# How To Trade Futures For Beginners | The Basics of Futures Trading [Class 1]

May 13, 2024
Hey, it's clay in a clay churro, don't worry. I'm going to be your guide here through

## futures

at a very beginner level and at a very basic level, so I want to quickly tell you who this is for because I don't want to waste your time. If you're looking for the mathematical theory of things, if you're looking for all the different nooks and crannies of how the

## futures

markets work from a mathematical standpoint, you're probably starting to get disappointed if you're looking for it, just listen, I want to

futures. I want to know how I can make money with futures sure I want to know some general aspects of you know how the futures market works what it actually is from a broad sense yes I want to know that but I'm more here for the practical real world applications, not a bunch of theory, not a bunch of mathematical equations that you would learn in some kind of textbook.
I just want to know futures, sure, but I don't know how. Do you make money in the market? How do they work? How will they put profits in my pocket? If that's your way of thinking then this will be for you but again if you are someone who is looking for the mathematical theory of everything then you will probably be disappointed so keep that in mind and maybe you won't be sure if I want to learn about futures. One of the biggest benefits that futures allow people is that it's a way to get around the day

r pattern rule, so maybe you're a little stumbling over that, you're a little frustrated with that, futures

doesn't. it has to be subject to those regulations, so that's something I would just mention that might interest you. in the markets and I want to learn more about them, so with that said, let's go to my desk and start this course in class, welcome to my desk, first of all, we need to take a very smart approach to all of this and the smart approach.

## how to trade futures for beginners the basics of futures trading class 1...

That would be okay, let's figure out what the futures market is, what its purpose is, what's going on, how it interacts with you, you know the general markets as a whole and once we know that, let's start making money with it, but like. I said that if we're going to make money with the futures market, it would probably be wise to at least know what the futures market is in the first place, so that's what we're going to do here with your first class, establish a good, solid framework. . foundation upon which we can build and eventually start making money, but as I said on the ground floor, let's look at some definitions here, so let's grab our trusty Merriam-Webster dictionary and look at each of these words so that First is future, what does it really mean future?
Well, it is something that will exist or happen at a later time. The two key components are something so good, something is what will happen at a later time and we will get to more of that as we go. then the next part is simply a market and a market is a gathering of people for the purpose of trading which we are too worried about and what we are going to see is a gathering of people so the future market is simply something and something is happening later and this is all based on a market and the market is a gathering of people, so the logical question then is okay, who are these people?
Who are these people who are meeting? Know? What are they doing but writing very, very logical questions? So with that you have to keep in mind that there are two main people who must participate for a market to exist again. You know basic economics, you can't have a market here. If there are not two people involved, one person does not constitute a market, so who are these people that must be involved, who are these people that make up the market, while you will have a buyer and you will have a seller or just? generally buyers and sellers and that brings up the next, well, what is the purpose of your meeting and is it to negotiate a deal or a business right?
That's what a market does if you go to the supermarket and you want to buy an apple you're negotiating a deal you're saying okay I'll exchange this piece of money for that and you have to try to negotiate if you think the price is too high if you think the seller is trying to scam you well then guess what, as a buyer, no deal, right, no deal, nothing happens, so again, it's worse that we keep it very basic right now, just economics 101, that's what that a market is made up of two people and these two people are. buyers and sellers let's see the next part here something and then this will happen at a later time now at this point the deal has been made, that brings us to well, well, what is the something of a deal?
I get it, a deal has been made, but that something, so what is this something and is it an agreement for a transaction to take place at a later time in the future? There we go, are you seeing how everything is coming together here, so a deal has been made and then? the details of the agreement that some of this agreement is just an agreement for some type of transaction, so what type of transaction or in other words, what are the details of this agreement? So a little bit of context here, let's say that when this particular You know, an agreement was reached that the current date is August 15, so again to reiterate who's happening, who's manufacturing or who's happening between who makes up the market.
Well, we have the buyer again and in our situation in our little story here. We're passing on, let's say the buyer in this story, they make, produce, sell one of my all-time favorite Sour Patch Kids, so if you don't know that Sour Patch Kids aren't exactly healthy, so eat them in moderation. but the buyer, one of the main ingredients in Sour Patch Kids that he needs to buy is sugar, so he says, "You know what I would like to buy 100 pounds of sugar for a dollar fifty a pound and then the other part of this." market who would they be talking to, I hope they have common sense, if they are looking to buy sugar, they are probably talking to someone who sells sugar, a very good job, exactly, so they are talking to a seller who is going to offer a right to produce sugar, They have large sugar cane fields and they are sugar producers, so the seller looks at their proposal and the buyer says, "Well, the buyers offer us a dollar fifty per pound and they want to buy a hundred." pounds of sugar, well, you know, yes, I will produce those 100 pounds of sugar for you and then the final part of this agreement, the last detail that is very important for the futures market is that they say that this transaction will take place on October 15th, not to insult your intelligence, but again, as far as our story goes, the current date is August 15th, so this agreement, this transaction will not take place until two months later, just two months in the future, so that's what's happening. make an agreement for this transaction to take place in the future or in the future and that is why this would be called a futures contract.
A futures contract is an agreement to buy or sell a commodity on a certain date at a certain price, so the agreement Again in our situation right there and to buy, so what is going on here? Will they want to buy the 100 pounds of sugar or sell them? So in this situation the seller will sell 100 pounds of sugar for some good, what is the good in this case? Will the commodities be sugar itself? What is a commodity in general? Well, that is just a raw material or our agricultural product and it can be bought and sold.
So it's a physical product. It's something you can, you can pick up with your hands. smells that you can throw at someone, I guess if you want, what are other examples of raw materials? Well, there are coffee beans and these are all things that can be traded in the futures market, there is oil, there is gold, corn and wheat, and there are others. There are many others, but these are just some of the most common ones, but again, that's what a commodity is just a commodity and then going back to the definition, this Agreement, this futures contract is everything that will happen in a certain date. in this situation on October 15th and then for a certain price that we have set is a dollar fifty per pound, but why in the future do I agree to buy or sell something in the future when you can just buy and sell it right now?
To understand we have to go back to the

