Futures Trading In Australia Explained: A Beginner's Guide

 

If you want to enhance leverage in your investment portfolio and protect your positions from market risks while operating with limited capital, consider exploring futures contracts as a viable option.

 

With futures trading, you can speculate on financial markets while safeguarding your existing positions from potential market fluctuations.

 

In this guide, you will learn about the mechanics of trading futures, initiating your first position, the advantages and disadvantages, selecting an appropriate broker, and much more.
 

If you don't have a trading account yet, consider eToro, which is used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

 

eToro Service ARSN 637 489 466 promoted by eToro AUS Capital Limited ACN 612 791 803 AFSL 491139. Capital at risk. See PDS and TMD. Zero commission does not apply to short or leveraged positions. Zero commission means that no broker fee has been charged when opening or closing the position. Limited stock exchanges only.

 

Buy Australian & international shares with unlimited commission-free trades. (No brokerage). Other fees may apply. It offers extensive trading features, social trading tools, and copy trading to imitate the trades of other famous traders.

 

 

 

1. What Are Futures?

 

Futures are legally binding contracts that enable traders to purchase or sell an asset at a predetermined future date and price.

 

They are derivatives traded on highly regulated exchanges standardized to ensure the same quantity and quality per contract.

 

While futures are usually associated with commodities trading, there are also available with other asset classes, including government bonds and indices.

 

Each futures contract is assigned a code for identification purposes. This code includes information related to the underlying asset with contract month and year.

 

 

2. How Are Futures Priced?

 

How the price of the futures contract moves depends on various factors such as:

 

• The spot value of their underlying market

• Any commission or spread paid to a broker to execute a trade

• The forces of demand and supply, as lower supply and higher demand, cause futures prices to rise and vice versa.

 

 

3. How Do Futures Contracts Work?

 

Trading futures involves:

 

• Speculating on the performance of assets.

• Considering factors like volatility.

• Interest rates.

• Time until delivery.

• Costs associated with maintaining a position.

 

When trading futures, you can go long (buy) or short (sell) based on your prediction of whether the market price will rise or fall. Your profit or loss depends on your prediction's accuracy and the market movement's size.

 

 

 

Traders sign futures contracts to lock in shares at a specific price, aiming to profit by selling them when their value increases.

 

At contract expiry, the value of a futures contract matches the spot price. You can either roll the contract and continue holding the position or settle it through physical or cash settlement.

 

Due to speculation, the futures market is highly liquid and volatile, requiring effective risk management strategies.

 

The futures market involves various participants, including buyers, sellers, hedgers, and speculators, all seeking to profit from market fluctuations.

 

Identifying trends and having insight into future company performance is crucial for successful and profitable futures trading.

 

 

4. Components of Futures Trading

 

Before learning the steps to trade futures contracts, it is necessary to learn the basics components:

 

 

Underlying Asset Of Futures Contract

 

You can trade in futures in a variety of assets ranging from traditional to exotic:

 

 

• Traditional Futures Products: Agricultural commodities, valuable metals, foreign currencies, interest rates, and energy products.

 

• Exotic Futures Contracts: Region-specific snowfall, hurricanes, temperature indexes, cryptocurrencies, and box office receipts for a motion picture release. 

 

 

Pricing

 

The current futures contract price is the amount of money required for an individual to purchase or sell the underlying asset before the expiration day. It depends on its projected value at expiration.

 

 

Expiration Date

 

Each contract has an expiration date that depends on the contract's specifications. It is the last day when you can trade the contract.

 

 

 

Leverage

 

Brokers generally provide "leverage" to enable traders to trade multiple quantities at a smaller price.

 

It is extra capital that traders borrow to take larger positions. Traders use it to amplify their profits with the lowest capital investment. Leverages, when used wisely, can significantly amplify profits and vice versa.

 

 

Margins

 

The brokerage firm determines the Margin requirements to govern the maximum number of tradable lots. There are two types of margins: 

 

• Intraday Margins

• Overnight Margins

 

Margin requirements vary significantly based on position size, client account size, brokerage firm, and futures products traded in the market.

 

 

Settlement

 

You can settle Futures contracts in the form of both physical and cash settlements.

 

Not every Futures trader wants to exchange the underlying asset at expiry. Some may want to settle in cash.

 

Mostly hedgers and speculators do this when they wish to take a position on whether the market price will fall or rise without owning the asset.

