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When looking for an online investing vehicle, we will consider futures as a superior means to achieve success. We will look at the benefits of the low margin and high leverage associated with futures trading. We will examine the idea that a futures contract will never go bankrupt. We will also look at the advantages related to the variety of products available to be traded as futures contracts.
Margin and Leverage
When it comes to online investing, the first thing that comes to mind with futures trading is the fact that they trade on low margin. This gives the trader very high leverage. For example, a crude oil futures contract at full value (assuming oil is selling at $100 per barrel) would be $100,000. Each $1.00 change in price, and we know that oil prices fluctuate by several dollars a day regularly, equals $1000 in or out of your pocket. The advantage to futures is that you don't have to put down anywhere near $100,000 to trade an oil futures contract. Rather, the margin is around $7000 (today it was $6548). Lets do the math, if futures prices fluctuate $1.50 per contract in one day, and you manage to put that fluctuation into your pocket in the form of profit, then you have just made $1500 by only putting up $7000 and all in one day. That's (1500/7000 =0.21) 21% on one trade in one day, without wild price moves. Through simple ordinary moves, you can expect to pocket these types of percentage gains regularly. Well, you can if you take the time to learn a futures trading strategy like the ones referred to here. Don't let me give you the wrong impression. Trading futures won't necessarily make you regular high percentage gains, that would depend on your skill. However, futures trading can make you much higher percentage gains with much higher frequency than you could ever hope to make trading stocks, even if you trade stocks on margin.
The above oil futures example is the consistent with the low margin requirements of all futures contracts. Typical margin on any futures contract varies from between about 5% to about 10%. Bear in mind that margins are subject to change any time without notice, and they do. One week your margin on natural gas futures will be $2700 and then next week they will be $3300. All this means is that you have to stay vigilant about margin rates so you don't get accidentally get liquidated out of your position by your futures trading brokers.
Now that we are aware of the possible benefits of low margin and high leverage in online investing, let us consider the possible detrimental aspects of low margin and high leverage. High leverage means that you can make tons of money with a little money, and the same is true for losing money. You can lose a lot of money, even though you put up relatively little. You can even wind up in debt. This can be avoided. Ensure that you know all about the margin and leverage and the implications for price and account fluctuations this means for the futures contract you want to trade. Make sure that you do some futures trading practice and futures paper trading before putting real money on the line. Make sure to use effective money management technique, like stops and planned exit strategies. If you apply these mechanisms to stay high and dry, you may find futures trading to be extremely rewarding.
Another reason futures trading is an excellent candidate for online investing is that most futures contracts are range bound to some extent. Specifically the commodity based futures contracts. These contracts include energy futures, agricultural futures, softs futures, meats futures, metals futures, and so forth. These futures show some degree of being range bound because of supply and demand theory. A commodity that gets too cheap ceases to be produced. What farmer would keep growing corn if prices were less than what it costs to produce? As prices of a commodity drop, productions progressively ceases, and supply dwindles. Eventually there is not enough supply to meet the demand and prices rise. When prices rises, there comes a point that nobody will buy the product anymore. What livestock keeper would buy corn to feed his cattle if the corn was worth more than the cow? When prices reach a top threshold, the inevitably fall because no one is willing to pay that much for a particular commodity. Are there exceptions? Yes. We're not about to stop using crude oil, or gasoline. It's hard to quantify supply and demand for things like gold, because people buy it as investments, not just as materials for industry. Other non-commodity futures like currencies, or interest rate based products like bonds, the situation is different. Physical supply and demand forces don't apply the same way as they do with physical commodities like corn, sugar, or copper. The supply and demand based price floors and price ceiling we see in physical commodities simply does not apply as rigidly with non-physical futures.
Taking into consideration that many futures have some degree of fluctuation range, and others have less limitation on their range, no commodity will ever go to zero. Well, at least not until the apocalypse. In which case what does it matter anyways? The only possible way that I can imagine that a futures contract would become worthless is if a country defaults or politically disintegrates. In which case it's currency futures and bond futures would probably become worthless. Besides this extreme example, futures contracts don't go to zero, or anywhere near zero. Physical products can't file for bankruptcy like a publicly traded company.
Another very strong proponent of futures as a vehicle for online investing, is that there is a limited number of futures products. In stock markets, there are literally thousands of stocks. Each sector has hundreds of stocks to choose from. It would be extremely difficult to keep tabs on all of them with a huge team of investors, let alone by yourself. Besides, how much energy can you expect to spend on perfecting your trading system if you never get to focus on any particular stock? How are you ever going to get to know a stock's personality, if you're constantly screening hundreds of them searching for the perfect one?
In futures trading, there are really just two exchanges you really ought to watch, the Chicago Mercantile Exchange Group and the Intercontinental Exchange. Between these two exchanges you've pretty much got the full range of futures products covered. Unlike some of the futures exchanges in other countries, the CMEGroup and TheICE in the United States always have very good volume and liquidity in the majority of their products. (Read reviews for the CMEGroup and TheICE by clicking on these links). If you choose to trade futures rather than stocks, then you will always only have a limited amount products to watch. Less than a hundred. You can easily pick one or two sectors and watch all the products in that sector group without an information overload. It would take almost no time at all to apply your trading system to all the futures products and find the one that you like and focus on it and the other products in it's product class. This limited product range to choose from means that you can specialize and people that specialize in something become experts, in this case in a specific branch of online investing.
When considering futures as a candidate for online investing, we have seen that futures offer the potential for high percentage gains due to low margin and high leverage. We have also seen that many futures trade within historical ranges due to supply and demand fundamentals. We have also observed that limited product diversity can allow us to specialize and become experts in one product or product class. Futures make an excellent vehicle within which to pursue online investing
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