Online Futures Trading: Advantages and Disadvantages
What is online futures trading?
A futures contract is an agreement to buy or sell a commodity at a future date. Everything about a futures contract is standardized, except its price. All the terms under which the commodity or financial instrument will be transferred are set before active trading begins, so neither party is hampered by ambiguity. The price of a futures contract is determined in the trading pot or in the electronic trading system of a futures exchange.
The Internet now allows access to these e-commerce systems from anywhere in the world. This increases liquidity in those markets and makes them even more attractive to traders.
Trading on all future exchanges is carried out in a context of regulations and legal rules established by each exchange and the Commodity Futures Trading Commission (CFTC). Regardless of whether your trading is executed within the trading pool or electronically, it is subject to the same rules, regulations, and safeguards.
Advantages of online futures trading
To take advantage of. Futures trade on margin, which means that to take a position, only a fraction of the total value must be available in cash in the trading account.
Cost Commission. Electronically traded futures contracts do not require human intervention to match purchases and sales unlike a traditional futures pool. This means that commission costs can be drastically reduced, resulting in significant savings for the frequent trader.
Liquidity. Speculator involvement means that future contracts are reasonably liquid. However, liquidity depends on the actual contract being traded. Electronically traded contracts, such as e-minis, tend to be the most liquid, while pit-traded commodities such as corn, orange juice, etc. are not as readily available to the retailer and are more expensive to negotiate in terms of commission and margin.
Possibility of falling short. Futures contracts can be sold as easily as they are bought, allowing the trader to profit from both falling and rising markets. There is no ‘rule of thumb’, for example, as is the case with stocks.
Without “decay of time”. Options suffer from time deterioration because the closer they get to expiration, the less time there is for the option to enter the money. Futures contracts do not suffer from this, as they do not anticipate a particular strike price at expiration.
Automated trading. Electronic futures brokers offer developers the ability to interact directly with their trading software. This means that custom written trading software can automatically trade a strategy without any human intervention. A system can generate buy / sell signals that are automatically routed to the exchange along with stops and targets.
Almost instant full. With electronically traded futures, there is no need to call a broker and wait for a fill from the trading floor. Orders are instantly placed in the electronic order book and completed as soon as a match is found; for liquid contracts like the emini S & P500, this will be in a second.
Level playing field. With traditional pit-traded futures, the pit professional has a huge advantage over the retailer in terms of speed of execution and costs. E-futures trading offers all participants exactly the same benefits.
Disadvantages of online futures trading
To take advantage of. It can be a disadvantage if you encourage trading at too high a risk for a particular strategy. A carefully designed money management plan is essential.
Over-trade. The instant nature of electronic futures trading, coupled with low commission costs and tight spreads, can encourage a trader to trade in addition to those determined by their trading plan.
Futures trading online offers significant benefits for the retail trader. However, a carefully developed business plan must be formulated before attempting to enter this extremely competitive business.