How to trade index futures

What are index futures?

Index futures are derivative products used to trade stock indices at a specific date and price in the future. Traditionally, index futures were only for institutional traders buying and selling futures contracts directly by accessing the market via a broker. Now, you too can access and discover this form of trading with contracts for difference (CFDs), speculating on price movements of index futures.

All major indices have corresponding futures contracts traded in the futures market. The FTSE 100, Dow Jones, S&P 500 and DAX all have futures markets.

Index futures are traded in the same way as all other futures contracts. When you buy or sell the contract, you’ll be negotiating to settle it at a specific price on a predetermined date. With us, you will trade index futures by speculating on whether the price of an index futures contract will rise (known as going long) or fall (known as going short) with financial products called CFDs.

Like other futures markets, index futures are leveraged products, enabling you to open your trading position with a deposit that’s only a fraction of the contract value. This gives you increased market exposure, but it also means that any potential profits or losses will be magnified, as they’re based on the full position size and not just the deposit.

Index futures vs cash indices

While both index futures and cash indices trades make use of derivatives such as CFDs, there are some key differences between the two. Comparing index futures and cash indices will help determine which method of trading is right for you.

Index futures example

Let’s say you wanted to trade the FTSE 100 index using CFDs. If you think that the FTSE 100 is going to increase from 7300.00 to 7905.50 in the next three months, you could decide to buy (go long) two FTSE 100 futures contracts, valued at £5 each. The total value of your position would be £73,000 (a buy price of 7300 x 2 contracts x £5).

CFDs are leveraged, so you’ll put up a deposit (called margin) to open a position. The margin rate for trading futures with CFDs are 5%, so you would only need to put up a margin worth 5% of total value of your futures position – this equals £3650(5% x £73,000). If your prediction is correct, and the price increases to 7905.50, your profit will be calculated as the difference between 7905.50 and 7300.00 multiplied by the two FTSE futures at £5 each. However, if your prediction was incorrect and the price of the FTSE 100 falls to 7100.00 by the end of the three-month period, you’d incur a loss of £2000 (7100 - 7300 x 2 FTSE futures at £5 each).

Remember that both profits and losses are calculated based on 100% of your position value, not your margin amount.

How to trade index futures

1. Know the difference between CFDs and futures

You can use CFDs to speculate on the price of an underlying futures market. All this means is that your futures positions are opened and closed directly in our platform. So, you’ll never need to take delivery of the underlying options but can instead trade with leverage, whether index prices are rising or falling.

You can also use CFDs to trade cash indices, which is called spot trading. This is better suited to day trading.

Find out more about spot trading

Learn about the difference between futures and CFDs

2. Understand leverage

CFDs are leveraged, meaning that you can speculate on the price of index future contracts without needing to buy or sell any physical assets. With leveraged trades, you will use a deposit (called margin) to open a larger position, and have profits and losses calculated based on the full position size. This means any losses or profits incurred can be much greater than the initial deposit.

3. Choose your index

There are various futures markets that can be traded with CFDs. We offer all the world’s major indices for futures trading, including the FTSE 100, Wall Street, the Germany 30 and more. If you choose to trade futures with CFDs, this amounts to over 80 global indices. We also offer competitive spreads – for instance, you can tradethe FTSE 100 for as little as 1 point.

Some indices – like the Germany 40 for example – experience higher volatility than others, and could be better suited to short-term traders, often using spot trading.

4. Decide whether to go long or short

Unlike owning a futures contract outright, trading futures with CFDs means that you can go long or short on an index price. Going long means that you are speculating on the value of a future increasing, and going short means that you are speculating on its value decreasing. If you think that the underlying price of an index will increase, you’ll open a long position.

If you think the underlying index price will fall, you’ll open a short position.

5. Place your first trade and begin trading

To place your first trade, go to our trading platform and select an index. Next, select ‘Futures’ from the drop-down menu next to the index name tab on the price chart, decide whether you want to buy or sell the index, and choose your position size.

Remember to set your stops and limits before placing your trade.

Find out more about stops and limits

6. Monitor and close your position

After you’ve placed your trade, you’ll need to monitor it to monitor whether the markets are behaving in the way that you expected.

You can close the trade to lock in potential profits, or to limit losses if the trade isn’t going as you predicted. To close your trade, select your open position and click on ‘Close’.

Remember, you can close a futures contract trade before its expiry date.

Why do people trade index futures and cash indices?

Take your capital further with leverage

As leveraged products, index futures provide exposure to a market or sector as a whole, for much lower amount, and without having to buy the individual shares. This initial outlay is a fraction of the value of your trade to receive the same profit as in a conventional trade and, because of this, can free up capital that can be committed to other investments. Just remember that trading with leverage means that, while profits can be maximised, losses can be compounded too, as both are calculated on the full position size.

Capitalise on rising and falling prices

Unlike owning an asset outright, trading futures with CFDs means that you can make a profit (or a loss) even if and index’s price drops. You’d simply go long if you believed that the index price will rise and go short if you believed it will fall.

Get better execution with our deep liquidity

The number of trades that we handle every day – coupled with our size, international reach and large client base – means that our futures markets are particularly liquid. This means that if you deal in larger sizes, you’re more likely to have your order filled at your desired price.

Access a huge range of markets

With us, you can trade all the top global indices, including the FTSE 100, Wall Street, the Germany 30 and more. Apart from index futures, you can also speculate on bond futures and commodity futures – all from one centralised account.

Hedge existing exposure

Hedging is the method of opening a position that offsets potential losses in one or more existing trades. A hedging position will be one that moves inversely to the asset you’re holding already. For example, you could open an index futures contract position going short to offset an existing stock position in which you went long, meaning your futures contract would offset any losses in your stock position by making a profit and vice versa.

Footnotes:

¹ Based on revenue excluding FX (published financial statements, June 2020)
² This excludes the 10 hours from 10pm Friday until 8am Saturday (UK time). Only selected indices and the GBP/USD forex pair are available for weekend trading.