Derivatives Part I:
Futures & Prop Trading

1.1 A standard promise

A futures contract is an agreement to buy or sell a set amount of something at a price agreed today, with the exchange of money and goods happening on a set future date. The thing being traded is called the underlying. It might be a stock index, crude oil, gold or a currency.

Futures began as a tool for businesses. A farmer wants to lock in a selling price before harvest. A bakery wants to lock in a buying price for wheat. Each side agrees a price now so that neither is surprised later. Speculators, including retail traders, take the other side of these agreements. They are not trying to own wheat or oil. They are trying to profit from the price moving.

The key idea is standardisation. Every contract of the same type is identical: same size, same quality, same expiry date, same rules. Because all ES contracts for one month are interchangeable, buyers and sellers can find each other quickly, and the price you see is the price for a known product. An exchange (for example CME Group in the United States) runs the market, and a clearing house stands between every buyer and seller so each side only has to trust the clearing house.

1.2 Reading a contract code

Each contract has a code made of three parts: the root symbol for the product, a month letter, and a year digit. Take ESZ6. ES is the E-mini S&P 500. Z is the month, December. 6 is the year, 2026. So ESZ6 is the E-mini S&P 500 contract that expires in December 2026.

The month letters are fixed by the industry. Equity index futures such as ES and NQ expire only in four months: March, June, September and December. They are called the quarterly cycle. Other markets, such as crude oil, have a contract for almost every month.

A chart labelled ES1! on TradingView is a stitched series of the front (nearest) contract, so it is a convenient chart but not a single tradable contract. When you place an order, you must pick a specific month, such as ESZ6 or ESH7 (March 2027). Picking the wrong month is a common beginner slip, so read the code before every order.

1.3 Settlement and why most close or roll

Settlement is what happens when a contract reaches its expiry. There are two kinds. With cash settlement, no goods change hands. The exchange compares your entry price to a final settlement price and moves the difference in cash. ES and NQ are cash settled. With physical settlement, the real thing is delivered. Crude oil (CL) and gold (GC) are physically settled, which means an unclosed position near expiry can lead to a delivery process that a retail account is not set up for.

Most brokers protect you from this. They set a deadline well before expiry and may close your position automatically, sometimes with a fee, and they can do so at a price you would not choose. The practical rule for retail traders is simple: do not carry a position into expiry unless you have read your broker's rules and fully understand them.

That is why most retail traders either close the position before expiry or roll it. Rolling means closing the expiring contract and opening the same position in the next month. Lesson 4 covers roll week in detail. For now, remember that every futures position has a clock on it, and the clock is the expiry date.

Hypothetical example: you buy 1 ES at 5,000.00 and later sell it at 5,010.00. The move is 10 points. Each ES point is worth $50, so the gross result is 10 x $50 = $500 before fees. Nothing was delivered and you never needed to wait for expiry. You simply closed the trade. That is how the great majority of retail futures trades end.

2.1 Ticks, points and dollars

Prices on a futures market move in fixed steps. The smallest step is the tick. The tick size is how far price moves in one tick, and the tick value is how many dollars one tick is worth for one contract. A point is a bigger unit, usually a whole number on the price, and the point value is the dollars per point.

For ES the tick size is 0.25 index points and the tick value is $12.50. There are four ticks in a point, so the point value is 4 x $12.50 = $50. If ES moves from 5,000.00 to 5,001.00, that is 4 ticks, or one point, and one contract gains or loses $50.

Always check the official contract specification on the exchange website before you trade. Specs can change, and the numbers below are the ones this guide uses for teaching.

Notice that the micros are one tenth the size of their full-size cousins. MES is one tenth of ES, and MNQ is one tenth of NQ. That makes micros a way to take smaller risk while you learn.

2.2 Worked tick maths

The method is the same for every market: move in ticks x tick value x number of contracts. Here are four hypothetical examples. All prices are made up for teaching.

Hypothetical example, ES: a long position moves from 5,000.00 to 5,007.50. That is 7.50 points, or 7.50 / 0.25 = 30 ticks. 30 x $12.50 = $375. Check by points: 7.5 x $50 = $375.

Hypothetical example, MNQ: price falls 20 points against a long position. 20 / 0.25 = 80 ticks. 80 x $0.50 = $40 per contract. With 3 contracts the loss is 3 x $40 = $120. Check by points: 20 x $2 = $40.

