Futures Trading UK Guide 2022
As the name suggests, futures allow you to speculate on the future value of an asset like oil, gold, stocks, and wheat. The agreement requires the holder of the futures contract to buy or sell the underlying asset on a specific date, at a pre-defined price.
The overarching concept is to predict whether the asset in question will be worth more or less when the futures contract expires. If you speculate correctly, you make money. However, it’s a bit more complex than simply guessing which way the markets will go, which is why we would suggest reading our in-depth guide.
This guide on futures trading in the UK will cover the basics about buying and selling contracts online. We explain how futures trading works, what assets you can access, how you can make money, and ultimately – how to get started with an investment account today.
What is Futures Trading?
Futures contracts allow you to speculate on the future value of an asset. This covers virtually every financial instrument imaginable – including but not limited to stocks, oil, gold, silver, indices, and even cryptocurrencies.
The main concept is that the futures contract will have a ‘strike price’ attached to an ‘expiry time’, for example, 3 months. You then need to determine whether you think the price of the asset will be higher or lower than the strike price, on or before the futures contract expires.
In a time not so long ago, futures trading in the UK was reserved primarily for institutional investors. This is because you often need to meet a minimum ‘lot size’, which is essentially the minimum investment required to access the futures market.
But, with the evolution of online stock brokers, virtually anyone in the UK can buy and sell futures contracts from the comfort of their home. However, this particular investment stream is a lot more complex than simply buying an asset like stocks or bonds. This is why futures are usually left for those with a bit of prior trading experience.
Nevertheless, let us explain the fundamentals of UK futures trading in a bit more detail.
How Does Futures Trading Work?
There are several key terms that you need to be made aware of when trading futures in the UK, these include:
First and foremost, futures contracts will always have an expiry date. This is the date in which the futures contract must be settled. In other words, those in possession of the futures contract will have a legal obligation to purchase the underlying asset. This is always the asset that the futures contract is backed by (such as barrels of oil), as some markets are settled in cash.
In the traditional financial markets, futures contracts expire on the third Friday of each month. Furthermore, each contract is usually active for 3 months. You will, however, be able to choose which month you wish to target. For example, you might want to trade a futures contract that expires on the third Friday of July, August, or September.
The price of a futures contract is often referred to as the ‘strike price’. In its most basic form, this is the price that the markets believe the asset will be worth when the contracts expire. As a futures trader, it is your job to evaluate whether you think the price will be higher or lower on the expiry date.
- Crude oil futures that are due to expire in September 2020 might have a price of $40 per barrel
- Crude oil futures that are due to expire in October 2020 might have a price of $42 per barrel
- Crude oil futures that are due to expire in November 2020 might have a price of $45 per barrel
As you can see from the above examples, there is a different price for each expiry date. This is fully in line with market sentiment. In this example, the sentiment is that crude oil is likely to go on an upward trajectory for several months, which is why the price of each futures contract gets higher as the year progresses.
Number of Contracts
In some cases, your chosen broker will ask you to meet a minimum lot size. This is the minimum number of contracts that you need to purchase to access the futures market in question. There is no hard-and-fast rule as to how many contracts you need to buy, as it will vary depending on the broker and the specific market.
Nevertheless, here’s a couple of examples of how your investment will be priced by the broker:
- If you purchased 100 futures contracts on oil at $40 per barrel, then you would be staking $4,000
- If you purchased 10 futures contracts on Amazon stocks at $3,500 per share, you would be staking $35,000
- If you purchased 5 futures contracts on Bitcoin at $10,000 per coin, you would be staking $50,000
As you can see from our examples, futures contracts typically require a much higher investment size than other trading scenes. For example, CFD trading sites often allow you to trade with really small stakes – meaning you will be risking just a few pounds on each position. The fundamentals of CFDs operates much the same as futures, albeit, the former doesn’t have an expiry date.
