FUTURES TRADING GLOSSARY

Before diving into the world of Futures Trading, it’s important to familiarize yourself with some key terms. This glossary will help you understand the technical vocabulary used throughout the article and ensure you can follow along with ease.

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1. Core Concepts & Instruments

Futures

Financial instruments that obligate the buyer to buy or the seller to sell an asset at a future date and at a predetermined price.

Futures Exchange

A marketplace where futures contracts are bought and sold (e.g., CME Group, ICE, Eurex). Exchanges standardize contracts and ensure fair trading practices.

Expiration Date

The date when a futures contract is settled. At this point, the buyer and seller fulfill their obligations (either through physical delivery of the asset or cash settlement).

Rollover

The transfer of an open position from one futures contract to another as expiration approaches.

Rollover period

Rollover refers to the process of closing a position in an expiring futures contract and simultaneously opening a position in the next contract month. The rollover period is the timeframe when most traders perform this transition, typically in the weeks before expiration.

Holding Period

The length of time a position is held before being sold.

Underlying Asset

The asset that a futures contract is based on. This can include commodities (like oil, gold, or wheat), financial instruments (like stock indices or currencies), or even cryptocurrencies.

Contract Size

The quantity of the underlying asset specified in a single futures contract. For example, one crude oil futures contract might represent 1,000 barrels of oil.

Settlement

The process by which a futures contract is resolved at expiration. This can involve physical delivery of the asset or cash settlement based on the difference between the contract price and market price.

Open Interest

The total number of outstanding (unsettled) futures contracts for a particular market or asset at any given time.

Tick Size

The minimum price movement allowed for a specific futures contract. For example, if a tick size is $0.01 and you hold 1,000 units per contract, each tick equals $10.

Bid-Ask Spread

The difference between the buy (bid) and sell (ask) price of an asset.

2. Types of Futures Contracts

Agriculture Futures

Futures contracts on agricultural commodities such as corn, wheat, etc.

Currency and Cryptocurrency Futures

Futures contracts linked to exchange rates and cryptocurrencies.

Energy Futures

Futures contracts on energy products such as crude oil, natural gas, etc.

Interest Rate Futures

Contracts based on interest rates, such as the Eurodollar.

Metal Futures

Futures contracts on precious metals such as gold, silver, etc.

Stock Index Futures Contracts

Futures contracts based on stock indices.

E-mini Micro Contracts

Small-sized futures contracts based on stock index.

WTI (West Texas Intermediate)

A grade of crude oil traded on futures markets.

Commodity Futures

Futures contracts based on physical goods like oil, gold, wheat, or coffee.

Commodity

A financial asset based on raw materials such as gold or oil.

Cryptocurrency

Digital currencies like Bitcoin and Ethereum.

Currency Pair

Two currencies quoted against each other in the FOREX market. Can be traded in Futures or Forex spot.

3. Trading Strategies & Styles

Intraday Trading

The act of taking positions and closing them within the same trading day.

Scalping

A trading strategy that involves making small profits on small price movements.

Swing Trading

A trading strategy that seeks to capture short-term price movements within a larger trend.

Algorithmic Trading

The use of computer algorithms to execute trading orders efficiently and quickly.

Automated Trading

The automatic execution of trading orders using algorithms.

High-Frequency Trading

A trading strategy that uses advanced algorithms to make a large number of trades in a very short period of time.

Long Position

A position where the trader agrees to buy the underlying asset at the contract’s expiration. Traders take long positions when they expect prices to rise.

Short Position

A position where the trader agrees to sell the underlying asset at the contract’s expiration. Traders take short positions when they expect prices to fall.

Hedging

Using futures contracts to reduce or eliminate risk from price fluctuations in an asset. For example, a farmer might hedge against falling crop prices by selling futures contracts.

Speculation

Trading futures contracts with the goal of profiting from price movements rather than hedging risk. Speculators take on more risk in hopes of earning higher returns.

Day Trading

The buying and selling of financial assets within the same day.

