DB et al,
I thought I might take a moment to report to you from the futures trading world where I've been since June. Those of you who don't like meandering thoughts may just want to scroll to the next message.
I started trading futures (and not doing any equities or options) this summer because a friend was kind enough to help me get set up. I believe that futures trading is "pure" trading in that it is boiled down to the essence of trading, versus concepts of investment, analysis, outsmarting the market, etc. My experience has confirmed this to me.
1. Trading is not an intellectual exercise. This gets pounded into me each day as I follow the charts. My current analogy for trading futures is playing tennis. Playing tennis well requires a long apprenticeship, expenses with little initial payback (or none), careful study of the game and then a development of skills and instinctual responses to a given set of rules on a specific, measured surface. You want to play tennis well? Get ready to spend money on racquets, lessons, tennis balls (lotsa), court time, entry fees, etc. Prepare to get scorched in your tournament and other competitive activities. The tennis "market" will have you for lunch as you learn the game and get bagled and french-fried for a long time (that is, losing 6-0, 6-0 (bagled) or 6-1, 6-1 (french fried)). When you become a moderately competent player you will still be reading tennis articles, taking lessons and working on your thought processes. But when you reach the level of a good tennis player, you won't read (or need to read) the articles in Tennis magazine, and you will begin to develop more and more your rhythm and your instinct on the court.
Now to futures. You will pay commissions and slippage and incur losses in your account, if you are really learning to play, just as certainly as you will buy and blow out case upon case of tennis balls, move from racquet to racquet, pay court time and teacher time. The more I trade futures the more I understand that it is the antithesis of an intellectual exercise. Most of the greatest tennis players don't even have a semester of college, many have only received the formal schooling they might get at the Bolletieri Academy during off hours from court time, hardly Andover. The worst thing you can take into a futures session (daytrading) is some concept of where the market "should" go. It might go there, or not, or it might go there in the most roundabout way imaginable.
If it goes there in a roundabout way then you will be stopped out, at your preset loss, before the market has a chance to prove your "concept" was correct.
The leverage available in futures is incredible. Just as an example, my first trade on Friday was a single contract in the Mini Russell 2000, which requires $1687.50 in daytrading margin. The index gained $1.90 ($190) in about 11 minutes on Friday morning, less $7.50 for commissions and charges, and netted $182.50. That's a neat 11% gain. Going into the market, the Russell was technically a sell, but it rose, then fell, then rose, fell and then really rose to a nice high of the day before selling off at the end. Traded correctly, it could have yielded, on a single contract (a "one lot") basis, 70-80% return on Friday.
Did I get that? No. I was interrupted by a technical problem with my system (Strategy Runner software with Man Financial as the broker) and was without my system when it made its big move.
2. A word about technical trading. No, not TA but the actual technique of trading futures. You absolutely have to trade for a longish time in small lots in order to make all the stupid mistakes when it will cost you only hundreds, rather than thousands, of dollars. For example, try trading out of a long position (going flat) only to discover that you didn't sell out of your long position when it moved against you, you actually bought 2 more contracts and are sitting on a 3 lot with the market heaving against you. (I've done that, it's not fun). Or being long a crude contract at 12:01 p.m. Chicago time (the market for crude closes at 1:30 p.m. Chicago time) only to find out the market is closed for 4 days because today is Labor Day Friday and the market closes an hour and a half early. (I just did that, and had a $900 gain evaporate to a $2,000 loss and then come back to a $500 gain again by the open of the US crude market on Monday). You have to spend weeks and months learning your software, learning to check all open positions, all open orders at any time you think you might want to take a long distance call, go to the bathroom, get a cup of coffee or answer the front door.
3. Day trading futures requires an emptying of the mind of all prejudgments, ideas, concepts and analysis. You have to trade the chart and react to what IT is telling you, and nothing else. It's very Zen, but the day often stretches out and can get rather tedious. Because you can take no comfort (false comfort, in my view) from your ideas, concepts, opinions and prejudices about these instruments and their direction, you can get very tired of simply reacting.
4. In futures, sometimes a loss is superior to a gain. This ridiculous sounding axiom is actually true. For example one day I was sitting on about $300 in losses on the Mini Crude contract, but saw what looked like a nice setup in the final 20 minutes. I traded it (Trade A) and gained $225 on the trade, so I was sitting with a loss of -$75. In the last 5 minutes the contract traded hard in the opposite direction and if I had reversed (instead of just selling the contract; let's call this Trade B) I could have ended up positive $150. But that would have been a bad thing. Why? Because in futures you have to discipline yourself to take the high probability, low risk trades and ignore the low probability, high risk trades. Do Trade A, do not do Trade B. Trade A won't always win for you and occasionally Trade B will come through, but that's not the way to trade. If you do Trade B you will quickly find that your futures account has gone from Something to Blown Up. The futures game is all about taking the high probability, low risk play each and every time.
5. Stops. Folks can debate stops, doubling down, adding to losing positions, etc. in equities, and even in options, but in futures there is no argument. You have to trade with stops and you have to move your stops to lock in smaller losses, then breakeven points and finally small gains and larger gains. I don't believe a trader can survive in the futures market without stops.
In any event, once I get comfortable enough with futures, because it is so anti-intellectual as a way to spend time, I think I will return to the heady and fun world of structured options trading, which is about as opposite as can be imagined.
Kb |
