Futures: Part I 🗣🆑️Ⓜ️7️⃣
Is trading a foreign language?
Welcome to the Grain Trading Crash Course (GTCC). This is a free course presented by GrainStats.com for anyone who is interested in the grain markets. Whether you’re a seasoned pro or a newbie, there is something for you in this course. Feel free to share the knowledge gained from this series and pass it along to your students, friends, family, and co-workers.
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Remember that scene in The Matrix?🎞️
It was just before midnight in Chicago when several traders arrived at the office. Listening to their Apple iPods and dressed in shorts, t-shirts, and baseball caps, these mid-20 year olds appeared as if they were going to catch a baseball game at Wrigley Field. Instead, the traders were getting prepared to play in an even bigger game at the Chicago Board of Trade.
“Why isn’t our position balancing?”
“What’s the PnL (Profit and Loss)? Check the trading statements!”
“What did the head trader say? Should we be adding or reducing risk?”
These were just some of the questions being posed by the more experienced traders to the junior traders before the start of the overnight trade. If errors or hesitations were made in answering the question or requests, the experienced traders would get aggravated and berate the junior staff. If the junior traders made enough errors or failed to correct their way of thinking about risk management, they were often let go from the firm within the first several months.
It was a sink or swim mentality at this particular firm and most participants realized they weren’t cut out for professional trading early on in their career. I myself had doubts during this time as a junior trader. I could answer most questions as they were posed to me, but I didn’t fully understand my answers. Trading was still very foreign to me and I needed some guidance.
It was that same night that I voiced my concern to one of the experienced traders. He offered to let me stay into the early morning hours of the night and observe him trade. While he was trading that night, he would interject from time to time about what he was trying to accomplish with the positioning of his portfolio. I don’t recall most of what he was talking about because it felt like he was speaking a foreign language to me. My mind could not process the trading terminology, contract terms, and the overall trader mindset.
The trader started to realize this and when a quiet moment in the market came up he posed me a question:
Ever seen the movie, “The Matrix”?
I responded by telling him I was a big fan of the movie and had seen it at least a dozen times. But what did it have to do with trading?
The trader instructed me to pull up YouTube in my browser on the non-trading PC beside me and pull up the following clip below.👇🏻 (YouTube Link)
Neo: Do you always look at it encoded?
Cypher: Well you have to. The image translators work for the construct program. But there’s way too much information to decode the Matrix. You get used to it. I…I don’t even see the code. All I see is blonde, brunette, red-head.
The trader started relating this clip to the futures market. He explained to me that after participating in the markets for several years, his mind would essentially decrypt and translate whatever he’d see on his trading monitors without even thinking.
The trader then started pointing his finger at various points of his six monitor trading setup and translating everything he saw in real-time.
U7-Z7? Sep Dec Spread!
VWAP? Volume Weighted Average Price!
+40z? Forty over the Dec!
ZWU7? Sep Wheat!
OHLC? Open, High, Low, Close!
OND? Oct Nov Dec!
H7M7Z7? March - June - Dec Butterfly!
It was at that point I began to realize that trading was a foreign language and I needed to brush up on the lingo if I wanted to be successful in this business. I then thanked the trader for his time and took the subway home at 3am thinking about our conversation that night.
The next few days before, during, and after work, I started to quiz myself on various trading terms. I wrote futures symbols and contract codes out on a sheet of paper and began memorizing them and thereafter engaged in speed runs using flash cards in a similar capacity. I developed two goals for myself. The first goal was to mentally translate the trading terminology as fast as possible, without error. The second goal was to become deeply proficient in what the terms meant, because anyone can translate, but not everyone can be fluent.
It took some time, but things began to click after a couple weeks. Months later, it became natural to read futures quotes and translate them instantly. I definitely was not as fast as the trader who mentored me, but I definitely was headed in the right direction.
Looking back to that night +15 years ago, I have realized of all the languages I have attempted to learn in my life - Spanish, French, Russian - the one that I became fluent in was trading. All it took was that initial advice and analogy from The Matrix to wrap my head around it. So to answer the rhetorical question posed by the article subtitle, yes, trading is a foreign language, and within trading, futures trading is one of those dialects that traders must become fluent in to understand the grain markets.
Futures: Part I
Grain Futures 🌾
As we mentioned in our earlier lesson, Where does food come from? , the major grain and oilseed production of the world is centered around the following commodities: Corn (Maize), Wheat, Rice, Soybeans, and Rapeseed (Canola). Because of their sheer size, multiple uses (food, feed, energy), and importance in the supply chain, the prices of these commodities are widely watched by end users, producers, and everyone in the middle (merchants, traders, governments, economists, investors). To better help participants manage the price risk of these commodities, futures contracts were developed.
Futures contracts help participants hedge pricing exposure of physical grain by providing standardized contract terms where price risk can be transferred from buyers to sellers without having to physically deliver the grain itself.
Pictured below are the various grain and oilseeds that futures contracts have been developed for.👇🏻
It should be apparent that the futures contracts listed above match nearly perfectly with the largest grains and oilseeds produced in the world. Not only that, but futures contracts based on the products created from oilseeds have also been developed (soybean oil, soybean meal).
