Forex & Futures
Getting Started in Futures
Lofton explains the plumbing of a futures trade better than almost anyone: what the contract actually obligates you to, how a margin call is triggered and what it takes to satisfy it, and what happens if you are still holding when delivery arrives. He never claims to hand you a way to make money, and he does not.
The one idea
A futures contract is a forward contract with an escape hatch bolted on. If you and a neighbor agree today that you will buy his corn in November at a set price, you are both stuck. He can go bankrupt, hail can flatten the field, or he can sell the farm to someone who never agreed to anything. A futures contract fixes all of that by taking away your freedom to negotiate. The exchange decides the grade, the quantity, and the delivery months. On corn at the Chicago Board of Trade that means 5,000 bushels of No. 2 yellow, and delivery only in March, May, July, September or December. Nothing else is on the menu. The only thing left for you to argue about is price.
That forced sameness is what buys you the exit. Because every December corn contract is identical to every other December corn contract, you can cancel yours by selling one, and the clearinghouse will match you with whoever bought that day. You never find your original counterparty and you never ask his permission. At the close of every session the clearinghouse steps in as the buyer to every seller and the seller to every buyer, which is the single mechanism that makes the whole thing liquid. Lofton spends the book building out from that one idea.
The other half of the idea is the money. Futures margin is not a down payment and nothing is borrowed, so you pay no interest on the rest of the contract value. It is a good faith deposit, typically a fraction of one percent to ten percent of what the underlying is worth, and it is why futures look more volatile than they are. Cash cotton moving from 80 to 81 cents is a 1.25 percent move in the cotton. On a 50,000 pound contract with $2,000 of margin posted, it is a 25 percent move in your account. The commodity did not get wild. Your slice of it got thin.
What it actually teaches
This is not a trading system, it is the lifecycle of one futures position from open to close, and Lofton walks it in order.
READ THE CONTRACT SPEC BEFORE ANYTHING ELSE
The exchange fixes grade, quantity, delivery months, minimum tick, and daily price limit. You only supply the price. Learn what one tick is worth in dollars, because that is your real position size, not the margin. In the 5th edition: corn and wheat and soybeans are all 5,000 bushels, a quarter cent tick is $12.50, so one cent is $50. Live cattle is 40,000 pounds at CME, one cent is $400, and because the tick is two and a half cents the last digit of every quoted price is always 0, 2, 5 or 7. COMEX gold is 100 troy ounces, a ten cent tick is $10. CBOT Treasury bonds are $100,000 of par quoted in points and 32nds, so 1/32 is $31.25 and a 14/32 day is $437.50. Japanese yen drops two zeros after the decimal to keep the quote readable, so .7608 is really $.007608 per yen on 12.5 million yen. The S&P 500 in this edition is $250 times the index, meaning a 1484 index is a $371,000 contract.
POST MARGIN AND LEARN THE TWO LEVELS
There are two numbers, original margin and maintenance margin, and beginners confuse them constantly. Original margin is what it takes to open. Maintenance is the floor your equity can drift down to before you get called. Lofton gives 75 percent of original as the common benchmark for where that floor sits, which is edition specific and no longer how exchanges set it. The critical rule: a margin call is triggered at the maintenance level but must be met all the way back up to the original level, and only money above the original level is ever free for you to withdraw. Margin flows down a chain, exchange minimum, then the clearinghouse can ask its members for more, then your broker can ask you for more, and increases are retroactive to positions you already hold. Speculative positions carry the highest margin, hedges the lowest, spreads sit in between.
PICK THE ORDER TYPE ON PURPOSE
Every order carries five things: buy or sell, quantity, delivery month, the commodity plus the exchange if it trades on more than one, and any price or time condition. A market order takes the best price available with no recourse, which is fine in a liquid pit and reckless in a thin one. A limit to buy fills at or below your price, a limit to sell at or above, and either may never fill at all. A market-if-touched turns into a market order the instant your price prints, so you can easily pay worse than the number you named. A stop is the loss-cutter: sell stops rest below the market, buy stops rest above, and it also converts to a market order when hit, so a fast tape can fill you several ticks away. A stop limit protects the fill price at the cost of possibly getting no fill. MOC gets you the closing range, loosely the last 60 seconds. Any order that does not state a time is a day order, and Lofton is blunt that GTC orders are how brokers come back from vacation to find a forgotten stop got triggered.