#### basics

of business, even if you've never taken a business class, okay, this is very simple, but you know a principle in business 101 that, assuming of course you want to be A successful business, assuming you want to have a successful business, you need to know from the very center, at the forefront of any decision you make, any path you choose to take, you should always try to do one thing and all businesses. again, assuming they want to be successful, assuming they want to be profitable, they are trying to do this and what is this, i.e. trying to manage risk, nobody knows the future, there is no crystal ball, nobody can know.
Surely, no one can be sure what is going to happen, so you need to be able to do your best to forecast what you think is going to happen, what you think is most likely to happen, and that way you can manage the risk. in the best way, so that's really it and that's why I love that image, that's what companies are trying to do, they're trying to go from uncertainty to certainty, no guarantees, no crystal balls, Nobody can predict the future, but the better a company is, the better the risk management, the better the company will be.
It's trying to erase that uncertainty or erase the uncertainty. Don't say that's a good thing that will give them an advantage over their competition. That's how companies get so big. It's because they're so good at handling the unknown. There's so much of them. They're good at making decisions. based on what they believe will be best for them from a risk management perspective, so risk management, the other word for this would just be hedging, so hedging, that's what's happening in the futures market , you already know. The fundamental core is risk management and that, in futures market terminology, would be known as hedging, so let's look at each person you know from the perspective of the deals and we will start with the perspective of the buyer, now a buyer from a point of business.
From one point of view, a big focus for that buyer is you want to make money, of course, and you're going to make money and your goal is going to be well, you want to keep your cost of production as controlled and predictable as possible, it's not guaranteed, but just Trying to keep our costs as controlled and keep them as predictable as possible because that will make our lives easier to make future projections and all that, from the buyers' perspective, when everything is good, we need sugar to make those Sour Patch Kids. so they are thinking no in the future.
I think a pound of sugar could actually go above a dollar fifty a pound, so if that's what the buyer thinks, that's why they're thinking, you know what happens if we think now why? I guess what I mean is that for some reason they think sugar prices are going to go up, so I say, you know, let's set the price, let's set the price at a dollar 50, so that's it. let's do that so that they have it secured for that deal, let's say now as part of this story, our tornado comes and the sugar crops are destroyed everywhere and because of that, suddenly there is less sugar and when there is less supply, correct supply and demand, less supply of something, but one man staying the same, that will drive prices up, so let's say the new market price is two dollars and 25 cents per pound.
Now here's a test I want you to do. answer what the buyer pays what price per pound they are paying well I hope I gave you enough time if you said you know what they are paying 225 realized because that is the new market price that would be wrong they are paying a dollar fifty per pound for what because well, that's what they agreed to, remember that agreement in the future we will buy it for a dollar fifty a pound, so sure, I mean for Sugar Company that's not a very good deal because if they wouldn't have signed that.
Okay, they could sell those 100 pounds for 225 a pound, but since they did and are interested, now they have to sell it for a dollar fifty a pound, of course, from the buyer's perspective. Hey, it's okay, we made a good decision. You know, good job. We're all high-fiving each other, we're only paying a dollar fifty a pound. Great, now our competitors said it's a shame they're not as smart as us, they're out there paying 225 a pound, but we, you know, We're going to be able to make those bitter kids for a dollar fifty a pound now let's look at the other one. side, the sellers perspective is a big focus now for the seller, of course, they also want to make money, this is just a business, but how are they doing?
They are going to make money, how was the seller going to make money? Well, they are going to make money simply by selling their product at a price as high as the market. You know that buyers are willing topay. That's just basic stuff. What if you are looking to sell? something to make money, yes, the higher you can sell, that would be the goal because the profit will be higher, so from the sellers perspective, they will think about something like this when they enter into the agreement, you know what? futureI think a pound of sugar could drop below \$50, that's worth it now.
Why do they think they are going to have the reasoning that their economic models are going to have, but for some reason they believe that in the future, yes, you know what I believe. I think a \$50 is getting pretty high. No, I don't think this price is going to last long, that's why they say you know what, yeah, yeah, sour patch kids producer. We'll sell, we agreed to produce a hundred pounds of sugar in the future for a dollar fifty a pound because deep down they're thinking about that, because I mean, if they waited they could probably get it cheaper, but I mean, if you're willing to pay us a dollar fifty , okay, which we'll accept, so to continue the story, they get you know it was approved and suddenly the sugar supply increases everywhere.
You've got a lot of new people coming into the business of selling sugar, you've got sugar cane crops popping up everywhere, so again, economics 101, when suddenly the supply of something increases, that will drive the prices down, so the new market price is suddenly a dollar fifteen, so let's go over the quiz again. This time the question is: what does the seller get? How much does the seller receive? Will he get a dollar fifteen or a dollar fifty if you're saying? Well, they're getting a dollar fifty a pound, you'd be right because that was the deal, so who gets the brunt here, who feels any pain, oh man, the buyer, because a buyer says, uh, I mean Shall we sign that? contract we made that agreement we have to buy it for a dollar fifty ah ah that's not going to be very nice now the sellers think so, we were there high-fiving because, oh yeah, you know, you know other people have to sell their Sugar for a dollar, you know, all those other competitors have to sell their sugar for a dollar fifteen a pound, but because we made this deal with a Sour Patch company, we can sell it for a dollar fifty a pound. and they feel very, very good about themselves.
I mean, it would have been a nice transaction on their part, but this is all fantastic. This is just, you know the

