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How to Make Consistent Profits Futures Trading

admin — Fri, 22 Jan 2010 09:37:39 +0000

The issue of direct access is an important one and it becomes more important the more short term your trading is. The market can change from a state of seeming paralysis to one of shocking volatility and activity in a flash. The length of time it takes between you deciding to enter an order and the order actually being in the market is obviously important.
When I first started trading I used a phone broker and was dismayed that my fills would often be so far from the price the market was trading when I first entered the order.
The first time I visited the trading floor, I discovered why. When I called in an order, first my discount broker would check my account equity, then he would call a phone booth on the floor, the phone broker on the floor would then write the order down and pass it on to a booth next to the appropriate pit, at that booth my order would be written down again and then signaled to a broker in the pit to be executed.
As you can imagine this would take quite a long time, even longer of course if the market was very active, as this would mean that the broker in the pit would be too occupied to take new orders. Compare this to my experience of trading as a pit trader. In the pit I was in the heart of the market and could observe every single order as it was executed (there was no delay in my price feed!).
To initiate a trade, whether it was to buy or sell at the market, or join the bid or the offer, all I had to do was open my mouth. You can start to see the huge advantage that trading on the floor gave me over off floor traders; and that doesn’t take into consideration the fact that my round trip costs fell by 96%.
Now the floor no longer exists, not in Europe at least, so why talk about the advantages of pit trading? Well the level playing field is now open to all, but very few take advantage of it. Trading with an electronic trading platform is exactly the same as trading in the pit, except I can sit down, it is much quieter and there are no crude jokes flying around.
I can trade with the click of a mouse; my order shoots to the exchange, enters in the market and appears back on my screen before I have time to blink. I think the advantages of direct access trading are clear and any futures trader still using a phone broker should move to direct access, they will also find their commissions are less (around $8 for private client traders).
The next question that arises is why trade futures? That is an important consideration given that there are a variety of alternatives vying for your trading capital (spread betting, CFDs and options), but in my opinion, futures are the only option (no pun intended) for successful short term trading.
A lot of traders are trading the stock indexes like the FTSE, the DAX, the S&Ps, NASDAQ and the DOW, but rather than use futures they are using spread betting firms. The reasons for using these firms is that they require very small amounts of capital to get started, a trader can trade very small amounts (like $1 a point on FTSE as opposed to $10 for FTSE futures) and these firms make opening an account so easy.
I understand the lure of being able to open an account with very little money and trading small amounts, but I have some serious considerations about using spread betting as a realistic vehicle for professional trading.
The two biggest selling points are no commissions and no capital gains tax. There are many different costs to trading, commissions are one and the spread is another (especially when you have to trade at the market as you do with spread betting, with futures you have the choice of joining the bid or the offer).
Commissions are important for an active trader and as an active trader you can get them very low, but lets assume they are $8 per round turn for futures and lets assume that the spread in FTSE futures is an average of 2 points. If the spread with a spread betting firm for FTSE is 6 points and assume that we are trading $10 a point we can compare the two trading vehicles.
Last week I made an average of 2.42 points per contract traded and I traded 48 times. That is, for each contract I bought and sold I made $24.20 before commissions, assuming my commission rate is $8, I made a profit of $16.20 per contract traded, which is $777.60 net profit if my average size per trade is one contract.
Had I had the same success trading with a spread-betting firm, with a 6-point spread, I would have lost $1718.40! Now I would rather pay tax on a profit that no tax on a loss.
There is one other very important reason for trading the futures market rather than a non-exchange traded market such as those offered by spread betting firms. The futures markets are exchange traded and this means that they are fully transparent, i.e. everything is visible and above the table, I can see every single trade that happens. Imagine the trading pit, as it used to be when traders stood physically in a ring trading with each other.
When a trade is entered, the order goes into the pit and is represented there, free to be taken by any other market participant. We can all see what is happening, we trade with the same information and with the same advantages/disadvantages.
Now assume you are a trader who can only trade with one broker in the pit, you can trade as much as you like, any size you like, but he sets the spread he is willing to offer you and you have to trade at market (i.e. buy at his offer and sell at his bid). This broker doesn’t want to loose money, naturally, so he always makes his spread wider than the real market spread, he also, naturally, puts his interests before yours, so he won’t always be willing to trade when the market is moving fast and he is uncertain.
Remember whenever you make money he loses, so he is very careful to maintain his advantage at all times. Who wouldn’t want to be in this brokers position (he isn’t really a broker, though he claims to be)? When you trade with a real futures broker, all the broker does is facilitate your trade; he gives you the ability to have you orders represented in the pit. A real brokers concern is that they execute your order as efficiently as possible, that is their job, they do not take positions and they do not take the opposite side to you.
They naturally want you to make money because by making money you become a client who will continue to pay them commissions. Trading with a spread betting firm is absurdly costly, spread betting firms are like amusement arcades, they can be fun, but to imagine you are going to make your living from slot machines is illusory.

