Trading futures?

I have been trading most of my life and have found that trading futures from my home is a comparatively easy and profitable way to support myself. Further, with the correct methodology and mentoring I have schooled hundreds of other people to trade successfully. Since I am retired, I have found this to be a most enjoyable interest.

But isn’t trading futures really complicated?

The truth is it can be very complicated, if you make it complicated. My trading techniques are elementary and very practiced. Complexity does not equate to success. I started trading on the floor the NYSE long before we had fancy computers and elaborate algorithms. I learned a trade using simple indicators and was very properous. I still use simple indicators and am highly successful. You don’t need fancy computers or even elaborate computer programs to trade successfully on your computer. It’s actually a very simple exercise, and there are even practice accounts where you can hone you trading skills until you become proficient. Demo accounts are like real accounts except you are not trading real money, you are just trading hypothetical money.

I believe that, the most profitable Internet business is not signing up recruits in trying to get them to peddle programs for you. I need only rely upon myself to earn money and have been doing it for nearly 25 years. The point is, you could do it too. Learning to trade is a simple as taking an inexpensive e mini trading course and practicing until you become competant and at ease with the futures market The nice thing is there is no hurry, you can practice at your own rate and begin your trading career when you feel you are ready.

Many opportunity seeks avoid this line of work because they feel it is either too difficult or it is out of their comfort zone. You would be surprised at the individuals I have trained successfully. They include housewives, retired blue-collar workers, and a host of other unbelievable candidates. The point is; it can be done, and you can do it.

Won’t this take an a tremendous amount of effort?

There is some study and work involved in learning to trade. Of course, I am always there to answer questions via an 800 number and question you on?your path. You might even visualise a personal mentoring program if you want to get off to a promptly start.

So what’s so great about this trading?Who wants to sit in front of a computer all day?

It sure beats working all day in an office, or dig ditches, to say the least. And best of all, with a little practice you can become very successful and earn more money then you have probably ever made. The course I offer is easy to visualise and even easier to implement. There are no complicated equations or sophisticated math. You simply read what’s on the chart and compare it to what you have learned in the course. Everything you need to trade is in the trading course.

in the final analysis, I trade when I feel like it. It’s a wonderful life way to live and it gives me lots of time with my children and leisure time, especially golf. I would note that I am a better trader than a golfer.

So guess about it, perhaps you’re the next great trader.

I am a long time retail and institutional trader who now only trades part time, usually in the morning.  I enjoy composition informational articles about my style of trading so others may benefit.

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I think one of the most important issues, especially of late, is the issue of transparency in financial reporting. Both the stock market and futures markets are highly transparent exchanges with well-documented recordkeeping and long-standing procedures in trading. There are well-established trading and clearing procedures in these two types of exchanges that have evolved over decades of trading and now function in nearly seamless fashion, despite the number of fiduciaries involved with each individual transaction. To be sure, the procedural methodology in stock trading and futures trading are well-established and well documented through legal precedent and published in a manner that each investor should have a firm understanding of the risks and procedures involved in these two investment classes.

But the question is a bit more complicated than simple standardized procedures, as some investments lend themselves to specific types of trading while other classes of investments are better suited for different types of investing. For example, the pure speculator will probably lean towards futures contracts in his investment portfolio because of the high level of leverage and volatility futures contracts inherently possess. On the other hand, a conservative investor with a longer-term investment horizon might favor a blue-chip stocks as his favorite investment class. While there are instances where stock investing can be quite volatile, by and large stock investing is a more stable investment than their volatile cousin, the futures contract. The important point here is for the average investor to match his investment goals with a class of investments that will meet his needs and expectations. For example, an investor who prefers very volatile investments in hopes of making a tidy profit in a relatively short period of time probably shouldn’t invest in blue chip stocks. While some erratic movement in blue-chip stocks is possible, they are generally fairly stodgy and methodical in price movement. On the other hand, another investor may truly enjoy the volatile price movement involved in trading oil futures, for example. Oil futures are often very volatile and it takes a steady and skilled hand to manage these investments profitably. Just the same, the potential for extraordinary profits over a short period of time is far more likely in oil futures than blue-chip stocks. I must add one caveat, though: the fact that volatility exists in a given investment class does not assure profit, it only assures movement and it is up to the individual investor to translate that movement into profit, as opposed to loss.