Buy and Hold

A long term investment strategy without much trading.

Grid Trading

A trading strategy using a grid of orders to capture price movements.

HFT (High Frequency Trading)

High-frequency trading, which uses algorithms to perform transactions at high speed.

4. Risk Management & Account Management

Drawdown

The maximum reduction of a position or overall trading capital from a previous level.

Maximum Drawdown

Maximum loss allowed before an evaluation failure.

Maintenance Margin

The minimum amount of funds a trader must maintain in his trading account to avoid a margin call and liquidation of his positions by the broker.

Margin Call

A request by the broker/prop firm for the trader to add funds to his account due to significant losses.

Stop-Loss Order

An order that automatically closes a position when the price reaches a predetermined level in order to limit losses.

Trailing Stop

A type of stop-loss that automatically follows the price at a specified distance.

Trading Capital

Amount of money available for trading in the financial markets.

Circuit Breaker

A safety mechanism that temporarily suspends trading in the event of extreme market movements.

Margin

A deposit required to open and maintain a futures position. It’s like collateral to ensure both parties meet their obligations. Margins are typically much smaller than the full value of the contract, allowing traders to use leverage.

Initial Margin

The upfront deposit needed to open a position.

Maintenance Margin

The minimum balance you must maintain to keep your position open.

Overnight Margins

minimum balance required to hold positions overnight.

Leverage

The ability to control a large position with a relatively small amount of money (margin). While leverage can amplify profits, it also increases potential losses.

Mark-to-Market

The daily process of adjusting the value of a futures position based on market prices. Gains or losses are credited or debited from the trader’s account each day.

Risk Management

Risk management in trading.

Collateral

The assets used to secure a loan or transaction.

5. Market Dynamics & Analysis

Economic Announcements

Official releases on important economic data.

Market Maker

A prop firm can act as a market maker by facilitating transactions by providing liquidity in the market.

Market Sentiment

The general attitude of investors toward a particular market, often analyzed by prop traders to anticipate price movements.

Quote Stuffing

A high-frequency trading practice of flooding the market with false orders to create confusion.

Stock Market Indices

Statistical measures that reflect the overall performance of a financial market.

VIX (Volatility Index)

An indicator of the expected volatility of financial markets.

Implied Volatility

An estimate of the future volatility of an asset derived from the price of options.

Real Volatility

The measure of the actual price variation of an asset over a given period.

Contango

A market condition where futures prices are higher than the current spot price of the underlying asset, often due to storage costs or expectations of future price increases.

Backwardation

A market condition where futures prices are lower than the current spot price of the underlying asset, often due to high demand for immediate delivery.

Liquidity

The ease with which a futures contract can be bought or sold without significantly affecting its price. High liquidity means there are many buyers and sellers in the market.

Fundamental Analysis

The analysis of financial assets based on economic and financial data.

Technical Analysis

The analysis of charts and indicators to predict price movements.

Economic Indicator

An economic statistic that influences financial markets.

Entry Point

The moment when a trader or investor opens a position on an asset.

Fair Value

The intrinsic value of a financial asset based on objective criteria.

Going Long

Buying a financial asset with the expectation that it will increase in value.

Gross Domestic Product (GDP)

Gross Domestic Product, a measure of a country’s economic health.

Handle

The integer part of a price, excluding decimals.

Heat Map

A visual representation of price changes in a market.

Illiquid

A financial asset that is difficult to sell without affecting its price.

Information Asymmetry

A situation where one party has more information than another.

Jitter

Random fluctuations in the price of a financial asset.

Leading Indicator

An economic statistic that predicts future market movements.

Market Capitalization

The total value of a company based on its stock price.

Market Risk

The risk associated with general market fluctuations.

Momentum

The current price trend of a financial asset.

Noise

Random variations in the prices of a financial asset.

Non-Farm Payroll

An economic indicator that measures employment outside the agricultural sector.

Notional Value

The total value of a futures or option contract.

Order Flow

The flow of buy and sell orders in a market.

Overbought

A condition where a financial asset is considered overbought.

