Now that you understand futures margin, let’s discuss how to place a futures trade.  

When trading futures, you can take a long or short position. At this point in your trading education, you should be familiar with the terms long and short. Let’s have a quick review to make sure we’re on the same page. A long position in both stocks and futures is a bullish trade. It means purchasing shares or contracts to open a trade. A short position is generally a bearish trade that means selling shares or contracts to open a trade. 

Creating orders

To create an order, first you need to select a contract. Our examples will use the thinkorswim^® desktop platform. Please note that the interface is to vary on the mobile or web experience. Thinkorswim defaults to the “active” contract, which is usually the contract with the highest volume and open interest. Still, when the due date is approaching, it is wise to consider other contracts. This is because the liquidity in the current contract is about to dry up and go to the next contract. Low liquidity can result in less favorable order pricing. You can view the other contracts by selecting ALL from the list below the quote box. 

To start a trade, select the ask price. This will create a buy order. Or select the bid price to create a sell order. To make this easier, the thinkorswim platform provides labels for the ask and bid. The ask is labeled as buy, and the bid is labeled as sell when you point to each price. 

The difference between the bid and the ask price is called the spread. It’s a good practice to look for futures with narrow spreads and high volume. When placing trades, consider using limit orders to enter or exit a position at your specified price. Still, remember with any limit order, you’re not guaranteed a fill even if the price trades through your limit. Be careful with market or stop orders. Even in liquid markets with narrow bid/ask spreads, they can cause slippage. There can also be a failure to fill.

There are more tabs dedicated to futures trading on the thinkorswim platform. Specifically, there is the Futures Trader tool and the Active Trader ladder. These tools are designed especially for futures traders. They feature one-click order entry, an easy-to-use bid/ask price ladder, fully customizable charting, and advanced order types. 

Futures Trader

Active Trader ladder

These tools have many features tailor-made for active futures traders. We won’t discuss all the details of these advanced tools in this introductory course. Refer to the thinkorswim Learning Center for detailed demos of these tools.

Transaction costs

Before trading futures, you should also be aware of transaction costs. You can view the commission structure on the pricing page on schwab.com. There are also exchange and regulatory fees, which vary by exchange and product. Regulatory fees are assessed by the National Futures Association (NFA) and can change at any time without notice. 

How a futures trade end

Let’s discuss some potential outcomes of a futures trade. To close a futures position, you’ll need to do the opposite of what you did to open it. If you’re long the contract, you’ll need to close the position by selling it. If you’re short the contract, you’ll close the position by buying back. The same transaction costs for opening the trade apply to closing it. 

If you’re long a contract and the underlying increases in value, you’ll have a gain. If you’re long the contract and the underlying falls in value, you’ll have a loss. Conversely, if you’re short the contract, a rise in the underlying would translate into a loss. A drop in the underlying would result in a gain. 

There are many ways in which people decide when to close a futures trade. We’ll walk through an example in the next lesson. But, traders need to remember that futures contracts have an end date. If your contract is approaching expiration, you can also choose to roll the trade. 

Rolling involves closing your existing position. At the same time, you open the exact same position. Yet, it has an end date that is further out. For example, a trader with a long position would sell to close their existing expiring contract. They would then buy to open a contract with a further-dated end date. A trader with a short position would buy to close their existing expiring contract. Then, they would sell to open a contract with a further-dated ending. Keep in mind, rolling into a longer dated contract face liquidity constraints.