Buy or Sell Position
Once you know which futures contract you wish to trade, you then need to determine which way you think the markets will go. This works much the same as any other trading sector – as you simply need to choose from a buy or sell order.
For example, let’s suppose that you are looking to purchase futures contracts on Netflix stocks – which expire in 3 months time. Each futures contract is priced at $100 and you need to meet a minimum lot size of 10 contracts.
- If you think the price will be higher than $100 on expiry, you will be placing a buy order worth $1,000
- However, if you think the price will be lower than $100 on expiry, you will be placing a sell order worth $1,000
As we cover shortly, you can typically exit your buy/sell position before the expiry date when trading futures. This allows you to lock in your profits (or mitigate your losses) before the settlement date.
How to Potentially Make Money From Futures Trading
When it comes to making money from futures trading, the overarching objective is to correctly speculate on which way you think the markets will go.
Asset valuations are based on supply and demand, this is often fueled by geopolitical events. For example, if OPEC decides to halt production levels, then it is all-but-certain that the value of oil will increase.
As such, those going long on their oil futures trading contract will see a positive return. At the other end of the spectrum, if OPEC decides to increase production, then the value of oil will likely go down. This will negatively impact a long futures position, and positively impact those going short.
Nevertheless, below we list a couple of examples of how you would make money from futures when trading in the UK.
Buy (Long) Futures Trade
In this example, we are going to look at a long trade. This means that you think the value of the futures contract will increase.
- You want to trade the future value of Facebook stocks – which are currently priced at $300 per share
- You opt for a 3-month futures contract with a price of $320
- Next, you buy 10 futures contracts – which takes your total investment to $3,200
- When the futures contracts expire in 3 months time, Facebook stocks are priced at $350 per share
- You agreed to pay just $320 per share, meaning that you can now sell them at a profit of $30 per contract
- In total, you purchased 10 contracts, taking your overall profit to $300 (10 x $30)
As you can see from the above, there is virtually no limit to the amount you can make from a long futures trade. In other words, if Facebook stocks were priced at $370 on expiry, you would have made $50 per contract. If they expired at $400, then it would have been a profit of $80 per contract, and so on.
Sell (Short) Futures Trade
In this example, we are going to look at a short trade of oil futures trading. This means that you think the value of the futures contract will decrease.
- Let’s say you want to trade the future value of oil – which is currently priced at $40 per barrel
- You opt for a 2-month futures contract with a price of $42
- You sell 10 futures contracts – which takes your total investment to $420
- A few weeks into the contract, the price of oil crashes. It is now priced at just $30 per barrel
- You are happy with your gains, as you are looking at a profit of $12 per contract ($42 – $30)
- As such, you exit the position by placing a buy order
- In total, you sold 10 contracts, meaning that your overall profit is $120 (10 x $12)
There are two key points to take away from the above example. Firstly, you were able to speculate on the value of oil going down. This isn’t possible when investing in assets in the traditional sense.
Secondly, you were able to cash in your profits before the futures contracts expired. This is something that most futures traders do, as it eliminates the risk of having to settle the contracts when they eventually expire
What Assets Can You Trade as Futures?
As we briefly noted earlier, futures contracts can be traded on virtually every asset class imaginable. With that said, below we list some of the most common markets that seasoned futures traders like to target.
Commodity Futures Trading
Without a doubt, the most commonly traded futures market is that of commodities, these include:
- Natural Gas
- Soy Beans
Crucially, buying and selling these assets in the traditional sense – i.e having to physically transport and store them – would be an impossible task.
In other words, you wouldn’t want to take delivery of 100 barrels of oil, just to try and make a couple of percentage points of profit. As such, futures contracts allow you to speculate on the future value of hard assets without you taking ownership.
With volumes of $5-$6 billion dollars per day, the forex industry is the largest trading arena globally. With that in mind, it makes sense that a fully-fledged futures market exists. The idea here is much the same as the conventional forex trading scene, insofar that you will be speculating on the future value of a currency pair.
