How to Speak the Language of Futures Trading
If you’re going to trade futures, you have to know trader talk. Here are some key terms that will help you find your way around the market:
Going long: You’re bullish, or positive on the market, and you want to buy something. When you say I’m long oil, in the context of futures trading, it means that you own oil futures.
Being short: You’re bearish, or negative on the market, and your goal is to make money when the price of the futures contract that you choose to short falls in price.
Locals: The people in the trading pits. They’re usually among the first to react to news and other events that affect the markets.
Front month: The futures contract month nearest to expiration. This time frame may not always feature the most widely quoted futures contract. As one contract expires, the next contract in line becomes the front month.
Orders: Instructions that lead to the completion of a trade. They can be placed in a variety of ways, including the following:
A stop-loss order means that you want to limit your losses at or above a certain price. A stop-loss order becomes a market order to buy or sell at the prevailing market price after the market touches the stop price, or the price at which you’ve instructed the broker to sell. A buy stop is placed above the market price. A sell stop is placed below the market price.
A market order means that you’ll take the prevailing price the market has to offer.
A trailing stop is a self-adjusting stop order. When you place a trailing stop, it changes automatically depending on the price of the underlying asset.
Hedging: A trading technique used to manage risk. It may mean that you’re setting up a trade that can go either way, and you want to be prepared for whichever way the market breaks.
The pit: Where all futures contracts are traded during a regular-hours trading session in the futures markets.
Speculators: Traders (usually small- to medium-sized) who are trying to make money only from the fluctuation of prices without intending to take delivery of the contract.
Floor brokers: Agents (generally futures commission merchants) who receive a commission to buy and sell futures contracts for their clients.
Bid: The highest price a buyer is willing to pay.
Offer: The lowest price a seller is willing to accept.
Taking delivery: Taking the product on which you were speculating.
Supply-and-demand equation: Trader talk referring to whether buyers outnumber sellers. When there are more sellers than buyers, the equation tilts toward supply, and vice versa.
Expiration: The date at which a contract expires, or is no longer trading.
Delivery: What futures contracts are all about — someone actually delivering or handing something to someone else in exchange for money.