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


Hey, it’s Clay at ClayTrader.com. I’m gonna be your guide here through futures trading
at a very beginner level, and a very basic level. So I want to quickly just
tell you who this is for, because I don’t want to waste your time. If you are 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 the mathematical standpoint, you’re probably gonna be disappointed. If you are looking for just
listen, I want to trade futures. I want to know how do I
make money from futures. Sure, I want to know
some broad aspects of, you know, how the futures market works, what actually it is, from a broad sense, yeah, I want to know that, but I’m more here for the practical real world type applications, not a bunch of theory, not a bunch of just
mathematically equations that I’d learned in some
sort of, you know, textbook. I want to just know futures, sure, but I wanna know how to, how do you make money in the market? How do they work? How will they put profit in my pocket? If that’s more of your mindset, then this will be for you, but again, if you’re
somebody that’s looking for the mathematical theory of it all, then you’re probably
gonna be disappointed. So keep that in mind, and maybe you’re on the fence. Do I even want to learn futures? One of the biggest benefits
futures do allow for people is that it is a way around
the pattern day trading rule. So perhaps you’re kind of
stumbling around with that. You’re a little bit frustrated with it. Futures trading does not have to, it doesn’t fall under those regulations. So that’s one thing that I would just kind of throw out there that may get you interested
into the markets, and wanna learn more about them. So with that being said,
let’s go to my desktop, and let’s get this
course and class started. Welcome to my desktop. Before anything else, we need to take a very
wise approach to all this, and the wise approach would be, well, let’s just figure out
what the futures market even is. What’s the purpose of it? What is going on? How is it interacting with the
general markets as a whole? And once we know that, well lets start to make money from it, but like I said if we’re gonna make money from 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 gonna do
here with this first class. Establish a good solid framework, and foundation from
which we can build upon, and then eventually
start to make money from. But let’s just start, like
I said at the ground floor, and let’s look at some definitions here. So let’s grab our trusty
Merriam Webster dictionary, and look at each of these words. So the first being future, what does future actually mean? Well it’s something that will exist, or happen at a later time. The two key components
there being something. So okay something is what? Happening at a later time, and we’ll get to more of that as we go, and then the next part is just a market, and a market is a meeting
together of people for the purpose of trade. But we’re concerned about, and
what we’re gonna look at is a meeting together of people. So a future market, just something, and this something’s
happening at a later time, and this has all been
based within a market, and a market, a meeting together people. So meeting together of people. The logical question then becomes, okay, well who are these people? Who are these people that
are meeting together? You know, what are they doing? But who, right? Very, very logical question. So with that, you got to keep in mind that
there are two main people that must be involved
for a market to exist. Once again, very, you
know, basic economics here, you can’t have a market if there’s not two people involved, right? One person does not make up a market. So who are these people
that must be involved, who are these people
that make up the market? Well you’re gonna have a buyer, and you’re gonna have a seller, or just in general buyers, and sellers, and that brings up the next question. Okay, well what is the
purpose of their meeting? And that is to negotiate
a deal, or a trade, right? That’s what a marketplace does. If you’re going to the grocery store, and you want to buy an apple,
you are negotiating a deal. You are saying, okay, I will trade this piece of money for that, and you have to try to negotiate. If you think it’s priced too high, if you think the seller
is trying to rip you off, well then guess what? As a buyer there’s no deal, right? No deal, nothing’s happening. So again, we’re keeping
it very basic right now on just economics 101, that’s what a marketplace is made up of. Two people and these two
people are buyers, and sellers. Let’s look at the next
part here, something, and then this is
happening at a later time. Now at this point, the deal has been made. So that leads us to, alright, well what is the something of a deal? I get it, a deal has been
made, but the something. So what is this something? And that is an agreement for
a transaction to take place at a later time in the future. There we go. Are you seeing how everything’s kind of coming together here? So a deal has been made, and then the details of the deal, the something of this
deal is just an agreement for some kind of transaction. So what kind of transaction, or in other words, what are the details of this agreement? So a little bit of context here. Let’s just say that when this
particular agreement is made, that the current date is August 15th. So again, to reiterate,
who is this happening, who is making, or who’s
is this happening between, who’s making up the marketplace? While we have, again, the buyer, and in our situation, in our little story here
that we’re going through, let’s say the buyer in this story, they manufacturer, they produce, they sell one of my all time favorites, Sour Patch Kids, alright? So if you’re not aware, Sour Patch Kids aren’t exactly healthy. That’s why I eat them in moderation, but the buyer, one of their main ingredients