#### basics

of how it works, but let's move on to get a little more. practical here and this will be a kind of launching point for you and I to start making money from the futures market itself, unless of course you are a manufacturer of some kind of product, then yes, such time you'd like to have Many of you know this approach, but I'm guessing probably 99% of the people watching this will want to be a little more hands-on with all of this, but it's good to know what's really going on behind the scenes here, so the strategy hedging are the pillars of the futures market, as I said, that is the base, those are the pillars on which we want to build and this is also what is known as a physical settlement, however, for us, as I said, the vast majority of the people here and the vast majority of the people in the market itself, I mean, they are not producers, they are not manufacturers, so the majority of the people I want to say that because I make the distinction, I already made the comment about yes I assume most of you are watching, which is also true, but please also understand that when it comes to the futures market as a whole, the vast majority of people participating in it are not there like you and I , they are not producers.
We are not manufacturers of any type of product for which you would need ingredients or anything like that, so this is what would be known as speculators, you have coverage with the physical agreement and then you have speculators and this is the investors, these are the traders so that You and I can get involved through what is known as cash settlement because we are not interested. I guess no one here wants a hundred pounds of sugar showing up on their doorstep, so assuming that's right. so yes, you will want to get involved through cash settlement, but the point here is that we can get involved in the futures market through speculation being an investor or a trader and yeah, that's definitely exciting, that's good, I I'm glad I did it. can I get involved, so what are the types of futures markets?
Basically, there are two broad markets that speculators can choose from, so if you're saying you know what, yes, I want to participate in the futures market. I want to get involved, come on, there are two. types of markets, you can choose between two types of futures, so the first type is the commodity futures that we have already talked about. These are raw materials, they can be metals, they can be agriculture, they can be energy, I mean, they can be livestock, as was said. anything you can pick up, grab, smell, like I said, throw at someone, you might have a hard time throwing a cattle at someone, but you get the point here, like they're items that you can see, you can pick up with your hand and then the other type are financial futures and these are literally just pieces of paper.
These are just, you know, they're kind of a piece of paper that says, "Hey, this represents some other kind of abstract object like a currency that I once thought of, like money that you have in your hand, why is that?" Does it mean anything? Because there's this abstract idea, there's this belief that well, there's value there, but is there really value in that piece of paper? I mean, I guess maybe if you're looking to try to start a fire, there would be some practical value? in real life, but other than that, no, I mean, it's not like you're able to know a hammer, a nail and with a piece of you, a piece of paper in your hand So these are just objects that represent. abstract ideas, so you would have indices and the most popular one for these would be the sp500.
You have futures contracts attached to them and we will actually talk about them in future classes, but you can do that in Regards, you know currency exchange rates and then even interest rates and the treasuries themselves and these are all contracts that revolve around debt and you know you can do it. Some people trade common commodity futures. Some people just want to focus on financial futures, but. The point here is that these are the two general types of futures markets that exist and that the types of futures that would exist are commodity futures and then financial futures.
So how do speculators make money? Let's look at an example. here and remember we had that price of 50 dollars and that's what we would consider and call in our example here the spot price and the spot price is something that you'll see out there, but understand that a spot price all it means is that's the current price right now, if you wanted to buy sugar, it would be \$50 a pound right now, the current price, that's the spot price, but spot prices don't think about changing or don't hold up. Same thing, as time goes on, things will start to change around spot prices, spot prices will change.
