Futures trading lets you speculate on or hedge against asset price movements.
Trading futures can be risky due to market volatility. It’s a complexity investment strategy often used by experienced investors to profit from market fluctuations.
It’s legal to trade futures in Canada, but not all investment platforms offer this feature.
What is futures trading?
Futures trading involves buying and selling contracts to buy or sell a particular commodity or stock index at a predetermined price at a future date.
While farmers and consumers originally used futures contracts to sell and purchase crops at set prices throughout the year, futures trading has become an increasingly popular strategy for regular investors to hedge against market volatility, diversify and trade strategically. Most contracts are closed before expiration, avoiding physical delivery of the product. Whether they take a profit or loss on the futures contract depends on market movements.
Trading futures is riskier than stock trading, making it critical to understand how futures trading works before you get started.
How to trade futures in 6 steps
When you know how to trade futures, your whole investment portfolio opens up to new opportunities. All it takes is just a few steps.
1. Understand the basics of futures
Before you can trade futures, you need to know how they work.
A futures contract is when you enter into a contract to purchase or sell a specific commodity or stock index at a fixed price on a future date. Futures trading generally uses an exchange registered with a provincial or territorial securities regulator or the Canadian Securities Administrators (CSA).
When trading futures, it is important to assess these key areas:
Contract size. The contract size refers to the number of futures in the transaction.
Tick size and value. Consider the contract value by assessing the current price and looking for the tick size, which shows the minimum price change guaranteed by the contract.
Leverage. Leverage is required when trading futures, meaning traders control larger contract values with a fraction of the capital required. This amplifies both gains and losses.
Margin requirements. The margin requirements dictate the minimum capital required to purchase a futures position.
Expiration and settlement date. Expiration is the last day you can trade the contract, while settlement is when gains, losses or physical delivery obligations are finalized.
2. Select a futures trading strategy
Futures can be everything from gold to cryptocurrency to stocks and indexes. There are also energy and agricultural futures available. Consider which markets interest you and whether you have any particular knowledge or experience in a certain sector.
Regardless of whether you choose a commodity or an index, these factors can aid your decision.
Market type. Several types of futures contracts incorporate markets like financial, metal, agricultural, energy and cryptocurrency. To create the best strategy, it helps to know how to trade oil or whichever commodities you may be interested in.
Contract specs. These specs outline the stipulations for trading specific futures.
Liquidity. Liquidity shows how quickly you can sell or buy a futures contract with minimal impact on cost.
Volatility. Volatility in futures refers to how much securities are subject to change. The higher the volatility, the more the security is likely to change.
3. Open a futures trading account
To get started trading futures, you will first need a brokerage account.
How to create an account will vary by platform. Here is an example of how the process might work.
Go to the investment platform’s website and select Sign Up.
Provide basic personal information like your email address, legal name, phone number, residential address and country of residence for tax purposes.
Verify your identity by uploading a copy of government-issued ID like a driver’s license or passport photo page.
Review the terms and conditions, and submit your application. Once approved, transfer funds into your trading account.
You may need to answer some questions about your investment experience and employment. Additionally, you will need to review the terms and conditions and agree before you can proceed with funding your account and learning about how to trade futures.
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Take the time to research stocks, exchange-traded funds (ETFs) and indexes to see which might be the best for your portfolio.
Consider your comfort level with risk, and identify your overall trading objectives.
Check volatility to see how much movement you can expect with a particular security.
Look for key trends that can help you project future gains or losses.
Review valuable insights on market projections from industry experts.
Consider enlisting the help of a financial advisor if necessary.
5. Choose your futures and place the trade
When you are ready to begin trading, access your brokerage platform.
Navigate to the futures trading section.
Select your futures product.
Opt whether to buy or sell.
Enter the trade details, such as the order type, position size and price.
Manage risk by placing stop-loss and take-profit orders if needed.
Review your order and then submit it to place your trade.
6. Monitor the trade
Once you make your trade, it is critical that you monitor it to track movement. This way, you can act when the market changes.
Adjust stop-loss or take-profit orders. These features allow for better risk management without constant oversight.