In recent years another investment class has appeared and it is called Forex. Opinions on the Forex market range from a wholehearted acceptance of the investment to some investors who are, to say the least, very wary of the Forex market. I trade the Forex market from time to time and have not encountered any of the alleged horror stories some investors claim occur. But I think it is important to note that the Forex market, as opposed to the stock and futures markets, has very little transparency. There is no exchange on which Forex pairs are essentially traded. The Forex market is a loose conglomeration of participating banks that clear Forex trades more or less independently. To date, the system has worked reasonably well and been free from any widespread accusations of fraud or wrongdoing. To my way of thinking though, the lack of transparency in the Forex market is something that needs to be rectified before I can wholeheartedly embrace the Forex trading system. Without standardized contracts, exchange oversight, and a centralized location the possibility for widespread problems simply outweighs the possible benefits the Forex system offers. I think at some point this need will be realized and the Forex system will develop a centralized exchange with standardized contracts as the public clamors for the uniformity common to all investment classes. But to date, the system is still a loose association of banks and financial institutions clearing the Forex trades.

To my way of thinking, I will stick with stocks and futures contracts and my trading until the Forex system advances to the point of uniformity. Of course, there are uniform currency futures available on the Chicago Mercantile exchange for those who are interested in trading currencies. On positive note, I have no doubt that the Forex markets will evolve into a more structured trading format in the near future.

And believe it or not, these stories are true. I wish they weren’t, but I see it on a fairly regular basis. Yet, I don’t understand it.

Many traders purchase a book or two on day trading and establish a demo account and trade for a few weeks and decide they’re ready to trade a live account. The results of this type of trading preparation are fairly predictable. These traders never had a chance because they were poorly prepared to trade and hadn’t spent the time and effort to understand how markets function and how trades are set up.

You would think common sense would be a great asset in trading, but nothing could be farther from the truth. Common sense will serve you very poorly in trading futures contracts. For reasons not fully understood, market sense is far different than common sense. I can’t tell you how many times I’ve seen government issued a report that ought to send the market skyrocketing. Yet, the market reacts very poorly to this good news and ends up tanking. The point is a simple one; there are many variables that go into stock market and futures contract pricing, and to focus on one piece of news is to miss the point.

Even more disappointing is the fact that had this trader taken the time to learn how to trade in a proper fashion he or she would probably still be trading profitably. I have a very good friend who is a very intelligent fellow. He has an MBA from an Ivy League school in business management. Like many people, he decided that he was sick of the corporate rat race and decided to become a full-time futures trader. But his education betrayed him. He’d been trained to look at past trends and historical data and make decisions based upon this information. Unfortunately, the market doesn’t look backwards; it looks forward. And that’s the hardest thing to teach people, that the market is constantly trying to price equities six months to a year in the future.

To make things worse, it’s not unusual for traders to become desperate as they begin to deeply their trading accounts and abandon the limited trading technique they learn; and problems compound and beget more problems until they no longer have a problem, they’re broke and out of the business.

It’s not necessary, and proper training will keep you in the market as long as you maintain proper trading technique and exceptional self-discipline. But the question is this:

Why do rational traders sometimes act irrationally?

One of the toughest facts to accept as a trader is that you are going to lose on some of your trades. Probability makes it infinitely clear that there is no trader who can trade with 100% accuracy. Quite simply, you’re going to lose a certain percent of trades and there is nothing you can do about it. No trading system can assure you of 100% accuracy, I don’t even know of a trading system that consistently trades with 70% accuracy. Now let me qualify that, you will see ads in the trade journals that trumpet the fact that they are trading at an 80% profit rate. Don’t believe it.If a trader that assist them performing at 80% efficiency he most certainly would not be advertising it for sale.

