The post Pros and Cons of Futures Trading by Anna Yen appeared first on Benzinga. Visit Benzinga to get more great content like this.
Futures trading can offer the experienced investor amplified returns on investment. Traders who can tolerate risk can trade futures to grow their wealth. Futures traders traditionally use generously leveraged positions, allowing greater exposure to the market than their capital would otherwise allow. Highly leveraged positions allow traders to maximize profit. It also exposes them to a higher risk of loss.
Investing in futures comes with benefits and drawbacks. Read on the learn more about the risk and rewards of trading futures.
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What is Futures Trading?
Futures trading is an investment strategy that involves buying and selling contracts for future delivery of a commodity, security or currency at a predetermined price. It is a highly speculative form of trading and can be used to speculate on the direction of markets, hedge against risk or as part of one’s portfolio diversification strategy.
To trade futures, investors purchase contracts that represent a certain quantity and quality of the underlying asset at a predetermined price on a specified future date. The contract does not involve ownership, but rather, an agreement to buy or sell the asset on that date. Futures contracts are traded on exchanges such as the Chicago Mercantile Exchange (CME).
Benefits of Futures Investing
Futures investing offers opportunities for profit in a diversified investment portfolio.
Leverage
Futures contracts give traders exposure to a large amount of a commodity or financial instrument with a relatively small amount of capital. Traders can leverage futures trades by up to 90%, meaning they can open much larger positions than they could with their own capital. The profit potential of a leveraged position is amplified, but so are the risks, so futures traders must have a risk management plan in place.
Liquidity
Futures markets are highly liquid. Traders can quickly enter and exit trades. High trade volumes allow futures traders to concentrate on the timing for the best returns. Futures markets are also transparent and well-regulated.
A Hedge Against Price Changes
In industries where price changes are frequent, futures trading offers traders insurance against price changes. Farmers sell their products ahead of the harvest to ensure they get their needed price when the harvest is ready for sale. Farmers only receive the proceeds when the crops are delivered, but the futures contract protects them from price changes.
Risk Mitigation
Forward contracts are commonly seen in foreign currency purchases by businesses that operate across international borders. Cross-border trade exposes companies to the risk of exchange rate losses. Such companies avoid the risk by buying forward contracts, pinning the price at the current exchange rate.
Diversification
Futures contracts for a vast range of financial assets, from commodities to currencies, are traded on the futures market. This practice allows traders to diversify their futures portfolios to reduce risk. Traders use advanced trading strategies to identify price discrepancies in closely related products, taking simultaneous long and short positions to offset the losses on one contract against the profits on another.
Low Barriers to Entry
Flexible contract sizes mean that you don’t need vast sums of money to start your futures investment journey. Transaction fees are also low at between $0.25 and $1.00. Traders can make many trades each day without incurring hefty fees. It is also easy to access the futures markets using investment apps or trading platforms.
Drawbacks of Futures Investing
Like most investments, futures investments have potential disadvantages.
High Risk
Traders have no control over what happens in the future. Political instability, economic meltdowns and natural disasters can quickly affect the price of commodities and cause large, unexpected losses. Leverage can amplify these losses, so traders should be aware of the potential risks involved.
Complexity
Futures trading can be complex and successful traders must have extensive market knowledge. Markets are open around the clock, and trading can take a lot of time. Successful traders must stay abreast of global changes and track price trends to maximize profits. Many traders close their positions in their futures portfolio at the end of the day to avoid overnight losses.
Volatility
Futures markets can be highly volatile, making it difficult to predict price movements and manage risk. Volatility is the degree to which processes move around an average. Price volatility in the futures market is caused by issues that influence the prices of the underlying assets.
Leverage and Margin Calls
Leverage works both ways. It offers traders an opportunity to maximize profits on their futures portfolio, but it also amplifies losses. Traders who lose money must pay it back. Losses may be more painful for traders accustomed to the higher maintenance margin of 25% to 40% of stocks. Futures contracts may require as little as a 3% maintenance margin.