 

 

Trade Participants

 

Futures contracts online trading is fast-paced with massive volatility and liquidity. Exchanges, Regulatory bodies, brokerage houses, and individual traders play separate roles in executing these trades.

 

 

5. Steps To Become A Futures Trader In Australia

 

Follow the below steps to trade in futures:

 

 

Step 1: Find an Online Futures Trading Broker

 

When you feel confident trading futures, find an online trading platform to place your trades. Take some time and compare different broking platforms based on various factors to select the best one.

 

If you don't have a trading account yet, you could consider eToro, which is used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

 

Buy Australian & international shares with unlimited commission-free trades. (No brokerage). Other fees may apply. It offers extensive trading features, social trading tools, and copy trading to imitate the trades of other famous traders.

 

eToro AUS Capital Limited AFSL 491139. eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. See PDS and TMD

 

 

• Reputation in the market

• Competitive fees

• Safety and Security

• Access to advanced market analysis tools

• Ease of use

• Payment modes support

• Level of Customer satisfaction

 

Based on these factors, these are the most popular trading platform to trade futures:

 

• eToro

• Interactive Brokers

• Charles Schwab

• TradeStation

• NinjaTrader

 

 

Step 2: Check Requirements

 

After having created an account, the first thing you need to do is to look at the margin requirements.

 

It will give you an idea of how much you need to invest initially to place a Futures trade and how much you will lose in fees when withdrawing your funds.

 

Another important thing worth noting is to learn how to create an exit strategy to save your investment when the market starts to get unpredictable. Futures are short-term trading options where you don't intend to hold your position for the long term.

 

Some exit strategies include normal, trailing, guaranteed stops and limits when added to your trades, helping manage the risk. 

 

While a stop order closes your position automatically when your contract price moves to a less favourable level, a limit closing order closes your position automatically when your contract price moves to a more favourable one.

 

 

Step 3: Understand How Futures Contracts Work 

 

Before placing your first trade in Futures, you must learn its key terminologies and strategies. Some Important things listed in a futures contract include: 

 

• The unit of measurement

• Margins

• Leverage

• Expiration Date

• Pricing

• Underlying assets of Futures Contract

• Cash or Physical Settlement of the trade 

• Quantity of goods

• The currency where the contract gets executed

 

Get a good understanding of the market you want to trade in to get your predictions correct and make profits from both rising and falling markets.

 

 

Step 4: Understand The Risks

 

Just like getting the conceptual knowledge of Futures contracts, it is equally important to understand the associated risks.

 

Futures are riskier than other investment instruments because it involves dealing with larger investment sums.

 

Though the initial investment can be small, leverage can lead to more losses if your strategy fails.

 

That's the reason why it is vital to be knowledgeable of the common risks that come along with futures trading. Good market research in the companies you are considering for investment will give you confidence in the behaviour and direction of the market and help lower the risks. 

 

 

Step 5: Choose A Futures Market To Trade 

 

Futures are tradable in various markets, such as indices, interest rates, shares, forex, bonds, and ETFs.

 

You have to find the one that best suits your trading style. Indices experience higher volatility and are ideal for short-term day traders.

 

 

On the other hand, Futures in commodity markets, such as gold or silver, are most suited to people with low-risk appetites and who enjoy lower volatility.

 

After choosing your market, find industries and companies you are familiar with. In addition to their current performance, check their past performance, future demand, growth potential, and financial data given by the company and analysts. 

 

Only when you are a hundred per cent convinced, go ahead and plan your entry, purchase, trade, and exit strategy in case things go differently than planned.

 

 

Step 6: Decide The Type Of Trade

 

Once you have decided what Futures markets and companies to trade in, the next step is to choose whether to go long or short.

 

Going long implies that, based on your fundamental and technical analysis, you believe the value of a future contract will increase over time.

 

If your analysis suggests that the underlying market price will fall, you could open a short position.

 

 

Step 7: Place Your First Trade

 

After checking the margin requirements and understanding the trading platform, you are ready to execute your order.

 

Choose a Futures market that interests you, decide the type of trade you wish to take (long/short), choose your position size, and set Stop loss and limits.

 

 

Step 8: Monitor And Close Your Position

 

After placing the trade, you must regularly track it to ensure that the markets behave as expected.

 

If they follow your predictions, you should close your trade after gaining a satisfactory profit. In other cases, you might have to close your position earlier to trim your losses. You can settle a futures contract trade before its expiry date.

