Futures orders are placed by using a broker’s trade execution platform. Using the broker of your choice, a trader will place orders using that platform.
Traders rely on software provided by their broker to place orders. While all software allows traders to place orders for futures contracts, each broker’s software will look a little different and may include different features.
The execution platform can either be visual, where traders drag and drop orders, commonly referred to as a Depth of Market or DOM; or an entry screen, where traders type in the parameters of their order.
Most brokers have a desktop and mobile version of their platforms, allowing them to place orders and monitor their account from anywhere there is a connection to the internet. This is a huge change from just a few years ago, where orders were telephoned in to the broker. Real-time streaming data has also leveled the playing field for individual traders as they are no longer looking at prices from 15 to 20 minutes in the past.
The trading screen will provide information, like contract name and expiry, current bid and ask prices, and the number of orders placed in the market at various prices. The number of orders are typically shown 5 to 10 ticks above and below the current price of the futures contract. Many trading DOMs also show the daily volume that has traded at each price level, allowing traders to see at which prices traders had interest in buying or selling the futures contract.
While there are many brokers, all electronic orders for CME Group products are routed through the CME Globex electronic trading platform.
Electronic orders are matched on CME Globex through algorithms that support order management functionalities offered to market participants and ensure that each market participant is given the best possible execution at the fairest price.
Prior to placing an order, a Trader will make decisions about:
Traders will first analyze the market to determine the contract they wish to trade. Each contract has various characteristics, like typical size of moves, or dollar value per point; a trader must be familiar with the specifics of each contract prior to entering an order. CME Group offers futures contracts in a wide variety of markets: Equity Indexes, Interest Rate Products, Agricultural Commodities, Foreign Exchange, Metals and Energy.
After selecting the contract, a trader will select the expiry month to trade. Many individual traders select the futures contract with the nearest expiry, which will most often be the actively traded contract based on the most daily volume. Many traders use the current contract and then roll to the next contract if they want to hold the futures contract past expiry.
The trader will then decide to either buy the futures contract, if they think price is moving up, or sell the contract, if they think price is moving down in the future. Traders will typically use technical analysis, fundamental analysis or a combination of the two to make their trading decisions and will develop specific strategies to help determine if they should buy or sell.
Based on account size and individual risk parameters, a trader also chooses how many contracts to trade.
Position sizing is an important factor in trading futures contracts; trading the correct number of contracts for your account size and investing goals is important and can have a large impact on your trading account. Position sizing is up to the individual trader, but you can contact a registered broker or financial advisor if you need assistance determining an appropriate amount of risk.
Traders need to select a price at which they will enter the order. Orders can be placed at market, which is the current price that the futures contract is trading, or as a limit order, which is an order placed away from where price is currently trading, in anticipation of price moving towards the order to get filled.
For example, a trader using the DOM can place an order by buying one contract near current price or can enter an order by placing it further away from where price is currently trading to get filled once price moves to levels they want to be filled at to enter the order.
Stops and targets can also be added to the DOM as plans to exit for either a loss or profit. Stop loss and orders to exit a position at a profit can be placed to trigger automatically or can be entered manually at the time the trader wants to exit the position.
As you make your decision about contract size, remember that all futures contracts are traded with margin. This means you only need a portion of the contracts total cost to be in your account to trade the contract.
For example, suppose you can trade the E-mini S&P500 futures contract with several brokers for $500 of day margin. ES has a value of around $50 x 2500 = $125,000, this means that for $500 of cash in your trading account you can control $125,000 of value in the market. This has the effect of having a magnifying effect on both gains and losses.
Each market will have different margin requirements, which vary by contract and whether you are trading during the day or overnight. Each broker will have a list of the margin requirements per contract. Most brokerage platforms provide real-time margin calculations that allow traders to know how much margin they have remaining in their account to determine how many trades can be placed. Prior to entering any order, a trader should be aware of the margin required for the futures contract they are trading.
Once a trade has been entered, the brokerage platform will show the trader in real-time that their order has been accepted by the exchange, the price the order was filled at, and current real-time profit and loss (P&L) of the trade.
Entering an order is only one aspect of trading, there are many more steps that traders will need to know to successfully manage a trade from beginning to end.
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