|
Trader's Tip
You can trade a range bound market, you can trade a trending market. You just need the right system.
- Lawrence Szczech |
|
Quotes & Charts
Quote Search:
Market Specific Links:
Indices/Minis
Grains
Currencies/Forex
Financials
Food/Fiber/Softs
Metals
Energy
Meats
|
Special Message from Our Author
10 Do's & Don'ts of Trading Futures
Get 20 tips to more successful futures trading with the "10 Do's and Don'ts of Trading Futures and Commodities" guide. This guide provides some of the basic principles that professional futures traders inherently live by and may contribute to your potential success in trading futures.
Get your complimentary guide today! |
|
Today's Featured Article
March was a good month for stocks; after rebounding from its lows in early March, the S&P 500 rallied as much as 25%. April continued the rally, with the index opening the month over 790 and closing near 882: a 10% gain.
Is this the start of the next great bull market...or a bear market rally that will test new bottoms in the next quarter? What do your trading signals or your trading advisor tell you? Both should be telling you to consider trading the S&P futures contract instead of a mutual fund or exchange traded fund (ETF).
"Futures," as an investing term, is often used as a synonym for commodities. This is a limiting portrayal; futures can be used to take positions in a broad range of investments and asset classes, equities being one of the most liquid - particularly equity indices. If you're an individual stock picker, single stock futures (contracts with the underlying asset being one particular stock, usually in batches of 100) were introduced in 2001, but these contracts have not attracted the trader interest needed to provide precise entry and exit points.
Futures contracts on indices like the S&P 500, the Dow and the Russell provide traders with the opportunity to apply their equity market trading signals -- whether technical or fundamental in nature -- to a market that provides distinct advantages.
|
|
|
A Word from a Fast Break Sponsor
Advertise With Us
Get your complimentary copy of the "Reversal Day Trading Indicator"
Trader's Network brings you the "Reversal Day Trading Indicator", it works with any trading system to signal market turns and pinpoints market entry and exit signals. You will learn how to rely on internal market forces not guesswork, and overcome the 7 biggest mistakes traders make. Learn more about reversal day phenomenon and get your complimentary booklet today! |
|
Management fees
When you invest in a mutual fund, you're paying a fee. Even a high-quality, low-cost provider like Vanguard charges 18 to 25 basis points on its broad equity index funds. While this seems like a deal when there are no other charges, such as an online transaction fee, you have to consider the size of your investment and the projected length of time you'll be holding the position when factoring in the true cost of ownership.
The short-term holding penalties of many mutual funds make them useless vehicles for position or swing traders. An ETF still has management fees, albeit minimal; add in the transaction fees and watch for slight variances in tracking performance -- a fee of a different color -- due to cash on hand for redemptions.
It is hard to beat the E-Mini S&P on the CME's Globex platform when it comes to transaction costs per $1000 of trading value. Many firms offer free electronic trading systems to retail investors who pay only a low single commission which gets you both the entry and exit trade. Quotes are free as well but be prepared to fly solo, as service is almost nonexistent at the lower commission price points.
Leverage
It's all about the price you pay for the value you control in terms of investment return or trading profitability. In mutual funds, you put up $10,000 and you get slightly less than that in investment value on an annual basis. In an ETF, you can trade in a margin account and if you deposit $10,000, you'll control $20,000 of equity index value (prior to subtracting the transaction charges and the interest you will actually be paying on the margin loan, currently about 8.75%).
Deposit $10,000 in a futures brokerage account, and you can control $90,000 worth of the S&P 500 (prior to subtracting transaction charges).
If the index goes up 10%, as it did in April, you would make $980 in the mutual fund, $2,000 with the ETF, and $9,000 in the futures brokerage account (that's a 90% return). Of course, a 10% drop would show the same severity of the variance in results, but in the opposite direction. Your futures brokerage account would be worth only $1,000 and you would be in a margin call; meaning the Exchange and your broker would be requiring you to deposit additional funds (i.e. a performance bond) to continue to hold the position in an attempt to ride out the down market.
You need to deeply understand the risk/returns of leverage, but the impact on returns, both positive or negative, is undeniable. Inexperienced, unconfident, or time-strapped traders need to work with a senior advisor to improve their chances of managing this kind of risk.
|
|
Market direction
Let's revisit the initial question: is this a bull or bear market? What are your chart signals or trading advisor telling you and, most importantly, how do you take advantage of the guidance?
Mutual funds were designed for "buy and hold." While ETFs were built to trade, one still must borrow shares to go short. Being long is the predominant position in the market.
Futures were designed with truly no specific market direction in mind. There are an equal number of long and short contracts. Being long or being short is the same transaction with the same costs and rewards (obviously, depending on whether the market moves in your favor). The ability to follow trends, to be unbiased in market direction with profit being the directional guidepost, is unsurpassed in its simplicity when it comes to the operation of the futures markets. Futures were built for bi-directional trading.
Favorable tax consequences
Futures contracts were also built to benefit short-term traders when it comes to tax calculations. A futures transaction, regardless of the length of time you hold the contract, will be taxed: 60% as a long-term capital gain and 40% as a short-term capital gain.
Add these factors together and the benefits, including fees, leverage, market direction and taxes, suggest you weigh the potential for using futures as the vehicle for your equity index trading strategies.
For more information, get our "10 Do's and Don'ts of Trading Futures and Commodities" guide.
Disclaimer: The risk of loss in trading commodity futures and options can be substantial. Before trading, you should carefully consider your financial position to determine if futures trading is appropriate. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results.
|
|
About the Author
With over 20 years in financial services, Mr. Szczech has worked with both institutional and retail clients in diverse roles such as managing director at the NYSE and as president of the Client Group at TD Ameritrade. He is currently the CEO of RJO Futures, the private client division of R.J. O'Brien & Associates LLC, in Chicago. |
|
Special Message from Our Author
10 Do's & Don'ts of Trading Futures
Get 20 tips to more successful futures trading with the "10 Do's and Don'ts of Trading Futures and Commodities" guide. This guide provides some of the basic principles that professional futures traders inherently live by and may contribute to your potential success in trading futures.
Get your complimentary guide today! |
|
|
