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 date in the future. Everything about a futures contract is uniform except its price. All of the terms under which the commodity or financial instrument is to be transferred are established before active trading begins, so neither side is hampered by ambiguity. The price for a futures contract is determined in the trading pit or on the electronic trading system of a futures exchange.
The internet now allows access to those electronic trading systems from anywhere in the world. This increases liquidity in those markets and makes them already more attractive to traders.
Trading on all futures exchanges takes place against a backdrop of statutory regulation and rules as laid down by each exchange and the Commodity Futures Trading Commission (CFTC). in spite of of whether your trading is executed within the trading pit or electronically, it is unprotected to the same rules, regulations and safeguards.
Advantages of online futures trading
Leverage. Futures function on margin, meaning that to take a position only a fraction of the total value needs to be obtainable in cash in the trading account.
Commission Costs. Electronically traded futures contracts require no human intervention to match buys and sells unlike a traditional futures pit. This method that commission costs can be cut dramatically, leading to meaningful savings for the frequent trader.
Liquidity. The involvement of speculators method that futures contracts are reasonably liquid. However, how liquid depends on the actual contract being traded. Electronically traded contracts, such as the e-mini’s tend to be the most liquid while the pit traded commodities like corn, orange juice etc are not so freely obtainable to the retail trader and are more expensive to trade in terms of commission and spread.
Ability to go short. Futures contracts can be sold as easily as they are bought enabling a trader to profit from falling markets in addition as rising ones. There is no ‘uptick rule’ for example like there is with stocks.
No ‘Time Decay’. Options suffer from time decay because the closer they come to expiry the less time there is for the option to come into the money. Futures contracts do not suffer from this as they are not anticipating a particular strike price at expiry.
Automated trading. Electronic futures brokers offer the facility to programmers to interface directly with their trading software. This method that custom written trading software can automatically trade a strategy without any human intervention at all. A system can make buy/sell signals which are automatically routed to the exchange along with any stops and targets.
Almost moment fills. With electronically traded futures there is no need to call up a broker and wait for a fill from the trading floor. Orders are immediately placed on the electronic order book and filled as soon as a match is found – for liquid contracts such as the emini S&P500 this will be within a second.
Level playing field. With traditional pit traded futures the specialized in the pit has a major advantage over the retail trader in terms of speed of execution and costs. Electronic futures trading offers all participants exactly the same advantages.
Disadvantages of online futures trading
Leverage. Can be a disadvantage if it encourages trading with too high a risk for a particular strategy. A carefully devised money management plan is basic.
Overtrading. The moment character of electronic futures trading coupled with low commission costs and tight spreads can encourage a trader to take additional trades to those determined by their trading plan.
Online futures trading offers meaningful benefits to the retail trader. However, a carefully developed trading plan must be formulated before attempting to go into this extremely competitive business.