Futures contracts are used in the Danish financial market, as in others worldwide, for both hedging and speculation purposes. Unlike a forward contract, futures are traded on exchanges for set expiry dates, like stocks. This means they benefit from (normally) good liquidity, clear terms and regulatory protection. However, they are more complicated than spot transactions and require a more in-depth understanding of the financial markets to be useful.

Where can I buy futures contracts?

A wide range of banks and brokers offer futures contracts for sale. In Denmark, Saxo Bank allows for futures trading on many underlying assets and asset types. Futures are sold at a set price and date, and the ‘futures curve’ shows the price to buy a particular asset at a certain number of months into the future. For most commodities, this slope goes down, with the most expensive contract being todays and longer-dated ones cheaper. This state is known as contango, with the opposite shape called backwardation.

Why trade futures?

The majority of participants involved in trading futures are corporates or institutions looking to hedge risks in the commodities market, and speculators in forex. Speculators make up the most important part of the forex market because they are so numerous, and it is in this category that retail traders fall.

Hedgers buy futures in order to lock in prices so they can calculate their break-even points and cost of production. If they cannot guarantee a certain market price, there will be uncertainty about the viability of their operations. This is even more true when the price of the commodity they produce is volatile, or there are both forex and commodity price risks to be considered.

Speculators buy futures to bet on future price moves in their chosen market. They use futures as one of several tools to gain exposure to positive or negative moves in the price of their chosen asset. They are important to hedgers because speculators provide the trading volume and contrary view that allows hedgers to lock in prices.

Who trades futures?

All sorts of market participants trade futures, from financial institutions and national governments down to retail traders. Futures are most associated with industrial companies who produce commodities or are exposed to foreign exchange risk, alongside financial institutions who tend to act as the speculators taking the other side of the contract.

Retail investors in futures should know they are the smallest fish in the pond. This doesn’t mean opportunities don’t exist for skilled day traders to make money, but market moves are primarily driven by much larger participants.

Day trading futures contracts

Day trading futures is not easy. Compared to spot trading, futures require additional understanding of financial markets, require trading on an exchange in standardised lot sizes, and may involve longer-term positions. On the other hand, they offer directional flexibility, are less complex to price and manage than options, and can be executed on regulated exchanges, giving you greater peace of mind.

You can close out futures positions, making day trading viable without waiting for delivery, but you need a good rationale for why the trade is better executed as a futures contract than on the spot market. Once you execute your trade, be sure to use a tight stop loss and monitor the position for losses and gains. Be careful using leverage as this can magnify moves in either direction, which can improve profits but also comes with the risk of serious losses and margin calls.

Tips for success in day trading futures contracts

Make sure your investment plan is sound, with a rationale for your view on the underlying asset and a good reason to execute the trade using futures rather than on the spot market or with another derivative. Ensure the lot size and expiry date is correct – you will require a minimum sum to buy futures contracts, which in some markets can be considerable.

All of the usual risk management advice still applies. Make sure you are using stop losses, trailing ones if need be, make sure you commit the correct proportion of your portfolio and do not be tempted to overtrade. If you are in doubt about your trading strategy, speak to a trusted financial advisor.

Futures are an important financial product, with immense volumes traded in Denmark and worldwide in commodities, FX and other underlying categories. Understanding how this giant market works will make you a better trader, both when dealing with Danish futures and more generally.