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Friday, October 24, 2008

Advantages of Futures Spread Trading

There are many advantages of trading futures spreads over trading naked futures (taking simple long or short futures positions).
  1. More profit opportunities and flexibility – trading futures spreads offer more opportunities as they are less volatile (compared to simple contracts), predictable and usually they follow trends.
  2. Less risk – As spread trading involves taking both long and short positions, traders have almost hedged their downside risk.
  3. Lower margin requirements – Most brokers offer reduced margin requirements for trading futures spreads. This allows futures traders to open larger positions with smaller accounts.
  4. There are many commodities (mostly agricultural commodities) which exhibit well defined seasonal trends. Futures spread trading offer better opportunity to profit from these trends.
  5. Low time requirements – As you are trading spreads, there is less requirement of following market in real-time. Spreads are better traded with end-of-the-day data.
  6. Offer better opportunities to limiting risks.
  7. Suitable for both experienced and novice traders.
But like trading any other financial instrument, futures spread trading involves sufficient risk and the trader should be well informed of his margin requirements, risk tolerance and his limitations; and also should be aware of various position sizing and risk minimizing strategies.

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posted by Daniel Pipitone at 5:41 AM

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