A futures contract is an agreement to buy or sell a commodity at a date in the future
. Everything about a futures contract is standardized except its price. The price for a futures contract is determined in the trading pit or on the electronic trading system of a futures exchange.
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).
Advantages of online futures trading
Leverage: Futures operate on margin. In simple words, to take a position only a fraction of the total value needs to be available 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. Thus, you can cut down on your commission costs, leading to significant savings for the frequent trader.
Liquidity: Futures trading is 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 whereas the pit traded commodities like corn, orange juice etc are not so readily available to the retail trader and are more expensive to trade in terms of commission and spread.
Automated trading: Electronic futures trading brokers offer the facility to programmers to interface directly with their trading software. A system can make buy/sell signals which are automatically routed to the exchange along with any stops and targets.
Almost instant 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 instantly placed on the electronic order book and filled as soon as a match is found - for liquid contract.
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 essential.
Overtrading: The instant nature 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 significant benefits to the retail trader. However, a carefully developed trading plan must be formulated before attempting to enter this extremely competitive business.