Hypothetical example, CL: crude moves 0.35 against you. 0.35 / 0.01 = 35 ticks. 35 x $10 = $350 per contract. A move of a full dollar in crude is 100 ticks, or $1,000. Oil is a fast market for its size.

Hypothetical example, GC: gold rises 5.00. 5.00 / 0.10 = 50 ticks. 50 x $10 = $500 per contract. Check by points: 5 x $100 = $500.

2.3 Notional value, and a skipped trade

Notional value is the full value of what the contract controls: price x point value. Hypothetical example: if ES is at 5,000, one contract controls 5,000 x $50 = $250,000 of index exposure. One MES controls 5,000 x $5 = $25,000. If NQ is at 18,000, one contract controls 18,000 x $20 = $360,000, and one MNQ controls $36,000. A crude contract at $70 controls 70 x $1,000 = $70,000.

Notional value matters because your profit and loss follow the full amount, not the small deposit you put down. Lesson 3 covers that deposit. Here, just notice that a single contract can control a very large number.

Hypothetical example (skipped trade): your account is $5,000 and your plan risks 1%, which is $50. You spot a setup on MES with a stop 12 points away. 12 points = 48 ticks. 48 x $1.25 = $60 for one contract. Because $60 is more than your $50 limit, even one contract breaks the plan. A trader who follows the plan skips the trade or finds a tighter, still logical stop. Taking one contract anyway and calling it close enough is how risk rules quietly break.

3.1 Margin is a deposit, not a down payment

Margin in futures is a good-faith deposit. It is not a loan to buy the contract and it is not a fee. It is money set aside in your account to show you can cover losses. The amount is a small slice of the contract's notional value, which is why futures are called a leveraged product.

Initial margin is the amount needed to open a position and hold it overnight. Maintenance margin is the minimum balance you must keep while the position is open. If your account equity falls below maintenance margin, you may get a margin call, a demand to add money or reduce the position. Brokers can also close positions without asking.

Many brokers also offer day-trade margin (also called intraday margin). It is a much lower requirement that applies only if you close the position before the session ends. It varies a lot by broker, and brokers can change it, even raise it quickly in fast markets. The exchange sets the base requirement and the broker may ask for more. Always read your own broker's current margin page.

The numbers in this lesson are hypothetical. Do not treat them as current requirements.

3.2 Leverage works in both directions

Leverage means a small amount of money controls a large position. Hypothetical example: ES is at 5,000, so one contract has a notional value of $250,000. Suppose initial margin is $12,000. Leverage is about $250,000 / $12,000 = 20.8 to 1.

Now watch what a 1% move does. 1% of 5,000 is 50 points. 50 points x $50 = $2,500. If your account holds $15,000, a 1% market move equals $2,500 / $15,000 = 16.7% of your account. The same arithmetic works for gains and for losses. Leverage does not change the odds. It changes the size of the swing.

Hypothetical example (margin call): you have $15,000 and hold 1 ES. Suppose maintenance margin is $11,000. Price falls 90 points. 90 x $50 = $4,500 loss. Your equity is now $15,000 - $4,500 = $10,500, which is below $11,000. You may receive a margin call, or the broker may close the trade for you, locking in the loss.

3.3 Losing more than you deposited

In futures it is possible to lose more than the money in your account. This is the point many beginners miss. If the market gaps, jumps past your stop, or trades with no buyers, your loss can exceed your balance and you may owe the broker the difference.

Hypothetical example: a $5,000 account holds 1 ES over a news event. Price gaps 150 points against the position. 150 x $50 = $7,500. The account goes to $5,000 - $7,500 = -$2,500. The trader owes $2,500, and the stop order did not help because price jumped over it. A stop is not a promise of a price. A gap is the exact moment it cannot be.

A small account with a full-size contract is the easiest way to end up here. The cure is not clever stops. It is smaller size. Tie your size to a fixed fraction of the account, such as the 1% teaching guideline from Supplement 5 (Psychology & Risk Management). With a $15,000 account, 1% is $150. A hypothetical MES stop of 30 points is 30 x $5 = $150 per contract. So the plan allows 1 MES. Compare that to 1 ES at the same stop: 30 x $50 = $1,500, which is 10% of the account and ten times the plan.