The point is a simple one, and has been my focus for the last couple weeks. I want to trained novice traders in a system that will help them succeed in the early parts of their trading career. I have worked diligently to set up a system that will accomplish just this goal. I will be posting links to the system in the coming weeks and I encourage you to take advantage of the system, as there is no better lifestyle than trading for a living, especially when you are trading profitably.

I began my trading career day trading stocks, mostly the blue chip variety. And there is nothing wrong with day trading stocks, though generally speaking individual stocks do not have the volatility that many day traders crave. To be sure, stock trading is a longer term proposition and are less prone to to dramatic movement. For my money, I generally buy stocks to either swing trade, or hold onto for longer term growth. On the other hand, you can often find individual stocks that oscillate widely on a daily basis and are perfect for day trading, but these instances are rare. I can recall years ago that Jupiter Systems was a great day trading stock, as I haven’t traded it in years, I do not know the current status of this issue.

On the other hand, the financial requirement for trading index futures contracts lends itself favorably to the day trader. The key element is margin, in this case. When trading stocks, Regulation T becomes a prime issue, and Regulation T requires you to put up 50% of the contract value in order to trade the stock. If you are trading GOOGLE in round lots, say a hundred shares, (google is trading in the low 500‘s) you will be forced to pony up a significant amount of cash in order to trade this stock.

Futures contracts are another matter all together. Most futures contracts, specifically the emini variety, were specifically designed for day traders. You can usually find brokerages that offer margin requirements in the range of $500 per contract. Each point on, lets use the ES emini contract, is worth $50 dollars, and lets assume the ES index is trading in the 1000 dollar range. Simple math tells us that you are controlling nearly $50,000 dollars with a paltry 500 margin requirement. In trading, leverage is kind, when used properly.

Once simple consideration should always be forefront in your mind, though. Leverage will maximize you returns and maximize you losses. A skillful trader will manage his money effectively, never overextending himself/herself in a given trade. In my trading, I never like to risk more than 10% of my futures account value on a given trade. Some traders even lower this amount to no more than 5% on given trade. This is, of course, a personal preference but the point is a simple one; because of the high degree of leverage in futures contracts, money management is of utmost importance.

For example: Lets say you have established a $5000 futures trading account. Generally speaking your futures broker will let you trade up to 5 contracts on this account. It should be noted that most futures brokerages will not let you trade up to your account limit, and most set trading restriction at about 50% of your account value. Anyway, there is no way that you should even consider trading your maximum level (5 contracts) on a given trade. On a $5000 account I would be hesitant to trade more than I contract, maybe 2 if I felt very comfortable with the trade. Overextending your trading account is a great way to end up broke. Be judicious in the number of contracts you trade, and always use stops to make sure you don’t get caught in a run away trade in the wrong direction.

Leverage in futures contracts can be a very useful tool to increase your account balance, and your potential to make money is far greater in a futures account than day trading a stock account. But managing a futures account takes a high degree of skill and self discipline. There is a constant compulsion to overtrade your account, or trade an excessive number of contracts relative to your account size that has to managed with skill. Further, it is your responsibility to exercise proper money management when trading futures contracts.

In summary, we have taken a close look at day trading stocks and futures contracts. Stocks can be suitable investment vehicles to day trade, but because of the leverage requirements in futures contracts they are generally a better choice, but only if you are able to responsibly implement money management techniques that don’t expose you to excessive risk. Money management is one of the most challenging aspects of trading, and one of the most difficult to master. I suggested never risking more than 10% of your account on a given trade.

Do you find it ironic that we understand the more about the subatomic world of molecules than we know about how the market and it’s functions?  Some of the best and brightest academics claim there is no predictive ability in using Fibonacci trading.  Why?  The science of predictive indicators does not pass the litmus test of scientific legitimacy.  If you have ever traded Fibonacci numbers, can you tell me whether the market will turn on 38% retracement, 50% retracement, 61.8 retracement?  That’s the problem academics have with these systems, there are no empirical facts.  Yet many traders swear by them and are very successful in trading them profitably.

