Comprehensive Futures Trading 101 Guide

Welcome to the world of futures trading! This guide is designed to help beginners, options traders, and those new to proprietary (prop) trading gain a solid understanding of futures contracts, trading strategies, and key terms. Let's dive into the essentials, including micro vs. mini contracts, specific strategies for NQ and MNQ, and more.

What is a Futures Contract?

Q: What exactly is a futures contract?
A: A futures contract is an agreement to buy or sell a particular commodity or financial instrument at a predetermined price at a specific time in the future. Unlike owning a stock, a futures contract involves a commitment to transact the underlying asset at the contract's expiration.

Understanding Ticks

Q: What is a tick in futures trading?
A: A tick represents the smallest price increment that a futures contract can move. The value of a tick varies by the futures contract being traded and is crucial in determining profit or loss on a trade.

Comparing Futures and ETFs

Q: How do ES (S&P 500 futures) and NQ (NASDAQ 100 futures) differ from SPY (S&P 500 ETF) and QQQ (NASDAQ 100 ETF)?
A: ES and NQ are futures contracts based on the S&P 500 and NASDAQ 100 indexes, respectively, allowing traders to speculate on the future value of these indexes. SPY and QQQ are ETFs that track the current value of the same indexes. Futures contracts like ES and NQ offer leverage, the ability to go long or short easily, and are primarily used for speculation or hedging. ETFs like SPY and QQQ are investment funds traded on stock exchanges, similar to stocks, and are commonly used for investment portfolios.

Time Frames for Trading Futures

Q: What time frame should I prop trade futures on?
A: The choice of time frame for trading futures depends on your trading strategy, risk tolerance, and time commitment. Day traders may focus on shorter time frames (minutes to hours), while swing traders may look at longer time frames (days to weeks). It's essential to choose a time frame that fits your trading style and goals.

Expiration and Roll Forward

Q: What do expiration and roll forward mean in futures trading?
A: Expiration refers to the date a futures contract ends. Traders must settle the contract by either taking delivery of the underlying asset (not common in financial futures) or closing the position. Roll forward is the process of exiting a position in a nearing expiration contract and entering a new position in a later-dated futures contract to maintain exposure.

Micro vs. Mini Futures Contracts

Q: What are micro and mini futures contracts?
A: Micro and mini futures contracts are smaller versions of standard futures contracts, making futures trading more accessible to individual traders. Micro contracts are 1/10th the size of mini contracts, which are already smaller than standard (or "full-sized") futures contracts. This size difference allows traders to participate in futures markets with significantly lower capital requirements and risk exposure.

Tick Prices for Key Contracts

Q: Can you explain the tick price for MES, MNQ, ES, and NQ?
A: Tick prices vary by contract, reflecting the minimum price movement:

ES (S&P 500 Mini): 1 tick = 0.25 index points = $12.50 per tick.
NQ (NASDAQ-100 Mini): 1 tick = 0.25 index points = $5.00 per tick.
MES (Micro S&P 500): 1 tick = 0.25 index points = $1.25 per tick.
MNQ (Micro NASDAQ-100): 1 tick = 0.25 index points = $0.50 per tick.

Recommended Timeframes for Day Trading

Q: What timeframes are recommended for day trading futures, specifically NQ and MNQ?
A: For day trading, the 4-hour and 5-minute charts are commonly used. The 4-hour chart helps identify the broader market trend, while the 5-minute chart is ideal for timing entries and exits with more precision.

Trading Strategy: NQ and MNQ

Q: Could you share more about your trading strategy with NQ and MNQ?
A: When trading NQ, I use a 50 tick stop loss to manage risk, aiming for a risk-reward ratio of at least 1:1, though I strive for 1:4 or higher. For MNQ trades, I typically set a 100 tick