Home » Funded Trader Programs » Futures Trading Terminology – Top 20 Trading Terms

Futures Trading Terminology – Top 20 Trading Terms

futures trading terminology

Futures trading involves several niche terms which can be enough to discourage any new trader. Along with new terms also comes having to understand the concepts behind the terms, and in futures trading sometimes the concepts aren’t as easy and straight forward as you would hope.

Below I’ve listed 20 futures trading terms and sayings you may come across as a new trader and be unsure what they mean. Hopefully this will demystify the trading terminology and give you a nice introduction. Since some terms are related (a stop order is a type of limit order for example, both explained below) I included a few more than 20.

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Trading Terms

Spread Trading – Spread trading isn’t something a new trader would or should try to attempt, but you may hear of it. There are several types of spreads, but they all boil down to entering a long trade on one product and a short trade on another. The concept is that the trader expects the prices between the 2, or the spread, to move in a direction where one of the trades will be more profitable than the other. Spread trades can be taken on 2 complimentary products (eg. long Crude Oil and short Gasoline), the same product but different months (eg. long Crude Oil in December and short Crude oil for the following June), or between products in the same category (long 30 Year Bonds and short 10 Year Notes). Profits from spread trading will be limited, but the purpose is to take less risky trades. Identifying spread opportunities is an advanced technique.

Scalping – Usually refers to making quick trades with only a few ticks of profit as the goal. There is no specific amount of ticks nor time that make a trade a scalp or not. Usually though scalping is under 1 minute, and even as quick as seconds.

Support and Resistance – Traders will look for price levels where the product is seeing price support, for example if Crude Oil fell to $80 repeatedly through the session and doesn’t break below it, this might be considered support. There are enough traders willing to buy at $80 to keep the price above it. As well on the upper level, if Crude Oil repeatedly rallies to $89 and can not break through the price, this would be considered resistance. Traders use many different time frames to determine support and resistance, it does not have to be within 1 day.

Tick and Tick Value – A tick is a generic term used as a measure of 1 price movement in a product. Since each futures product trades in different increment, a tick isn’t a specific dollar value. An example would be that ES trades at $12.50 per tick, where Crude Oil trades at $10 per tick. Often traders will talk of a trade in terms of just ticks “I made 23 ticks on that trade”. A scalper might just try to make 2-3 ticks per trade in short term scalping.

Market Order – When you place an order, there are always buyers and sellers working at any given price point. A market order essentially is saying give me the best available price right now. If the current price of Crude Oil is buyers bidding at $73.12 and sellers offering at $73.13, and you place a market order, you will get the price of $73.13 (the best selling price currently). Market orders are a good way to get into a trade instantly.

Limit Order – A limit order is an order where you say you will only pay a specific price. Using the same example above, you could place your limit order at any price, say $73.10. Only if a seller is willing to sell it to you at $73.10 will you get your order filled. Likewise if you entered a limit order right at the current bid price of $73.12, you aren’t guaranteed to get filled, a seller still has to be willing to sell at this price.

Stop Loss (Order) – A stop loss is an order you place when in a trade at a price which will limit your loss if the trade went against you. Continuing with the same example, if you bought Crude Oil at $73.13 assuming you expect the price to go up, you might set a stop loss at $72.80 so that if you are wrong and the price moves downwards, you will limit your loss. A stop loss can be set as either a Market Order or Limit Order. It is usually recommended to set them as Market Orders. Remember a limit order is an order for a specific price. If you set your limit stop loss at $72.80 and the price happened to rapidly fall, you might get skipped over, where a market order will always trigger.

Take Profit (Limit Order) – On the flip side you may have a specific price you think your Crude Oil trade will go to. If you bought at $73.13 maybe you think it’s going to go to $73.25 and you are happy with the 12 cent win. You would set a Take Profit order at $73.25 so that if the price trades up there, you’ll automatically close out your position and “take a profit”. Of course you can always adjust these after the fact, so if the price started to rise and you wanted to move it higher you certainly could.

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Product Terms

Contracts (Lots / Cars) – When trading futures you are technically trading a contract to buy a product at a certain price for a set quantity. The majority of traders though have no interest in actually “taking delivery”, meaning actually using the contract to buy a product. For example if you buy a Crude Oil contract, chances are you aren’t hoping to actually take delivery of crude oil. None the less, you still buy and sell the contracts themselves. Each contract represents a specific number of the product, for example 1 Crude Oil (CL) contract represents 1,000 barrels of crude oil, at a specific price per barrel, with delivery on a specific date. Lots and Cars are 2 additional names also used instead of Contract. A Car is a throw back to when futures were typically used for actual physical delivery and a car was a railroad car worth of the product (think of a railroad car full of corn).

Product Code – Each product has a 2 letter abbreviation, which can be found on the CME website. A few examples, Crude Oil is CL, Ultra Bond is UB, Natural Gas is NG. Usually traders will use the full name and 2 letter code interchangeably when talking about products. When looking up a product to trade though in your online software, you’ll be looking for the 2 letter code.

Settlement Method – Deliverable and Financial – This one won’t impact day traders as you are buying and selling contracts for profit, and not looking to hold contracts until settlement. But to know, some products if a contract was held to delivery are actually physically delivered, such as Crude Oil. Others are just settled financially such as treasury products.