Option Trading: Thinking “Outside the Box”

admin — Mon, 04 Jan 2010 20:46:24 +0000

Wouldn’t it be great if we could buy an option with five months left until expiration and sell an option with 2 months left until expiration for the same price? You couldn’t lose. Well we can’t. I love options spreads so much I realized something very important. We can buy a spread that has a lot of time value left at almost the same price as we can sell one with less time value left. The reason really opened my eyes and gave me new insight into options. Here is what I came to realize.
I started comparing how expensive options were in relation to the other strike prices in the same month and to the other months. I wanted to know based on th e price per day which options were more expensive.
The first 1 or 2 option months, as everyon e knows loses time value quickly. The at the money strike prices are very expensive compared to the out of the mon ey strike prices. Since there is not that much time left, how much can they charge for an out of the money option? Not much.
The next several months, the opposite is true. Compared to each other, the strikes that are closer to the money are cheaper in terms of price per day than the options further out of the money. Let me explain it another way using the S&P market.
6 days left at the money option cost 12 points
6 days left out of the money option cost 2 points
70 days left at the money option cost 43 points
70 days left out of the money option cost 29 points
There is more than 10X the time left but the 70 day at the money option (43 points) is only less than 4X the price than the 6 day at the money option (12 points).
The 70 day out of the money option (29 points) is almost 15X the cost of the 6 day out of the money option (2 points) but only has 10X the time value. We will buy the cheaper options and sell the more expensive ones.
Sell 6 day at the money and sell 70 day out of the money. Buy 6 day out of the money and buy 70 day at the money. This will be done for a 4 point debit. We are now buying a spread that has 10X more time value than the one we are selling and are only paying 4 points for it.
When the 6 day options expire we can sell the next month to take in more premium, still keeping the 70 day option spread.
What goes up, must come down! We have all heard this befo re in reference to the laws of Gravity. We have laws in the commodity markets as well. What comes down, must go up! The greatest traders of our time like War ren Buffet know this. He is perhaps the greatest Stock trader ever. He had never traded commodities until a few years ago. He bought silver in the futures market. When the market went even lower he bought more. The “smart money”, commercials will not be scared into selling when a market they have purchased drops even further. They know better than anyone that a commodity has real value and will always be worth something.
There is a famous book, “You Can’t Lose Trading Commodities”. The author buys commodities and then just waits for the market to go higher. He would purchase more as the market fell.
You need a big bankroll for this. Personally I know corn won’t go to $1.00 but what if it did? I want to minimize the risk in case I want to end the trade.
I started trading the Soy Complex this way several years ago. Not with options. Strictly futures. I bought what was similar to a crush spread. I increased the contracts as the market went against me until the spread rebounded a little. Since I increased the contracts I didn’t need the market to come back to where I started. It only had to rebound to the next level.
Black Jack players did this until Casinos caught on and put limits on bets. It is a known fact that futures traders make good gamblers and professional gamblers make good futures traders. I am against gambling but even gambling done with a system is not really gambling.
These card players would bet something like this: $5 lose, $10 lose, $20 lose, $40 lose, $80 win. The losses add up to $75. They would win $80, so the profit is $5. Not a lot, but they would do this all day. Black Jack is just under 50% probability for the player.
The problem is there is a slight chance that you could lose 40 times in a row. Now with Commodities we have a 50% probability and we won’t lose 50 times in a row because the market can’t go b elow zero.
Now before I go an y further, I need to tell you that I am not recommending you double down on your trades. What you can find are mark ets that are near their lows where you can do a small scale trade. Spreads offer even better opportunities. They have a closer range (high to low).
By now you can see we only use this to go long a market since we can never b e sure how much a market can go higher. First we need to find a market that is low already so we won’t have to wait that long and also so there will be less capital needed. I prefer to trade this using options. There are many ways to do this. You could buy an option in a market like soybeans and choose how many cents the market will drop before you buy more. The problem is, an option is a wasting asset. The Theta (time decay) would cause you to lose money.
I use spreads so I am not paying for time decay. I will probably sell more Theta than I buy, so if the market does nothing I will make money just on time decay.

Forex Options Trading – What is Forex? (part 2 of 2)

admin — Sat, 02 Jan 2010 21:17:32 +0000

Companies, exporters and importers are also very much involved in the forex market as buying and selling of products takes place all over the world thus buying and selling of currencies to facilitate and complete all these transactions are needed. An exporter in the USA might have sold his products to a company in Europe in US dollars so the importer has to buy US dollars while selling his Euro dollars to pay for the products from the USA. Or a company may need certain parts for their equipment which is not available locally so they have to order from overseas.

This process requires the company to purchase the supplier’s currency so as to pay for the parts.

Lastly, we have the retail traders who have chosen the forex market above others like equities, commodities, etc. to do our trading or investments so as to make some profit. This is a growing segment due to the prevalence and accessibility of the internet which allows brokers to provide trading platforms and continuous price data feed to the small players globally. The low and affordable cost of the internet also helped many to participate in this growing phenomena.

