Futures Algo Trading: How AI Has Transformed Trading Future Contracts
Futures are amongst the most complex yet profitable derivate contracts to trade in the financial market. Many traders want to trade futures, however, they are scared of its complexity.
What if I tell you a way to turn the complexity into simplicity? Yes, by integrating future and automated trading, you can do so. In this Market Investopedia blog, we will discuss what future algo trading is, as well as its pros and cons. So stay tuned.
What is Algo Trading?
Algo trading is a strategy that uses highly advanced computer-based trading algorithms into consideration to assist traders in automating most of their trading tasks.
Automated trading tools can watch the market, analyze technical and fundamental conditions, identify opportunities, and execute trades on the trader’s behalf.
The strategy works on the basis of technical analysis indicators and predefined trading rules. Traders just need to monitor the automated system and make changes according to real-time market conditions.
What are futures?
Futures are financial derivatives contracts that give an obligation to buy or sell assets at predefined prices at a specific date in future. Traders can trade in forex, indices, commodities, bonds, and the stock market through future contracts.
At present, the number of future traders is increasing significantly. By trading futures, traders can take advantage of rising and falling markets, high liquidity, good leverage, and experience time flexibility.
How Futures Algo Trading Works
Future algo trading refers to using algorithmic trading tools and software for trading financial derivative contracts. Here is how you can start automating future trading:
- First, start getting a little technological and market knowledge. It will help you incorporate automated tools in trading.
- Now it’s time to select ideal Forex expert advisors, automated software, and technical analysis tools for your trading. Traders can practice demo trading to select an ideal automated trading bot and analyze its features.
- Once you have selected an automated software, customize it according to your trading strategy. Set risk-to-reward criteria, leverage limit, analysis methods and indicators, trading time frame, and overall trade execution criteria.
- Backtest your algorithmic trading system to find its strengths and weaknesses and make changes accordingly.
- Let your automated system analyze market data, identify trading opportunities, and execute trades. You just monitor the activities, keep an eye on current market conditions, and make changes if required.
A quick glance
Futures trading algorithms have altered the way traders approach the markets — futures traders may now trade faster, more precisely, and with more potential complexity since automated tactics can be handled
There’s one important ingredient that sets futures trading apart from gambling: you. The individual determines the rules of the game ― not the casino. Futures equip you with the ability to accept risk, recognise rewards, and construct strategies on your own terms. To illustrate this notion, look to the house-edge table above.
For futures contracts and some options, this rule applied to holding periods: 60% of gains taxed as long term, 40% as short term, regardless of holding time. Maximizing these advantages is only achievable with appropriate filing.
A futures trader can potentially benefit by correctly forecasting the direction that the price of gold will go. But if the futures trader guesses incorrect, he can lose his entire investment and more. Now that you know how a futures contract is used, let’s look at five main components of a contract.
Once you complete your school and have some experience with trading, you can start pursuing a job as a futures trader by pursuing education in the financial industry. Consider positions that allow you to work directly with futures contracts or train under experienced traders.
To design algo-trading strategies, you need to have programming skills that let you control the technical parts of the approach. So, being a programmer or having experience in languages such as C++, Python, Java, and R will assist you in handling data and backtest engines on your own.
Top Algorithmic Trading Strategies:
Traders can go for a number for a number of strategies for automating trading in the future market. Here are the top ones:
High-Frequency Trading HFT: Practice high-frequency strategies such as scalping and day trading, which require quick decision-making. With algo future trading, traders can use highly advanced software to efficiently plan and execute their day trades.
Hedging: Future contracts are majorly used to hedge the risk associated with the rise and fall of the asset price. Automated bots assist hedge fund managers in identifying hedging opportunities and executing trades accordingly.
Trend Trading: Trend trading is all about taking advantage of current or ongoing trends in the asset price. A trader needs to conduct a technical analysis to identify the strength of the prevailing trends. With Algo future trading, the software can conduct analysis and place trades; you just need to monitor them.
Market Making: Market Making is a strategy where a trader places buy and sell orders to maintain liquidity for an asset and make a small profit from the bid-ask spread. Future traders can make quick decisions, practice risk management, and effectively use this approach.
Arbitrage: Arbitrage is a strategy for taking advantage of price differences on different platforms. Traders buy an asset where the price is low and sell it on the platform where the price is high. Automated tools can help you identify price gaps and place trades.
Advantages of Futures Algo Trading:
High Volume Data Analysis: Future traders buy or sell the contracts, predicting the rise and fall of the asset price. A trader needs to organize technical and fundamental analysis to identify the asset price movement.
Watching global market news and updates and examining historical price patterns require continuous monitoring. Algo trading software can help you with that. It can organize high-volume data analysis in milliseconds and provide valuable insights.
Practice Advanced Trading Strategies: Advanced future trading styles require an advanced trading approach, and automated software can give you that. With algo future trading, traders can open, close, and manage multiple trades simultaneously. Also, the tools give impeccable speed, and traders can execute the trade in even seconds.
Solid Risk Management: Future Trading involves significant risk, and almost every trader has risk management rules. However, the real task is to keep control of your greed and stick to these rules. And many traders failed in that.
Automated tools are designed based on predefined rules, and they only place a trade when the market conditions fulfill your trading criteria. Also, these systems follow proper risk, leverage, and position sizing criteria that lead to logical trading.
High Efficiency and Accuracy: With manual trading, human error may occur during data analysis and interpretations. However, automated systems use highly advanced technology, so the chances of errors during executions are negligible.
Proper market analysis results in informed decision-making that ultimately boosts trading efficiency and accuracy. With high efficiency and accuracy, profits are also high.
Trading Capital Diversifications: Futures contracts allow traders to trade in diverse financial markets. However, knowledge of different markets is required to identify opportunities in diverse markets.
Having in-depth knowledge of all financial markets and assets is rare. With a futures algo trading strategy, bots can identify potential opportunities and place trades in diverse assets. Traders just need the basic knowledge to monitor and make changes accordingly.
Backtesting and Strategy Optimization: Backtesting is the most important method of checking the effectiveness of your strategy or trading system. With automated trading, a backtesting tool can also do it for you.
A range of automated tools are available on which you can test your strategies and algo system. The software can examine them and provide you with the necessary solutions.
Limitations of Algo Future Trading:
Costly: Traders can find free and paid algo tools on different future algo trading platforms. However, the quality of the free system is questionable. Risking your hard-earned money based on such tools is similar to gambling.
An automated system with a good track record and success rate involves a significant cost. Not every future trader can afford to pay such a cost.
Limited Flexibility: The future market tends to react to changes in economic, geopolitical, and social conditions. A big event or news causes a sudden and significant change in the market volatility. Automated trading systems are based on predefined rules, so these can underperform during sudden market changes.
Technical Errors: The smooth integration of automated systems requires robust internet connections. Small disruptions, data outrage, or network errors can affect the entire system. In such cases, traders may miss an opportunity or even lose a potential amount.
Regulatory Restrictions: Practicing future algo trading is legal in almost every country. However, an algo trader needs to adhere to the rules and regulations that are set for automated trading. These rules depend from country to country, so if you are thinking of starting future algo trading, first learn about these regulations.
Bottom Line
Future contracts are amongst the best ways to trade in diverse financial markets. When you integrate an algorithmic system with future trading, the chances of positive returns are much higher.
Futures algo trading is suitable for advanced, intermediate, and even market beginners. However, remember every technology has its limitations. And that’s where human intelligence can be used.
Trading futures contract with Algo software is only profitable when you have the right knowledge and proper execution. If you lack market knowledge, you can explore our educational resources and take a step toward profitable trading.