Spot prices could rise to the 225 mark. Spot prices could go down to, let's call it, \$15 mark. Okay, so why do spot prices change? Well, I mean, you could have weather, you could have government decisions, you could just have world events, you know, just things happened in the world, interest rates, maybe interest rates change something, speculation itself, which It's always the fun, crazy part, not necessarily just about the futures market, but you really know the financial markets as a whole are fine, why is the price changing? I don't, because he has a group of traders, you have a group of investors who make different decisions, so it's not like, from an economic point of view, supply and demand have changed.
Not at all, I mean supply and demand could be exactly the same, but prices could be changing. Spot prices could be changing simply due to speculation. Investors, traders act and that's it. That's always the crazy part of the market: sometimes nothing happens. the demand remains exactly the same, but the spot prices still fluctuate well because there is a group of traders and investors that make up the market, so let's think about the value of the contract due to this change in the spot price, what is the value of this contract? make and again the contract between buyers and sellers, well, spot prices change, the value of the contract changes.
I want to say it again, if you're taking notes, definitely write it down because that's how you make money. The futures market opens the door for you and how to make money when spot prices change again. The hole we just talked about can be due to a variety of reasons, but when the spot price has changed, the value of the contract changes. The futures contract itself is going to change, it's going to go up and down and all over the place and right here the change in the value of the contract itself is what allows speculators again traders, American investors to earn or, of course, lose money from the contract and who they are.
These traders will be the traders of our land and anyone you can imagine, they could be people from Wall Street, they could be people you meet in the retirement home, if they have access to the Internet, they could be, you know, whoever wants to get involved in that is The power of this age of technology, the Internet, software, brokerages and platforms is that anyone can participate, anyone can make money from this fluctuation of this change in the value of a futures contract, so you don't need any requirements. You don't need to go to college, you don't need to have a college degree.
I mean, in theory, it wouldn't necessarily be wise, but you could in the next five minutes open a futures account and trade. You know the value of contracts. I mean, in theory, if you wanted to, it's just an age of technology that we live in, but that's how we're going to make money, that's how the opportunity to make money actually arises, because spot prices change, the value of contracts changes and because the value of contracts changes there is an opportunity for traders and speculators to make money, so where does all this really happen? Well, this all happens in what is called the futures market, once again let's quickly pull out our dictionary, so what does exchange mean?
Well, that is the act of giving or receiving one thing in exchange for another, but we can summarize it a little more, in our case, in regards to the futures exchange, it is the act of giving or receiving contracts in exchange for a good. . our case, money, we are giving money, we are getting contracts etc., now these markets can be found all over the world, the most famous of all is where it all really started and that would be the Chicago Mercantile Exchange, the CME. If maybe you've already done a little bit of research on the future and maybe you've seen places of C and I, that's what it means, but as far as you know and because I want to, I want to make this timeless presentation, so if you're watching this.
Several years from now, as far as things changing right now, the Chicago Mercantile Exchange has been around for decades and decades, but you know you never know, to keep this timeless, just bring out a little technology, ya You know, if Google doesn't do it. You might know that ten years from now when you're watching this, there's going to be a little butler robot that's going to come down from the ceiling and you're going to be able to ask them, but what are you going to want to ask or just type it into the search engine? it's just type futures exchange, insert the country you live in and then insert the year and you know it will do its thing, it will spit out all the information about the current futures exchanges that are out there and you know you can then keep up to date, you know everything from that point of view, so that's what I have here.