A futures trading is an agreement to buy or sell a commodity at a date in the future. Except for its price, everything about a futures contract is standardized. The price for a futures contract is determined in the trading pit or on the electronic trading system of a futures exchange.
Futures trading takes place against a backdrop of statutory regulation and rules as laid down by each exchange and the Commodity Futures Trading Commission (CFTC). Regardless of whether your trading is executed within the trading pit or electronically, it is subject to the same rules, regulations and safeguards.
Listed below are some of the advantages and disadvantages of futures trading
Advantages:
Leverage. Futures operate on margin, meaning that to take a position only a fraction of the total value needs to be available in cash in the trading account.
Liquidity. The involvement of speculators means that futures contracts are reasonably liquid. However, how liquid depends on the actual contract being traded.
Ability to go short. Futures contracts can be sold as easily as they are bought enabling a trader to profit from falling markets as well as rising ones.
Automated trading. Electronic futures brokers offer the facility to programmers to interface directly with their trading software. This means 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.
Disadvantages of futures trading:
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.
Leverage: It can also be disadvantageous asit encourages trading with too high a risk for a particular strategy. A carefully devised money management plan is essential.
One company that enables you undertake futures trading is United Futures. For more information, log on to www.unitedfutures.com.