The futures market is an exciting arm of the investment industry. Unlike equities, which are influenced by the success or failure of individual companies, the prices of futures contracts are based on overall economic conditions in a variety of areas. Futures are speculative instruments for trading. They do not extend ownership in any entity. Their use is dependent on the strategies and needs of each individual trader. The choice of which contracts to trade is based on the knowledge and interests of the trader.

Intention

Consider your trading objectives. Futures provide liquid instruments for the day trading of overall stock indexes. Their high leverage is particularly risky for buy-and-hold strategies. Nonetheless, sector-specific futures contracts are popular for traders in certain industries. A farmer, for example, may buy futures in a commodity such as corn to hedge against a potentially poor crop. Most active traders identify a particular futures contract they are comfortable with and get to know it intimately. The type of price action and overall volatility between contracts varies. Profiting from extreme moves often requires the trader have an in-depth understanding of the history of the contract's behavior. This comes only from experience. If you are simply seeking a liquid leveraged vehicle for active trading, the speculation of individual sectors may provide unnecessary additional challenges in a field that is already very demanding.

Stock Index Futures

Identify an appropriate stock index futures contract if you do not have knowledge, experience or direct involvement in a specific sector, such as agriculture or oil. Stock index futures are priced in direct correlation to a specific stock exchange. Thus they allow the leverage of the futures vehicle based on the speculation of equities. Futures exist for most major indexes. The S&P 500 futures contract, the ES, is the most actively traded investment vehicle in the world. It moves in conjunction with the overall U.S. stock market. Therefore it is especially popular for day traders. The large volume and tight spread between prices make it highly liquid and appropriate for active trading. Other index futures are less liquid, such as the Dow Mini and the Russell 2000 futures contracts.

Sector Futures

Speculative positions in futures based on oil, metals, minerals, agriculture and other commodities are more complicated for most traders. Stock index futures are relatively easy to understand compared to the complex economic conditions that affect the price of goods in stores around the world. Consider trading sector-specific futures if you are hedging against other positions in your portfolio. If you have a large bullish exposure to oil, for example, you may consider short-selling an oil futures contract. This position will profit in the event the price of oil falls. Such a profit would protect against losses elsewhere in the portfolio. This same strategy extends to futures for gold, silver or commodities. Those without an existing vested interest in a particular sector should carefully consider if these contracts are appropriate for trading. Futures trading is an exceptionally competitive field, and knowledge futures traders hold in specific sectors gives them an advantage over traders with little expertise in the field.

Source:

Toni Hansen: Introduction to EMini Trading