Futures trading is a popular investment activity in Australia, with many attracted to the potential for high returns. However, investors should be aware of several dangers of futures trading before entering into this type of investment. To participate in markets, you can start trading futures with Saxo.
Lack of Regulation
The futures market in Australia is not as heavily regulated as other financial markets, such as the stock market, which means more opportunities for fraud and manipulation. Investors should be wary of any firms or individuals offering advice or investment opportunities in the futures market, as they may not operate under proper regulatory guidelines.
Leverage
Futures contracts are often traded with leverage, which means that investors only have to put down a little bit of money to control a much more prominent position. While leverage can lead to higher profits, it can also magnify losses. Investors need to understand how leverage works before entering into any future trades.
Volatility
The futures market is notoriously volatile, and prices can move up or down very quickly. It can result in investors incurring significant losses in a short period. It is essential to monitor the market closely and have an exit strategy before entering any trades.
Margin Calls
If the value of a futures contract falls below a certain level, investors may be required to make a margin call, which means they have to put more money into their account to cover the loss. If an investor cannot meet a margin call, their position will be liquidated, and they will incur a loss.
Commodity Price Fluctuations
Futures contracts are based on commodities, like oil or gold. The price of these commodities can fluctuate significantly, leading investors to make substantial losses. It is essential to research the underlying commodity before entering into any trades.
Interest Rate Fluctuations
Interest rates play an influential role in the futures market. Rising interest rates can put downward pressure on prices while falling interest rates can boost prices. Investors should watch interest rate movements to gauge how they might impact their positions.
Counterparty Risk
When entering a futures contract, investors agree to trade with another party. This counterparty may not fulfil its obligations under the contract, resulting in investors incurring losses. It is important to only trade with reputable counterparties to minimise this risk.
Economic and Political Uncertainty
Changes in the political or economic environments can significantly impact the futures market. For example, Brexit and the US-China trade war have increased volatility for many years. Investors should monitor these developments closely to understand how they might affect their positions, as well as any reverberations from the closing of the Brexit deal and ongoing US-China political conflicts.
Technology Risk
The futures market is highly dependent on technology, and any issues with trading platforms or systems can lead to disruptions in trading. It can result in investors incurring losses. It would be best to trade with a reputable broker with robust technology infrastructure.
Emotional Trading
Many investors enter the futures market with an emotional attachment to their positions. It can lead to impulsive decision-making and poor trade execution. It is essential to control emotions when trading and to stick to a well-planned strategy.
Benefits of futures trading in Australia
Here are benefits of futures trading in Australia.
The futures market is regulated
The futures market in Australia is not as heavily regulated as other financial markets, such as the stock market. It means that there is more opportunity for fraud and manipulation to occur. Investors should be wary of any firms or individuals offering advice or investment opportunities in the futures market, as they may not operate under proper regulatory guidelines.
You can trade on margin
When you trade futures, you only have to spend a small amount of money to control a much more prominent position known as leverage. While leverage can lead to higher profits, it can also magnify losses. Investors need to understand how leverage works before entering into any future trades.
The futures market is open day and night
The futures market is open day and night from Sunday evening until Friday night. It allows investors to take advantage of global events that might impact prices. For example, if there is an unexpected political event in the US, investors can react quickly and adjust their positions accordingly.
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