New to trading futures contracts -- input needed ?

[spunky]

Going to toss my hat in the ring trading futures contracts. I have read up what information I can find online and in my Jim Rogers book. Looked about setting up an account on Interactive brokers site or Lind Waldock.


I 've got my arse covered with bullion and bonars and have a stable secure job.

Input folks ????? Currencies, PM's grains ?????

[grapejelly]

Re: New to trading futures contracts -- input needed ?

I didn't have the ability to trade. So I avoid margin completely now. I don't even go short because I am lousy with anything connected with a timetable or fuse on it. My advice is to read a few good books on trading psychology, and also keep a really good journal of what you are doing, your moods, charts and influences on you that day, in addition to a log of your trades.

Good luck!

[spunky]

Re: New to trading futures contracts -- input needed ?

I didn't have the ability to trade. So I avoid margin completely now. I don't even go short because I am lousy with anything connected with a timetable or fuse on it. My advice is to read a few good books on trading psychology, and also keep a really good journal of what you are doing, your moods, charts and influences on you that day, in addition to a log of your trades.

Good luck!

Last summer I bought and sold individual stocks, and only made 3%. Is the same psychology at play for futures ?? Is there a big difference between a trader and investor, other than the time horizon ??? I thought commodities would work on a more simple supply and demand model ; I did piss poor understanding " market psychology " , and what made individual stocks move one way or the other :cool:

Thanks for the reply grape

[grapejelly]

Re: New to trading futures contracts -- input needed ?

Last summer I bought and sold individual stocks, and only made 3%. Is the same psychology at play for futures ?? Is there a big difference between a trader and investor, other than the time horizon ??? I thought commodities would work on a more simple supply and demand model ; I did piss poor understanding " market psychology " , and what made individual stocks move one way or the other :cool:

Thanks for the reply grape

The big issue with futures is margin. If you trade without margin then it's no big deal. If you trade with margin, the psychological issues become very great.

I can comfortably invest in the stock market because I don't have time pressures. I can look at a sector that I like -- gold and silver junior miners mostly, along with some smaller energy plays at this point -- and since I like the fundamentals, I can take my time to find good stocks and buy on dips.

Each stock is a story. If I decide the story has changed and no longer justifies my confidence, I'll sell and replace it with another stock whose story I like.

I depend upon a few newsletter writers for most of my research and ideas because I am quite lazy. I know that if I am in the right sector, and have someone else I trust do some basic homework, I will do just fine. I could just buy mutual funds and it would work but I like to buy stocks and maintain my portfolio by myself because it is more fun and interesting.

I constantly avoid the urge to vary the formula. Many times I hear an idea to "short this" or "buy that" but the way I do things, I avoid anything short or intermediate term.

Note that I don't just buy and hold if holding isn't justified in my mind anymore. But I do buy with the intention of buying part of a good company and holding hopefully for years, to see the bull market through. So dips and corrections (such as the recent months-long correction that seems to be over) don't bother me.

That is completely a different mindset than trading. I find it a lot more fun this way as I don't get all worked up anymore.

I keep it interesting my managing my own portfolio -- if I invested in funds only, I would probably want to take flyers on things and do stupid things for the sake of excitement.

[Finster]

Re: New to trading futures contracts -- input needed ?

Going to toss my hat in the ring trading futures contracts. I have read up what information I can find online and in my Jim Rogers book. Looked about setting up an account on Interactive brokers site or Lind Waldock.


I 've got my arse covered with bullion and bonars and have a stable secure job.

Input folks ????? Currencies, PM's grains ?????

Since Bart is too modest to mention it, I will ... you might check out his site ... NowAndFutures.

My two cents: Be careful! As GJ notes, margin is the big risk. Leverage can wipe you out, even leave you with less than your original investment.

It's a seductive thing, because when you enter a contract, you usually only have to put up a small percentage of the notional value. But that "small percentage" is NOT your investment, it's just a security deposit. You are financially exposed for the entire value of the contract.

I would urge anyone considering futures to start out without margin. Remember the margin requirement is only a minimum. You can always post more, and limit your exposure to the equity in your account if you wish. Then as you gain experience, maybe consider, say 50% margin or 2:1 leverage. Whatever you do though, never enter into positions whose aggregate value exceeds the amount you are willing to lose, even though the required margin is much less.

[Spartacus]

Re: New to trading futures contracts -- input needed ?

