Why do some traders use futures trading systems?

The Power to Overcome Human Nature. By definition, algorithmic trading systems are inanimate objects. They are nothing more than a binary logical construct, a computer program which reacts to incoming data. If this happens, then do this. While one might think it is best to have a thinking human being pulling the trigger on a trade, one might consider a machine that knows no fear and has no greed.

As everyone knows, a profitable trade is made by following the deceptively simple instruction to buy low and sell high. But this process goes against human nature. Though counter-intuitive, humans like to buy things when they are expensive and sell them when they are cheap. Speculative bubbles build as buyers out bid each other for assets, paying more and more expensive prices. Crashes arise as the very same buyers who built the bubble burst it, racing to sell lower and lower priced assets. Inevitably most are late to the party, buying high and selling low.

As humans, we like to buy peaks and sell valleys. It’s something we see time and time again across asset classes and markets. Studies show that investor performance lags the funds in which they invest by an average of 5% a year “simply because they plow more money into a fund after performance has been hot, and step away or slow deposits when times have been bad” (read the full article here), It is extremely difficult to overcome one’s fear and buy a market when it is selling off. For better or worse, algorithmic trading systems are not conditioned by fear or greed; they only know binary logic. If this happens, then do this.

Alpha in All Types of Markets. Trading systems are not limited to one direction, one methodology or one market. Futures trading systems utilize every conceivable means of technical analysis to produce trading signals. They can profit (or deliver losses) in all types of markets, from bull to bear to sideways.

Low Correlation to Traditional Asset Classes. The realm of alternative investments generally maintains a low correlation to more traditional asset classes, like stocks and bonds.

Risk Management. Systems will vary the manner in which they manage risk, but most systems employ some means by which they can manage the risk born on a given trade. That can be in the form of position sizing, stop loss orders or trade filters. And while none of this is a protection against large or consistent losses, on an individual trade basis futures trading systems have robust options for managing risk which may not be accessible with traditional asset classes.

Of course, with the potential for profit comes the potential for loss. Futures trading systems are risky investments. Draw downs can come quick, be steep and last a very long time–perhaps permanently if market conditions change. Past performance is not necessarily inactive of future results. A futures trading system should only be traded with risk capital.

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