Notice that margin is not part of the sizing formula. Your margin tells you what the broker allows. Your risk rule tells you what you should allow yourself. They are different numbers, and the second one is usually much smaller.

4.1 The nearly 24-hour day

Equity index futures trade on an electronic platform that is open almost around the clock from Sunday evening to Friday afternoon. Stocks, by contrast, trade mainly from 9:30 am to 4:00 pm Eastern Time (ET). That daytime window is called the regular session or regular trading hours (RTH). The rest of the time is the overnight or extended session.

The most commonly quoted schedule for CME equity index futures is a one-hour daily maintenance break in the late afternoon, around 5:00 pm to 6:00 pm ET, when trading pauses. Check the CME Group website for the current times, because holidays and special days change the schedule.

Liquidity changes through the day. Liquidity means how easily you can buy or sell without moving the price. Overnight, fewer orders are in the market, so the gap between the best bid and ask can widen, and prices can jump on thin trading. Some traders prefer the regular session for that reason. This is a feature of the market, not a rule.

4.2 Roll week

Because each contract expires, the market must move its trading to the next month. This happens gradually. For equity index futures, many traders move from the expiring contract to the next one about a week or so before expiry. In those days, trading volume (how many contracts change hands) falls in the old contract and rises in the new one. The period is often called roll week.

The front month is the nearest expiry. As volume shifts, the next month becomes the most active one. Most traders follow the contract with the most volume, since that is where the tightest spreads and easiest fills are. Check the volume of both contracts in your platform before you decide.

To roll a position you sell the old contract and buy the new one, or the reverse for a short. The two prices are not identical. The difference is the calendar spread. Hypothetical example: you are long 1 ESZ6 and ESZ6 trades at 5,000.00 while ESH7 trades at 5,030.00. You close ESZ6 at 5,000.00 and buy ESH7 at 5,030.00. Your chart now shows a 30-point jump that is not a market move. It is the difference between two contracts. Continuous charts such as ES1! handle this by stitching, which is why they can show gaps at the roll.

Hypothetical example (skipped roll): you hold 1 CL into the last days before expiry. Your plan was to close the trade, but the position has a profit and you do not want to exit. The broker's rule says positions must be closed or rolled by a set time or they will be liquidated. You decide to skip the extra hold, close it and re-enter in the next month only if the setup is still valid. Following the broker's deadline over your wish to keep a winner is the plan working.

4.3 The calendar, limits and halts

Scheduled economic releases can move futures sharply. In the United States, many traders mark the 8:30 am ET reports such as the monthly jobs report (usually the first Friday of the month) and the consumer price index (CPI), and the Federal Reserve's interest-rate announcements, usually at 2:00 pm ET. Right before and after a release, spreads can widen and price can move fast in both directions. Some traders reduce size or stay out around them. That is a choice, not a rule.

Exchanges also put brakes on extreme moves. A price limit is a boundary, set relative to the prior day's settlement price, beyond which the exchange does not allow trades. In plain terms: when price touches the limit, trading continues only at or inside it, and a halt pauses trading for a short time. Equity index futures also follow market-wide circuit breakers linked to big drops in the S&P 500. The exact levels and rules change, so read the exchange's current rules.

What does this mean for you? If a market is limit-locked or halted, you may not be able to exit at all until trading resumes. Your loss can continue to grow while you are locked in. That is another reason to size positions small.

5.1 What an evaluation is

A proprietary trading firm (prop firm) is a company that lets people trade its rules-based accounts. In the retail futures world, the usual model is an evaluation (sometimes called a challenge or combine). You pay a fee. You trade a simulated account under a set of rules. If you meet the goals and follow every rule, you may be offered a funded account, which is a trading account on which you may earn a share of the profits.

This lesson is strictly educational. It does not name, rank or recommend any firm. Rules differ by firm, and they change often, so everything below is a general description, not a promise about any particular product. Also, most participants do not pass an evaluation, and many who do pass lose the funded account later. Treat the fee as money you may not get back.

The money in an evaluation is often simulated. The fee is real. Your results on a simulated account may also differ from live trading, because simulated fills can be better than real ones.

5.2 How the numbers work

Take a hypothetical $50,000 evaluation with a $3,000 profit target, a $2,000 trailing drawdown and a $1,000 daily loss limit. These numbers are made up for teaching.