Oversold

A condition where a financial asset is considered oversold.

Price Action

The analysis of price changes on a chart.

Quote

The current price of a financial asset.

Rally

A rapid rise in prices in a market.

Rate of Return

The rate of return on an investment.

Resistance

A price level where strong upward opposition is expected.

Reversal

A change in trend in a market.

Support

A price level where strong downward opposition is expected.

Volatility

The amplitude of price variations on a financial asset.

Volume

The number of financial assets traded in a market.

6. Trading Platforms & Tools

NinjaTrader

This platform is popular for its customizable interface, advanced charting tools, and support for automated trading.

Proprietary Software

Software tools developed internally by a prop firm to perform analysis, manage risk, and automate trading operations.

Sierra Chart

A popular trading platform.

Trading Platform

Software used to place orders and analyze financial markets.

TradingView

A popular online charting platform.

TWS (Trader Workstation)

The trading platform of Interactive Brokers.

Candlestick

A type of chart showing the opening, closing, high and low prices.

7. Advanced Trading Concepts & Strategies

Arbitrage

Exploiting price differences of the same or similar financial instruments in different markets to achieve a risk-free profit. This can include statistical arbitrage (using statistical models) and index arbitrage (exploiting differences between an index’s futures price and the value of its component stocks).

Basis

The difference between the cash price of an asset and the futures price of the same asset. Understanding basis is critical for hedging.

Calendar Spread

A strategy involving simultaneously buying and selling futures contracts on the same asset but with different expiration dates. This aims to profit from changes in the price difference between the two contracts.

Inter-Commodity Spread

Trading the difference in price between two related but different commodities, such as the spread between crude oil and heating oil futures. This strategy capitalizes on expected changes in the relative values of the two commodities.

Intra-Commodity Spread

Similar to a Calendar Spread, involving the simultaneous buying and selling of futures contracts with different expiration dates, but for the same underlying commodity.

Call Option

An option contract that gives the holder the right, but not the obligation, to buy an underlying asset (including a futures contract) at a specified price (the strike price) on or before a specific date.

Put Option

An option contract that gives the holder the right, but not the obligation, to sell an underlying asset (including a futures contract) at a specified price (the strike price) on or before a specific date.

Strike Price

The price at which the holder of an option can buy (for a call) or sell (for a put) the underlying asset.

Premium

The price paid by the buyer of an option to the seller (writer) of the option.

Market-if-Touched (MIT)

An order that becomes a market order when a specified price is touched (reached). Useful for entering a market at a specific level.

Market-on-Close (MOC)

An order executed at the closing price of the trading day.

Limit Order

An order to buy or sell a futures contract at a specified price or better. Buy limit orders are placed *below* the current market price, and sell limit orders are placed *above* the current market price.

Stop-Limit Order

Combines a stop order and a limit order. The order becomes a limit order when the stop price is triggered, but it will only be executed at the limit price or better. This helps control the execution price in volatile markets.

Trailing Stop Limit Order

A **Trailing Stop Limit Order** is a type of order where the stop price adjusts automatically as the market price moves favorably.

VWAP (Volume Weighted Average Price)

A benchmark price calculated by weighting prices by trading volume over a specific period (often a trading day). Used by institutional traders to assess execution quality.

Time and Sales (Tape Reading)

The real-time display of completed trades, showing price, volume, and time. Traders use this for order flow analysis to gauge short-term market direction.

Depth of Market (DOM) / Order Book

Shows the pending buy and sell orders at different price levels for a specific futures contract. Provides insight into market liquidity and potential price support/resistance.

Synthetic Positions

Creating a position that has the same risk/reward profile as a futures contract, but using different instruments (usually options). For example, a synthetic long futures position can be created by buying a call option and selling a put option with the same strike price and expiration.

8. Risk Management & Value

Value at Risk (VaR)

A statistical measure of the potential loss in value of a portfolio (or position) over a specific time period, with a given confidence level. For example, a 95% one-day VaR of $10,000 means there’s a 5% chance of losing $10,000 or more in one day.

