Financial Futures and Automatic Trading Systems

Algorithmic trading in futures represent a powerful tool for investors and traders seeking efficiency, diversification, and discipline in their operations.

ALGORITHMIC TRADING

Javier González-Barros, CFTe

2/12/20243 min read

Financial futures are standardized contracts that oblige the parties to buy or sell a specific asset at a future date and at a price agreed upon in advance. These contracts are traded on futures markets, which are centralized platforms that facilitate the buying and selling of futures among investors. The underlying assets of these contracts can include commodities, stocks, bonds, currencies, and other financial instruments. Futures are used for a variety of purposes, including risk hedging, speculation, and gaining exposure to assets or markets without the need to own the underlying asset.

What are financial futures for?

  • Risk Hedging: Producers and consumers of commodities use futures to fix prices and secure future costs or revenues, protecting against price volatility.

  • Speculation: Investors and traders use futures to speculate on the future direction of prices of the underlying assets.

  • Arbitrage: Some market participants seek to take advantage of price differences between different markets or futures expiration dates to achieve risk-free profits.

  • Price Discovery: Futures markets provide valuable information about future price expectations, aiding decision-making.

chart trading
chart trading

How Financial Futures Work

  1. Standard Contract: Specifies the quantity, quality, expiration date, and price of the underlying asset.

  2. Initial Margin: Investors must deposit an initial margin as a guarantee against potential losses.

  3. Daily Settlement: Futures positions are adjusted daily to the closing market price, reflecting gains or losses.

  4. Contract Expiry: Investors can settle in cash or by physical delivery, though most opt for cash settlement before expiration.

Important Considerations

  • Leverage Risk: Futures offer high leverage, amplifying both gains and losses.

  • Liquidity: Futures markets are typically very liquid, facilitating easy position entry and exit.

  • Volatility: Futures prices can be highly volatile, necessitating constant monitoring and risk management

Automatic Trading Systems in Financial Futures

Automatic trading systems, also known as algorithmic trading systems or trading robots, are computer programs that operate in financial markets automatically. These systems range from simple strategies based on technical indicators to complex models that use machine learning and quantitative analysis, operating on platforms like iSystems.com or TradingMotion.com.

Operation of Automatic Trading Systems

  • Trading Strategy: Based on specific conditions, defining when to enter or exit a position.

  • Trading Signals: The system generates buy or sell signals based on its predefined strategy.

  • Automatic Execution: Signals trigger automatic buy or sell orders in the futures market.

  • Risk Management: Includes mechanisms like stop-loss orders to protect capital.

    Advantages of Automatic Trading Systems

  • Emotional Factor Elimination: Automated operation removes emotional impact on trading decisions.

  • 24/5 Operation Capability: Can exploit market opportunities any time without human limitations.

  • Backtesting: Strategies can be tested on historical data to evaluate potential performance.

  • Diversification: Multiple systems and strategies can be used to diversify risk.

    Considerations and Risks

  • Overoptimization: Risk of optimizing a system too closely to historical data, which may not perform well under future conditions.

  • Operational Costs: Transaction costs can significantly impact profitability.

  • Continuous Monitoring: Essential to ensure systems operate correctly and adapt to market changes.

  • Technological Dependence: Effectiveness depends on the reliability of technology used.

a man in a headset is sitting at a computer
a man in a headset is sitting at a computer
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wall st

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