Steve Sjuggerud reports that for every system he's ever tested, the system's profit rises significantly with stop - losses, and the worst-case losses are always lowered.

He claims it doesn't matter whether you have a 10% trailing or 20%, just having something that kicks you out automatically always improves the statistics.

I'm not 100% convinced that the maximum possible profit is always improved but it sounds like a good exercise to me - test every system with and without stop-losses.

Certainly that discipline will prevent you losing 90% or all your capital in those disastrous Northern Telecom or JDS or Enron type blow-ups.

[Finster]

Re: New to trading futures contracts -- input needed ?

Steve Sjuggerud reports that for every system he's ever tested, the system's profit rises significantly with stop - losses, and the worst-case losses are always lowered.

He claims it doesn't matter whether you have a 10% trailing or 20%, just having something that kicks you out automatically always improves the statistics.

I'm not 100% convinced that the maximum possible profit is always improved but it sounds like a good exercise to me - test every system with and without stop-losses.

Certainly that discipline will prevent you losing 90% or all your capital in those disastrous Northern Telecom or JDS or Enron type blow-ups.

Call me a skeptic. Stop losses sound to me like a guaranteed sell-low strategy. I've never used one in my life.

If you find yourself using a lot of stop losses, then you need to examine why you bought the position in the first place. You evidently didn't think it was even worth what you paid, or why would you be willing to sell it for even less?

And if you had 90% of your capital in ANY one position, you were courting a whole lot of risk. Kind of ironic that you would then suddenly get religion on risk aversion when plying a sell strategy.

[Spartacus]

Re: New to trading futures contracts -- input needed ?

Good questions, shows one place where I mis-communicated badly, namely this one -

And if you had 90% of your capital in ANY one position, you were courting a whole lot of risk. Kind of ironic that you would then suddenly get religion on risk aversion when plying a sell strategy.

(S. recommends) No more than 2% of your trading capital in any one position. So when he says your downside risk is 10%, it's a maximum of 10% of 2% of your total trading capital. If you're well diversified you'd have to get very unlucky to lose a lot. Unless, of course, the world of investment has now become extremely coupled and everything falls together. (my portfolio breaks this rule very VERY badly).

Call me a skeptic. Stop losses sound to me like a guaranteed sell-low strategy. I've never used one in my life.

No upside sell targets (no "profit taking").

Update your stops once per day or week. So if your stock doubles, then goes down 12% (the stop S. uses himself) , you sell at an 88% gain.

If you find yourself using a lot of stop losses, then you need to examine why you bought the position in the first place. You evidently didn't think it was even worth what you paid, or why would you be willing to sell it for even less?

IIRC That's exactly the rationale he gave (aside from just the empirical study of trading systems) - just in case your analysis is totally wrong, don't ride it to a 50% loss - get out as 15% or 20%.

On reflection, if you're fully invested, and no more than 2% in any one position, how many positions can you realistically have, if you fully research each one - sounds like a full time research job.

[Finster]

Re: New to trading futures contracts -- input needed ?

Good questions, shows one place where I mis-communicated badly, namely this one -



(S. recommends) No more than 2% of your trading capital in any one position. So when he says your downside risk is 10%, it's a maximum of 10% of 2% of your total trading capital. If you're well diversified you'd have to get very unlucky to lose a lot. Unless, of course, the world of investment has now become extremely coupled and everything falls together. (my portfolio breaks this rule very VERY badly).



No upside sell targets (no "profit taking").

Update your stops once per day or week. So if your stock doubles, then goes down 12% (the stop S. uses himself) , you sell at an 88% gain.



IIRC That's exactly the rationale he gave (aside from just the empirical study of trading systems) - just in case your analysis is totally wrong, don't ride it to a 50% loss - get out as 15% or 20%.

On reflection, if you're fully invested, and no more than 2% in any one position, how many positions can you realistically have, if you fully research each one - sounds like a full time research job.

The more I hear, the more convinced I am Sjuggerud hasn't a clue about investing. Can't think of any other excuse for such a maze of artificial trading rules.

Let's consider the example of a 20% stop loss in closer detail. You own a stock at $50. You set a stop loss as $40. So you're willing to sell it at $40. But it's quoted now at $50. Why not sell it there? And be $10 better off?

Correct me if I'm wrong, but doesn't that mean you have no idea what it's worth?

[Spartacus]

Re: New to trading futures contracts -- input needed ?

Sjuggerud didn't get into all that (what it's "worth" or what you're "willing to sell for" and so on). That type of commentary above is from me.

