Pros –

• Highly Leveraged

This is both an advantage and a disadvantage. But a trader is only required to put down a fraction of the full value of the contract in order to control it. • Essentially a “Paper” Investment • Unless you plan on taking delivery of the underlying  commodity being traded, the transaction is purely a paper transaction. • (Take advantage of investing in gold, without actually “buying” gold)

 High Liquidity

In most markets, there is a high volume of contracts traded each day. (Not true for markets like lumber, OJ, etc.) Majority of retail traders are not going to run into liquidity problems. (This is not true for hedge funds) This means it is normally very easy for a trader to get into and get out of positions.

Lower Commission Rates

Compared to other investments, futures contracts have relatively low commission rates. However, commission rates vary widely depending on broker, account size, retail vs. institutional, etc.

• Tax Advantages

  Profits from trading futures contracts are counted as 40% short term and 60% long term capital gains no matter how long you hold the position. This can end up saving you a lot of money if you earn a substantial return.

Cons

Futures Prices Move Faster

Futures contracts tend to move much faster than cash markets do.

This can allow traders to earn a substantial return much faster than trading other markets. • Price is Only Going to Go Up or Down • At the most basic level, the market is either going to go up or down. All you have to do is be on the right side. (Technically can go sideways, but this is normally just a setup for a great trade!)

 Can “Spend” Unrealized Gains

You can use unrealized gains from an open position to meet margin requirements to buy/sell another position.

 Highly Leveraged Market

This is a double edged sword. Can increase losses just as much as increase gains.

Markets Move Quickly

While also an advantage, if you are not careful this can also cause you to lose money just as fast as make money. • Short-Term Investment 

Harder to be a position trader in the futures market due to contract rollover. (Just have to understand how to rollover a position to next month, don’t hold until expiration!)

Limited Number of Markets

There are a much smaller number of markets that you can trade when compared to something like stocks.

Margin Requirements Increase Overnight

• This causes many smaller investors to have to exit positions

before the close in order to meet margin and can make a good trade become a bad trade.

 Some Markets Are Highly Manipulated

Some futures markets are very highly manipulated. (Indices, OJ, Etc.) • Large Amount of Event Risk • This is both an advantage and a disadvantage. There are many news events that can cause the futures market to move a substantial amount and if you do not know what you are doing, can quickly cause you to lose money. • Little to No Volume During Off Hours • Much harder to trade futures during off hours. Volume almost dries completely up and causes spread to increase drastically.

Limit Moves

• Although you should NEVER get stuck in a limit move when trading properly. The futures markets can go both limit up and down. This is when a price goes so far that the exchange will not allow it to move any further. If you are on the wrong side of a position, you can become stuck and unable to exit your trade.

Higher Barriers to Entry

Many futures contracts have a very high margin requirement. If you have a small account it is harder to trade futures.

Summary

Traders that enjoy high volatility, fast pace trading.

Day and Swing Traders (Position traders can also trade futures, just need to understand how to rollover to new contract)

Medium to large amount of risk capital. (Very difficult to trade futures with a $4-5k account)

More Trade Opportunities per day.

 Those looking for tax advantages.