 

Use specific tools on your platform to monitor your investments, and set up alerts to get notifications for any significant changes.

 

 

 

6. Pros And Cons Of Futures Trading

 

Like all investments, trading in Futures also has its advantages and drawbacks.

 

Understanding them will help traders calculate their risks and decide whether futures trading suits their financial goals.

 

 

Pros

 

• Affordable to traditional stocks as you require investing a percentage (approx. 10%) instead of paying for the full stock price.

• Leverage trading to take larger positions.

• Access a broad range of markets

• Capitalize on rising and falling prices

• The abundance of liquidity leads to better trade execution.

• Facility to hedge existing exposure

• Avoid overnight funding charges.

• 24*7 market operation provides numerous opportunities for Aussie investors to hop in and execute orders instantly. 

• Diversification helps you lower the possibilities of risks.

 

 

Cons

 

A Futures Contract is an advanced investment strategy tailored for short-term trading to "anticipate" market trends.

 

Nonetheless, the inherent leverage facilitated by margin and the short-term time horizons entails higher risks than investing in stable, high-quality companies.

 

• You can lose all your money quickly if you are unsure what you are purchasing or how your trading account works in terms of minimum margin requirements.

• Over time, your selected asset could decrease in value and drive down your return. 

• Possibility for Loss (Both Small and Big)

• Not Recommended for beginners

 

 

7. What Is The Most Popular Futures Broker In Australia?

 

Here is one of the most popular future brokers in Australia:

 

 

eToro

 

 

Features

 

• Established in 2007

• Regulated by: ASIC

• Minimum Deposit: $10

• Deposit Fees: USD 0

• Inactivity Fee: Yes. $10 per month if your account has been inactive for 12 months 

 

 

Pros

 

• Access to advanced trading tools

• Access to ASX shares and forex

• Diversify your portfolio by trading in all kinds of markets such as crypto, forex, CFDs, and more in one place

• Copy-trading to create the same product portfolio and make the same trades.

• Availability of several orders to protect investments if the market suddenly dips.

• Ideal for beginner investors 

• Get access to shares of Australian and international markets, including US shares

• Comparatively Low fees 

 

 

Cons

  

• The currency is in USD

• It doesn't offer support for advanced integrations like MT4

 

 

8. What Are The Three Types of Futures?

 

You can classify future contracts into three standard asset classes:

 

 

Commodity Futures

 

• Energy Futures – Brent Crude Oil, Natural Gas, WTI Crude Oil, and RBOB Gasoline.

• Metal Futures – Gold, Silver, Copper, and Platinum.

• Agriculture and Grain Futures – Sugar, Soybeans, Coffee, Wheat, Cotton, and Grains.

• Livestock futures – Cattle, Lean Hogs, and Feeder Cattle

 

 

Financial Futures

 

• Stock index futures (S&P 500 Index, S&P/ASX 200, etc.) 

• Forex futures

• 3-year and 10-year Bonds and interest rate futures

 

 

Currency Futures

 

• Dollar Index

• Pound

• Yen

• Euro

• Bitcoin.

 

 

 

 

9. What Is The Best Futures Trading Strategy?

 

When creating a futures trading strategy, the first step is to choose one to two main sectors, such as commodities, financial, or energy, in which you thoroughly understand those markets.

 

It is essential because in-depth market knowledge, a sound understanding of markets’ fundamentals and economic trends, public sentiment, and technical analysis will help you predict stock price movements.

 

There are different strategies for futures trading; you need to analyse them and consider which one you want to go with.

 

 

Directional Strategy

 

With this strategy, you speculate on the direction of an underlying asset or a specific commodity and take long or short positions accordingly.

 

 

Spread Trading

 

It is a more complicated trading strategy than the directional strategy. Here, the trader simultaneously opens long and short positions for the same underlying asset.

 

This strategy doesn't spread the risks and can dangerous your funds if the trade goes against you. Spread trading can be helpful in cases when you trade between two correlated markets.

 

 

Swing Trading

 

This trading strategy is beneficial in solid trading markets. Here the trader takes the position based on trends. So, selecting the correct time frame is crucial to succeed in this strategy.

 

Note that overnight gap risks can lead to higher margin requirements. It may require investing more capital to cover margin requirements to swing trade futures.

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above are just some general options for educational purposes. All these options come with risk. This is not financial advice.

 

 

 

10. How Do Beginners Trade Futures?

 

Trading in Futures is not straightforward, and that's the reason even advanced traders make mistakes sometimes.