GET MARKED TO MARKET EVERY SINGLE NIGHT
This is the part that surprises people coming from stocks. Nothing is unrealized overnight. At the end of each session the clearinghouse debits and credits every open position off the settlement price, and any deficit is due before the next morning's open. That flow is called variation margin. Exchanges can also call for it intraday in an emergency, usually due within the hour: on October 19, 1987 the CME made two extraordinary intraday calls on long S&P 500 positions. Daily price limits are measured from the previous settlement and cut both ways. Soybeans in this edition have a 50 cent limit, so a 6.50 close means tomorrow can only trade 6.00 to 7.00, and corn's limit is 20 cents. When a market locks limit, trading can effectively stop because there is nobody on the other side, and exchange rules expand the limit automatically after consecutive limit closes.
EXIT BEFORE THE LAST TRADING DAY, OR MEAN TO DELIVER
The exchange sets a last trading day inside the delivery month. For December CBOT T-bonds it is the seventh business day from the end of December. After that the contract cannot be closed with an offsetting trade: shorts deliver the actual commodity to an exchange-designated point, longs pay in full and take ownership, and cash-settled markets simply exchange the difference. The short starts the process by having his broker file a delivery notice, the clearinghouse assigns it to a clearing member holding a long, and that member assigns it to a customer. On some exchanges the assigned long can duck it by selling new futures and passing the notice along, on others he must accept and pay. Margin also gets raised routinely during the spot month. Note what is missing here: the book never tells you the procedure for rolling a position to the next month.
What it looks like Monday morning
You open the exchange page for whatever you were about to trade and write down four numbers before you place anything: contract size, dollar value of one tick, the daily price limit, and the last trading day. Then you multiply the tick value by a realistic daily range to find out what a normal day costs or pays you. Most people who blow up an account in futures did not have a bad opinion, they had the multiplier wrong, and the whole first half of this book is really an argument that the multiplier is the trade.
The second thing you do is stop treating your account balance as one number. Split it into original margin, maintenance level, and the cushion above original, because only that top slice is actually yours to touch. Then put a calendar reminder a week ahead of first notice day on any physically delivered contract you hold, since the book will not tell you to do that and your broker's liquidation desk will do it for you at a price you did not choose.
| Day | Gold price | Equity | What happens |
|---|---|---|---|
| 1 | 383.00 | $2,700 | Buy one contract. Original margin $2,700, maintenance level $2,100. |
| 2 | 379.00 | $2,300 | Equity eroded but still above the maintenance level. Nothing owed. |
| 3 | 374.50 | $1,850 | Below $2,100. Call issued for $850, the amount needed to restore the full $2,700. |
| 4 | 384.10 | $3,660 | Call met that morning, then the price rallies. $960 is now above original margin and withdrawable. |
| 5 | 393.90 | $4,640 | $1,940 above original margin, free to take in cash or use to margin another position. |
| 6 | 390.70 | $3,320 | You withdraw $1,000 in the morning, then the price slips back. |
| 7 | 384.20 | $2,670 | Below original margin but still above maintenance, so no action is required. |
| 8 | 385.70 | $2,820 | Close the position out at the end of the day. |
You put in $3,550 and took out $3,820, a gain of $270, which is simply the 2.70 price move times 100 ounces. The table's real lesson is that the call fires at the maintenance level but must be met back to the original level, and only money above the original level was ever yours to spend.
If you take money out of the futures markets, it's not coming out of thin air; you're taking it from another player.Todd Lofton, Getting Started in Futures
Where it fails
- The marquee chapter of this edition covers a product that no longer exists. Lofton's preface tells readers drawn by single-stock futures to read Chapter 13 first, and Appendices E and F list every underlying stock on OneChicago and LIFFE CONNECT. OneChicago shut down in September 2020. The book itself already reports that NASDAQ-LIFFE suspended trading on December 17, 2004, which should have been the warning. Worse, one of the two advantages the chapter claims for single-stock futures over stock is that futures shorts are exempt from the uptick rule. The SEC scrapped the uptick rule in July 2007. So the chapter's headline argument died three years after publication and the product died thirteen years after that.
- Rollover, the thing beginners actually get wrong, is not in the book. The word rollover does not appear. There is no explanation of first notice day, no description of how you move a position from the expiring month to the next one, and no warning that most retail brokers will force-liquidate you out of a physically delivered contract before delivery whether you like it or not. The only sentence on the subject is buried in Chapter 11's advice on selecting a delivery month for a hedge. The book also never uses the words contango or backwardation, preferring its own carrying charge and inverted, so a reader will not recognize the concepts when he meets them everywhere else. Nor does it explain that the smooth continuous price chart he is staring at has an artificial gap at every roll.