Pro Tip: If you plan on starting a career in grain trading, the above mentioned futures contracts are likely the only contracts you will ever trade. We’re not saying there won’t be any new futures contracts developed, but it is highly unlikely that any new grain or oilseed futures contracts will debut and reach the success of the above mentioned contracts.
Translating Grain Futures 🗣️
Grain contracts on futures exchanges have been assigned trading symbols, which are typically a two or three letter combination to describe the contract. For example, ZC stands for Corn, which trades on the Chicago Board of Trade (CME Group).
Below are several other contracts that trade on the Chicago Board of Trade (CME Group) and other exchanges including the Intercontinental Exchange (ICE) and the Minneapolis Grain Exchange (MGEX).
To differentiate between delivery months, we now introduce futures month codes as presented below.
You might be wondering, why do we need monthly futures codes?
Monthly futures codes are necessary as grain futures contracts are based on physical grain in the form of a warehouse receipt or shipping certificate for a certain delivery month in a certain delivery location as per the rules of that contract. Essentially, it’s a way of differentiating between the delivery months that you wish to trade or hedge your grain in. (more on this topic in Futures: Part II)
For example, it is February and corn farmers are hedging the price risk of their grain using futures. If they are hedging using the nearby March (H) Corn futures contract, it is for the crop that has already been harvested in the year prior. To hedge their next crop (new crop) that has yet to be planted, farmers should utilize the December (Z) futures contracts to hedge their grain effectively.
Not only are monthly codes important in distinguishing futures contracts, so are the year identifiers. This is extremely intuitive and requires no translation. All you have to do is add the year to the contract to identify it.
Now you have all the major components necessary to translate a futures contract - the trading symbol, futures month code, and year. Below are examples of various futures contracts and how they are translated into plain English.
As you can imagine, you are probably agreeing with me by now that trading is a foreign language and this may take some time to learn, especially for those unfamiliar with futures. Never fear, this is a journey and not a sprint. With enough patience and practice, all of this will become second nature with time.
Futures Calendar 🗓️
Although futures month codes represent each of the twelve months, not all grain futures delivery months are available for every contract. Below is a graphic detailing which delivery months are available per contract listed. Note the contracts that are flashing - these contracts denote where the trade hedges the majority of “new crop” production.
Pro Tip: Note the abbreviated calendar months. Traders utilize as much shorthand abbreviations as possible when describing futures contracts and months. (e.g. “Nov Beans” or “Jan Meal” ).
By the way, “Dec” is not pronounced “Deck”.
Where Futures Trade 🌐
Grain and oilseed futures (including vegetable oil and feed) are available for trading from the following exchanges.
For the purposes of this course, we will focus mainly on North American futures exchanges as they are the most developed futures markets of the world.
Please see the links below that will take you to the exchange websites where you can learn more about the contracts that are available to trade.
North America -
Contracts Specifics 📚
All futures contracts have specific standardized contract terms and rules associated with them. Below are a couple of attributes of several grain futures contracts traders should be aware of.
The underlying quantity determines how much grain or oilseed is backing one futures contract.
For example, one futures contract of Corn is the equivalent of 5,000 bushels. If Corn futures are trading at $5.00 per bushel then the notional value of that futures contract is worth $25,000 ($5.00 * 5,000).
The table below presents a quick recap of the various underlying quantities for grain and oilseed futures contracts.
The tick size determines the minimum price fluctuation of a contract.
For example, Corn futures are currently $5.00 per bushel. At a minimum, Corn futures can move up or down a quarter of a cent (1/4 cent or $0.0025) to $5.0025 or $4.9975.
The minimum price fluctuation can be translated into a dollar value by multiplying the underlying quantity by the minimum tick size ($0.0025 * 5,000 = $12.50 per contract.)
There are many more attributes of futures contracts that can be found in the rulebooks of futures exchanges websites. In the next lesson of this course we will go over several advanced attributes including margin, futures delivery, and price limits (limit moves).
This concludes Futures: Part I of the Grain Trading Crash Course. In the next lesson we will continue explaining much more advanced topics regarding futures that rely heavily on this lesson. Topics will include futures spreads, the futures delivery system, and an introduction to cash markets.
We hope you enjoyed this lesson of the Grain Trading Crash Course. Remember to subscribe and leave a comment below if you enjoy the content we are providing to the community. Thank you! 🤠
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Just ripped thru the first two lessons on this blog - I can't tell you how grateful I am to have found this information.
I am a grain producer in Alberta myself, and also work a day job as an agricultural account manager for an Ag financial institution. I can tell you that in the "white collar" portion of my ag career (Ag accountant turned Ag banker), that the piece that sets the "great" producers apart from the "okay" producers from a financial standpoint, is their knowledge of grain markets and how to properly market and hedge their production.
I am glued to my email inbox awaiting the next installation into this series. If you have any additional resources to recommend I am all ears and eager to learn.
Thank you - sincerely - again :)
What I always asked myself: how do these crazy codes for the months come about? F-G-H-J-K-M...
Have the inventors here perhaps had too much "liquid cereal" 🥃🤪🥴 ? Or has one fallen back on some Mesopotamian (homeland of the primeval grain) alphabet 🧞♂️ ?