must control position size and drawdown carefully.

Settlement of futures contracts

Every futures contract has an expiration date. At expiration, the contract is settled.

Cash-settled contracts

Most index and financial futures use cash settlement. The exchange credits or debits the difference between the entry price and the final settlement price.

No physical delivery takes place.

Physical delivery contracts

Some commodity contracts allow physical delivery. Most retail traders close positions before expiration to avoid delivery.

Liquidity and volatility

Futures markets are highly liquid. Large volumes allow fast execution and tight spreads.

High liquidity also means prices can move quickly during news, economic releases, or market imbalances.

Opportunities and risks

Volatility creates opportunity. It also increases risk. Without clear risk rules, losses can escalate quickly.

• Use defined stop levels
• Limit daily losses
• Control leverage
• Avoid overtrading

Why risk management matters

Successful futures traders focus on survival first. Profit comes from consistency, not oversized bets.

Professional traders treat risk limits as non-negotiable.

Final thoughts

Futures trading offers flexibility, leverage, and access to global markets. It also demands discipline and risk awareness. When you understand contract mechanics, leverage, and settlement, you trade with clarity instead of guesswork.