- The trading floor the book is built around is gone, and so is the order handling that went with it. Chapter 8 describes open outcry as the default and floor brokers versus floor traders as the cast. Chapter 19 notes only that electronic volume at CME and CBOT passed the halfway mark in early 2004. CME closed nearly all of its open outcry futures pits on July 2, 2015 and the remaining Chicago and New York floors in 2020 and 2021. That takes out the floor broker's discretion to work a spread order, the description of orders reaching a hand-held device in the pit, and the loosely defined 60 second closing range for MOC. It also guts Chapter 19's argument that phoning a human broker gives you a useful buffer because he might talk you out of the trade. Nobody is on the other end of that call anymore.
- Every contract spec in Chapter 17 needs re-checking, and the one contract a beginner most needs is missing. Micro E-mini futures did not exist in 2005 and are absent, but they launched in May 2019 and are now the obvious starting size for exactly the reader this book targets. The full-size $250 times index S&P 500 that Lofton uses for his worked examples has been superseded by the E-mini and the Micro. Pork bellies, which get a full spec page, were delisted in 2011. The exchange abbreviations he lists on the chapter's first page are mostly dead entities: CBOT merged into CME Group in 2007, NYMEX and COMEX were acquired in 2008, NYBOT became ICE Futures U.S. in 2007, KCBT was bought by CME Group in 2012. All the margin dollar figures ($2,700 and $2,100 on gold, $1,500 on copper, $2,000 on cotton, $2,500 on soybeans) are illustrative of 2005 and should be read as arithmetic, not as amounts.
- Two of the ten brokers the book names by name later lost customer money. Chapter 19's direct-access list includes PFG Direct at pfgbest.com and Lind-Waldock. Peregrine Financial Group collapsed in July 2012 when its founder confessed to roughly twenty years of fraud and a shortfall of about $215 million in customer funds. Lind-Waldock's book ended up inside MF Global, which failed in October 2011 with roughly $1.6 billion of segregated customer money missing. Chapter 8 reassures the reader that his funds sit in a segregated account and that clearinghouse guaranty deposits mean no public customer loses money on a member default. That reassurance failed twice within seven years of publication, and the industry's response, daily segregated funds reporting and direct electronic bank confirmations, exists precisely because the protections this book describes were not enough.
- There is no method here, and the money management chapter is six maxims. Chapter 14 tells you to cut losses short, diversify, have a plan, keep your own counsel, use money you can afford to lose, stay calm, and never average down. The entire position sizing framework is 'decide beforehand how much loss you will accept, say $500.' There is no percent-of-equity rule, no volatility-based sizing, no expectancy math. The one honest signpost is that he lists Ralph Vince's Mathematics of Money Management in the further reading, which is where the actual math lives. Chapter 10 on technical analysis is trendlines, support, resistance and a 3-day moving average, with weighted averages and stochastics exiled to appendices. And the sole piece of evidence in the whole book on whether speculators actually win is Hieronymus's study of 462 accounts at one brokerage during 1969, which Lofton concedes is 35 years old and waves through on the grounds that human nature has not changed.
- The rules chapter is out of date in both directions, including on tax. Chapter 12 describes interest-rate swaps, equity swaps, currency swaps and structured notes as unregulated. Dodd-Frank in 2010 pulled most standardized swaps under CFTC and SEC oversight and pushed them into central clearing. Chapter 16 says the CFTC sets speculative position limits on several agricultural markets and the exchanges set the rest, which the CFTC's 2020 federal position limits rule for 25 core referenced contracts has largely rewritten. Most conspicuously, the tax section covers year-end mark to market but never mentions Section 1256 or the 60/40 split that treats 60 percent of futures gains as long term regardless of holding period. That was law from 1981, twenty-four years before this edition, and for a U.S. retail trader it is the single biggest tax fact about the asset class.
Who it is for
Buy it if
You are about to place a first futures trade, or you already trade stocks and cannot say out loud what a futures margin call actually is or how it differs from a Reg T call. It also lands for a small business owner with a real input cost to hedge who needs the vocabulary before he picks up the phone. Read chapters 6, 7 and 8, ignore the price levels, and verify every contract spec against the exchange's own page.
Skip it if
Skip it if you want a way to make money. There is no system, no position sizing past 'name a dollar amount you can lose', and nothing backtested. Skip it too if you have traded futures for even a year, because you learned all of this from your first three fills and your first margin call, and the parts you did not learn that way (rollover, micro contracts, electronic order routing) are the parts this book does not have.
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