in Sour Patch Kids that they need to buy is a sugar, right? So they’re saying, you know what? I would like to buy 100 pounds
of sugar for $1.50 per pound, and then the other part of this market, who would they be talking to? Well, hopefully you
have your common sense, well, if they’re looking to buy sugar, they’re probably talking to
somebody that sells sugar. Very good job. Exactly, so they’re talking to a seller that is going to offer up
or produce sugar, right? They have the big sugar cane fields, and they are a producer of sugar. So the seller looks at their proposal, the buyer, and saying, alright, the buyer’s offering us $1.50 per pound, and they want to buy 100 pounds of sugar. Well, you know, yeah, I will produce that 100
pounds of sugar for you, and then the final part of this agreement, the last little bit of detail, which is very important
for the futures market, is that they are saying this transaction will take place on October 15th. Not to insult your intelligence, but again, as far as
our story is concerned, the current date is August 15th. So this deal, this transaction
will not actually take place until two months later, right? Two months into the future. So that’s what’s going on, or they are making an
agreement for this transaction to take place in a
future, or in the future, and that’s why this would be
called a futures contract. All a futures contract is,
is an agreement to buy, or sell a commodity on a
given date for a given price. So the agreement, again in
our situation right there, and to buy, so what’s going on here? Well, they want to buy that
100 pounds of sugar, or sell. So in this situation, the seller is going to
sell 100 pounds of sugar for some commodity. What is the commodity in this case? Will the commodity is
actually the sugar itself? What is a commodity in general though? Well that’s just a raw material, or an agricultural product, and that can be bought, and sold. So it’s a physical product. It’s something that you can
pick up with your hands, you can smell, you can
throw it at somebody, I guess if you want. So what are some other examples
out there of commodities? While there is coffee beans, and these are all things that can be traded in the futures market. There’s oil, there’s
gold, corn, cotton, wheat, and there there are many others, but here is just kind of a
few of the more common ones. But again, that’s what a commodity is. Just a raw material, and then getting back into the
definition, this agreement, this futures contract is all what? It’s gonna happen on a given date. So in this situation, October 15th, and then for a given price, which we’ve established
is $1.50 per pound, but why in the future? Why agreed to buy, or sell
something in the future when you can just simply buy it, and sell it right now? To understand we got to go back to kind of the foundations of business. Even if you’ve never taken a
business class, that’s okay. This is very straight forward, but you know a principle in business 101 that if, assuming of course you want to be a successful company, assuming you want to have
a successful business, you need to, you know,
at the very, very core, the forefront of any
decision you make of any, you know, pathway that you choose to take, you need to always be
attempting to do one thing, and all companies once more
assuming they want to be, you know, successful, assuming
they want to be profitable, they are attempting to do
this, and what is this? Well that is try to manage risk. Nobody knows the future. There is no such thing as a crystal ball. Nobody can know for sure. Nobody can be certain
what’s going to happen. So you need to be able to
do your best to forecast what you believe is going to happen, what you think is most likely to happen, and that way you can
manage risk the best parts. So that’s really, 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 tell the future, but the better a company
is at managing the risk, the better a company is at trying to, you know, erase that uncertainty, or erase the uncertainty,
that’s a good thing. That’s going to give them a
leg up on their competition. That’s how companies get so big is they’re just so good at
managing the unknown. They’re just so good at
making decisions based off of what they think is gonna
be in their best favor from a risk management perspective. So risk management, and the other word for this
would you just be hedging. So hedging, that’s what is
going on in the futures market at, you know, the, the foundational
core is risk management, and in that you know, in
futures market terminology that would be known as hedging. So let’s look at each person
in the agreement’s perspective, and we’ll start with
the buyer’s perspective. Now, a buyer from a
business point of view, a huge focus for that buyer is what? They want to make money of course, and they’re gonna make money, and their goal is gonna be what? Well, they want to keep
their costs of production as controlled, and
predictable as possible. Not guaranteed, but let’s just try to keep our costs as controlled, and just keep it as
predictable as possible, because that’s gonna make our life easier to do forward-looking
projections, and all that. So from the buyer’s perspective,
when there’s, alright, well we need sugar to make
those Sour Patch Kids. So they’re thinking you know what? In the future, I believe a pound of sugar might actually rise up
above $1.50 per pound. So if that’s what the buyer’s thinking, that’s why they’re
thinking, you know what? If we think now, why do they think that? I mean they have, for some reason, they believe that sugar
prices are gonna be going up. So that’s why they’re
