By Sam Seiden, an experienced equities and futures trader, as well as a trading educator*
I have been trading futures for approximately 15 years. When speaking to people about trading and investing today, I find that many still think of futures speculating as high risk Wild West gun slinging, and this could not be further from the truth. The truth is, in many ways, these are the lowest risk markets in the world and really do make the most sense for people looking to get involved in market speculation.
Teaching exactly what futures are and how to trade them is what we do in Online Trading Academy's week-long course, which is beyond the scope of this piece. However, I can give you a run-down on the four main benefits of the futures markets, so you know what you are getting into.
- The Tax Break: There is a major tax break when you trade futures. It is the 60 / 40 long-term capital gains benefit, which is much more attractive than stock trading. This makes a big difference and is something many people simply don't know.
- Leverage: Futures offer incredible leverage. Many people think they need to get involved in options to attain a lot of leverage. The futures markets offer much more leverage than stocks or options do. If you think this means high risk, think again. If you use protective stops, these markets become some of the lowest risk markets in the world because, in the high-volume / liquid futures markets, it is more likely that your stop will get filled where you want than it would in stock trading.
- Low Risk: Each day, we can find stocks gapping double-digit percentage points on the open. If it is a gap in your favor, that's great, but, if it is not, your trading or investment account can be ruined. In the high-volume / liquid futures markets, gaps like this don't happen. While there is always the risk that a major gap can happen in any market, can you imagine a 10% gap in the 30-Year Bond, the S&P, the 10-Year Note, and many more? There are some futures markets that don't have much volume and gap sometimes, but we don't trade those.
- Non-Correlated Market Opportunity: For me, the most important reason to get involved in the futures markets is that these are the only markets in the world that offer non-correlated opportunity. There are always small exceptions, but, for the most part, most stocks simply move in the same direction as the S&P over time. It is not common that you will be short one stock and long another, and both will make a profit.
In futures, however, you can be long the S&P futures, short crude oil futures, long the Yen futures, short the 10-Year Note futures, and all these positions can be very profitable at the same time. Also, when you trade the futures, you have a global opportunity at your fingertips. Some of the futures markets I trade in Europe have much more volume than any of the markets here in the U.S.
The chart shown previously is the NASDAQ futures and represented a potential shorting opportunity going into the session on the day this article was originally published in December 2007. When you trade just one NASDAQ futures contract, you are making or losing $20 per point. For example, if you had bought one at 2040.00 and sold it at 2041.00, you would have made $20.
If you like using moving averages or any indicator or oscillator, you would use them the same in futures as you do in stocks. In the 10-Year Note futures chart shown previously, you can see that the buy signals from a moving average cross-over or a pullback to up-sloping moving averages works fine when applied properly.
I trade more than 20 futures and Forex markets with one simple supply (resistance) and demand (support) strategy, and the benefits to trading these markets are fantastic. The goal of this piece is not to convert stock traders to futures traders. It is simply to help educate people on what futures are and some of the benefits of trading them. There are other benefits, too, such as hedging your portfolio risk with the S&P futures, hedging your adjustable rate mortgage risk with the 10-Year Note Futures, and more.
If you would like more practical information on futures trading, you can email me. If you want to learn more about the specifications on some of these markets, you can always go to the websites of the exchanges, such as the Chicago Mercantile Exchange and the Chicago Board of Trade. When you go to these websites, click on the "contract specification" tabs, and, there, you will find the numbers behind these futures contracts.