Front Month – Futures contracts are for delivery in specific months, and the next month which is up for delivery is considered the front month. Some products trade monthly contracts (Crude Oil for example) and others in quarterly (Treasury products for example). Most of the trading volume will be in the front month, giving you more liquidity for entering and exit trades.

Roll Forward – When the current front month contract is coming up for delivery, traders will roll forward and start trading the next months contract. Often for day traders this means changing your charts to the next months contract and trading it going forward and not much more. If you notice the volume for the product you normally trade has substantially dried up, there’s a good chance your product has rolled over to the next month.

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Funded Trader Evaluation Specific Terms

The terms below are somewhat unique to the world of funded futures trader programs. To learn more about these programs and any sales going on, be sure to visit my Deals Page.

Drawdowns – There are 2 types of drawdowns – Trailing and End of Day, both explained in detail below. Overall a draw down is the most you can lose before you break a rule and have to restart your evaluation. How the amount of the drawdown is calculated is what varies between the 2 types. Be sure to fully understand how drawdowns work and what your account balances are for trader evaluations, as this is the main way people break a rule.

Trailing Drawdown – Your drawdown will trail your profits typically during each trade. For example if you have a $3,000 trailing drawdown on a $100,000 account and make $2,000 in profit, your new minimum balance will go from $97,000 ($100K less $3K), it is now $99,000 ($102,000 less $3,000).

End of Day Drawdown – Your drawdown in an End of Day is exactly that, not calculated until end of the day. Using the same example above, if you made $2,000 and brought your account up to $102,000, but then took a $4,000 loss in the same day, bringing it to $98,000, you would still be okay. Your drawdown does not update until the end of the day, and since you are still above $97,000 you haven’t broken a rule.

Daily Loss Limit – Several trader evaluations have a daily loss limit. It will be smaller than your overall loss limit. For example your total loss limit may be $2,500 but your daily loss limit $1,500. Not all firms have the daily loss limit though.

Scaling Plan/Progression Ladder – A scaling plan (sometimes referred to as a progression ladder) means that you are not able to trade the full amount of contracts available on your account from the start. As you make more profit, you unlock the ability to trade more size. For example if you are trading a $100,000 10 contract account but it has a scaling plan, you might only be able to trade 3 contracts to start until you reach a profit of $2,000 for example. Each firm will outline specifically what the rules are around this. Not many firms have a scaling plan during the evaluation, but several do once you are funded.

Consistency Rule – Some programs want you to demonstrate that you can trade well over a series of days, instead of hitting 1 home run trade or day and passing. As such they may have a rule that you can make no more than 30% to 50% of your profits in 1 day. So for example if your goal was to make $10,000 and there is a 40% consistency rule, you can’t make more than $4,000 in one day.

Other Trading Terms

Globex – This is the electronic exchange on which all CME and related exchanges (outlined below) trade on. You can trade basically 23 hours a day on Globex during Sunday evening until Friday afternoon. Often times people will refer to trading “on Globex” as hours that aren’t standard in the US, and the US hours as the “pit session”, when the former physical trading pits would be in action. But don’t be fooled, all electronic trading regardless of time of day is via Globex.

Margin – When trading futures you do not put up the full value of the contracts you trade, just a portion. This is the margin required. Each brokerage will have different margin requirements, which will vary as well by the product. For example, many brokerages offer $500 margins for popular products like ES. When you enter a trade, the amount of margin is held against your account while in the trade. As an example, if you had a $5,000 account value and entered a trade for 5 ES contracts at $500 margin, then $2,500 of your account will be frozen essentially while in the trade. If the value of your account falls to the point of less than $2,500, your brokerage will close the trade.

Commissions – The fee you pay to a broker for executing a trade. Typically futures trades have commissions in the range of $1 to $4, but this will vary by the product you trade and brokerage. Also the commissions listed are usually “per side” which means you’ll pay it when you buy and when you sell also.

Algo / Algorithmic Trading – Essentially this is automated trading using pre defined rules. Algo traders will build a rule set based on market conditions and/or indicators, and the algo will execute buy and sell orders based on these rules. Typically algo traders will spend an extensive amount of time backtesting their work, and fine tuning the conditions. There is no such thing as a 100% win rate, and be wary of anyone selling an algo. Keep in mind if it was as profitable as they say, why wouldn’t they just use it to scale up and trade for themselves and not get it out to others.

CME (And related exchanges) – CME stands for Chicago Mercantile Exchange. They are the umbrella market and go to place for all things future. You can find their website at https://www.cmegroup.com . There are several subset markets if you will that products trade on as well. Namely the NYMEX (New York Mercantile Exchange), CBOT (Chicago Board of Trade), COMEX (Commodity Exchange) and some products trade directly on CME.

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Conclusion

Futures trading terminology can be overwhelming at first, especially when newer traders are talking to experienced traders. Similar though to learning anything new in life with a bit of exposure and experience, you’ll soon start hearing the same terms over and over and learn what they are. Soon enough you’ll be finding yourself helping out a newer trader than yourself understand the basics to start.


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Risk Disclosure:

Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

Hypothetical Performance Disclosure: 

Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight.

In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.

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