Why Futures Trading is Dangerous and Unprofitable: Risks, Fees, and Why Long is Better Than Short
Futures trading is often seen as a fast path to wealth due to the use of leverage. However, behind the illusion of huge profits lie serious risks, high fees, and mathematical peculiarities that make this instrument dangerous, especially for beginners. In this article, we will analyze why the futures market can be a trap and explain why long-term long positions (buying) have an advantage over short positions (selling).
1. The Dangers of Futures Trading
1.1 Leverage: Friend or Foe?
Futures allow trading with leverage up to 1:100 or higher, which multiplies both potential profits and losses. For example, with a $1,000 deposit and 1:10 leverage, you control a $10,000 position. While this seems like an opportunity to earn more, even a small price movement against your position can lead to disaster:
- A 10% drop in the asset will wipe out the entire deposit ($10,000 × 10% = $1,000 loss).
- Volatility of 2-3% per day is common for many markets, making the risk of a margin call (forced position closure) extremely high.
Conclusion: Leverage turns futures into "Russian roulette"—one wrong move can erase your capital.
1.2 Fees and Hidden Costs
Futures trading involves not only broker commissions but also financing costs (if the position is held overnight). For example:
- Transaction fees: With active trading, they can consume 30-50% of profits.
- Short position financing: During contango (when futures are more expensive than spot), traders opening shorts pay daily fees to maintain their positions. This creates additional pressure on the deposit.
1.3 Margin Calls and Psychological Pressure
A margin call is a broker's demand to top up the deposit when losses approach a critical level. During high volatility (e.g., news releases), prices can "gap" past stop-losses, leaving traders with losses exceeding their calculations. Constant stress and the need to monitor positions 24/7 are emotionally draining, increasing the likelihood of mistakes.
2. Why Long is More Profitable Than Short: Math and Market Logic
2.1 Profit Asymmetry: Example with Growth and Decline
Consider a hypothetical asset that rises from $20 to $100 and then falls back to $20.
- Long position (buy at $20):
When selling at $100, the profit will be:
($100 – $20) / $20 × 100% = 400%.
- Short position (sell at $100):
When buying at $20, the profit will be:
($100 – $20) / $100 × 100% = 80%.
Why such a difference?
- For longs, the calculation base is the initial price ($20).
- For shorts, the base is the selling price ($100).
Thus, to achieve equal profits, shorts require 5 times greater price movement than longs. This fundamental asymmetry puts short traders at a disadvantage.
2.2 Risk-Reward: Why Shorts Lose
- Long: Maximum loss is limited to 100% (if the price falls to zero), while profit potential is theoretically infinite.
- Short: Maximum profit is limited to 100% (if the price falls to zero), while losses can be infinite (prices can rise indefinitely).
2.3 Market Trends and Crowd Behavior
- Historical growth: Stock markets, cryptocurrencies, and commodities tend to rise long-term due to inflation, technology, and demand. Shorting against the trend is fighting statistics.
- Panic rallies: Sharp price increases (e.g., due to short squeezes) force short traders to close positions en masse, amplifying their losses.
3. Additional Risks of Short Positions
3.1 Position Rollover Fees
Shorting futures often involves swap fees, especially during contango. For example, Brent oil futures may have a daily rate of 0.1%, which with 1:10 leverage consumes 3% of the deposit per month.
3.2 Psychological Stress
- Short trading requires perfect timing, leading to stress and impulsive decisions.
- Long-term longs allow weathering corrections, while shorts require constant monitoring.
4. Alternative: Long-Term Investments Instead of Futures
4.1 Spot Buying (No Leverage)
Investing in stocks or cryptocurrencies without leverage reduces risks: even if the price falls, you still own the asset, and recovery is always possible (e.g., Amazon after the dot-com bubble).
4.2 Diversification
Instead of focusing on one futures contract, spread capital across stocks, bonds, and ETFs. This reduces portfolio volatility.
4.3 Using Options
Options limit risks: for example, buying a call (right to buy) caps losses, unlike shorting.
Conclusion
Futures trading is a tool for professionals willing to accept extreme risks. High fees, leverage, and the profit asymmetry between longs and shorts make it unprofitable for most retail investors. Long-term long positions, on the other hand, align with market logic: they forgive mistakes, harness compound interest, and don't require constant monitoring. Remember: capital preservation is the top priority. As Warren Buffett said:
"Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1."
Before opening a futures account, ask yourself: Are you ready to risk everything for a dubious chance at quick profits?