 

You need to have a solid understanding of the market movement as it forms the base for making speculation and the possibility of gain or loss in the trade.

 

If you're new to trading and want to try futures trading, here are some important things to think about:

 

 

Understand The Basics

 

Learn about futures contracts – what they are, how they work, their different types, ways to trade them, and associated concepts such as margin trading, leverage, margin call, transaction fees, and obligations.

 

 

Find a Broker

 

Look for an experienced and reputed broker who provides you with a direct connection to the exchange and helps you form informed trading decisions. Once you open an account, familiarise yourself with different assets of futures contracts.

 

 

Develop a Trading Strategy

 

The trading strategy you choose and how diligently you implement it determines your trade success. It may involve set-ups or finding trading patterns to identify perfect opportunities to enter a trade.

 

The best approach is to learn futures trading from a professional. They will teach you about specific trading strategies, risk management, the proper context of using that strategy, and, most importantly, technical analysis to speculate underlying asset prices of futures.

 

 

Create a Trading Plan

 

Besides a solid trading strategy, you also need a trading plan that includes:

 

• Your trading objectives

• Risk appetite

• Desired profits

• Trading frequency

• Management of open trades, and a realistic method to attain them.

 

 

Maintain a Trading Journal

 

Keeping a trading journal while you trade can help you track your trades and performance and understand your trading style better.

 

Moreover, it can help you learn from mistakes, stay disciplined, and improve your odds of success.

 

 

Required tools to start futures trading:

 

You will need tools and services to access the Futures markets and place buying and selling trades. These include:

 

• A laptop or computer capable of running trading software. 

• A reliable internet connection to access the live markets that move fast and execute your trades quickly. 

• A Trading platform that connects you to the market. Most trading platforms provide you with drawing tools, functions, and charts to identify and place trades.

 

 

Things to remember when entering a trade:

 

• Don’t be fooled by the heavy leverage offered. 

• Don’t trade or invest money you can’t afford to lose. 

• Stay within your risk margins. Fixing the asset’s price in advance will help lower your risk chances.

• Always set up stop-loss (maximum loss you can undertake) and take-profit level (the maximum profit you wish to settle for.)

• Ensure healthy futures trade margins and tweak them per the market volatility.

• Stay disciplined and stay focused on your investment. Invest time to learn trading strategies that enables you to find high-probability trades.

• Know the associated trading costs per trade, including stamp duty, goods and services tax (GST), statutory charges, and securities Transaction Tax (STT).  

 

As with futures trade, you can execute multiple transactions quickly; it multiplies your overall trading cost. Hence, always check the number of transactions against the profits you make.

 

 

 

11. Frequently Asked Questions (FAQs)

 

 

What Is The Code For ASX Futures?

 

Whenever placing a buy/sell order, investors and traders need to know the ASX code for the instrument they wish to trade.

 

ASX uses a variety of codes (of different lengths) that help identify each tradeable instrument in an abbreviated form. It makes it easier to track them throughout trading, price reporting systems, and settlement. Click here for the complete list of ASX 24 commodity codes.

 

In 1960, Sydney Futures Exchange was a Capital market/Institution in Australia focused on trading derivative and cash products.

 

It covers financial market community trading products, investment and risk management, stock trading, clearance, facility, institution, real-time and historical trading market, settlement, depository, services, and globally centralized clearing.

 

 

 

What Are The ASX 200 Futures?

 

Futures contracts, like ASX 200 futures, are a form of derivative used for the objective of prediction or hedging.

 

The ASX 200 Futures Index helps traders monitor the returns made from the investment in the front-month futures contract in the ASX 200.

 

 

How Much Money Do You Need To Trade In Futures?

 

To start trading in futures, you need money to open a Futures account (minimum deposits), execute the futures contracts (initial margin minimum), and keep the account active (maintenance margin).

 

If you don't have a trading account yet, you could consider eToro, which is used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

 

eToro Service ARSN 637 489 466 promoted by eToro AUS Capital Limited ACN 612 791 803 AFSL 491139. Capital at risk. See PDS and TMD. Zero commission does not apply to short or leveraged positions. Zero commission means that no broker fee has been charged when opening or closing the position. Limited stock exchanges only.

 

eToro is a leading stock broker charging zero brokerage for stock trading. The trading platform offers extensive trading features, social trading tools, and copy trading to imitate the trades of other famous traders. 

