Day Trading Tips and Tricks

July 9, 2019

Erich Senft

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11 Things You Might Not Know About Trading Futures

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Okay, so you’ve heard of the Futures markets, but if you’re like most Stock Traders, you think that the Futures markets are like some dangerous financial animal best avoided. You’ve heard the stories. You know; the one about the guy who knows the guy who wiped himself out trading Futures?

Yes, it is possible to clean yourself out trading Futures, but not any more likely than doing the same thing in the Stock Market. Stock traders do themselves a disservice by not looking more closely at the Futures markets. You see, Futures are the ultimate investment vehicle. Massive rates of return, endless trading possibilities, and superb liquidity are only a few of the benefits of trading Futures.

So if you’ve ever been curious about what makes Futures better than Stocks, read on to find out 11 things you may not have known about the Futures markets.

1. Futures are Less Volatile than Stocks

What? That can’t be right, can it? Yes, it’s true. Unbeknownst to Stock traders, the stock market is more volatile than the Futures markets. Oh, sure, there can be some “monster moves” in Futures, known as limit moves, but dollar for dollar, the Stock market presents a greater risk regarding market volatility.

2. Futures Trades are Easier to Find

What do I mean by “easy”? I am saying you don’t have to scan 40,000+ stocks to find a good market to trade. There are less than 50 major Futures markets and but you don’t even need to watch all those. If you scan a dozen markets, you’ll have more trades than you can take. I know professional traders that make an excellent living watching only three markets.

3. Leverage is Your Friend

No doubt the Futures horror story you heard told you about the evils of leverage in Futures. Unlike Stocks which you have to pay in full to trade, Futures can be bought on margin. Trading futures means you only have to put up a deposit to control a much larger value of the particular commodity. Futures trading also means that your Return on Investment is huge when compared to the Return on Stocks.

4. Futures Can’t be Manipulated

If leverage is the evil side of Futures, then stock manipulation is the skeleton in Wall Street’s closet.  Of course, no one is going to manipulate the big DOW company stocks, but there are a lot of stocks that get “hyped” and overvalued only to leave the small investor holding the bag. This situation is virtually impossible to do in Futures as Futures represent real physical goods which have a real inherent value.

5. Futures are Cheaper to Trade

Futures are more cost-effective because of leverage. Trading Futures is an excellent way to get more bang for your buck. Imagine controlling $160,000 worth of Gold for only $9000 or how about $39,000 worth of Corn for only $2700? How is that possible?

Well, the Futures Exchange only requires you to put up enough Margin to control a contract, and once you manage the contract, you just need to keep a lower Maintenance amount in your account to maintain control of the contract. By trading Margin, you can free up much of your valuable trading capital for other opportunities.

6. Futures Can Be Traded by the Small Spec Trader

Let’s face it; stocks can be expensive to trade. Yes, I know there are Penny Stocks, but trading those can be a bit like tip-toeing through a minefield.  But in Futures, there are markets for every budget – and all with good liquidity. Don’t have a lot of money to trade? Try trading Canola or maybe the 5 Year Note. Got lots of money to trade? Great, look at Crude Oil and perhaps Coffee to get into some big profit markets.

7. Futures will Never Go Bust

Remember Enron? How about Bre-X? Unlike Stocks, Futures are based and real live physical goods and, as a result, they will always have value; therefore, they will never trade to zero. Sure, the price might go down, but rest assured that the underlying Futures Contract will never become worthless.

8. Futures Offer Better Diversification

Many stock traders try to lower the risk to their overall account by diversifying investments across various industries. This approach is a good strategy; however, the problem with limiting your diversification to the stock market is that almost all stocks tend to move in the same direction, regardless of their sector.

For example, if the S&P is climbing then nearly all stocks appreciate, but if the S&P is falling, then almost all the shares lose some of their value. Futures are only somewhat affected by the state of the economy. By and large, they follow their cycle.

This unique characteristic of Futures is because they represent physical goods. Corn, wheat, soybeans are planted the same time every year, harvested at the same time every year, go to market the same time every year, etc. regardless of what is happening in the stock exchange. This kind of diversification can add a lot of stability to your account.

9. There are More Opportunities in Trading Futures

Most Stock traders only look to buy stock in hopes that it will trade higher. Have you ever tried to sell a Stock? Pain in the butt, isn’t it? In the Futures world, it is just as easy to sell a market as it is to buy it. This situation means you can make money whether prices are going up or down. Now you can not only “buy low and sell high,” but you can “sell high and buy low” as well.

10. You Never Own a Futures Contract

Unlike a Stock, where you have to shell out cash and buy stock in the company you’re trading, in Futures you are contracting for a commodity. In Futures, you contract to buy or sell at a particular price and look for the opportunity to “offset” your contract at a better price and profit from the difference. If you can’t wrap your head around it think Wal-Mart: you buy something at one price and try to sell it for another. Same idea, but it’s all contractual.

11. Super Liquidity

Granted some of the massive stocks like Apple, Caterpillar, and Hewlett-Packard can post volume of 100k shares on big trading days, but even these are no match for an average day in most Futures markets. The Eurodollar for example routinely trades 150k contracts a day.  A “bad” day in Crude still posts over 300k trades. And even an old stand-by like Wheat will post over 100k trades a day.

So what does this mean for you? It means that Futures are ultra-liquid markets. You’ll never have to worry about getting a fill on your entry or exit, no matter how big your position might be. And that’s important if you’re looking to get into, or out of, a trade in a hurry.

So there you have it, 11 advantages that Futures have over Stocks. In spite of these apparent benefits, most Stock traders are woefully ignorant of the opportunities in the Futures markets. One thing I can tell you for sure: once you begin exploring the possibilities in the Futures markets, come to understand how easy and profitable they can be to trade, you’ll wonder why you never considered trading them sooner!

July 9, 2019

Erich Senft

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