The Benefits of Futures Trading
The Benefits of Futures Trading
When it comes to trading different asset classes, I get more questions about the Futures markets than any other set of markets. This is because many people hear from others how great these markets are for short and long-term trading but know very little about them. In my opinion, these are the greatest trading markets in the world. They have many benefits that other asset classes don't and I will bullet those points for you here.
Benefits of the Futures markets:
- No $25,000 minimum day trading requirement like you have in Equities
- Plenty of leverage, low margin requirements
- Most futures markets have available around-the-clock trading
- Low commissions
- Only set of markets in the world where you have true non-correlated / diverse opportunity, which is key for managing risk
- No overnight gap risk like you have in Equities
- Huge volume, 24 hour Electronic trading
- 60/40 Long term capital gains tax treatment
How do you trade Futures?
To answer this question, let's look at a trade right out of the Extended Learning Track (XLT) - Futures Trading class.
S&P E-mini, XLT Trade ñ Friday August 13, 2010
During our trading and analysis XLT sessions, we identify support (demand) and resistance (supply) levels. These are price levels where the chart is telling us there is either more willing demand than supply, or more willing supply than demand. This is exactly where we want to enter our trades as the risk is lowest, reward is highest, and the probability of the trade working is strongest. In the S&P E-mini here, we identified a supply level before the U.S. stock market opened. Once the market opened, I waited for price to rally up to that level where I was interested in taking a short position. I was simply selling to someone who was buying after a rally in price and at a price level where the chart was telling us supply exceeded demand. In other words, I was selling short to a novice buyer. Futures trading is a zero sum game. The traders that know what they are doing get paid from those who don't. The demand level below was the profit target area for the short position. When you sell short in Futures, you simply push the button. There never was an "uptick" rule. These trades are done electronically. When you trade the S&P (E-mini), for example, you are trading it on the Globex system which is the Chicago Mercantile Exchange's electronic order matching system.
What about margin and leverage?
Often, when I mention the words Futures and leverage together, people want to run because they think it's very high risk. That is not true at all. If you use and adhere to your protective stops, the Futures become one of the lower risk asset classes for two reasons. First, the huge volume in the Futures markets we trade means very little slippage compared to other asset classes. Second, most of the Futures markets we trade are open close to 24 hours a day, which means your overnight gap risk does not exist like it does in some other asset classes.
Online Trading Academy offers its students global opportunity when it comes to short-term and longer term speculating in Futures markets. This means true diversification. Most investors have their portfolio split between equities and bonds. What most people don't realize is that there are two major problems with this approach. First, no matter how diversified the equity portion of your portfolio is, global equity markets typically move in the same direction. Instead of diversifying across global equity markets based on supply and demand (proper market timing) to decrease portfolio risk, this approach actually increases risk, but most investors never realize this until it's too late. This type of investing also requires global equity markets to increase in value for the investment to appreciate. Once again, this is high risk investing as markets can decline for long periods of time such as Japan's multi-year equity meltdown not long ago. The ideal market speculator (short-term trader or longer term investor) diversifies based on objective risk and reward and speculates in non-correlated markets, which offers clients true diversification and constant low risk / high reward opportunity.
Being a Futures trader and a Futures XLT lead instructor, one of the most enjoyable aspects of my daily routine is scanning the global markets with students for the low risk / high reward opportunities we require for trading. We focus on pure supply and demand as seen in the price action (candles) alone. We don't have different strategies for different markets or different market environments. We simply apply one high probability strategy across global semi-nonñcorrelated markets, which means identifying a supply and demand imbalance wherever it is around the globe. Students understand that their job as an active trader is not to wake up each morning and trade; it's to wake up each morning and apply our rules to look for low risk, high reward, and high probability trading opportunities. When we find them, we take rule-based action and trade. When we don't, we don't trade. We always have a mix of day trades and swing trades as well as longer term position trades when they arise. We move from country to country and continent to continent with the push of a button, searching for our picture of low risk, high reward, and high probability trading opportunity and it is truly a fun experience.
When I began trading from home many years ago, I was amazed at the fact that I had the ability to trade the global markets from my fingertips. These days, it's even more amazing as new markets have come on the scene. Volumes are huge, commissions are low, and the playing fields are more level than they have ever been, and so on. It's great to be a trader.
Below are some (but not all) of the markets we learn about, analyze, and trade in the Futures XLT:
With our focus on quantifying supply and demand across global markets and a team of XLT students scanning for imbalances (opportunity), it is really amazing where globalization has taken us. The XLT program is for those who are serious about attaining an edge in the markets. Much like the XLT, the Futures markets are only for serious traders. They are certainly not complicated markets to trade. In many ways, they are structured in a very simple way with few yet important rules and regulations compared to other asset classes. Whatever market you are trading, make sure you first and foremost learn how to trade. Each time you push the button to buy or sell, there is someone on the other side of your trade trying to take your hard-earned money. On the trade above, I made a profit of $1,142.50. This money was made because of an edge that allows the student and I to get paid from those who don't have an edge. It would be great if everyone could profit in trading all the time, but that's not how the world works, unfortunately.
If you have more questions about the Futures markets, much more information can be obtained by either emailing me, taking an Online Trading Academy E-mini Futures or Commodity Futures course, joining the Extended Learning Track (XLT) - Futures program, and/or spending time on the Chicago Mercantile Exchange's website: www.cmegroup.com. This piece was not in any way intended to suggest that trading is easy. The rules and logic behind our core strategy are very simple. However, "doing it" is not easy as proper trading can be emotionally challenging to the average person at first. The key to overcoming this is a strategy that is based on a mechanical set of objective rules.
Have a great day.
- Sam Seiden"
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