As a trader I have explored multiple trading vehicles in the search for the most beneficial, flexible and profitable trading vehicle I could find. Obviously the profitability is not based merely on your trading vehicle of choice but finding the vehicle that best fits your trading style, life style and personality witch have a large impact on your bottom line. In this piece I want to outline some of the key reasons that I feel trading futures is not only the best vehicle for my trading plan but could be for yours as well. Lets begin with a short definition of futures as defined by investopedia.com :-A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument , at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of corn by going long or short using futures.
As outlined above futures traders are generally broker down into one of two categories, the hedger and the speculator. The majority of you will more than likely be the speculator, the trader trying to profit by predicting the direction of a given market. Let’s take a look at the key attributes that futures offer to a speculating trader that make them so attractive.
Trading hours- Most of the readers of this article probably have a day job and do not rely on trading as their primary source of income. What that means is most of you are at work during market hours, that makes it pretty difficult to place a trade. How many times do you get home from work and wish you could get in the market before the next trading day? Well with the futures market you have that option. While trading hours vary depending on what contract your trading, the majority of commonly traded futures contracts trade close to 24 hours a day Sunday night through Friday night. This means that late into the night or early in the morning you can get long or short a market at your leisure. For example, its Monday night after the stock market has closed and there is huge market moving news. You want to take part in the action but you know that once the stock market opens the gap will be so big you will miss the move. With futures you can hop online and enter a position in the stock index futures with ease, no waiting for the opening bell.
No daytrading rule- As most traders know there is a regulation put in place that does not allow a trader with less than $25,000 in his/her account to day trade stocks. A daytrade is considered the open and closing of a position on a stock in the same day. Now your broker may allow 3 round trip day trades with under 25k but that can be very limiting and stressful to a traders game plan. With futures there is no restrictions on how many round trip day trades you can place. This is perfect if you do not have or do not want $25,000 of your money tied up in a stock account. And that brings me to my next point, margin.
Margin- One of the big draws to futures trading is the leverage you can get. Now don’t forget leverage can be a double edged sword but when used with respect it can have big advantages. Futures get traded based on theoretical margin at a fraction of what the contract is actually worth. This means that with a small account you can make or lose ALLOT of money very fast. Now when trading stocks many traders use a margin account, this allows them to buy more stock than they can afford with their account size. The problem with this is you end up paying your broker interest on the money borrowed to pay for the stock! With futures this is not the case, you do not pay on the margin used to purchase or sell the contracts, this helps cut down your costs and helps your bottom line. So in my futures account I can fund an account with less money and keep the bulk of my money in a high yield savings account to make money, and isn’t that the purpose of trading , to make money?! Now that we learned futures can cut down the costs of trading lets learn how they help us keep our hard earned money.
Taxes- Once you have made your money as a trader you want to keep it right? well with stock trading Uncle Sam likes to take a big chunk out of gains made by the sale of a stock transaction that was held for less than 12 months. Most ‘traders’ do not hold stocks for a year, this means Uncle Sam will want his capital gains taxes on all your hard earned gains. While we cannot avoid paying our taxes on our gains futures can help cut down the amount we give back to Uncle Sam in a big way. Short term capital gains get taxed at ordinary income tax rates up to 35% and Long term capital gains (stocks held 1 year or more) get taxed at 15%. So for a trader you are going to get up to 35% of your gains taken from you(unless your holding your plays for 1 year or more). Futures get automatically taxed as a 60/40 rate 60% of gains get taxed at long-term rate and 40% at short-term rate, no matter how long you held your trades. This can make a BIG impact on your bottom line. Lets look at an example. Lets say a stock trader and a futures trader both made $50,000 this year from trading. The stock trader would keep $32,500 the futures trader would keep $36,500. The futures trader would walk away with $4,000 more in his pocket! I hope you all find this article helpful when looking at futures as a possible trading vehicle. Don’t forget to check www.tradersbase.com/smf for more information, education and entertainment in all that is trading, Join our forums with a community of great information and great people. Good luck in your trading adventures! -Cire2222 of www.tradersbase.com
Had we just executed the edge those few runner trades would have more than made up for the stop outs and we would be making great money. It’s not small profit often that will make us net positive, rather just one good move caught and executed on could make a traders week, month or even make the year. The short term pleasure turns to negativity when you realize you are not executing and leaving $$$ on the table, costing you net profitability!