Brokers are going online with their own platforms that allow easy and simple to use trading and also to provide education to these small retail traders. The mushrooming numbers of brokers in recent years also act to lower cost (wonder of competition) for the small retails traders.

Most brokers do not charge commission and the spreads for major trading currencies have also narrowed tremendously. There is no better time than now to start your foray into forex trading.

Forex Options Trading – How to Read Forex Price Quotes (part 1 of 3)

admin — Wed, 09 Dec 2009 21:29:02 +0000

When you start trading in the Foreign Exchange market, you will notice that the prices for either buying or selling a currency pair always come in a pair of price quotes. One is called the ‘Bid’ (or Sell) and the other is called the ‘Ask’ (or Buy). You will notice the same in any other investment/trading products (e.g. equities, commodities, etc.). The price that you buy a currency pair is reflected in the Ask price while the price that you sell a currency pair is reflected in the Bid price.

The Ask price or selling price of a currency pair is always the higher one in a price quote. While the Bid price or buying price is the price at which you buy the currency pair. What this means is that you will always buy at the higher price and sell at the lower price of a price quote.

You will notice that between the Bid and Ask price there is a difference and this difference is what we call the “Spread”. The spread is the cost of the trade or transaction. Usually this is the only cost for the trader as most forex brokers nowadays (due to competition on the internet) do not levy any additional commissions unlike when you are trading on other investment markets like equities, etc.

At the beginning it may seem confusing for a beginner as when we purchase something only 1 price is given to us. However, beginners just have to remember that you will always have to buy at the higher price of the 2 prices while selling a currency pair you would have to remember that it is the lower of the 2 prices. It doesn’t make sense for the broker to sell you at a lower price and then buy back from you at a higher price.

To be continue… on Forex Options Trading – How To Read FOREX Price Quotes (Part 2 of 3)

Forex Options Trading – 9 Reasons on Why You Must Trade Forex (part 2 of 2)

admin — Tue, 08 Dec 2009 08:12:49 +0000

In the last article on “9 Reasons on Why You Must Trade Forex (Part 1 of 2)” You have understand the:

1. Round the clock trading 2. No need to choose from too many counters 3. Liquidity 4. Good Leverage

Next you will understand more on why you must trade forex.

5. No Brokerage fee or commission

Forex brokers mostly make from the spread between the bid and ask prices. Unlike other stock brokers where on top of the spread between the bid and ask prices, they will charge a commission based on the percentage of total value of contract.

6. Able to short currencies

In forex, there is no restriction on short selling as all currencies are traded in pairs. i.e. you buy or sell one currency against another unlike stocks and shares. Without the restrictions, a trader can react quickly to the changing dynamics of the market unlike in the equities market where short selling is discouraged or made inconvenient to do.

7. Minimum investment

You can start trading in forex from as little as USD200. The amount is dependent on the broker you are opening an account with. This is due to the leverage a trader can obtain from the broker which allows such low minimum deposit.

8. Trade globally

With the overwhelming prevalence of internet and the many easily accessible forex trading platform provided by the forex brokers, we can now trade anytime and anywhere in the world as long as we have access to the internet.

9. Unlimited Real time Demo Account Practice

Most forex brokers will allow you to open a demo trading account to practice your strategy and also get familiar with their trading platform. What this means is that you do not have to paper trade. It allows you to get as close and as real as trading in the real market without losing a cent first.

Forex Options Trading can do a very good model for people who want to do Forex Trading. What you need is a right system, the willingness to work and determination to not give until you reach your goal. If you are willing to take action, then this Forex Trading is suitable for you.

Forex Options Trading – What is Forex? (part 1 of 2)

admin — Sat, 28 Nov 2009 08:58:45 +0000

Forex or foreign Exchange or FX involves the buying and selling of one currency against another currency. They are always traded in pairs e.g. EUR/USD, USD/JPY. So when you are buying Euro dollars (EUR) you are also selling the US dollars (USD) in exchange for the Euro dollars. If you want to buy US dollars then you would sell the Euro dollars in exchange for buying the US dollars.

An example that we would encounter frequently is when we travel overseas and need to exchange the local currency for the foreign destination currency and we would head to the local money changer or bank to buy the foreign currency. This is a good example that we are familiar with.

By buying and selling currencies at the money changer or bank we are already involved in this huge foreign exchange market. Banks and central banks, investment funds, hedge funds, exporters and importers, companies and retail forex traders are among the main participants in the forex market.

Banks trade to generate profits and also act as buyers and sellers of one currency against another for their clients trading and commercial transaction. While central banks buy and sell currencies to hold as reserves and protect the reserves. They also act to moderate their country’s currency strength to facilitate reasonable terms of trade in the international markets for their exports and imports.

Investment funds have a percentage of their portfolio in the forex market for many reasons like diversification, hedging, etc. While most hedge funds will speculate on currencies as it is the biggest market in the world thus able to accommodate their large trading size which is quite difficult to do in the equities or futures market.

To be continue.. at – Forex Options Trading – What is Forex? (Part 2 of 2)