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Disadvantages of Futures Trading

Disadvantages of Futures Trading

High Leverage: While the ability to leverage transactions is undoubtedly one of the core benefits of futures trading, it is also one of the core disadvantages, holding the potential to destroy a trading account in a matter of minutes.  Traders also often make the mistake of assuming that online trades can’t have real world effects beyond their deposit amount – with futures in particular this is not the case, and a highly leveraged position that doesn’t work out can be catastrophic.

Time Decay: Because futures have a specified and definite expiry date, they are subject to price decay even where an assets value is fixed, because the right to purchase that asset at yesterday’s prices becomes increasingly less valuable as its expiry date draws near.  This often results in futures expiring entirely worthless, and can make it particularly galling for a trader to watch his hard-thought positions trail off into nothing.

Like pretty much anything in investing, futures trading is a case of weight up the pros and cons and making a judgement as to whether it represents a good investment opportunity. By ensuring you’re familiar with the relevant risks before you get involved, it can be possible to dramatically reduce your exposure to risk and to take steps to prevent wayward trades from unduly prejudicing your trading future.

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