Trading in options and futures can be financially rewarding, but achieving consistent results requires a sophisticated set of tools.
Time is money, as the saying goes. When it comes to trading financial derivatives such as options and futures, this could never be truer. Prices change very quickly, so every second counts.
Analysis to profit
To be successful in trading derivatives, it´s important to have access to real-time data as well as advanced tools. You also need to know what the various gauges are telling you.
Using charts to decipher short-term pricing trends, or technical analysis as it is known, tends to drive the trading decisions that investors make on software platforms.
Whether you want to trade in shares, currency or commodities, a good software platform will contain the kinds of features that enable you to get the most out of technical analysis.
Traders seek to capture the future direction of an underlying asset and position themselves accordingly so they can make profits. Technical analysis, using sophisticated charts, helps to identify attractive entry and exit points.
Advanced tools extrapolate trends from technical factors such as the pricing and trading volume of a given asset, considering both real-time and historic data.
What´s known as fundamental analysis, meanwhile, tends to be more the domain of the longer-term investor. For instance, analysing a company´s income statement or a country´s economic data can help such investors understand the bigger picture.
Some canny investors manage to combine the two disciplines; fundamental analysis identifies the wider trend but technical analysis helps them with timing the trades.
Your trading platform should be able to offer comprehensive, accurate, up-to-date data, along with the built-in algorithms that will ultimately deliver the analysis on which you base your decisions.
It´s important to have access to a wide selection of charts that can plot factors such as volatility, moving averages and Bollinger bands.
Moving averages are just as the name implies, and give you a smooth trend line by averaging the price data. A Bollinger band, meanwhile, is formed by lines plotted two standard deviations either side of a moving average. As 90% of pricing takes place within the two bands, a move outside the band is a notable event.
A range of visual display types are available, including line and candle, helping you to identify the trends and patterns represented by charts more quickly. It´s also useful to have access to flexible charting so you can compare different assets against each other.
Using stop and limit orders can be used so you automatically close out a position once a certain price is reached. This means you can take profits when the price hits a certain level, but also that you can limit your losses.
In addition, automated trading is used to open and close positions based on technical signals. Algorithms can enable you to implement more sophisticated trading strategies that have been pre-built for you.
Software platforms may also offer backtesting, which allows you to simulate how well trading strategies perform against historical data over a given time period.
Investing in options
Buying call options, also known as taking long-call positions, can be used to profit from rises in indexes or stock prices. Purchasing put options, also known as long-put positions, means you could also potentially make money from price falls.
Investing in long-calls means you make a profit if a stock price rises above a certain level. If it doesn´t rise to that level, you just lose the amount of money you paid when you initiated the call transaction, known as the option premium.
With a long-call, the good thing is that your losses are limited, but your potential profits are unlimited.