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When people talk about futures in the stock market, it can sound confusing and technical. But, at a high level, futures are actually one of the simplest ways to understand what might happen next in the market.
Today I’m explaining exactly how futures work and why they’re an important tool for traders to predict market movements.
What Are Futures?
Futures are contracts between buyers and sellers that lock in a price today for something to be delivered later.
You may have heard of commodity futures for things like wheat, oil, or corn, where producers and buyers agree on a set price for delivery months down the line.
But futures aren’t just for goods — they’re also for financial indexes like the S&P 500. Index futures are a way for traders to bet on where the stock market is heading, even after regular trading hours are over.
Why Are Futures Important?
Here’s the key: while the S&P 500 or the Dow Jones Index might stop calculating at the end of the trading day (i.e. 4pm Eastern), futures keep going.
This is important because global markets are constantly moving, especially when major economies like Europe and Asia are awake while we’re sleeping here in the U.S.
Let’s say the European markets tank overnight. By the time we wake up, the futures for U.S. indexes will have already dropped, reflecting the bad news from Europe.
So even though the S&P 500 might not have opened yet, futures would give us an early warning.
Futures: Your Early Indicator
Think of futures as a sneak preview. Instead of waiting until 9:30am Eastern for the U.S. markets to open, futures give you a sense of what’s likely to happen.
Are futures pointing up? Chances are the market will open higher. Are they pointing down? You might brace for a lower open.
Futures don’t tell the whole story, but they give traders a snapshot of market sentiment — the general mood of traders — before the official market opens.
In tomorrow’s article, we’ll explore how futures help bridge the gap between different global markets and the U.S. stock market.
— Geof Smith
P.S. With gold making a major move, you don’t want to jump in just yet. Check out this special session where I’ll show you how to tap into this breakout with my Perfect Gold Trade strategy to target gains from this supercycle without holding physical gold. | | | | |
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