For example, trading the exchange rate of the British pound and Australian dollar would be represented by the pair GBP/USD. If the pair is priced at 1.80 you need to decide whether you think the exchange rate will go up or down. This sentiment remains constant when trading forex futures.
- The current price of GBP/USD is 1.3308
- Your chosen UK forex broker offers a 3-month futures contract on GBP/USD at 1.3100
- This illustrates that the market believes the price of the pair will go down in the coming months
- You, however, believe that the downfall of GBP/USD won’t be as severe as the market expects, so you place a buy order
- When the contracts expire, GBP/USD is worth 1.3203
- This means that you made a profit of 0.0103 for each futures contract that you hold
In the case of forex futures, each contract will likely be based on the specific lot size. This is typically 100,000 units of the base currency. However, with the aide of leverage, you will likely be able to access the market with a much smaller investment.
For example, if the lot size is worth £100,000 and you trade with leverage of 1:30, you will only be required to outlay £3,333.
The first fully-fledged, regulated cryptocurrency trading futures market went live in late 2017. Unfortunately, the FCA is looking to clamp down on cryptocurrency-based derivatives, which includes futures. This is to protect retail investors from speculating on digital currencies through complex financial instruments.
The good news is that you can still speculate on the future value of cryptocurrencies like Bitcoin, Ethereum, and Rippler through a CFD position. Bitcoin futures trading is the most popular form of crypto futures trading.
Much like commodities, forex, and cryptocurrencies – you can also trade futures contracts on stocks. The theory remains the same as all other futures markets, insofar that you need to determine whether you think the stock will be worth more and less in the coming weeks or months.
You can typically trade futures on large-cap stocks. In the UK, this might include heavyweight firms like AstraZeneca, British American Tobacco, or GlaxoSmithKline. In the US, think along the lines of Apple, Amazon, IBM, Facebook, and Twitter.
Let’s look at a quick example of how a stock futures trading would work in practice.
- The month is September and Twitter has a stock price of $42
- Your broker offers a futures contract that expires on the third Friday of December
- The contract is priced at $45. You decide to buy 100 contracts as you think the stock price will increase
- 1-month later, Twitter stocks are priced at $50. This is $5 higher than the price of your futures contract.
- You decide to cash in your profits by exiting the position, subsequently selling the futures to another investor
- At $5 per contract, your overall profit is $500 (100 x $5)
Although this sounds identical to a traditional stock trading of UK investments, there are two key differentiators. Firstly, futures contracts typically allow you to access the market without you needing to purchase the full contract value upfront. In this example, 100 contracts at $45 each would have been worth $4,500.
But, if you traded with leverage of 1:5, the broker would only required a margin of 20%. As such, your initial outlay would have amounted to just $900 – as opposed to the full $4,500.
Secondly, it is important to remember that futures contracts always give you the option of going long or short. Again, this isn’t something that traditional stock brokers offer.
If you don’t feel comfortable trading individual stocks, it might be worth considering indices futures. For those unaware, indices – or indexes as they are commonly referred to as in the UK – track the value of the wider stock markets.
- For example, a futures contract on the FTSE 100 would track the value of the 100 largest companies listed on the London Stock Exchange.
- Similarly, a futures contract on the Dow Jones would track the 30 companies that make up the Dow Jones Industrial Index.
It is important to remember that indexes are not priced in currencies like the pound or US dollar. Instead, they are priced in points. With that said, the process of calculating your profits and losses is somewhat similar to other futures markets, albeit, you need to quantify this as a percentage.
- You want to trade futures on the FTSE 100 – which is currently priced at 6,000 points
- You think the value of the FTSE 100 will go down, so you will be short-selling some futures contracts
- A 3-month contract is priced at 6,200 points
- You stake a total of £1,000
- When the contracts expire, the FTSE 100 is worth 5,000 points
- This works out at 19% less than the price of your futures contract
- As such, a £1,000 stake makes you gains of £190
When it comes to the value of each indices futures contract, this can vary depending on your choice of broker. As such, just be aware of exactly how much you are staking.