 

Buy Australian & international shares with unlimited commission-free trades. (No brokerage). Other fees apply. 

 

The amount of money you need will depend on the broker in Australia you choose to open your Futures account and the type of futures you want to trade.

 

The margin minimum for futures contracts defines how much money you will need in your futures account to start trading contracts. It is determined based on the contract value and the volatility.

 

Futures contracts with a low value and less volatility have relatively minimum margin requirements.

 

 

Can You Make Money Trading Futures? 

     

The simple answer is Yes and No. Future offers plenty of trading opportunities to Aussie investors around the market 24*7 daily.

 

Futures are an affordable trading instrument with the potential to make large profits. Unlike traditional stocks, it allows you to use high leverage to take larger trades with a smaller investment.

 

However, the high leverage in futures trading also amplifies the potential for significant losses. As a result, traders must exercise caution, implement proper risk management strategies, and possess a solid understanding of the market to navigate these heightened risks successfully.
 

Compared to regular stock trading, brokers allow futures trading at a low or $0 commission. It benefits traders by saving on commission fees and gaining a better return on investment.

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above are just some general options for educational purposes. All these options come with risk. This is not financial advice.

 

 

 

How To Trade Futures in Crypto?

 

Crypto futures contracts can help hedge price risk and speculate on price direction, which makes it attractive.

 

Like other markets, trading futures in crypto provides the benefit of leverage to add more to your trade. (Crypto assets are unregulated & highly speculative. No consumer protection. Capital at risk.)

 

If you want to trade Futures in Crypto, here are some popular Crypto Futures Trading Platforms for Aussie investors:
 

• eToro

• DYDX

• FTX

• Bybit 

• Binance

 

 

Is Futures Trading Allowed in Australia?

 

Yes. Futures trading is legal in Australia. You can buy and sell Futures contracts on the ASX 24*7.

 

ASX’s New Trading Platform offers unmatched access to the country’s futures markets. Rich functionality, advanced technology, improved latency, and product pre-trade risk management are vital platform benefits.

 

Once you open an account with a trusted futures broker, you can trade in a range of assets and commodities, such as:

 

• Equity futures 

• Interest rate futures 

• Grain futures

• Energy futures

 

 

Can Trading Futures Be Profitable?

 

Yes and No. Trading futures can be profitable if you:

 

• Have the right mindset 

• Learn trading psychology skills that allow you to stay patient and avoid mistakes.

• Learn to limit your emotions as much as possible.

• Master a trading strategy that helps you identify high-probability trades. 

• Create and implement a robust risk management strategy.

 

Combining the above will give you the “trader’s edge” and maximise your chances of success. However, remember, many people lose their money when trading futures, so be careful.
 

 

 

What Is The Best Time to Trade Futures?

 

In Australia, futures traders can engage in multiple trading sessions.

 

You have the following choices for executing your trades in a live trading room (Brisbane Local Time):

 

• Asia Open: 9:45 a.m. to 12:00 p.m. 

• Euro Open: 5:45 p.m. to 7:30 p.m. 

• U.S. Pre-market: 10:45 a.m. to 1:00 a.m.

• U.S. Close: 4:45 a.m. to 7:00 a.m.

 

 

How Much Can You Lose When Trading Futures?

 

Since futures contracts are leveraged, investors aren't obligated to invest their entire equity amount to initiate trades.

 

The initial margin in futures trading amplifies the risk in situations where the trade moves unfavorably.

 

In such instances, investors face the potential of losing more funds than their initial investment capital.

 

 

Should You Hold Futures Overnight?

 

Most Futures traders choose to hold their trading positions for two main reasons:

 

• They hold their positions overnight in hopes that the market will turn in their favour and they will recover their losses. – This is a bad risk management strategy.

 

• They believe the market won't change overnight and will remain in their favour. It is another mistake, as there is no assurance that the market will follow the same direction overnight. What if the market reopens with an unfavourable price gap?

 

Regardless of what causes you to hold overnight trade positions, both these scenarios are risky and can result in losing more than your trading account.

 

Furthermore, taking your futures trading contract the next day could incur a massive jump in margin requirements. So, your account will trigger the entire maintenance margin as soon as you carry forward your position (after the end of the day's session). It may wipe out your money leading to a significant loss.

 

Suppose you have used a margin and failed to exit your trade. In that case, the brokerage can forcibly close your trading position to protect itself.