When the value of a trader’s account falls below a certain level, the broker will issue a margin call. A margin call requires the trader to deposit additional funds into the account or close out positions. Check your broker’s margin requirements before trading.
Expiration Dates
All futures contracts have an end date, otherwise known as the expiration date. It is the last day on which the contract is valid. As the expiration date approaches, futures contracts often become less attractive. Toward the end, the futures contract may lose all of its worth.
Futures May not Have SIPC Insurance
The Securities Investor Protection Corporation (SIPC), insuring most brokered investments, doesn’t insure for a loss in value for futures contracts. It also doesn’t cover most commodity futures.
Open a Futures Trading Account Today
If you’re evaluating your long-term investment strategies, you’ll want to consider all your options and weigh the pros and cons. Benzinga’s insights and reviews can help you make the best choices to fulfill your long-term financial objectives. Explore futures brokers to make informed choices that suit your risk tolerance, market knowledge and budget.
NinjaTrader is a powerful derivatives trading platform specializing in futures, forex and options. The platform has a number of unique trading tools. A free version does exist without the extra goodies provided by Trader + and OrderFlow + but users can still break down charts, backtest strategies and trade without upfront payment. NinjaTrader hosts its own brokerage services but users have their choice of several different brokerage options. Accounts have minimums depending on the securities traded and commissions vary depending on the version of the platform. Advanced derivatives traders will have endless fun with the platform’s mighty array of tools and analyzers.
The free version, which is included with all brokerage accounts is a great starting platform for new traders without the financial commitment. As you grow in your trading and are ready for more tools and functionality, you can add more complexity.
Best For
- Futures Traders
- Traders looking for 24/7 action
- Advanced Traders
- Powerful analysis tools
- Free download and simulated trading
- Open source trading apps to enhance experience
- Can only trade derivatives like futures and options
Discount trading is a no thrills futures trading broker that offers a multitude of options available to start trading. Low commissions, no inactivity fees, and powerful platforms to start trading.
Best For
- High volume / High frequency futures day traders
- Futures investors looking for the lowest futures margins
- Traders needing ultra-low commission rates
- Traders looking for great customer service and fast account opening
- Ultra-low commission rates ($0.49 or less)
- $500 (or less) Day Trading Margin on most markets
- No monthly inactivity fee
- Five different trade routing solutions
- Over 20 of the most popular platforms in the industry
- A completely free trading platform that includes free Level 1 Streaming Futures Quotes ● Support team that answers phone calls quickly
- Tough to find the best platform for your needs, due to the sheer number of options available
- Geared for traders with at least some experience trading the futures markets
Tickmill is an award-winning, multi-regulated investment firm offering trading in a plethora of asset classes including, CFDs in forex, precious metals, indices, stocks, commodities, cryptocurrencies and bonds.
Apart from offering various platforms, Tickmill caters to traders of all levels by providing competitive pricing, leverage up to 1:500 depending on the entity and client classification, dedicated support, exclusive market analysis and a wide array of trading tools and education. This low-spread broker offers fast execution, several payment methods and no restrictions on trading strategies such as hedging or scalping.
Futures and Options are offered with Direct Market Access across multiple globally regulated Futures exchanges including CME, CBOT, NYMEX, COMEX, EUREX, ICE Futures Europe and more. Real Futures include Stocks, Indices, Forex, Metals, Cryptos and Energies like the Micro E-Mini S&P 500, Micro E-Mini Nasdaq 100 and Micro Bitcoin Futures.
Future and Options are offered with probably the lowest fees and transparent commission structures in the industry, ultra-low latency, and seamless trading solutions for high volume trading with reliable, flawless order routing underpinned by advanced technologies.
Tickmill has become a trusted market-leading broker because of its commitment to seeking regulations in several jurisdictions. Traders have access to forex, stocks, commodities, cryptocurrency and bond markets as well as Futures and Options.