Welcome to the world of day trading.  It’s a world where traders use systems that are wildly varied and the results are unpredictable.  Because the functions of the market are not well understood, as evidenced by the universe of varying opinions on market price action, you will find a plethora of divergent theories and traders who vociferously defend the system they trade to the exclusion of other trading systems.  Further, you are unlikely to find two traders who trade identically, even if their investment philosophy is identical.

Let’s start with the Fibonacci numbers.  The ratio used to calculate this set of numbers is 1.618 and it stays constant throughout the sequence.  Originally identified by mathematician Leonardo Fibonacci in the thirteenth century, their popularity has increased exponentially in day trading.  The question is whether they work, and why do they work.  Anyone who has traded Fibonacci numbers comes to realize that the market often pauses, sometimes turns, and often blasts right through the sequence of Fibonacci retracements.  There is no denying the numbers are relevant, and traders pay attention to them.

But why does the market stop and start so often on these numbers?  In trading we don’t necessarily worry about the “why” questions, if something works or has predictive value it is used.  You cannot necessarily predict which Fibonacci number the market will choose to honor.  On the other hand, many people identify market high and possible lows using Fibonacci ratios, but any trader could identify these point using the alternate method of support and resistance.  Yet this support and resistance often occurs right at the 50% or 61.8% Fibonacci levels.  Sheesh…..

It is my opinion that Fibonacci numbers work just fine, but the reason they work is because so many technical traders use the system.  When the market makes a move from trough to peak, most technical traders will immediately add the Fibonacci retracements to the entire move, and hence the system becomes a self fulfilling prophecy.  And that’s okay.  Many true Fibonacci traders take offense to this explanation, and claim there is relevance in the ratio.  Perhaps there is, but I’m not buying that explanation.  As a chaos theory adherent, I feel the only scientifically relevant explanation is the self-fulfilling prophecy argument.  The Fib people point to ancient architecture and a wide variety of natural phenomena that use the Fibonacci sequence.  It’s true, lots of ancients architects and unexplained phenomena have relevance in their respective fields, but I cannot connect the dots.  Which is to say, “yes there are Fibonacci numbers all about, but what does that have to do with investing?”  The answer is a resounding “nothing at all.”

But I still use Fibonacci numbers in my trading…

As a day trader, my job requires me to take profitable trades.  Whether the Fibonacci sequence is scientifically verifiable is irrelevant to me, as I am only concerned with profitable trades.  I cannot recommend using only Fibonacci ratios in your trading.  However, I always trace in the retracements after a significant market move, up or down.  You would be surprised how often the market honors them, too.  I especially like to trade the Fibonacci when it has already stopped and turned on a specific number, as this establishes real legitimacy for this point on the chart.  Then I can go to work trading, based on the info the Fibonacci has imparted.

So there you have it, the reason the Fibonacci ratios work is unclear, and I am unwilling to bestow mythic credibility based on the history of the ratio.  On the other hand, there is no denying the market pays attention to these numbers.  Whether I believe they are a self-fulfilling prophecy is irrelevant, because as traders we only deal in profitable trades and growing account balances.  The “why” just doesn’t matter.

It garners more trading volume than any emini contract on the Chicago Mercantile Exchange, and has run away (in trading volume) from any other futures contract currently traded.  It the pint sized version of the S and P contract that traders have flocked to in recent years.  Better yet, it is specifically designed and priced for the individual trader.  What’s not to like?

I spend a decent amount of time in trade rooms, helping novice day traders develop their trading style.  One thing I have noticed, especially among the novice day traders, is their lack of awareness of exactly what they are trading.  So I thought I would write an article that gives the very basics of the ES contract.

What is the S and P 500?  You would be surprised at how many traders can’t definitively answer this question.  The S and P 500 is a capitalization-weighted index of the 500 largest, publicly traded, large-cap stocks in the United States.  The index has been around since 1957.  The index is calculated and published by Standard and Poor’s, hence the S and P in the title.  Incidentally, the index reached it’s highest point in March, 2000 at 1552.87.  In 2010, it was trading in the 1100 range, a far cry from it’s apex.