 

Many brokers charge a hefty fee ($50 or more per contract) to liquidate your position. So, along with existing overnight losses, paying a hefty liquidation fee could become a big trouble.

 

Thus, you should only hold your Futures trading position overnight if you have a lot of trading capital.

 

 

 

Can You Make a Living With Futures Trading?

 

Yes and no. It is possible to sustain a living with futures trading, but it will not be easy. You must have a solid trading strategy, work hard, and follow a disciplined approach. Most traders will fail to make a living.
 

Here is how you can become a successful futures trader (no guarantee):

 

• Develop deep industry knowledge of the relevant market, learn stock fundamentals and other traders' positions, and understand the structural intricacies of a specific market. 

• Thoroughly research pre-and post-market conditions and the futures you wish to trade. 

• Have a tried and tested trading plan.

• Set and follow goals, as a slight deviation from your plan could cause you to lose control over your destiny. 

• Be on the right side of the market.

• Analyse stock technicals like charts and graphs to enter the trade on time and exit immediately when making a desired profit. If you keep repeating this, you will make profits.  

• Start with a small capital and slowly increase your investment as your account grows.

• Not being over-leveraged as a slight loss will wipe out your account.

• Have a solid risk management plan at hand. Never risk your capital without setting stop losses.

• Stay patient and disciplined in your trading approach.

• Maintain a trading account with sufficient funds, as losses can become evident unexpectedly and cannot be predicted in advance.

• Develop a habit of staying updated on the latest news releases, which will help make the right trade.

 

 

Are Futures High-Risk?

 

Yes. Futures trading can offer incredible profit-making opportunities but also involves high risks.

 

The main factor that makes futures trading risky is high leverage which enables traders to take a larger position than what they would with their trading capital.

 

It can amplify gains and losses, and speculators risk losing more money than the original margin. Also, hedgers might lose out on stock price decline by locking in current prices.

 

Considering the above risks, even advanced investors should research the market extensively before trading futures, as it can be lucrative only when you have in-depth knowledge and trading strategy.

 

Understanding your risk appetite and seeking assistance from a financial consultant would help you clarify whether it is the right trading instrument.

 

 

 

Can Beginners Trade in Futures?

 

Trading in futures is more complex than other strategies, and that's why not advised for inexperienced traders. Due to leverage (borrowed money for trading), your profits get magnified, but so are losses. This way, traders risk losing more money.

 

One must have a sound understanding of the market and extensive research of the traded assets and commodities, something beginner traders might still need to become familiar with.

 

Beginner investors should first fully understand the risks of futures trading and analyse their financial resources, experience level, and risk appetite before trading in futures.

 

Seeking advice from an independent financial advisor is also beneficial in this regard.

 

 

Why is Trading Futures Better Than Crypto?

 

While regular and cryptocurrency futures trading might look alike at first, they work differently in their markets.

 

Factors that make trading futures better than crypto:

 

 

Regulatory Framework

 

There are government laws and standards that govern traditional Futures markets. It ensures the exchange’s legitimacy and protects traders against fraud, market abuse, etc. The approval of each exchange slows down the trading process.

 

Crypto futures exchange markets, on the other hand, are unregulated. Besides fast executing trades, such markets allow trading in futures contracts without expiration.

 

 

Size

 

Another distinguishing factor between the two markets is their size. Conventional markets are a lot larger than crypto exchanges. Institutional investors, private investors, and corporations trade in these exchanges daily.

 

On the contrary, only a few institutional investors trade in crypto futures markets. Retail investors execute a majority of transactions on this platform.

 

 

Trading Hours

 

Trading hours are another obvious difference between these markets. Futures contracts are tradeable during the standard stock market duration. As the market remains closed for 13.5 hours daily, you can't change your trade positions after market hours.

 

However, crypto futures exchange markets operate 24*7*365. So, you can trade crypto assets at any time. It is a significant advantage for crypto traders, allowing them to capitalise on market changes anytime.

 

Regardless of the market you trade, it is more important to understand the stand-alone value of the asset you invest in and its market cycles.

 

Over-leveraged markets like Futures can burn investors and liquidate them quickly. However, your futures trade can yield considerable gains with a well-planned strategy. Moreover, the transactions on the ASX are secured by regulatory bodies, making them safer than trading on unregulated markets.

 

Crypto exchanges, on the other hand, are based on peer-to-peer transactions. You only require a reliable internet connection and anyone willing to play. With no intermediary between the exchange and the investor, crypto markets are hugely volatile and more liquid than the traditional Futures market.

