The Mechanics of Futures Trading

Futures contracts, like shares are traded though a broker. You have to use a futures broker, not a stock broker. Through any futures broker, you can trade any registered futures contract in the world whether it be gold in New York or share futures in London or the Nikkei from Singapore.

Trading examples

Here we are going to learn two strategies: going long and going short.

Going Long

If you have traded or invested in anything before, you are already familiar with the concept of going long. This is where you buy a certain asset with the view of it increasing in price. If and when the price does increase, you can close (sell) the position at a profit.

With futures contract you are not buying anything physical. You are essentially entering into an agreement to buy a certain asset on a certain date in the future. Today in the open marketplace you can agree to buy a futures contract at what the market deems to be the price. At some time in the future, perhaps later in the day, you can close out of the position by selling the contract back in the market.

Let’s look Wheat futures as trading on the Chicago Board of Trade (abbreviated to CBOT and pronounced “see-bot”).

Here December Wheat (chart below) is trading at 649 cents per bushel. Each contract equals 5000 bushels and therefore each cent move is worth $50 (1 cent times 5000). FYI, wheat is quoted in cents and eighths of a cent (eg 650’4 equals 650 cents plus 4/8ths).

Source: eSignal -

Suppose, based on your analysis you think the price of wheat was going to rise in the next few weeks. Here you would buy or “go long” wheat. The process is the same as buying shares or exchange traded funds except of course you use a futures broker.

Time passes and a couple of weeks later December wheat futures are trading at 684’4. If you were to sell at this price, the trade would show a profit of 35 and 4/8ths cents before commissions. In terms of dollars, this translates to $1775 per contract.

Source: eSignal -

In this trade, you “went long December wheat” and it showed a nice little profit.