Monitor margin levels. This is the amount of funds required for a futures position.
Close the position before expiration (or hold for settlement). You can either sell before the expiration date or hold to settle your current position.
Review and refine your strategy
After closing the trade, take the time to review its performance. Consider how your investing strategy can be improved or adjusted to net better gains in the future. Working with a financial advisor can help you determine the best strategy for your portfolio.
Futures trading examples
There are three main futures trading strategies: long, short and spread.
When you buy long, you buy futures expecting an increase in price. You profit as prices increase from the purchase price but experience losses when it decreases.
Buying short is the exact opposite—you purchase futures with the expectation that the price will go down. You sell when prices decrease, earning a profit. However, losses occur when the price increases above the sale price.
A spread strategy allows you to buy different futures contracts and capitalize on the difference. You could purchase two different types of commodities, such as crude oil and gasoline, and go long on one position while going short on the other. You earn a profit on the ensuing difference.
Futures trading fees to consider
Futures contracts hold certain fees that can affect your profit.
Commissions. This fee is paid out to the brokerage service handling your trade and can either be tiered or based on each contract.
Contract fees. Additional contract fees, such as open and close fees, may apply and may be either tiered or fixed, depending on your trade.
Exchange fees. These are assessed by the exchange where futures are being traded.
Futures trading advantages and risks
There are both benefits and drawbacks of futures trading that are important to consider.
Advantages
Leverage. With leverage, you can borrow money to increase potential gains, allowing you to use a smaller investment when trading on margin.
Diversification. If you are looking to diversify your portfolio, futures allow you to invest in a wide variety of securities that include both traditional investments like stocks and physical goods like gold.
Hedging. You can hedge both short and long positions, limiting your losses through locked-in prices and offset positions.
After-hours trading. Futures are available long after the stock market closes, allowing nearly uninterrupted trading for investors.
Risks
Complexity. Futures trading can be more complicated than other investments like stocks and bonds, requiring strategy and knowledge of the market.
Over-leverage. Leverage can help you take advantage of positive growth, but you could also find yourself on the hook for serious losses if the market moves against your position.
Managing expiry dates. Pay attention to the expiry date of your futures contract so you can track changes and act accordingly before the contract closes. You may be able to roll forward your futures contract into a new contract so you can maintain your position.
Physical delivery. With some brokers like Interactive Brokers, you may be forced to take delivery of the underlying asset at the contract price if you do not close your position or roll forward your contract.
Bottom line
Futures trading can be a way to capitalize on market fluctuations, but it is important to understand the risks involved. When you are ready to get started, check out the best brokerage accounts available, and be sure to check if they allow futures trading on their platform—not all do.
Frequently asked questions
In Canada, earnings from futures trading is taxable as capital gains or business income. For individual investors, that means a portion of your earnings should be included in your taxable income the year you earn it. Conversely, money you lose from futures trading might be deductible as a capital loss. Learn more about stock trading taxation.
The exact amount of capital you need to trade futures depends on the brokerage and the type of futures contract you enter into.
Important information: Powered by Finder.com. This information is general in nature and is no substitute for professional advice. It does not take into account your personal situation. This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for most investors. You do not own or have any interest in the underlying asset. Capital is at risk, including the risk of losing more than the amount originally put in, market volatility and liquidity risks. Past performance is no guarantee of future results. Tax on profits may apply. Consider the Product Disclosure Statement and Target Market Determination for the product on the provider's website. Consider your own circumstances, including whether you can afford to take the high risk of losing your money and possess the relevant experience and knowledge. We recommend that you obtain independent advice from a suitably licensed financial advisor before making any trades.
Lena Borrelli is an experienced finance writer with a deep understanding of personal finance, investing and consumer banking. Her work has been featured in top-tier publications such as Forbes, TIME, Bankrate, Moneywise and Annuity.org, where she provides expert insights on financial trends, smart money management and emerging fintech solutions. With a background in personal finance and content strategy, Lena specializes in breaking down complex financial topics into clear, actionable advice for readers. When she is not writing or scanning the news for the latest headlines, she is happiest spending time in the Florida sunshine with her husband and two pups. See full bio
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