Why People Do Futures Trading in the UK
Still not sure whether futures trading is right for you? If so, below we list some of the main benefits of trading futures in the UK.
- Long and Short: As we noted throughout this guide, futures contracts allow you to go long and short on your chosen market. This means that you can profit from both rising and falling markets.
- Margin: Most futures brokers allow you to trade on margin. This means that you only need to put a small amount of money upfront to access the market. If you’re a UK retail trader, this can be as high as 1:30 (major forex pairs).
- Exit Position: Futures allow you to exit your position at any given time before the contracts expire. This allows you to lock in your profits early.
- Tradable Markets: The futures scene is great for trading markets that would other be difficult to access. In particular, this includes commodities like gold, silver, oil, and natural gas.
As always, where there are benefits there are also risks. We cover the risks of UK futures trading in the section below.
Futures Trading Risks
Although all forms of trading come with risk, the futures market, in particular, can be challenging to navigate. As such, you need to consider the following risks before parting with your money.
The main risk facing UK futures traders is that of leverage. That is to say, in order to access your desired marketplace, you will like need to trade with margin. Let’s take the forex trading for UK futures scene as a prime example.
Currency pairs are normally quoted in lot sizes of 100,000 units. The futures contract, for example, might be worth 0.1 lot. When trading a pair quoted in GBP, this means that you will need to outlay at least £10,000 per contract (£100,000 x 0.1 lot).
As this will be out of reach for most UK retail traders, your chosen broker will likely allow you to access the market with leverage. With ESMA limits permitting leverage of 1:30 on major forex pairs, this means that you only need to outlay £333.33 to access the trade.
But, applying leverage to a futures trade also means that you stand the risk of being liquidated. In simple terms, if your futures trade goes against you by £333.33 or more – the broker will be forced to close your position automatically. When they do, you will lose your margin in its entirety. In this example, that would be £333.33.
When you purchase a futures contract, you are entering into a legal obligation to buy or sell the underlying asset when the contract expires. In some cases, such as indices and stocks, the futures contract is settled in cash.
However, when trading futures commodities such as gold, silver, or natural gas, contracts are typically settled in the respective asset. This was something that became apparent earlier in 2020, where oil futures prices in the US went into negative territory.
This is because the demand for oil went to such a low point during the coronavirus lockdown, there was physically nowhere to store new orders. As such, those holding the contracts began to panic, which resulted in the value of oil futures crashing.
By going into negative territory, holders of the contracts preferred to pay the buyer to take physical delivery of the barrels. With this in mind, you need to check the policy of your chosen broker with respect to physical settlement.
Futures Trading Strategies
There are many futures trading strategies that seasoned investors like to deploy. By learning the ins and outs of a particular strategy, you may give yourself a better chance possible of outperforming the market.
Some of the most popular include:
- Bear Cycles: Futures contracts are highly conducive for making money during a bear cycle. In simple terms, a bear cycle is a prolonged period of time when the wider economy is performing badly. For example, at the peak of the financial crisis of 2008, the wider stock markets went on a downward spiral. As such, those short-selling futures contracts would have made a lot of money.
- Break Out: When an asset ‘breaks out’, it moves above or below a specific trading range. For example, if Facebook stocks have been trading between $300 and $340 for several months, this would resemble the range. If and when the stocks move below $300 or above $340, this would mean that a break out has occurred. Catching a break out can be very profitable for futures traders, as it typically results in a prolonged trend upward or downward trend.
- Pullback: When an asset is on an upward trajectory, every now and then it will experience a ‘pullback’. This is usually a result of investors cashing out their profits. In turn, this forces the price of the asset to go down, even if the upward trend is likely to resume. As such, this is a great time to enter the market, because the respective futures price will correlate to the short-term pullback.