Hypothetical example, trailing drawdown: you start at $50,000, so your floor is $50,000 - $2,000 = $48,000. You trade well and the balance rises to $51,000. The trailing floor rises with it to $51,000 - $2,000 = $49,000. Later the balance falls back to $49,000 and the account is breached, even though it is still $1,000 above where you began. In many programs the trail follows your highest equity including open trades, so a trade that was up $800 and gave it back can still move the floor. Always check whether the trail uses intraday equity or end-of-day balance.

Hypothetical example, consistency rule: suppose the rule is that no single day may be more than 30% of total profit. You reach $3,000 profit, but one day made $1,500. $1,500 / $3,000 = 50%, so you do not pass yet. You would need more profit on other days. If total profit becomes $5,000, then $1,500 / $5,000 = 30%, which meets the limit.

Hypothetical example, fees: an entry fee of $150 and two resets at $100 each totals $150 + $200 = $350 before you have earned anything. If a payout split is 90/10 and you withdraw $2,000 of profit, you receive 90% x $2,000 = $1,800. Whether fees ever pay back depends entirely on passing and surviving, and you cannot know that in advance.

5.3 Why people fail, and how to read the rules

The common causes are not mysterious. People oversize to hit the target quickly, so a normal losing streak breaks the drawdown. They trade after a loss to win it back. They misunderstand the trailing rule and treat it as a fixed floor. They break a small rule they never read, such as a time restriction or a limit on contracts. And they feel the fee pressure, which pushes them to take trades they would otherwise skip.

A better route is to read the rules like a contract before paying. Look for: whether the drawdown is trailing or fixed and when it stops trailing; whether it counts open profit; the daily loss limit and whether it is a pause or a fail; the maximum contracts allowed; restrictions around news events and holding overnight; the consistency rule and how it is calculated; fees for resets and monthly charges; payout minimums, schedule and split; and what happens to your funded account if rules change.

Hypothetical example (skipped): a trader reads a program and finds that the trailing drawdown counts open profit, the daily limit fails the account (it does not just pause it), and the account is only $2,000 of room on a $50,000 balance. The trader's tested plan risks about $400 per trade on ES. Two losing trades in a row would use 40% of the drawdown. The trader decides the structure does not fit their method and does not pay. Walking away is a valid result of reading the rules.

Finally, remember that a prop firm account is a business arrangement, not a source of income you are owed. Treat any marketing claim, including about pass rates, payouts or time to pass, with caution. Ask for the written rules, and keep a copy dated the day you read them, since rules can change.

5.1 Three layers, three questions

When you combine several tools, the screen gets crowded. A framework keeps you organised. This one has three layers. Each layer asks one question, and you need an answer to all three before a set-up is even worth studying.

The layers go in this order on purpose. Location comes first because a pattern in the middle of nowhere tells you little. Context comes second. The footprint trigger comes last because it is the most detailed, and the easiest to over-read.

The same framework works on any market and any timeframe. The only requirement is that each layer has a definition you wrote down earlier. If you cannot say what would make a layer score 0, 1 or 2, the layer is too vague to be useful and you should tighten it before using it.

5.2 A sample scorecard (illustrative)

A scorecard turns the layers into a quick check. The one below is an illustrative example of the idea. It is not a tested system, and its numbers are not recommendations. Build your own, and test it on a demo account before relying on it.

Three gates sit on top of the scorecard in this example. Gate 1: every layer must score at least 1. Gate 2: the total must be at least 5 out of 6. Gate 3: the distance to the first target must be at least 2 times the distance to the stop. If any gate fails, the answer is to skip.

Gate 3 uses the idea of 'R'. One R is the amount you risk on a trade, measured by the stop distance. If your stop is 10 ticks away and your first target is 30 ticks away, the reward is 3R. On ES, 1 point is $50 and 1 tick (0.25 points) is $12.50, so a 10-tick stop is $125 of risk per contract. Lesson 8 uses this arithmetic.

Three points on the scorecard itself. First, it is deliberately small so you can complete it in under a minute. Second, the 5-out-of-6 threshold is an example. You may choose a different one, but choose it before you start. Third, the scorecard says nothing about outcomes; a high score does not make a trade win. It only measures whether your own conditions were met.