saying you know what? Let’s just lock in the price. Let’s get the price of $1.50 locked in. So that’s why we’re gonna do that. So they got it locked
in per that agreement. Let’s now say as part of
this story, a tornado comes, and sugar crops are destroyed
just all over the place, and because of that, all of a sudden there’s less sugar, and when there’s less supply, right? Supply, and demand, less
supply of something, but the demand stays the same, well, that’s gonna shift prices up. So let’s say that the new
market price is $2.25 per pound. Now here’s a quiz for you
that I want you to answer. What does the buyer pay? What price per pound are they paying? Okay, hopefully I gave you enough time. If you said, you know what? They’re paying $2.25 per found, because that’s new market price. That would be wrong. They are paying $1.50 per pound. Why? Because, well, that’s what they agreed to. Remember that agreement. In the future, we’re buying
it at $1.50 per pound. So sure, that’s, I mean
for the sugar company, that’s not a very good deal, because had they not
entered into that agreement, they could be selling that 100
pounds for $2.25 per pound, but, because they did enter into it, ah, now they got to sell
it for $1.50 per pound. Of course, from the buyer’s
perspective, hey, alright, we made a good decision. You know, good job. They’re all high fiving each other. We’re only paying $1.50 per pound, great. Yeah, our competitors hah, too bad, they’re not as smart as us. They’re over there paying $2.25 per pound, but us, yeah, we’re gonna be able to make those Sour Patch Kids for $1.50 per pound. Now let’s take a look at the other side, the seller’s perspective. A huge focus now for the seller, of course they want to make money too. This is just business, but how are they gonna make money? How is this seller gonna make money? Well, they’re gonna make money
by just selling their product for as high as the market, you know, the buyers are
willing to pay, right? That’s just basic stuff there. If you’re looking to sell
something to make money, yeah, the higher you can sell that, that would be the goal, because that’s gonna be the more profit. So from the seller’s perspective, they’re gonna be thinking
something like this when they enter into the agreement. You know what? In the future, I believe that a pound of
sugar might drop below $1.50. That’s what they think. Now, why do they believe that? I mean, they’re gonna
have their reasonings, they’re gonna have their economic models, but for whatever reason, they
believe that in the future, you know what? I think $1.50 is getting pretty high. I don’t think this price
is gonna last very long. So that’s why they’re
saying, you know what? Yeah, yes, producer of Sour Patch Kids, we will sell, we agree to produce
you 100 pounds of sugar in the future for $1.50 per pound, because in the back of their
mind they’re thinking yeah, because I mean if you would just wait, you can probably get it for cheaper. But I mean if you’re willing
to pay us $1.50 now, okay, we’ll take it. So to carry on with the story, they get that you know approved, and then all of a sudden the
supply of sugar just increases all over the place. You have a bunch of new people getting into the business
of selling sugar. You have sugar cane crops
popping up all over the place. So once again, economics 101, when all of a sudden supply
of something increases, well that’s going to cause prices to what? To go down. So the new market price
all of a sudden is $1.15. So let’s go through the quiz again. The question this time being, so what does the seller receive? How much does the seller get? Are they getting $1.15, or $1.50? If you are saying, well they’re
getting $1.50 per pound, you would be right. Because that’s what the agreement was. So who’s kind of getting the
short end of the stick here? Who is feeling some pain? Aw man, the buyer, because
a buyer saying, huh, I mean we signed that contract, we made that agreement, we have to buy that at $1.50. Oh that’s not gonna be very pleasant. Now the seller’s thinking,
yes we were right. They’re all high five’in because oh yeah, you know our you know, other people are having to
sell their sugar for a dollar. You all those other competitors out there, they’re having to sell their
sugar at $1.15 per pound, but because we made this agreement with the Sour Patch Company, we’re able to sell it for $1.50 per pound, and they’re feeling very,
very good about themselves. I mean it would have been a
good transaction on their part. But this is all fairy. This is all just, you know,
the basics of how it works, but let’s move into getting a little bit more practical here, and this will be kind of the
launch point for you and I to be able to start to make money from the futures market itself. Unless of course you are a maker of some sort of product, then yeah, maybe you would want to have more of a, you know, this approach, but I would assume that probably
99% of people watching this are gonna be, you know, wanting to get a little bit
more practical with all of this, but it’s good to know
what actually is going on, like I said, behind the scenes here, so the strategy of hedging are the pillars of the futures market. Like I said, that’s the foundation. Those are the pillars that
we want to build upon. And this is also what is known
as a physical settlement. However, for us, I mean, like I said, the
vast majority of people here, and the vast majority of
people in the market itself, I mean they’re not producers, they’re not manufacturers, alright? So majority of the people, I want to say that because I make this… I already made the comment about, yeah, I’m assuming most of you watching, which is true also, but
please also understand that as far as the futures market as a whole, the vast majority of
