Why I Trade Futures vs. Stocks:
This is the answer to an oft-fielded question: "...Is there any reason you stopped trading stocks and went only to index futures with your own account?..."
To give you some background on the whole process, it all started out when I was about 10 or 11 years old, in 1974 or 1975, when there was a big sugar shortage. Every time sugar was in the store, all the ladies in the neighbourhood would descend upon the store and buy all that they could. Every time we went back to the store, the price was radically higher. I thought it was very strange and puzzling. In time, the supply of sugar returned, and prices dropped like a rock, and no longer were we on alert to drop everything at a moment’s notice and go to the store, lest sugar became extinct as a commodity.
In 1976 or so, my father became a realtor. At the time, real estate had just started to get hot, and in due course, prices moved in parabolic fashion. Those were the go-go years. Then in 1979 or 1980, the gold rush came on, and my father, who had absolutely no trading experience of any kind, decided to “invest” in gold, for it was sure to make him a fortune. I remember being silenced daily at breakfast, so that he could listen to the spot gold price on the radio.
Gold, gold, gold. That was the topic of all conversion, in addition to how hot the real estate market was. Inflation was rampant and was projected to launch both commodities to the moon. After all, there was only so much gold and real estate on this planet. I recall watching footage on television, of lineups for blocks and blocks long outside the bank downtown, people waiting to buy their ounce of gold. To me, it seemed even more bizarre than the sugar-hoarding episode. After all, you can’t even eat this stuff. The price was going up insanely everyday, just as sugar had done.
Then, all in one day, it came to an end, as wage and price controls were announced on television by Canadian Prime Minister Pierre Trudeau and interest rates went to the moon. At that point, not a single person that I knew wanted to buy term deposits at 18% per annum. I thought, even as a kid, obviously this was a good deal, since the government had already decided to kill inflation, so how much risk was there? But of course, my father decided that I didn’t know anything, so after the price of gold broke from the top, he decided to buy some more. On the failing bounce, he doubled his position, and well, you can imagine what happened after that…
Even before I earned a driver’s license, I had witnessed three clear episodes of complete speculative mania, and was deeply affected. Time passed, and in my second year of university, I began to make quite a lot of money as a local model. I thought it would be a good idea to invest it somehow. I started buying mutual funds that year, and I think it was 1982, still as a teenager, in the days when people had to make appointments to see financial planners and pay 7% commission to get in.
When I graduated from university in 1986 I cashed in my mutual funds and started trading stocks. My first trade was made on a recommendation from a broker friend. Immediately after I purchased the stock, it started to go down and I told my friend to sell it. He refused, saying that I would be sorry, since there was “no reason” to do so, as the fundamentals had not changed. That was my last trade with a broker. I was cut in half in less than a week. I was not impressed. I decided that if there was the possibility of losing so much, I might as well try my hand in trading. The good news is that this same broker introduced me to some contacts and I gained entry into the securities industry. It was April 1987.
In that market, anything would fly, and fly on volume. The floor traders of the first firm that I worked at gave me some good advice. I was to keep an eye on volume and capital structure. If the public float of the stock is small, then it can go high, and fast, since the demand quickly exceeds supply as the public rushes in. That was my first venture into the world of corporate finance, and how to structure “tight” deals, ones that were guaranteed to go up with virtually no buying! There were some other simple rules: No volume = no trading. If you can’t “get off the paper”, then don’t get on, unless you BYOB (Bring Your Own Bid) by selling short first. If the stock was not in play, don’t touch it, until the public gets in there and starts loading up. And most of all, if you’re wrong, just get out, since it can always be bought later. And if not, there is always another play around the corner. In no case, no matter what, was I to become what they referred to as “A Bag Holder”, a retail trader who let pride, greed and hope con him out of his hard-earned cash, since a trader’s capital cannot be tied up in bad positions. That was all good advice, because you know what happened a few months later.
After the Crash, I saw volume dry up on almost every single issue that I had previously traded, and many of the stocks did not even have decent bids for days. The market eventually got better and in time, liquidity returned to the Canadian senior stocks and speculative issues. We also traded some stocks in the U.S. exchanges, and also gold futures. Of course, gold was a one-way street, so that was easy, and I got a lot of practice selling short.
After the collapse of Bre-X in 1996, the Canadian market truly died, and I decided that I would never be stuck in dead markets where even my order of 5,000 shares of a world-class gold company would move the market by $1.00 - and that was after getting up in the morning, to find the position against me by $3.00. It was not a good way to start the day. Besides, I was sick and tired of scanning for candidates, doing all the research, etc. I realized that I would be at a significant disadvantage as a trader if I were a Johnny-come-lately to a particular stock, since I was not familiar with the company’s fundamentals, it’s earnings, the rumours, the players, etc. I could be blind-sided at the open the next day, if I held a position overnight.
I wanted to have a life. To me, trading is a means to an end, and it was my job to have a set of skills that was transferable to all markets. Thinking about the market constantly was annoying and holding positions overnight made me nauseous, since the positions I had on were ever growing, increasing my risk daily. I had “blown out” twice before I was 25, and I realized at 32, I was only a couple of years away from retirement if I chose, and I didn’t want to endanger my future. I had also grown completely cynical from being in the brokerage industry, watching clients get fleeced like sheep in the stockmarket. With that, I decided to put stocks behind me forever and tried my hand at S&P futures, since I knew all the macroeconomic issues every well, from my years of observation of the world at large and all the manias that had happened before. I figured if liquidity in bonds and S&Ps ever ended, then the problem would be bigger than all of us, and leave the game.
I was soundly beaten upon entry to the world of S&P Index futures. Using my stock and option techniques, I discovered that I was only a third string athlete and did not make money at all in the allotted six months of climbing the learning curve. By using all my trusty indicators and what not, as I had used in trading stocks, I would always be “close enough” in futures, but never got the entries correctly before being stopped out. I discovered that there is a big difference between “indicator” and “signal”. After all, the supply and demand equation is radically different in the world of futures, compared to the world of stocks. Of course, the “tight” stocks can also come “loose”, given that insiders can create a ton of free-trading paper through options, escrow releases, and generally printing more paper on demand to raise money, thereby destroying their capital structure in time. Each market has it’s own unique characteristics. Still, I pressed on.
I did a lot of research and thinking, and challenged myself to develop a market model based on market mechanics that actually described the world before me. It took about six more months and from then on, I have never looked back. If it were not for the challenge of index futures, I would not be here today. And the good news is that if you can trade this beast, you can trade anything. If it were not for the web site, I would now be trading only in “campaigns”, when there is a reason. I would not be sitting in front of the screen all day, but this too, has changed, as I retired from the world of real-time chat a couple of weeks ago. Now I can go back to my life, as I had envisioned it four years ago.
Teresa |
