A while back, I wrote about how I got my start in the markets and I offhandedly mentioned, “If you learn how to play futures, stocks are nothing.”
Well, that resulted in some questions — namely, how exactly are stocks easy, Geof?!
It’s not that stocks are easy. It’s that futures introduce a lot of differences based on what you’re trading, while stocks are consistent all the way across.
So, I thought I’d write out some of the things that make futures a bit more involved — some would even say trickier — than stocks.
One of the most striking differences between futures and stocks lies in the complexity of futures contracts.
Unlike stocks, where buying 100 shares results in straightforward gains or losses based on price movement, futures contracts vary significantly in value per point.
This variation depends on the specific asset you’re trading, such as grains, crude oil, or precious metals.
For instance, a crude oil futures contract controls 1,000 barrels, meaning a one-dollar move equates to a $1,000 change in value.
On the other hand, a gold futures contract controls 100 ounces of gold, so a one-dollar move results in a $100 change in value.
But a silver futures contract controls 5,000 ounces, meaning a one-dollar move equates to a $5,000 change in value.
And so on, and so on for each different asset: wheat, cocoa, beef — you name it.
You also need to be aware of the expiration dates and rollover dates for each contract.
If you miss these dates, you could end up with the actual physical commodity, like barrels of oil or ounces of gold, which isn’t usually the goal for most traders.
Yet another layer of complexity in futures trading comes from the fact that it’s a 24-hour market.
Unlike stocks, which have set trading hours — everyone’s familiar with the 9:30am to 4pm Eastern time of the US markets — futures markets are open around the clock.
This means you have to stay informed about global events that could impact your positions at any time of the day or night.
It’s not uncommon to see significant price movements due to economic reports from other countries, geopolitical events, or even natural disasters.
Keeping up with these developments requires a higher level of dedication and awareness.
Additionally, futures markets can be influenced by seasonal trends and supply-demand cycles.
For example, agricultural futures like wheat or corn can be affected by weather patterns, planting seasons, and harvest times. The exponential rise we’ve seen in cocoa prices over the past 12 months or so are proof of that.
As cocoa crops in Africa — the world’s major supplier of cocoa — suffered from drought and disease, prices jumped accordingly. Typically weather and disease are not things you have to worry about when trading a company’s stock!
Energy futures, such as crude oil, can fluctuate based on OPEC meetings, production changes, and global energy consumption trends. Understanding these seasonal and cyclical patterns is crucial for making informed trading decisions.
Another key difference — the margin requirements for futures trading are different from those for stocks. Futures trading typically involves lower initial margin requirements, meaning you can control larger positions with less capital.
The flip side is that this also means that small price movements can lead to big gains or losses, adding another layer of risk management a futures trader has to think about.
By now, I think you can see why I said that starting with futures meant learning the hard thing first. And when I switched over to trading stocks, it was much easier by comparison.
It’s not that picking the direction of a stock is easier. It’s that all of the things that go into the actual trading — sizing your trades, managing your risk, being aware of events that could change the trade — are quite a bit more involved when dealing with futures.
UPDATE: I wrote a part 2 to this series where I explain why futures are worth it — even if you never plan to trade them!
— Geof Smith
P.S. A lot of traders — even experts — have been talking about a bubble in the market… Is the market due for a correction? Or maybe even a crash?
Anyone who tells you they know for sure is either lying to you or lying to themselves… That’s why one of my top strategies is a hedged trading strategy. This approach helps me navigate volatility by making sure one side of the trade often outperforms the other, providing a cushion against market swings.
Click here to watch the on-demand class where I shared my next hedge trade for FREE!
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