 

As the asset’s price swings up or down drastically within minutes, it may reduce or increase your holdings significantly at any instant. It can result in an entire capital loss in a single transaction.

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above are just some general options for educational purposes. All these options come with risk. This is not financial advice.

 

 

 

Why Are Futures Better Than ETFs?

 

ETFs and futures are the two most commonly traded assets worldwide.

 

However, some investors prefer trading in futures over ETFs for the following reasons:

 

 

Fees

 

Unlike ETFs, you don’t pay annual management fees throughout the life of the Futures contract.

 

 

Capital Efficiency

 

Futures margin is more capital efficient than ETFs. It is usually below 5% of the notional amount. However, ETFs are 50% of the stock value, far more significant than futures.

 

 

Trading Hours

 

In Futures Trading, you can trade the Asian, European, and U.S. session markets at various times.

 

However, you can’t trade ETFs 24 hours a day, except for certain ETFs that allow you to trade after market hours. So, regarding accessibility, “futures” is the clear winner.

 

 

Liquidity

 

Another advantage of trading in Futures over ETFs is that the former offers more liquidity. It is because futures contracts are traded broadly and in bulk quantities, and the futures market has a high volume.

 

It enables traders to buy and sell their futures contracts quickly and easily in the market and get instant monetary value for their investments. While ETFs provide favorable liquidity, they can't match the rapid turnaround of the futures market in terms of trading speed.

 

 

Tax Efficiency

 

Engaging in futures contract trading also presents tax advantages. In the event of a profitable short-term futures trade, the tax payment entails a combination of short-term and long-term rates that is lower than what is applicable to an ETF.

 

In the case of receiving a futures dividend, 40% of your profits will be subject to a 35% tax rate, while the remaining 60% of gains will be taxed at 15%, resulting in an average tax rate of 23%.

 

On the contrary, ETFs are subject to ordinary income tax rates, which can accumulate swiftly and somewhat diminish your earnings over time.

 

 

Trading Volume

 

It is another reason why people prefer trading Futures to ETFs.

 

Precious metals, treasuries, and crude oil are traded at values 20 to 600 times larger than ETFs. Also, Futures contracts significantly outpace ETFs as they have something in store for each type of trader.

 

 

Performance Accuracy

 

Futures monitors underlying asset performance very closely with minute tracking errors. ETFs may involve major tracking errors.

 

 

The Extent of Profit Generation

 

Futures contracts also differ from ETFs based on the ability to generate gains. In ETFs, heavy stock price movement results in decent net profits. However, futures contracts give you increased control of a commodity, leading to higher gains.

 

While both futures and ETFs are successful trading instruments, futures lead in several categories in a head-to-head comparison.

 

Though ETFs are convenient, they offer a different level of control over your assets than Futures. With a lack of fees and nearly double the volume of ETFs, trading in Futures is more affordable, accessible and allows instant buying and selling assets.

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above are just some general options for educational purposes. All these options come with risk. This is not financial advice.

 

 

 

Which Are Safer Futures or Options?

 

They are both risky. Futures and options are derivative securities bought and sold in the stock market. They are a contract between two parties for trading a stock or index at a predetermined price at a predetermined future date.

 

They derive value from an underlying asset, like a commodity, shares, ETFs, share market indices, etc.

 

While they do have some similarities, they also differ significantly in certain crucial ways:

 

 

Obligations vs. Choice

 

Futures require the contract holder to trade an asset on a specific date. At the same time, options give the choice to exercise the contract.

 

 

Costs

 

Futures contracts don’t require paying any upfront costs when entering the trade.

 

You need to pay only when squaring off your contract on a specified date. Options traders, on the other hand, need to pay a premium. The option seller earns this premium if the buyer decides not to exercise the option.

 

 

Extent of Loss

 

In Options trading, your potential loss is capped at your initial investment. On the other hand, futures contracts carry the possibility of unlimited liability.

 

It is due to the ability of futures to employ greater leverage that can magnify both gains and risks. You won’t have a choice but to make a margin call and top up more capital to compensate for your daily losses.

 

 

Risks

 

Options become safer than Futures as they allow you to opt out of exercising your options when the assets’ price drops. However, you don't get such freedom when trading in futures, where the trade compulsorily executes at a specified date, regardless of the asset’s price.

