Basically Futures

ACADEMY / FIRST LESSON

What exactly is a futures contract?

Start with how futures work, why the markets exist, and what leverage means. This is the opening lesson of the Basically Futures Academy; the full seven-level program is in development.

Why futures exist

A futures contract is a standardized agreement traded through an exchange. A business that uses a commodity may use futures to manage price uncertainty. A producer may use them to reduce the risk of falling prices. Speculators accept price risk while seeking a potential return. Futures connect those groups in markets with standardized rules and clearing.

What is standardized?

The exchange specifies the contract's underlying reference, multiplier, minimum price increment (tick), trading and expiration dates, and settlement conditions. Traders choose the price and whether they buy (go long) or sell (go short).

How profit and loss work

Each index-point move has a specified dollar value per contract. For example, MNQ (Micro E-mini Nasdaq-100) has a $2 index-point multiplier. If MNQ moves 10 index points, that is a $20 price move per contract before transaction costs. If the move is against the position, the same amount is a loss.

Try the math.

One MNQ contract moves 8 points against your position. Ignoring transaction costs, the loss is 8 × $2 = $16. Two contracts lose $32. If a stop slips farther, the realized loss can be larger.

Practice with the free calculator

Margin is not your maximum risk

Futures are leveraged. The amount your broker requires to open or maintain a trade (margin) is generally less than the contract's notional exposure. Margin is a performance bond—not the most you could lose. Risk budgeting and broker margin are separate decisions.

Before you trade

Learn how ticks, contract multipliers, order types, market liquidity, slippage, commissions, position sizes and daily losses interact. Practice using simulation and document a trading plan before risking capital. A profitable sample, especially a short one, is not evidence of a reliable strategy.

Check your understanding

1. What determines the dollar value of a price movement?

The contract's specified point/tick value and how many contracts you hold.

2. Does a low day-trading margin guarantee a small loss?

No. Margin is not a risk cap. Real losses can exceed deposited funds.

3. Why do you need a strategy test?

To evaluate an idea against evidence and its limitations instead of assuming an appealing setup will work.

Primary sources

Educational examples are hypothetical and not predictions of trading results. Futures trading carries substantial risk.