What are futures and how do you trade them? (2024)

What are futures?

Futures are financial contracts in which two parties – one buyer and one seller – agree to exchange an underlying market for a fixed price at a future date. Futures give the buyer the obligation to buy the underlying market, and the seller the obligation to sell at or before the contract’s expiry.

With IG, you can speculate on whether the price of a futures contract will rise or fall with CFDs. Since these products are financial derivatives, you don’t have to take on the obligation to buy or sell. Start trading futures CFDs today with an IG account.

Why trade CFDs on futures?

1. Trade with leverage
2. Access our deep liquidity
3. Avoid overnight funding charges
4. Go long or short
5. Hedge your existing positions
6. Speculate on a wide range of markets

Trade with leverage

Futures contracts are leveraged. That is, they enable you to receive increased market exposure for a small deposit – known as margin – and your trading provider loans you the rest of the full value of the trade.

Access our deep liquidity

The number of trades that we handle every day – coupled with our size, international reach and large client base – means that our futures markets are particularly liquid. This means that if you deal in larger sizes, you’re more likely to have your order filled at your desired price.

Avoid overnight funding charges

Overnight funding charges will apply to cash positions that are left open at the end of a trading day. However, with futures, the overnight funding charge is included in the spread.

This means that futures trading is preferred by those who are looking to take a long-term position on an underlying market – because they won’t incur multiple overnight funding charges.

Go long or short

When trading futures with CFDs, you can go long or short. You’d go long if you believed that the underlying market price will rise, and you’d go short if you believed it will fall.

Hedge your existing positions

Hedging with futures enables you to control your exposure to risk in an underlying market. For example, if you own shares in companies on the FTSE 100 and are concerned about their value dropping, you could short a FTSE 100 index future – the profits from which would hopefully offset a proportion of your share position losses.

If you had current short positions on the other hand, you could go long on an index future in case the market rises, with the idea that your long profits would offset your short losses.

Speculate on a wide range of markets

You can trade futures CFDs on indices and commodities with us:

How to trade futures

To trade futures with CFDs, follow the steps below:

1. Understand how futures trading works
2. Pick a futures market to trade
3. Create an account and log in
4. Decide whether to go long or short
5. Place your first trade
6. Set your stops and limits
7. Monitor and close your position

Understand how futures trading works

Futures trading works by using CFDs to speculate on the price of an underlying futures market. CFDs can be used to go both long or short, meaning that you can profit from markets that are rising as well as falling – provided your predictions are correct.

Pick a futures market to trade

With various futures markets to choose from, you should establish which one is most-suited to your individual trading style. Some indices CFDs – the Germany 40 for example – experience higher volatility than others, and could be better suited to short-term day traders.

Other CFD markets, such as gold or silver commodity futures are often preferred by traders who have lower risk appetites and enjoy markets with lower volatility.

Create an account and log in

To start trading futures with CFDs today, open an account with IG. We’re a FTSE 250 company with over 45 years’ experience. Our spreads are among the lowest in the industry and we have a diverse futures offering, which includes the most popular indices and commodities on the market.

Decide whether to go long or short

Going long means that you are speculating on the value of a future increasing, and going short means that you are speculating on its value decreasing.

If you think that the underlying price of an index or commodity future CFDs will increase based on your own fundamental and technical analysis, then open a long position. If instead, your analysis suggests that the underlying market price will fall, then open a short position.

Place your first trade

To place your first trade, go to the IG trading platform and select a market. Next, select the ‘Futures’ tab on the price chart, decide whether you want to buy or sell the underlying market, and choose your position size.

Set your stops and limits

Before you open your position, you should consider adding stops and limits to your trade. Stops and limits are highly recommended tools for managing your risk while trading futures CFDs.

A stop order will close your position automatically if the price moves to a less favourable level, while a limit order will close your position automatically if it moves to a more favourable one.

IG offers normal, trailing and guaranteed stops,¹ and you can set your stops and limits directly from the deal ticket. Once you’re happy with your levels, place your deal.

Monitor and close your position

After you’ve placed your trade, you’ll need to monitor it to make sure that the markets are behaving in the way that you expected. If they aren’t, you might want to close your trade to minimise your losses. If they are, you might want to close your trade after having achieved a satisfactory profit.

Remember, you can close a futures CFDs contract trade before the expiry date of the contract arrives.

Futures contract trading example

With financial derivatives such as CFDs, you’ll be speculating on the price movements of a futures contract rather than buying and selling the contract itself.

Say it’s April and you think the price of oil is going to rise in the future – you could open a long CFD on a June oil future. Your profit is determined by how much the price of oil has risen by the future’s expiry, and the size of your position – less any charges.

Alternatively, if you think that the price of oil is going to fall, you could go short with a CFD on the oil future. In this example, you’d profit based on how much the oil price fell, the size of your position and any fees incurred.

In both scenarios, your position would be closed automatically in June – but you could close it before if you wanted. Below, you’ll see a graphic of the futures tab in IG’s trading platform. If you thought that the underlying market price was going to rise, you’d buy the market on your CFD trading account. If you thought that underlying market price was going to fall, you’d sell.

The months for a futures contract will vary, and the example given here which uses June is for explanatory purposes. You should check the expiry of a futures contract before you open a position.