How Can Futures Trading Systems Improve Your Financial Portfolio?

When the subject of how to invest your money comes up, using a futures trading system can really impact your bottom line.

What is a futures trading system? First, let's start with the term "trading system". A trading system is a set of rules that quantify when to buy or sell a certain security or commodity. It is very typical for these rules to be computer-based and run in such a way as to automatically enter and exit position.

What are futures? Futures are contracts that are traded only on futures exchanges across the globe. While these contracts are technically agreements to transact an amount of the underlying asset at a date in the future, the simplest way to think of them like stocks that expire on a certain date. Gold, stock indices (like the Nasdaq), currencies, oil, and treasury bonds are some of the most popular contracts.

Why would you want to trade futures? Trading futures adds something that a stock-heavy portfolio can never achieve: diversification. Historically, when stocks gain in value, futures tend to lose value. And as stocks dip, futures tend to gain in value. This pattern holds up a decent portion of the time. At other times they move completely independently of each other. The upside to this is that the futures market is not correlated to the stock market. This is is a big advantage and it help an investor's portfolio to survive the storm of stock market rallys and bear markets.

Secondly, most futures are based on commodities: things like oil, gold, coffee, and wheat. These commodities are in global demand and aren't subject to the "fads" that can really take stocks for a ride. As prices around the globe for these commodities rise, we can gain from these price shifts by entering trades on commodities through futures.

So why would you want to use a trading system? They are superior in a number of ways to a discretionary approach. Discretionary trading means that the investor makes non-systematic choices about in what and when to invest. By using a trading system, instead of relying on what "feels right", you can make informed trade decisions based on patterns that have a high historical likelihood of success.

Secondly, and just as important, systems trading provides a means to keep your emotions under control when making investment choices. Like most investors, you've probably sold after a long losing streak only to see your stock rocket back into the green and make up for all the losses, leaving you reeling? How many times have you bought when the security looked like it would never stop going up, only to see your investment fall in the coming weeks? Unfortunately, none of our brains is unaffected by "herd mentality", and being swayed by the herd often leads to bad trading choices. By using systems, we can avoid this faulty thought process and make truly objective trading choices.

Lastly, and possibly most important, using trading systems frees up your time. Why not enjoy your time, have extra time to spend with your family, or keep up with your hobbies, rather than endlessly debating your next portfolio decision. Because most trading systems are computerized, they can be set to function automatically, and this means you can spend your time doing what you love, rather than placing your trades. For those investors that aren't computer savvy, there are many futures brokers that will faithfully trade your chosen system day in and day out for you so you don't have to be involved in the day-to-day actions at all.