people participating in it, they’re like you, and I, right? They’re not producers. They’re not manufacturers
of any sort of you know, commodity that what they would need, you know, ingredients for,
or anything like that. So this is what would be
known as the speculators. You have hedging with
the physical settlement, and then you have speculators,
and this is the investors, this is the traders. So you and I can get involved through what is known
as the cash settlement, because we’re not interested in, I’m assuming nobody here
wants 100 pounds of sugar to show up at their door. So assuming that is correct, then yeah, you would want to be getting involved through the cash settlement, but the point here is that
we can indeed get involved in the futures market through speculation by being an investor, by being a trader, and yeah, that, that’s
definitely exciting. That’s good, I’m glad we can get involved. So what are the types of futures markets? Pretty much there are two broad markets speculators can choose from. So if you’re saying, you know what? Yeah, I want to get in the futures market, I want to get involved, let’s go. There are two types of
markets you can choose from. Two types of futures. So the first type is commodity futures, which we’ve already talked about. These are the raw materials. They can be metals,
they can be agriculture, they can be energy. I mean they can be livestock. Like I said, anything that you
could pick up, grab, smell. Like I said, throw at somebody. You might have a hard time
throwing a cattle at somebody, but you get the point here, right? Like they are items that you can see, you can pick up with your hand, and then the other type
is financial futures, and these are literally
just pieces of paper. These are just, you know, they’re some sort of paper
that says, hey, this represents some of other sort of abstract
object, like a currency. Have you ever thought of like the money that you hold in your hand? Why does that mean anything? Well, because there
was this abstract idea. There’s this belief that, well there’s value in there, but is there actually value
in that piece of paper? I mean, I guess maybe if you we’re looking to try to start a fire, there’d be some real life practical value, but other than that, no. I mean it’s not like
you’re gonna be able to, you know, hammer a nail in with a you know, a piece of paper in your hand. So these are just objects
that represent abstract ideas. So you’d have indices, and the most popular for these
would be the S and P 500, you have futures contracts
attached to those, and we’ll actually be talking
about those in future classes, but you can do it in regards to you know, currency exchange rates, and then just even interest rates, and treasuries themselves, and these are all the contracts
revolving around debt, and you know, you can do either people, some people trade commodity futures, some people just want to
focus on financial futures. But the point here being is that these are the two broad types of, you know, futures markets that exist, and that the types of futures
that would be out there, you have commodity futures,
and then financial futures. So how do speculators make money? Well, let’s look at our example here, and remember we had that $1.50 price, and that is going to be
what we would consider, and call in our example
here, the spot price, and spot price is something
you’ll see out there, but just understand that a spot price, all that means is that’s
the current price. Right now at this very moment, if you wanted to buy sugar, it would be $1.50 per pound. At this very moment, the current price, that is the spot price, but spot prices don’t change,
or don’t stay the same. So as time moves forward, things are gonna start to change around. Spot prices are gonna change. Spot prices could rise
up to the $2.25 mark, spot prices could go down to,
let’s call it that $1.15 mark. Alright, so why? Why are spot prices changing? Well, I mean you could have weather, you could have government decisions, you could have just world events, you know, just stuff happens in the world. Interest rates, maybe interest
rates changed something. Speculation itself, that’s
always the entertaining, and crazy part. Not necessarily just
about the futures market, but really all financials
markets as a whole is, well why is the price changing? I don’t know, because he
got a bunch of traders. You got a bunch of investors
making different decisions. So it’s not like from a, you know, an economic standpoint, supply and demand has changed at all. I mean, supply and demand
could be the exact same thing, but prices could be changing. Spot prices could be changing just simply, because of speculation. Investors, traders, acting, and that’s it. So that’s always the crazy
part about the markets is sometimes nothing happens at all. Supply demand remains the exact same, but spot prices are still fluctuating. Well, because you have a bunch of traders, and investors that make up the market. So let’s think about the
value of the contract, because of this change in spot price. What is the value of this
contract gonna be doing? And again, the contract between
the buyers, and the sellers. Well when spot prices change, the value of the contract changes. I want to say that again. If you’re taking notes,
definitely write that down, because this is how you make money. This is how the futures
market opens up the door to you and I to make money. When spot prices change, again, the whole why we just talked about could
be for a variety of reasons, but when the spot prices change, the value of the contract changes, the value of that futures contract itself is going to change. It’s gonna go up, and down, and all over, and right here the change in the value of the contract itself is what allows speculators