He just ran a bunch of systems with stop losses and without.

All the tested systems had higher profits and lower worst-case drawdowns with the stop losses.

(below here is my commentary on the emprical results)

I'm not seeing where you see the complexity. There are 3 elements.
Cut losses short.
Let profits run.
Diversify".

Let's consider the example of a 20% stop loss in closer detail. You own a stock at $50. You set a stop loss as $40. So you're willing to sell it at $40.

You're not "willing" to sell at $40, you're using a system to force you to sell at $40 (against your wishes and normal tendencies) to save you selling at 10c. The $40 is a safety measure to save you from bigger losses.

Force is needed here because as the behavioral finance guys have shown, the tendency is to not sell - the tendency is to ride a falling investment into the ground. The BF guys have found that people just hate to sell at a loss, preferring to delay and delay until the losses become huge. (on the flip side, the BF people also have found a tendency to sell rising assets early.)

http://faculty.haas.berkeley.edu/ode...sposition.html

If this asset you're holding at $50 goes to $40 you're using the market to indicate to yourself that your analysis was wrong (or incomplete or you were mis-led) and you'd rather get out at $40 than $10 or $0 (cut losses short).

But it's quoted now at $50. Why not sell it there? And be $10 better off?

Because your analysis shows it could go to $100. IOW, let profits run - something that the behavioral finance guys have found most people hate doing - the tendency is to sell early.

Correct me if I'm wrong, but doesn't that mean you have no idea what it's worth?

You have an idea, but an idea is not a guarantee. Lots of people had ideas on AOL, Enron, et. al. Even with a huge 25% stop loss, many could have gotten out with huge profits. (You might have huge stop losses if your modeling shows a particular market has a high beta which is likely to shake you out just before making large gains.)

You BELIEVE it's worth $100 (so you bought at $50, a bargain) but you don't have a crystal ball or a guarantee. You KNOW it could drop to $0. Maybe it's another Enron.

Think "seat belts". You know that no matter how safe a driver you are, there are things on the road beyond your control that can kill you. You need seat belts.

In the same way, as an investor you can do all the research in the world, but no amount of research will save you from Ken Lay and Bernie Ebers and Arthur Anderson - approved accounting.

So get some seat belts for the financial world. In the Enron case, buy at $20 and sell 10% off the high (say $250 minus 10% or $225). Don't go without seat belts and sell at $0.

Also don't sell at $250 because theoretically it could go to $550 (and if it goes to $550, set your stop loss is at $500, which prevents you from selling at $100 or $50).

[spunky]

Re: New to trading futures contracts -- input needed ?

Thanks for the replys gents. I never knew anyone on this forum was modest

[Finster]

Re: New to trading futures contracts -- input needed ?

Let's consider the example of a 20% stop loss in closer detail. You own a stock at $50. You set a stop loss as $40. So you're willing to sell it at $40. But it's quoted now at $50. Why not sell it there? And be $10 better off?

You're not "willing" to sell at $40, you're using a system to force you to sell at $40 (against your wishes and normal tendencies) to save you selling at 10c. The $40 is a safety measure to save you from bigger losses.

How can you say "you’re not willing to sell it at $40" when the objective fact is that you’re entering an order to do exactly that? You may as well claim to be a vegetarian whilst munching down a Big Mac.

Force is needed here because as the behavioral finance guys have shown, the tendency is to not sell - the tendency is to ride a falling investment into the ground. The BF guys have found that people just hate to sell at a loss, preferring to delay and delay until the losses become huge. (on the flip side, the BF people also have found a tendency to sell rising assets early.)

Behavioral finance is exactly what I’m talking about. Look not at what they say, but what they do. If someone insists they are not willing to sell something at $40 while they are entering an order to sell at $40, I’ll go with the actual behavior any day.

If this asset you're holding at $50 goes to $40 you're using the market to indicate to yourself that your analysis was wrong (or incomplete or you were mis-led) and you'd rather get out at $40 than $10 or $0 (cut losses short).Because your analysis shows it could go to $100. IOW, let profits run - something that the behavioral finance guys have found most people hate doing - the tendency is to sell early.

You have an idea, but an idea is not a guarantee. Lots of people had ideas on AOL, Enron, et. al. Even with a huge 25% stop loss, many could have gotten out with huge profits. (You might have huge stop losses if your modeling shows a particular market has a high beta which is likely to shake you out just before making large gains.)