5.3 Seeing Where and Why on a real day

The chart shows how the first two layers might be filled in. Where: the prior day's VAL at 7,762.00. Why: price opened below it, so the open was outside the prior day's value. Whether you would have had a valid trade depends on the third layer, and no footprint exists for this day in our data. A framework that cannot be completed is a framework that says skip.

It also shows an important point: a plan is a set of questions, not a prediction. Having the three layers on paper before the open means you react to evidence rather than invent a story afterwards.

6.1 The pre-market page

Professionals in many fields use checklists. A trader's version is a one-page routine done before the session starts. Writing it down matters because plans made in your head change when price moves.

1. Note the date, the market, and any scheduled news times in your time zone.
2. Write yesterday's value area (VAL, POC, VAH) and the prior high and low.
3. Note where the market is trading relative to those levels and relative to overnight highs and lows.
4. Write your Where levels for today, and one sentence of Why for each.
5. Write what footprint evidence you would need to see (the When) and what would make you skip.
6. Write your maximum risk per trade in dollars, and the maximum loss for the day at which you stop.

Step 6 is about discipline. Decide the loss limit while calm. If you reach it, you stop for the day. Having a number written down makes that easier.

Keep the page short. If it takes more than ten minutes, you will skip it on busy mornings. A single sheet with a few boxes to fill in is enough. Many traders print a template and fill it by hand, because writing slows you down in a useful way.

6.2 The decision flow

Each step is a gate. Most of the time the flow ends in 'wait' or 'skip'. That is normal and intended. Many beginners feel they must trade every session. A written flow makes 'no trade today' a legitimate outcome.

To make the flow your own, change the questions to match your levels and tools, but keep the structure: a series of yes/no gates with a default of 'wait'. If you notice that you override the flow often, that is useful information. Either the flow is wrong, or you are not following it. Both are worth knowing, and a written record lets you find out which.

6.3 Managing the trade after entry

Once in a trade, the plan should already say what you do next. A common idea is to move the stop to breakeven (your entry price) after price has moved in your favour. Moving a stop to breakeven reduces risk but does not remove it. Price can gap through a stop, and fills can be worse than the stop price (slippage). Commissions and fees also apply. So even a breakeven stop can finish with a small loss.

Another cost of tight breakeven stops is that normal noise can stop you out before the idea has had time to play out. Whether to use one is a choice, and you should test the effect on a demo account first.

At the end of the day, add a short review: What did I plan? What did I do? What did I skip? Did I follow the gates? Reviewing process, not profit and loss, is how the routine improves.

7.1 What you need for each guide

This lesson is dated as of November 2026. Prices, plans and features change often, so verify current details yourself before you pay for anything. The tools named are examples only. They are not endorsements.

A quick note on the Obtainable tools: TradingView's free tier offers delayed or limited data for futures in some cases, and exchange data fees are separate from the platform subscription. When a platform lists a low monthly price, check whether CME data is included, because it often is not. Add the data fee to the platform fee to find the real cost.

7.2 Data quality and costs

Real-time data and historical tick data are different things. To study footprint patterns afterwards, you need tick history stored in your platform. Some platforms store it for you; others only store it while the chart is open. Check this before you rely on a back-test or a review.

Delayed data is cheaper or free but not suitable for live decisions. A 10-minute delay in a footprint is not only late, it can mislead you about what is happening now. Another cost is your own time: a platform with many features takes a while to learn, and you are more likely to over-trade with an unfamiliar tool.

A sensible approach is to start free (a TradingView chart of ES1! with volume profile and VWAP covers Guides 1, 2 and half of this one), practise on demo, and only pay for footprint data when you have a specific question you cannot answer without it. Keep a note of what you are paying each month and what it has taught you.

Another point is how you will review your work. A platform that lets you replay a day tick by tick, or that exports your trade log, makes weekly review much easier. Ask whether the tool can replay footprint data from past days. Practising on past days, with the answer hidden, is one of the cheapest ways to learn.

7.3 Disclosure

White Feather Finance does not currently include affiliate links in these guides. If any link is ever added that pays us a commission, we will say so next to the link. Nothing in this series is an endorsement of a product, broker or data vendor. Choose tools on their features, costs and fit for you, and compare more than one.