You should spend some time researching the many future trading strategies that you have at your disposal. By masting at least one, you are more likely to succeed in the space.
Algorithmic Futures Trading
Algorithmic futures trading is the process of allowing computer software to buy and sell futures contracts on your behalf. This operates much the same as a forex robot or EA, as the underlying technology is fully-automated. The algorithm is tasked with scanning the futures markets 24/7 – constantly looking for potential trends that can be traded.
It is believed that much of the traditional UK futures trading space is dominated by algorithmic software. As such, any product that you find in the online domain is likely to be substantially inferior to what large-scale financial institutions have at their disposal.
Futures Trading Platforms
So now that you have a birds-eye view of how futures trading in the UK works, we are going to discuss which platforms allow you to access the market. Our selection of brokers are all regulated, offer competitive fees, and allow you to deposit funds instantly with a debit/credit card.
AvaTrade is an established online broker that is regulated in several jurisdictions. This includes licensing bodies in Japan, Ireland, South Africa, and Canada. The broker offers heaps of CFD asset classes, which includes stocks, indices, forex, bonds, and commodities. Also AvaTrade also gives you access to the futures arena.
Some of the markets that you can access include Brent and Crude oil, natural gas, wheat, soybeans, sugar, and corn. If indices futures are more your thing, you'll be able to trade the S&P 500, NASDAQ, 100, Spain 35, China A50, FTSE 100, Dow Jones, and more. AvaTrade also offers futures markets on government bonds, such as those issued by Japan and the European Central Bank.
In terms of expiry dates, this will vary depending on the asset. A popular thing about using AvaTrade as your go-to futures broker is that it does not charge any commission. This is a great way to access CFD positions without needing to pay overnight financing fees. Ordinarily, you would need to pay a fee for each day that you keep your CFD position open. This makes medium-to-long term trading somewhat unviable.
In terms of the specifics, AvaTrade allows you to trade on its own proprietary platform, or through MT4/5. The later is what you will need if you plan to use an algorithmic futures strategy. You can get started with AvaTrade in minutes, and minimum deposits for UK traders start at £100. You fund your account with a debit/credit card or bank wire. Finally, AvaTrade also offers a mobile app, which is available on iOS and Android.There is no guarantee you will make money with this provider. Sponsored ad
2. Interactive Brokers
If you're an experienced futures traders and are looking for a more sophisticatd platform, we would have to point you in the direction of Interactive Brokers. The global trading platform offers tens of thousands of markets.
This includes everything from stocks, options, ETFs, indices, commodities, and of course - futures. In fact, you will be able to buy, sell, and trade futures contracts from dozens of global markets. This includes exchanges based in the US, UK, Belgium, Spain, Canada, Mexico, Switzerland, and more.
As such, you will struggle to find a more comprehensive futures trading platform that Interactive Brokers. In terms of fees, this will vary considerably at the broker, as it all depends on the specific futures market you wish to access. To give you an idea of what you pay, Interactive Brokers charges $0.85 per futures contract when trading the E-Mini S&P 500 index.
This is actually very competitive. On the flip side, the broker does have a minimum commission policy of $10 per month, so you need to be actively trading to take advantage of its favourable pricing structure. In terms of safety, the platform is heavily regulated - which includes a fully-fledged licensed with the FCA.Sponsored ad
IG is a UK-based broker that offers thousands of tradable markets. These include share and ETF dealing, spread betting, and CFD trading. Regarding the latter, this includes over 17,000+ instruments. On this platform, you can speculate on heaps of futures markets. This includes global index funds like FTSE 100 and Germany 30, commodities like oil, gold, silver, and wheat, and government bonds.
