The futures market is a common destination for traders who aim to make a living at their craft. Whether it’s through the currency, equity, debt, or commodity asset classes, futures markets give professional traders a variety of advantages not found anywhere else in finance.
Aside from such obvious benefits as robust liquidity, reduced tax liabilities, and limited commission structures, futures also furnish active traders with several more subtle upsides. In this blog, we will take a look at five lesser-known reasons why many financial industry pros choose futures over other modes of trading.
Reason #1: Broad-Based Trading Opportunities
In comparison to stocks or currencies, trading futures gives an individual an opportunity to capitalize on macro trends in market behavior. To successfully trade a futures market, a trader doesn’t need to conduct an abundance of specialized research. Broad analysis, be it fundamental or technical, often proves useful. In many cases, it’s possible to cash in on general shifts in entire markets or economies, not just micro trends.
Any trades are educational examples only. They do not include commissions and fees.
To illustrate this point, let’s say that Ashton the stock trader believes the S&P 500 is due to post extraordinary gains over the next 12 months. Futures make it easy to pursue profits, simply by buying a corresponding front-month E-mini S&P 500 contract(s). The process is much more involved if selecting an S&P 500-oriented mutual fund, ETF, or compiling a list of individual stocks for purchase.
Reason #2: The Availability of Leverage
Leverage is an element of finance frequently criticized, yet in constant demand. Professional traders understand that capital efficiency is a key element of making enough money to sustain a lifestyle. In short, futures provide the trader with enhanced purchasing power and the flexibility to pursue bold profits.
By offering initial margins somewhere in the neighborhood of 3% to 12% (depending on brokerage service and product), the futures market gives traders the ability to generate extraordinary returns. This pales in comparison to equities that require upwards of a 50% deposit on a position’s outstanding value.
Reason #3: Order Book Access
Following the rise of high frequency trading (HFT) practices and the growing popularity of dark pools, many professional traders sought the transparency of futures. In futures, market participants are able to access the exchange’s order book in a timely fashion. Market-related data sets — such as price, open interest, and traded volumes — are all available to the public. This is simply not the case for many equities markets or over-the-counter (OTC) venues such as the forex.
Reason #4: Extended Business Hours
The futures market gives participants the ability to trade on a near-24/5 basis. As futures have evolved from the open-outcry auction system to digital platforms, business hours have been extended well past the traditional 9-to-5 work day. This has opened the door to many strategic considerations because traders are now able to engage futures during the Asian-Pacific, European, and U.S. sessions.
Any trades are educational examples only. They do not include commissions and fees.
If our equities player Ashton was so inclined, trading hours could extend well past the traditional New York Stock Exchange (NYSE) close at 4:00 p.m. EST. In the case of an evening corporate earnings release or a particularly active geopolitical news cycle, Ashton could strategically engage products facing the Dow Jones Industrial Average (DJIA), S&P 500, or NASDAQ.
Reason #5: An Abundance of Strategic Opportunities
It stands to reason that enhanced leverage, a wide-variety of products, and a near 24-hour business day will produce an advanced collection of trading opportunities. When taken with the robust liquidity, consistent volatility, and flexibility to actively buy or sell each product, the futures market offers exponentially more strategic options than other venues.
Getting Started in the Futures Market
Given the opportunities and integrity local to the futures markets, professional traders around the world choose them as premier avenues for the pursuit of their financial goals. From self-directed options to managed futures portfolios, the pros at StoneX have everything you need to benefit from the advanced functionality of futures.