Expected Shortfall (ES) / Conditional VaR (CVaR)

A risk measure that considers the average loss *beyond* the VaR threshold. It provides a more comprehensive picture of tail risk than VaR alone.

Position Sizing

Determining the appropriate size of a trade based on risk tolerance, account capital, and the volatility of the asset being traded.

Risk/Reward Ratio

The ratio of potential profit to potential loss on a trade. A 3:1 risk/reward ratio means the potential profit is three times the potential loss.

Correlation

The statistical relationship between the price movements of two different futures contracts (or a contract and its underlying asset). Positive correlation means they tend to move in the same direction; negative correlation means they tend to move in opposite directions.

Beta (in the context of Futures)

How a specific futures contract’s price tends to move relative to a benchmark (like a stock index or another commodity). A beta of 1.2 means the contract is expected to be 20% more volatile than the benchmark.

Sharpe Ratio

Measures the risk-adjusted return of an investment.

Sortino Ratio

Similar to the Sharpe Ratio but only considers downside volatility.

Calmar Ratio

Performance metric that uses the maximum drawdown as the measure of risk.

Margin Utilization

The percentage of total equity currently used by the trader as margin for open trades.

Buying Power

The amount of equity available to trade.

9. Market Dynamics & Advanced Analysis

Commitment of Traders (COT) Report

A weekly report from the CFTC showing the positions of different market participants (commercial hedgers, large speculators, small speculators). A key tool for sentiment analysis and identifying potential market turning points.

Open Outcry

The traditional method of trading in a physical pit using hand signals and shouting. (Less common now, but important for historical context).

Electronic Trading

Trading via computer networks (the dominant method today).

Front Running

Illegally trading based on advance knowledge of a large order that will affect the market.

Spoofing

Placing large orders with the intent to cancel them before execution, to manipulate prices (illegal).

Wash Trading

Buying and selling the same asset to create artificial volume and the illusion of market activity (illegal).

Clearinghouse

The entity that guarantees the performance of futures contracts, mitigating counterparty risk. It acts as the buyer to every seller and the seller to every buyer.

CFTC (Commodity Futures Trading Commission)

The US regulatory agency overseeing futures and options markets.

NFA (National Futures Association)

A self-regulatory organization for the US futures industry.

Spot Price

The current price of an asset for immediate delivery.

Carry Trade (in the context of currency futures)

Borrowing in a low-interest-rate currency and investing in a high-interest-rate currency, aiming to profit from the interest rate differential.

Normal Market

A futures market in which the prices are higher in the distant delivery months than in the nearer delivery months.

10. Specific Contract Types & Terminology

Deliverable Grades

The specific quality standards that an asset must meet to be deliverable against a futures contract. (Important for physically settled contracts).

Cash-Settled Contract

A futures contract where the settlement is made in cash, rather than physical delivery of the underlying asset.

Physical Delivery

The actual transfer of the underlying asset at the expiration of a futures contract.

Inverse Futures

Contracts where the price is quoted as the inverse of the usual convention (e.g., some currency futures).

Micro E-mini Futures

Even smaller contract sizes than E-minis, making them accessible to smaller traders.

Last Trading Day

The final day on which trading can occur for a specific futures contract before it expires.

11. General Trading Terms

Backtesting

Testing a trading strategy using historical data.

Slippage

Difference between the expected price of a trade and the executed price.

Fill or Kill (FOK)

An order that must be executed immediately in its entirety or canceled.

All-or-None (AON)

Similar to FOK, but doesn’t have to be immediate. The order must be filled completely, but it can remain active until it is filled or canceled.

Good ‘Til Canceled (GTC)

An order that remains active until it is executed or canceled by the trader.

Good ‘Til Date (GTD)

An order that is valid until a predetermined date, unless it is executed or canceled before then.

Session Times

The hours of trading in an exchange for a particular asset.

This glossary serves as your quick reference guide as we explore how futures contracts work and how you can get started trading them!