KGI Crusoe – A New Platform Purpose-built for Futures Trading

A futures contract is a standardised agreement to buy or sell an underlying asset at an agreed price for settlement at a specified future date. Contracts trade on exchanges and can cover various markets, including stocks, bonds, ETFs, indices, commodities and currencies. Each has defined specifications, including its size, expiration date and settlement method.

You already know that when trading a stock or security, profits are made only if the price goes up. However, because futures are derivatives, you can potentially profit even if the price falls. Here’s how this works.

You can buy a futures contract, or “go long”, if you expect its price to rise. Alternatively, you can sell a contract, or “go short”, if you expect its price to fall. If the market moves in the same direction as your position, you can generate a profit. A move against your position produces a loss.

How to trade futures contracts

To trade futures, you select a contract based on an underlying security, such as Nvidia stocks (NVDA) or a tech-driven market index (QQQ). You decide whether to buy (go long), or sell (go short) the contract, and check its expiry, lot size and any other specifications.

Next, you need to fund your account to meet the applicable margin requirement. Futures are traded on leverage, and you can open a trade by placing down a fraction of the total contract value – this is known as the margin. 

You then place an order through your broker and monitor the position. Futures traders typically close their position before expiry by making an equal and opposite trade in the same contract. The difference (whether loss or profit) is then tallied. 

Holding a futures contract to expiry can result in cash settlement or physical delivery, depending on the contract and your broker’s rules. 

Why do traders use futures?

Futures offer greater flexibility to traders, enabling potential profit from both long and short positions. Futures traders can trade during both upswings and downswings for increased trading opportunities. 

Futures can also support hedging. For example, an investor holding US equities face losses during a market decline. They may choose to short a US-stock index futures contract to offset some of these losses, provided the decline plays out. 

Another benefit is capital efficiency. Futures require margin rather than payment of the contract’s full notional value, which allow traders to start trading with a smaller initial capital outlay, or control multiple positions at a fraction of the full cost of the underlying security. 

Risks to watch for

Futures contracts can increase potential trading opportunities, but they are not without risk.

Perhaps the foremost risk is leverage, which magnifies the impact of profits as well as losses. Also, understand that margin is collateral, not a cap on your potential loss, and losses can exceed your initial deposit. 

If your account falls below the required maintenance margin, you may face a margin call – you will be required to add more funds to your position promptly or face liquidation. 

Margin requirements can also increase as market conditions change; during high volatility, your margin may be quickly challenged or exceeded. Learning proper position sizing is important in maintaining a suitable margin. 

For these reasons, futures are therefore better suited to experienced traders who understand derivatives, can manage leveraged exposure and have the time and financial capacity to monitor positions.