Discount Futures Trading – A Few Things You Need To Know

Discount futures trading has grown up since the late 1990s. Before that there was only plain old ordinary futures trading. Without the internet, you actually had to use a telephone and ring your broker every time you wanted to place a trade. Can you imagine?

And it was time consuming. Good brokers were hard to find and word of mouth was the main method. It was all very expensive and so only the wealthy could engage in it. Now almost anybody can trade on the financial makets because of computer technology and the internet.

The origins of futures trading lie in farmers and traders requiring certainty as to the price of the commodity they were buying or selling at some point in the future. Farmers could sell their wheat, for example, a couple of months before harvesting, and receive a guaranteed price. They risked losing out if there was a bumper harvest, but then if the price went down for any reason they were protected by the guaranteed price.

This came to be known as hedging. You save yourself from a disastrous harvest, if you’re a farmer, or an increase in the price of a commodity that you don’t need for 3 months, if you’re a merchant. Hedging accounts for around 20 per cent of futures trading. The other 80 per cent is accounted for by speculators, who seek to profit from price fluctuations in commodities or other markets (e.g. foreign exchange) and believe they know which way the price will move.

When the internet enabled more and more people to trade in the financial markets, brokers used the increased profits this brought them to invest in software that enabled clients to trade using an interface on their computer screens. The active participation of the broker was not normally required. This reduced costs considerably and led to a drastic reduction in brokers’ fees, hence Discount Futures Trading.

Another benefit of internet technology was that whereas brokers had only been able to offer the Mini S&P 500 for online trading, from the late 1990s the whole range – stocks, indices, currencies, commodities, and so on – became available for online trading.

This situation was compounded in 2003, when a minimum equity of $25,000 was imposed on day traders, diverting them in droves to Discount Futures Trading.

Great story so far, isn’t it? Not only a low cost of trading, but leverage too. Leverage means you can trade with, say, $100,000 of stock or currency when you only have $10,000 in your account. That’s because very often only a 10 per cent deposit is required. So if your stock or currency increases in value by 5 per cent in a couple of days, which is quite commonplace, you actually gain a 50 per cent profit on your $10,000.

But there’s also a downside, and it is this. Just as it is easy to make huge profits very quickly, you can just as easily lose all your money if you’re not careful. And the tragic thing is that most of the new traders turning to discount futures trading are new to financial trading in general and don’t take this fact seriously. They are sitting ducks, waiting to be fleeced by the shrewder, more experienced traders who accept the rules of the game – that trading is not a license to print money and that they are inevitably going to have some losing trades.

Once you realise that, you have probably increased your chances of success in futures trading by at least 50 per cent. What else can you do to ensure your long term success at this business?

First, be wary of the advice and information made available to you by brokers. Their interests are not necessarily the same as yours. Secondly, look around and see what modern technology has to offer you in the form of information systems and software that can hugely increase your chances of success. There’s at least one out there that you can quickly learn to use to your advantage.