Free educational content and advanced tools are available for novice and experienced traders to help them enhance their trading strategies and achieve their trading goals.
The 20+ awards received are a testament to Tickmill’s commitment to providing optimal trading conditions for retail and institutional clients. Besides offering low spreads and fast execution, Tickmill ensures no trading restrictions, access to CFDs and occasionally runs campaigns (under Tickmill Ltd) to reward traders for their loyalty and activities.
Best For
- Forex, stocks, commodities, precious metals, bonds and crypto with competitive conditions
- Futures & Options trading with probably the lowest fees in the industry
- Retail and institutional clients
- Traders seeking various platforms and accounts
- Beginners wanting free trading tools and educational material
- Traders incorporating advanced tools and algorithm systems
- Strongly regulated broker
- Swap-free accounts available
- Enables access to various markets and asset classes
- Fast execution speed in milliseconds
- Crypto trading available 24/7 with 0 Commissions, 0 Swaps
- Deposits and withdrawals in BTC, ETH and USDT
- Free educational content
- Negative balance protection
- Mobile app available for account management
- User-friendly client area
- Free demo accounts
- Live chat is unavailable on weekends
Interactive Brokers is a comprehensive trading platform that gives you access to a massive range of securities at affordable prices. You can buy assets from all around the world from the comfort of your home or office with access to over 150 global markets. Options, futures, forex and fund trading are also available, and most traders won’t pay a commission on any purchase or sale.
IBKR is geared primarily toward experienced traders and investors but now with the availability of free trades with IBKR Lite, casual traders can also acclimate to IBKR’s offerings.
Best For
- Futures traders
- Trading futures 24/7
- Sophisticated investors
- Access to international markets
- Buy & sell futures at lowest commission rates
- Hedge positions or act on price movements in 150 financial markets worldwide
- Trade futures side by side on a single screen w/ substitute asset classes in stocks, bonds, options
- Beginner investors might prefer a broker that offers a bit more hand-holding and educational resources
Optimus Futures is a leading discount futures broker offering highly customized trading solutions geared towards cost-conscious retail traders with an eye for technology and personal service. Customers gain access to premium tools at no additional cost such as depth-of-market surface, footprint charting, and real-time news alerts along with a fully integrated trading journal.
Users can register a trial version of their software to take a test-drive of the platform, unlocking many of the analysis and charting features including unlimited simulated trades. Traders can also leverage Optimus Futures 3rd party app integration, allowing you to choose the futures trading platform best suited for you.
Best For
- Low account minimums, commissions, and margins
- Futures & micro futures traders
- Beginner futures traders
- Unlimited simulated trading
- Low day trading margins
- Highly experienced and competent technical support
- Customizable data fees and order clearing
- Limited to derivatives trading like futures
- The selection of data feeds and clearing firms can be overwhelming for newer traders
Start Investing in Your Future
When it comes to investing in futures, there are both pros and cons. On the plus side, futures trading can be a great way to take advantage of price movements in the market, as well as leverage your investments. Additionally, since futures contracts are standardized and highly regulated, they can be a relatively safe way to invest compared to other forms of speculation.
On the downside, however, futures trading is a highly complex and risky form of investing, so it should only be done with experienced investors who have the necessary knowledge and expertise. Since futures contracts are leveraged investments, investors can suffer significant losses if they are not careful. All in all, the pros and cons of futures investing depend on an individual’s goals and risk tolerance.
Frequently Asked Questions
What are the weaknesses of futures trading?
Futures trading has several weaknesses, including the trader’s inability to know what will happen in the future and the possibility of steep losses, amplified by high leverage.
Are futures profitable?
Futures are profitable for traders who understand how the markets work and who put in place automated, predetermined limits to ensure that they don’t exit the market too late, making unacceptable losses.
Do futures traders make money?
Yes, investors who trade futures can make money with the right knowledge and investing strategy.
The post Pros and Cons of Futures Trading by Anna Yen appeared first on Benzinga. Visit Benzinga to get more great content like this.
