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Understanding the Advantages and Disadvantages of Futures Trading

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Understanding the Advantages and Disadvantages of Futures Trading Powered By Docstoc
					Futures trading is not a perfect instrument, which means that while it
poses a lot of advantages and benefits, it also has some flaws or
disadvantages. Hence, it is very essential for traders to check and
understand both its pros and cons first in order to have a more holistic
and better judgment whether it is indeed profitable or not. It is in this
light that this article will address both these aspects.

On the one hand, when it comes to the advantages of futures trading, one
of the things that this boasts about is its high leverage. This is
because this aspect amplifies how big or small a transaction is without
even requiring the trader to put a bigger margin deposit to open a trade.
In other words, what this means is that the trader is not obliged to
solely and personally withdraw a lot of money from his or her pockets in
order to open a trade. Also, as an effect of this, a trader is allowed to
trade in higher volumes even without the actual capital deposits for
covering the trade with the help of the trade.

Secondly, another advantage of this kind of trading is the low commission
charges. We all know why it is an advantage or benefit. Well, in plain
words, instead of giving that money to the broker, then it is more
prudent to have it as your earnings or profits instead. Thirdly, trading
futures is also a highly liquid market, which means it has a high
turnover of trades that take place all throughout the trading sessions.
In other words, it is easier to close positions whenever the trader wants
to upon his or her discretion.

On the other hand, as I have said above, futures trading has its flaws as
well. Among these setbacks are the elements of high leverage and time
decay.

The existence of leverage is not in contrary to the advantages I have
mentioned above. As a matter of fact, leverage remains to be among its
key advantages. However, it also poses a possible negative impact since
it holds a potential to destruct an account as fast as possible if not
handled properly. Secondly, the time decay aspect refers to the fact that
futures contracts have a definite expiration date. Hence, it only means
to say that they are subject to the price decay even if the value of the
assets is fixed. Well, the rationale behind this is that the right in
purchasing such asset at the price yesterday is less valuable upon
reaching its date of expiration. There are even some cases when some
contracts expire absolutely worthless.

With the foregoing, it is up to whether you will pursue your career in
this field.

				
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posted:7/18/2012
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