 

Moreover, Futures entail more risk than options because they closely follow the price and volatility of the underlying asset. Even minor fluctuations in the underlying asset's price can have a more pronounced impact on futures than options trading.

 

However, Options react differently to the underlying movement of asset prices and allow traders to exercise specific options any time before the expiration date. Applying strategies and using Options efficiently to cover risks can help reduce your losses immensely.

 

Trading in options lowers your chances of losses, and options traders are less likely to lose their premium. Thus, trading in Options is safer than trading in Futures.

 

 

 

Are Futures Better Than Stocks?

 

Let's explore a few reasons that highlight the benefits of futures trading over stock trading:

 

 

Broader Market Exposure 

 

The futures market offers broader exposure to the world's most essential commodities, giving traders better opportunities to hedge or diversify their portfolio or speculate on the underlying asset.

 

 

High Leverage

 

Futures traders enjoy the benefit of higher leverage that enables them to purchase much greater value of stocks than they could when buying individual stocks. If the market moves in their favour, it can multiply their profits at significantly less investment.

 

 

High Liquidity

 

Another benefit of trading Future contracts is that the futures market has trading volumes. Hence, futures contracts are very liquid. You can exit a large position quickly and make an instant profit.

 

 

Trading Hours

 

Unlike stock trading, futures markets operate beyond the usual stock market hours. This constant accessibility advantage gives futures an upper hand compared to stocks.

 

 

Low Charges

 

Futures trading is more affordable than stock trading due to the less expensive commission structure.

 

Futures traders only pay a commission or brokerage fee of 0.5% of the contract value when they close their position. This cost is significantly lower than the fees incurred with every stock trade. As a result, futures traders can handle large volumes without substantial expenses.

 

 

Low Impact of External Events

 

When you trade a stock index, any risk arising from external events affects the entire market, resulting in minimal impact on the index. On the other hand, when dealing with individual stocks, you're more exposed to specific risks associated with those particular stocks.

 

 

 

No Pattern Day Trading Rule

 

Stock traders usually follow a pattern day trading strategy, buying and selling stocks based on their market patterns. This way, they use short-term stock price movements to make gains.

 

Also, you usually need at least $25,000 in your account to trade as a pattern trader. It limits a trader’s opportunities to build an account.

 

However, no such rule exists in Futures trading. Traders can access the markets without limits to trade numbers at a minor cost.

 

 

Ease of Tax Filing

 

Futures traders have an easier time filing taxes than individual stock traders as you don’t need to provide a detailed list of every trade you execute throughout the year. It saves them plenty of time and makes it easier to manage things in the tax season.

 

 

Ideal for Hedging or Diversification

 

The futures markets are the most varied among the financial markets. Unlike stocks, a Futures trader is exposed to various assets in domestic and international markets. It makes them an essential vehicle for hedging or managing risks.

 

Due to this feature, companies use futures to manage interest rates, foreign exchange (FX), and price risks. It helps them lower the unanticipated costs of buying an asset outright and improve the efficiency of the underlying market.

 

 

Less Cumbersome 

 

Futures Contracts are only paper-based investments that rely solely on speculative profit. Unlike stock trading, which requires keeping track of shares of individual stocks, Futures trading is less cumbersome as it doesn’t require record keeping.

 

 

Transparency

 

Futures offer a level playing field for both retail traders and market makers. As traders receive data directly from the exchange, they get the actual market value, not a stock broker’s interpretation.

 

 

Easier Short Selling

 

Futures traders get short exposure on a stock when they sell a futures contract. However, one can’t always short-sell all stocks, as specific markets prohibit short-selling of stocks altogether.

 

Thus, Futures offer great benefits that make them appealing to all types of investors - speculative or not. However, large contract sizes and highly-leveraged positions make the trader prone to massive losses, even for small price movements in the market.

 

Thus, one should understand their benefits and risks, perform due diligence and strategise before trading futures.

 

 

10. Conclusion

 

Futures trading offers potential profit opportunities but also carries inherent risks that can lead to losses.

 

Consequently, achieving success in this field requires a profound understanding of market dynamics and a substantial initial investment.

 

If you are prepared to venture into futures trading, follow the steps above to pave the way for a promising future trading career.

 

If you don't have a trading account yet, you could consider eToro, which is used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

 

eToro Service ARSN 637 489 466 promoted by eToro AUS Capital Limited ACN 612 791 803 AFSL 491139. Capital at risk. Other fees apply. See PDS and TMD

 

 

 

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