With that said, you will be trading futures contracts in the form of CFDs. This is beneficial if you're a UK retail trader, as you never need to worry about physical settlement. After all, CFDs are merely tasked with tracking the real-world price of the respective asset. For example, if an IBM futures contract for December 2020 is priced at $85, as will the CFD instrument at IG.
You will be able to access your chosen futures market with leverage, which mirrors the limits imposed by ESMA. In terms of pricing, IG does charge any commissions per-say on its futures offering. Instead, everything is built into the spread. This will vary from asset-to-asset, albeit, the spread is typically competitive at IG. If you want to get started with an account, IG requires a minimum deposit of £250.
You can fund your account instantly with a debit or credit card. The latter will attract a fee of 0.5% or 1% on Visa/MasterCard, respectively. We should also note that IG has an excellent reputation in the brokerage arena. Launched back in the 1970s, it is licensed by several tier-one bodies. This includes the UK's FCA. Furthermore, its parent company is listed on the London Stock Exchange.Sponsored ad
Futures Trading Fees
The costs of trading futures depends on the broker you use. Here’s how the popular futures brokers match up in terms of charges.
Futures Broker Commission Deposit Fees Inactivity Fee Withdrawal Fee AvaTrade Variable spread Free Flat £50 after 3 months, £100 after one year £0 FinmaxFX Variable spread $25 for wire transfer, free otherwide $80 after 3 months, $120 after 6 months 0.9%-7% Interactive Brokers Variable commission Free $20 per month if under $2,000 account balance £0 IG £0-£10 if buying and selling, variable spread for CFDs Free (0.5%-1% on credit cards) £12 per month after 2 years £0
How to Start Futures Trading
Like the sound of futures trading in the UK and wish to get started with an investment account today? If so, we are now going to walk you through the process.
Step 1: Open a Trading Account
Head over to the broker website and open an account. You’ll need to provide some personal information, alongside your email address and mobile number.
Step 2: Deposit Funds
You will now be asked to make a minimum deposit of £100. You can deposit funds with the following payment methods:
- Debit card
- Credit card
- Bank Transfer
Your deposit will come with a small currency conversion fee of 0.5%. Moreover, you don’t need to worry about paying foreign exchanges fees when accessing non-GBP markets.
Step 3: Place a Futures Trade
In our example, we want to trade oil, so we enter this into the search box at the top of the page. Then, click on the ‘Trade’ button. You will now need to set up your futures trader.
Finally, confirm the order. Once the position is live, you can manually close it at any time.
If you are looking to take your trading endeavours to the next level, you might want to consider futures. This offers a number of benefits over traditional asset classes. One of which is being able to choose from a longer short position, as well as the ability to apply leverage.
Furthermore, futures trading sites in the UK give you access to assets that would otherwise be difficult to reach. This is especially the case with hard metals like gold and silver, as well as energies like oil and natural gas. With that said, UK futures trading is a lot more complex in comparison to conventional stocks, ETFs, or bonds. With that in mind, make sure you brush up on your investment knowledge before taking the plunge.
Can you trade stock futures?You certainly can. Brokers will often allow you to trade stock futures on major, large-cap firms like Apple, Amazon, Facebook, and IBM.
How are futures different to options?When you trade futures, you have a legal obligation to buy or sell the contract in full when it expires. This will either be in cash or the physical asset itself. In the case of options, you have the right, but are not obligated, to buy or sell the contract on expiry.
When do futures expire?This can depend on the asset class and the underlying issuer of the contract. However in most cases, futures expire on the third Friday of each month.
What assets you can trade with futures contracts?Put simply, if a marketplace exists, you can likely trade the asset via futures contracts. This includes everything from stocks, indices, commodities, and forex.
How much does it cost to trade futures?When using a traditional futures brokers, you typically pay a flat fee for each contract that you purchase.
Is there a cryptocurrency futures market?Yes, the first Bitcoin futures market was launched in 2017.
Is futures trading regulated in the UK?Yes, futures - and all forms of trading and investing, is regulated by the FCA.
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