The ES emini contract was established on Sept. 9, 1997, and has grown steadily since that date.  Some specifics on the contract are:

1.  The contract months for the ES are
a.  March         =H
b.  June            =M
c.  September  = U
d.  December   = Z

Notice the contract months are designated by letters, and the contract designation is calculated by combining the letters with the ES designation, the month, and finally the last number of the year.  For example, ESM0= the ES contract for June in 2010.  Once you trade the ES for a period of time this nomenclature becomes second nature.

Many have been confused by the pricing model used for the ES contract.  It is fairly simple.  The ES emini is one fifth the value of the traditional S and P contract, so each point is worth $50 dollars, as oppose to $250 per point on the big contract.  Each point is divided into ticks or one fourth point, or $12.50 per tick.  So, 4 ticks at $12.50= $50.

The contract expires at 8:30 a.m. on the third Friday of contract month. (March, June, Sept. Dec.)  It is fairly normal for traders to have abandoned trading the contract about two weeks before the expiration.  Most futures brokerages  announce the date of switch over to their clients, so there is generally not the confusion that you might expect at contract expiration.  If you are a day trader, it is imperative that you switch to the new contract prior (preferably the above mentioned two weeks) and not trade the ES emini right up to expiration.  Most of the volume evaporates from the contract on the switch date, and you could run into having make good delivery of the full delivery requirement of the contract.

The clear advantage of the ES emini contract is the tremendous liquidity, and thus you should never see slippage as a result of the contract trading thin.  More than a million contracts are traded on an average day, which is astounding volume when taken against some of the thinner emini contracts offered.

The ES emini contract on the Chicago Mercantile Exchange, which has been a true innovator in the emini arena.  The CME Globex is the actual home of the contract, and it trades during regular trading hours, takes a short break, and then trades all night until the opening of the next days cycle.  The actual hours of trading are:

Monday-Thurs  5:00 p.m.-3:15 p.m. & 3:30 p.m.-4:30 p.m.
Sunday              5:00 p.m.-3:15 p.m.

Margins requirements vary by firm and whether you are trading intraday or holding contracts overnight.  For inraday traders, you can find margin requirements as low as $400/contract and as high as $3000/contract.  Of course, the lower contract margin requirement may tempt some traders into over trading their futures account, and this can be a real problem.  In any event, the contract margin requirements vary greatly.

As you can see, the ES emini contract is a versatile and popular equity trading instrument.  We have reviewed the monetary basis for the contract, as well as the calender specifics for trading.  We have pointed out the margin requirements and trading hours, now all that is left is for you to perfect your trading style and enjoy trading this flat-out-fun trading instrument.

But those calamities are problems that face long term investors.  You know, the buy and hold guys.   For years, the general line of thinking was to buy a stock and hold onto for years and reap the rewards in your retirement years.  Of course, the dynamic nature of the stock has, to a certain extent, changed that line of thinking.

Of course, there are still the hordes of mutual fund holders who have invested untold billions in these investment vehicles.  I have a low opinion of mutual funds, as an investor cannot exit a fund until the end of the day.  Additionally, very few fund managers even come close to matching the indexes they are supposed to be imitating.  Why pay exorbitant fees for substandard performance?  I will never understand it, but there are trillions of dollars still invested in these investment vehicles.

However, recent changes in investment structuring from the Chicago Mercantile Exchange has made investment for primary income a very attainable goal.  Several product lines are aimed directly at the consumer market and priced well within the average budget.   The are called e-mini’s and are investments that are traded during the day, and seldom held overnight.  No worrying about the stock market here, you are in complete control of your investment future.

I don’t want to give you the impression that these investment are like ATM machines that simply spit out money all day, but with proper training and practice a trader can easily earn $500 a day or more and not hold any positions over night.  Of course, most individuals have never given serious consideration to investing in the markets, which many consider relegated to Wall Street experts.  But nothing could be farther from the truth.

There are many courses, some home study, that are reasonably priced that will give you more than the pre-requisite knowledge you need to be an effective trader.  Thousands of people, from housewives to businessman, have turned to trading and greatly increased their income and improved their lifestyle.

