Futures are very popular, especially among day traders as they are utterly devoid of restrictions. You can short sell, buy, or sell futures any time during market hours. You don’t need to maintain a balance of $25,000 in your account to day trade futures, the way you have to while day trading stocks. Moreover, futures are available across multiple asset classes such as indices, currencies, and commodities.
Futures Contracts Defined
A futures contract requires traders and investors to enter and exit trades on a date and at a price determined in advance. You must sell and buy at the predetermined price, irrespective of the current value of the asset at the point of exiting or entering the trade. Futures are identified by their date of expiry. For example, a January crude oil futures contract will expire in January.
You can choose from several varieties of futures contracts:
- Stock index futures
- Commodity futures (wheat, corn, natural gas, and crude oil, among other)
- Precious metal futures (silver, platinum, gold, and others)
- US Treasury futures for financial products such as bonds
- Currency futures (GBP, EUR, and others)
When you trade futures, you will be neither taking ownership of nor distributing the underlying asset. Instead, you will be profiting on the price movement of the asset after you enter the trade. For example, if you purchase a crude oil futures contract for 1.075 only to sell it a few hours later for 1.105, you will be making a profit.
Futures trading is great for long-term traders, day traders, as well as non-traders who are interested in the underlying assets. If you are a farmer, for example, you can sell a futures contract in order to guarantee that you will receive the predetermined price for your farm produce.
Buyers as well as sellers of futures contracts have to fulfil the requirements in the contract. However, futures day traders are not bothered about fulfilling the requirements of the contract because they will be selling the futures contract before its date of expiry. For instance, a day trader who buys ten futures contracts only to sell them later in the day to profit from their price movement does not need to worry about fulfilling the contract requirements.
To put it very simply, futures trading involves entering a contract, in which you are obliged to buy or sell an underlying commodity or asset on a future date for a pre-determined price. As a futures trader, you will be profiting on the accuracy of your predictions on price movements. For example, if your market research reveals that the price of a particular commodity will increase next year, you can enter into a futures contract that will lock in the desired number of shares at their current value.
Futures Trading Pros
The advantages of futures trading are many, and here are some of them:
- Leverage:When you purchase a futures contract, you have to make a down payment, which is a percentage of the total value of the contract. Usually, this percentage is not more than 10%.
This is a huge advantage as it allows you to trade commodities or stocks worth $10,000 by just making a payment of $1000.
- Short Selling:Futures trading is great for short sellers. If you are absolutely sure that the prices of an asset or commodity will skyrocket, you can invest in a sell contract based on a reasonable time frame.
- Diversify Holdings:You can diversify your holdings with futures contracts. For example, if the volatility of an equity you recently purchased worries you, you can retrieve the loss by investing in a futures contract that requires you to sell on a future date at a particular price.
- Low Commissions:The commission for futures trading is much less than the commission for trading bonds or stocks. This gives you the opportunity to enter more trades at a lower commission.
- Highly Liquid:Futures contracts are associated with high liquidity, enabling you to enter and exit multiple futures contracts per day. The high liquidity and trading volume of futures contracts make them ideal for day trading.
Day trading futures contracts is also ideal for traders and investors who get nervous about fulfilling the requirements of a futures contract when it expires.
Futures Trading Cons
However, not everything is rosy for a futures trader. Here are some of the disadvantages of trading futures:
- Leverage:The biggest advantage of futures trading is also its biggest disadvantage. While leverage can boost your profits, it can also increase your losses if you make the wrong prediction.
- Complex Product:Futures contracts can be too complicated for beginners. They incorporate too many details, including delivery options, expiry dates, and so on, and this may be difficult for a newcomer to digest.
- Unpredictability: The future is unpredictable, and traders don’t really have any control over the future. Unpredictable events related to politics, economics, climate, and others can reduce the profitability of a futures contract.
Should You Trade Futures Contracts? Some Tips for Success
Futures trading is a tougher nut to crack that stock trading, but only till you get the hang of it. It is more reliable than other forms of trading, promising great returns and guaranteeing the safety of your investments.
We recommend getting started with futures trading on a demo account, which allows you to master the basics, learn new skills and strategies, and trade futures contracts without risking your own money.
You could also try out the following tips and tricks for futures trading success:
- Create a successful trading strategy and stick to it. Avoid breaking your own rules.
- Minimize the risk of futures trading by using stop limits or implementing hedging strategies.
- Set clear and achievable goals and focus on them. Understand that futures trading is not a “get-rich-quick” scheme.
- Be open to new ideas. Education is an ongoing process; so keep learning new strategies.
- Think independently; avoid following the crowd.
There are plenty of online brokers that offer futures trading. Read multiple broker reviews and research a broker really well before you create an account.