again, traders, us, investors, to make or of course lose
money from the contract, and who are these traders? Well the traders are any
anybody you can imagine. They can be people down on wall street, they can be people you know,
in the retirement home, if they have the internet access, they could be, you know, whoever wants to get involved in that, is the power of this day,
and age of technology, and the internet, and
software, and brokerages, and platforms is anybody
can be participating. Anybody can be making money
from this fluctuation, from 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 theoretically
wouldn’t necessarily be wise, but you could just open up in the next five minutes
a futures account, and be trading you know,
the value of contracts. I mean in theory if you wanted to, that’s just the day, and age
of technology we live in, but that is how we are
gonna be making money. That is how the opportunity to make money actually arises is because spot prices change. The value of contracts change, and because the value of contracts change, there is an opportunity
in there for traders, speculators to make money. So where does all this
actually happen though? Well, this all happens on what is called the futures exchange. Let’s once more quickly
get out our dictionary. So what does exchange mean? Well that is the act of giving, or taking one thing in return for another. But we can boil this
down a little bit more. So in our case, as far as the futures
exchange is concerned, it’s the act of giving, or
taking contracts in return for, well in our case, money. We’re giving money,
we’re getting contracts, and so on, and so forth. Now these markets can be
found all over the world. The most famous of them all
is were all actually started, and that would be the Chicago
Mercantile Exchange, the CME. If you, maybe you’ve
already done some research on the futures, and maybe you’ve seen CME places, that’s what that stands for, but as far as you know, because I wanna I wanna make
this timeless presentation. So if you’re watching this
several years from now as far as, because things change right? Now, the Chicago Mercantile Exchange has been around for decades upon decades. But you know, you never know. So in order to keep this timeless, just get out a bit of technology. You know, if Google doesn’t exist, maybe, you know, 10 years from now
when you’re watching this, there’s some little robot butler that will come down from the ceiling, and you can just ask them, but what you’re gonna want to be asking, or just typing into the search engine, and just type in futures exchange, insert whatever country you live in, and then insert the year,
and it’ll do its thing. It’ll spit out all the
information about the current futures exchanges that exist out there, and you can then keep up to date on everything from that point of view. So that’s what I have here. Let’s go back to me at my desk, and we’ll wrap this up. Well, hopefully now you have
a much better understanding of what the futures
market is, how it works, what the purpose of it actually is, and then who these players are. And then from that, that’ll give us a good foundation that we can build from in
future classes, no pun intended. Before I go though few things, first off, if you enjoyed this, just let me know. Hit that like button, and then also leave a comment
down below in terms of what you would like to see in the next classes I put together. Maybe you actually had a
question on this class in, and of itself so you can ask those, or like I said, if you want
to give me some suggestions for future videos, again,
sorry, no pun intended, then leave those out
in the common section, but if nothing else, and you’re just, hey, I enjoyed it, then hit that like button,
and over time I’ll try, and do some more series
in classes like that. So just like I said, the
easiest way to communicate, hit that like button. Also check out the channel. The entire channel is not necessarily just about futures trading, it’s more about just
kind of money in general, growing wealth, taking
control of your finances. So there’s stock market stuff, options, market stuff, personal finance, and real estate stuff. So check out the channel as a whole, and hopefully you to decide
to ultimately subscribe to the channel also, but if nothing else, like I said, hit that like button. Leave a comment down below, and I’ll see you back
for class number two. First off, thanks so much for
watching the entire video. Real quick before you go, I want to invite you to a live webinar, web class training workshop, online event, whatever you want to call it, but it will be me live revealing
to you what I discovered that has allowed me to transform myself from being an employee
to being my own boss, including how I had only one losing day out of 73 days in total. I’m gonna cover three keys
that have helped me unlock profitable consistency within the markets. The first key is super weird, but in a productive type of way. The second key is super awesome, because it quite literally is
wired into our DNA as humans making it very easy to use, but in a cruel way, this becomes a pitfall for many traders. I’ll explain it all though, including how to avoid the pitfall that it creates for some,
and yeah, the third key, when you hear it sounds way,
way too good to be true, but it’s not, and I’ll
show you how it all works. Then at the end, I open
it up for a question, and answer session that
is again, totally live. Even if you can’t make the live session, please still sign up
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truly is a live event. If you have any questions, let me know. If not, I’ll be seeing you soon.

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