The secret is training.  It is very important that a trader spends time learning the slightly illogical movements of the market.  Again, with proper knowledge this illogical movement becomes second nature to understand.

The benefits to trading for a living are many fold:

1.  More time with your family and children.
2.  No more boss, your self-discipline is the key to success.
3.  Time for leisure activities and enjoying the fine things in life.
4.  You control your income.  You have the skill to make money, and nobody can take that away from you, fire you, or change your job.  More than anything, once you learn to trade, you can become completely in control of your lifestyle.
So, I propose that you consider exploring the benefits of trading and see if it suits you.  It’s not for everyone, but it’s wonderful for a lot more people, especially if they have the knowledge of what is possible in trading right from your home.  You are your own boss, and master of you own lifestyle.  No more corporate mentality to deal with.

Not everyone day trades in the same manner, but successful scalpers tend to share some similar characteristics.  Over the years, I have noticed that:

1.  A good scalper is familiar with the contract he is trading.  He has extensive experience trading the contract, and most scalpers will tell you that every futures contract has it’s own idiosyncracies that make it unique.  Trading a contract you are unfamiliar with can be fun, if you are trading low contract numbers and trying to learn, but it is a tough place to try and make money.

2.  A good scalper is in complete control of his trading account.  He does not overtrade or trade more contracts than his pre-set risk tolerance.  There is often a tendency among less talented scalpers to start trading larger contract amounts if they find themselves having a bad day.  A good scalper does not try to over compensate and stays within the parameters he lives by in his trading life.  Doubling down is not a good way to make up for successive losing trades.

3.  A good scalper is self-disciplined and stays within himself.  He has a system and his goal is to execute his system flawlessly.  He does not take on a risky trade that is not within the parameters of his entries, and he does not bail out of a trade that is still within his parameters if he starts feeling bad about the trade.  The ability to stay under control during difficult trading times is the hallmark of a great scalper.

4.  A good scalper has a solid understanding of his own ability.  Some markets are very difficult to trade, especially when the price action is whipshawing back and forth and there is no clear trend.  There are risky techniques to trade these markets, but they involve considerable risk which is probably outside the risk parameters of the scalpers.   Trading is not like Texas Hold ‘Em, you never go all in, and you never bluff.

5.  A good scalper realizes that the market is always right and he is always wrong.  This is a tough one to swallow, but when I make a losing trade, even though the set up was just exactly what I was looking for and the price started moving in the expected direction, then turns south and I get stop out, I am wrong.  The market is a constant, so it is always right.  It may not always be logical, but it is the ultimate decider of trading truth.

6.  A good scalper keeps track of his trading.  Most good scalpers keep a trading diary and perhaps even the daily chart for every day they trade.  I frequently go back six months and look at the things I did well and some of the things I did poorly.  It is part of the method of learning to trade to keep track of where you have been and revisit that place from time to time.  You don’t live in the past or dwell on your mistakes, you learn from your mistakes.

7.  A good scalper controls all the outside variables in his trading environment.  Many traders listen to music while they trade, some prefer silence, but very few listen to the trendy market television shows that blare out all sorts of speculation and rumor.  Scalpers trade the chart in front of them, and that chart contains all the information they need.  There is no need for some television talking head to skew your thinking, and it can happen.  The trading atmosphere should be away from the family, tv, radio anything that can distract, and the family should understand that while dad is trading he should be left to trade.

8.  And finally, a good trader has a healthy perspective on life.  He understands that as a scalper he does not have to worry about the broader trends effecting the economy or the world, at least from a trading standpoint.   He knows that all the information he needs is right there in the price action and indicators he has come to rely upon, and he trust his system to serve him well.  Trading isn’t everything in his life, but it is his income.  But trading gives him the time to spend with his children and family, his leisure time is enhanced, and he has a chance to make the world a better place instead of working long hours in the corporate life.

I am a long time retail and institutional trader who now only trades part time, usually in the morning. I enjoy writing informational articles about my style of trading so others may benefit.

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