One more point on risk: trading futures involves substantial risk of loss and is not suitable for everyone. Using a demo account first costs nothing but time, and is the safest way to find out whether a tool and an idea suit you.

Finally, keep a simple record of what each tool costs and what you used it for each month. If a paid feature has not helped you answer a question in three months, cancel it. Spending less while you learn is a form of risk control, and it leaves more of your capital for the trading itself.

8.1 Read this first

All three cases below are hypothetical. The prices, levels and footprint numbers are invented to practise the process. They are not real trades, not real results and not recommendations. Real trading involves substantial risk of loss, and results vary. The cases use the same scorecard and gates as Lesson 5 (every layer at least 1, total at least 5 of 6, target at least 2x the stop).

Arithmetic reminder for ES: 1 point = $50 and 1 tick (0.25 points) = $12.50, so 1 point = 4 ticks. Dollar figures are per contract and ignore commissions.

8.2 Case 1 (hypothetical): a win

Hypothetical example. Where: the prior day's VAL is 7,700.00 (invented). Price drops to test it from above at the open. Why: the market opened inside the prior value area, and VWAP is flat, which looks like a balanced day. When: heavy sell volume prints at 7,699.00 to 7,699.50 but price cannot make a lower low, which is consistent with absorption (heavy volume, no progress). The next bar turns delta positive.

Scorecard: Where 2, Why 1, When 2 = 5. All layers are at least 1, and the total is 5. Entry: buy at 7,701.00 after the confirmation bar. Stop: 7,698.50, which is 0.50 points below the absorbed low at 7,699.00. Stop distance: 7,701.00 - 7,698.50 = 2.50 points = 10 ticks = $125 risk. First target: the flat VWAP at 7,708.50. Target distance: 7.50 points = 30 ticks = $375. Reward to risk: 30 / 10 = 3.0R, so Gate 3 passes.

Result in this invented story: price reaches 7,708.50 and the trade is closed there. Gross gain: +7.50 points = +$375 = +3.0R, before commissions. One winning example proves nothing about the method. It only shows the arithmetic.

8.3 Case 2 (hypothetical): a loss that followed the rules

Hypothetical example. Where: the prior day's VAH is 7,725.00 (invented). Why: price opened inside value; the day looks balanced. When: price pushes to 7,725.00 and the footprint below shows volume drying up at the top, a thin tip, which is consistent with exhaustion.

Scorecard: Where 2, Why 1, When 2 = 5. Entry: sell short at 7,723.50 after the follow-up bar. Stop: 7,726.00, which is 1.00 point above the 7,725.00 high, where buy stops of shorts and of breakout buyers may rest (long stops would sit below a low, not here). Stop distance: 7,726.00 - 7,723.50 = 2.50 points = 10 ticks = $125 risk. First target: 7,716.00, which is 7.50 points = 30 ticks = $375 = 3.0R. Gates 1, 2 and 3 all pass.

Result in this invented story: price pushes through the high and the stop fills one tick worse than planned, at 7,726.25 (slippage). Actual loss: 7,726.25 - 7,723.50 = 2.75 points = 11 ticks = $137.50, which is 1.1R. The rules were followed and the trade still lost. A loss like this is an expected cost of a process. The useful review question is not 'why did I lose?' but 'did I follow the gates and the risk limit?' Here the answer is yes.

8.4 Case 3 (hypothetical): a skipped trade

Hypothetical example. Price rallies on a day like the trend day above and reaches the prior day's VAH at 7,740.00 (invented). Where scores 2: a marked level. Why scores 0: price has stayed on one side of VWAP all session, and VWAP slope is steeply up, so the context argues against the idea of a reversal. When scores 1: a small ask imbalance but no clear exhaustion. Total: 2 + 0 + 1 = 3.

Gate 1 fails (Why is 0) and Gate 2 fails (3 is under 5). Gate 3 would also fail: a short at 7,742.00 with a stop at 7,744.50 risks 2.50 points = 10 ticks = $125, but the nearest target at 7,740.00 is only 2.00 points = 8 ticks = $100 away, which is 0.8R, under the 2R minimum.

The decision is to skip. What price does next does not change whether the skip followed the rules. A skipped trade that would have won is still a correct skip, and a skipped trade that would have lost is not proof of skill. Record it in your log with the three scores and move on.