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Online Futures Trading – Pros and Cons

2019-04-11 Investing No comment

What is online futures trading?

A futures contract is an agreement to buy or sell goods at a certain date in the future. Except for the price, everything about futures contracts is standardized. All terms of the transfer of goods or financial instruments are established before the active transaction begins, so neither party is hindered by ambiguity. The price of a futures contract is determined in the electronic trading system of the trading floor or futures exchange.

The Internet now allows access to these electronic trading systems from anywhere in the world. This increases the liquidity of these markets and makes them more attractive to traders.

All futures exchange transactions are conducted in the context of statutory regulations and rules established by each exchange and the Commodity Futures Trading Commission [CFTC]. Whether your transaction is executed on the trading floor or electronically, you must follow the same rules, regulations and safeguards.

Advantages of online futures trading

lever. Futures operate in the form of margins, which means that only a small portion of the total value needs to be obtained in cash in the trading account.

Commission cost. Electronic trading futures contracts do not require human intervention to match buy and sell, unlike traditional futures pits. This means that commission costs can be drastically reduced, resulting in significant cost savings for frequent traders.

fluidity. The participation of speculators means that futures contracts have reasonable liquidity. However, how liquidity depends on the actual contract of the transaction. Electronic trading contracts, such as electronic mini-contracts, are often the most liquid, while commodities traded by traders like corn and orange juice are not as easy to acquire as retailers, and transaction costs are higher. Entrusted and disseminated.

Can be short. Futures contracts can be sold as easily as buying, allowing traders to profit from falling markets and rising markets. There is no "rising rule" ' for example, there are stocks.

No ' time decay '. Options are affected by time because the closer they are to expiration, the less time they choose to enter the currency. Futures contracts are not affected by this because they do not have a specific execution price expected to expire.

Automatic trading. Electronic futures brokers provide programmers with the convenience of directly interfacing with their trading software. This means that custom written trading software can automate trading strategies without any human intervention. The system can make buy/sell signals that are automatically routed to the exchange and any stop loss and target.

Filled almost instantly. By electronic trading futures, there is no need to call a broker and wait for the filling of the trading floor. Orders are placed immediately in the electronic order book and filled out as soon as a match is found – for liquid contracts, such as the emini S&P500, this will be done in one second.

Fair playing field. For traditional on-exchange futures, professionals in the pit have a significant advantage over retail traders in terms of speed and cost of execution. Electronic futures trading offers exactly the same advantages for all participants.

Disadvantages of online futures trading

lever. If it encourages a transaction with a high risk of a particular strategy, it can be a disadvantage. A well-designed money management plan is essential.

Over-trading. The immediate nature of electronic futures trading combined with low commission costs and low spreads can encourage traders to make additional trades on transactions determined by their trading plans.

Online futures trading offers significant benefits to retailers. However, before attempting to enter this highly competitive business, a well-defined trading plan must be developed.

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