Futures Trading Strategies: Leverage, Rolls, and Diversification

How futures actually work

A futures contract is a standardised agreement to buy or sell a specific quantity of an asset at a specified future date. You do not pay the contract value; you post margin, a good-faith deposit typically 3 to 10 percent of notional, and the position is marked to market daily with cash moving between accounts each day.

Expiry, rolling, and the curve

Every contract expires. To maintain exposure you close the expiring contract and open the next one, which is called rolling. The cost or benefit depends on the relationship between contract months.

Contango

Further-dated contracts trade above nearer ones. Rolling a long position means selling low and buying high, producing a persistent negative roll yield. Common in markets with storage costs.

Backwardation

Further-dated contracts trade below nearer ones. Rolling a long position produces a positive roll yield. Common when immediate supply is scarce.

Roll window

The period, usually a few days before expiry, when liquidity migrates to the next contract. Rolling outside this window means trading in a thinner book.

Continuous contract

A stitched price series used for backtesting. Back-adjusted, ratio-adjusted, and unadjusted versions produce different historical prices and can change results materially.

Cash settlement versus physical delivery

Index and rate futures settle in cash; many commodity futures require physical delivery, which retail traders must avoid by closing or rolling before first notice day.

Strategies that suit futures

Position sizing in futures

Contracts = (Risk% x Equity) / (Stop distance in points x Point value)

Example: 50,000 account, 0.5% risk = 250 USD
  Micro S&P (MES), point value 5 USD
  Stop distance = 2 x ATR(20) = 2 x 45 = 90 points
  Contracts = 250 / (90 x 5) = 0.55  ->  round DOWN to 0

The correct response is not to round up to 1.  It is to recognise
that this stop distance and this account size do not permit the
trade at 0.5% risk.  Either use a closer stop that the strategy
supports, or accept fewer opportunities.

That example is the central discipline of futures trading. The contract size is fixed, so at small account sizes a single contract may represent more risk than your rules allow. Rounding up "just this once" is how leveraged accounts fail. Micro contracts exist precisely to make correct sizing possible at smaller capital levels.

Practical considerations

• Margin can change without notice. Exchanges raise requirements during volatility, precisely when your position is already under pressure.
• Overnight margin is higher than intraday margin. Brokers offering low day-trading margin will liquidate positions held into the close if the account cannot support overnight requirements.
• Limit moves halt trading. Some markets stop trading after a defined move, meaning you cannot exit at any price until the next session.
• Sessions and settlement conventions differ. Daily bars depend on which settlement your data uses, and the difference affects signals.
• Tax treatment can differ from equities. In the United States, certain contracts receive blended long and short-term treatment. Check your jurisdiction rather than assuming.
• Avoid delivery. For physically settled commodities, close or roll before first notice day. Retail accounts are not set up to take delivery of crude oil.