You BELIEVE it's worth $100 (so you bought at $50, a bargain) but you don't have a crystal ball or a guarantee. You KNOW it could drop to $0. Maybe it's another Enron.

Think "seat belts". You know that no matter how safe a driver you are, there are things on the road beyond your control that can kill you. You need seat belts.

In the same way, as an investor you can do all the research in the world, but no amount of research will save you from Ken Lay and Bernie Ebers and Arthur Anderson - approved accounting.

So get some seat belts for the financial world. In the Enron case, buy at $20 and sell 10% off the high (say $250 minus 10% or $225). Don't go without seat belts and sell at $0.

Also don't sell at $250 because theoretically it could go to $550 (and if it goes to $550, set your stop loss is at $500, which prevents you from selling at $100 or $50).

Now we’re getting to the nub of the issue. You didn’t know what the stock was worth the whole time.

Now I suppose you could take the approach you’re talking about. But if it was really effective, why aren’t those thousands of mutual fund and hedge fund managers using it to beat the market?

Simple. It doesn’t work. No mechanical trading system ever does for long. In this case, trouble is, often as not that position you set a 20% stop loss for will go down 22%, and then double from there. The trader who doesn’t know what the stock is worth panics out of the position at 20% and misses the subsequent gain. The one who does might know the market is making a temporary misjudgment and hangs on.

There are better solutions to this problem. One is to educate yourself on how to value securities. There are excellent books on this subject, such as the Graham and Dodd classics. Guys like Warren Buffet do this and actually do manage to beat the market long term. You do your homework. Roll up your sleeves, and start studying things like balance sheets, income and cash flow statements. Perform a discounted cash flow analysis. Evaluate the management, the competition, and the macro environment. Formulate an estimate of the intrinsic worth of the security. Once you do that, then you have some kind of benchmark against to weigh the current trading price and have an idea whether the security is undervalued or not, and whether you should hang on or not.

Another solution is to just face the fact that you’re not willing and able to do the due diligence required to manage a portfolio of individual securities and find yourself some good mutual funds.

[Spartacus]

Re: New to trading futures contracts -- input needed ?

You do your homework. Roll up your sleeves, and start studying things like balance sheets, income and cash flow statements.

How do you know that all of these are not lies?

How do you protect youself in the case that they are all lies?

Evaluate the management,

How do you know they are not liars and con artists?

Realizing that the best liars and con artists are always evaluated as the least likey to lie and con.

[grapejelly]

Re: New to trading futures contracts -- input needed ?

I detest a lot of homework. So I employ trusted parties to do the homework for me.

They have their integrity on the line, long track records, and they trade the positions they recommend.

Conflict of interest? Sure, but they have their own money on the line and I prefer to take advice from someone with her own dollars on the line.

Here's the thing. There is someone better at every aspect of investing and trading than I. All I can do is invest in what I judge to be a long term bull market due to funamentals, use technicals to assist in when to buy, and then just hold and and wait for something to happen or to change.

I hated trading futures because I always felt completely outclassed. Everything was against me, everyone knew more than me, and the short time frame made me feel pressured all the time. I lost a good deal of money and it taught me some (hopefully) life long lessons about my own abilities.

I build up companies and I am a very poor manager. But I am good at certain aspects of building companies so it doesn't matter. Similarly, I am a lousy trader but I am good at certain aspects of investing, so if I stick to those and am in a bull market long term, I'll do just fine. And so far, I have.

[Finster]

Re: New to trading futures contracts -- input needed ?

How do you know that all of these are not lies?

How do you protect youself in the case that they are all lies?



How do you know they are not liars and con artists?

Realizing that the best liars and con artists are always evaluated as the least likey to lie and con.

If you don't know they're not liars and cons, why did you buy their paper in the first place?

Of course you never know for sure, but if you do your homework you're going to have a better shot than if you didn't. Careful examination of financial statements and SEC filings can usually reveal red flags. Most investors miss them just because they don't bother. Just like back during the dot-com mania when they were listening to propaganda about valuing companies on nonsense like clicks and eyeballs. Even a cursory examination of financials and valuation estimates could have saved their retirements.

And don't forget the part about not putting 90% of your nest egg on one bet!

And have a healthy portion of that nest egg in hard money. When you have gold, you have an asset that does not depend on any one else fulfilling an obligation.

Another thing you can trust is dividends. Remember that old-fashioned concept? They can say anything they want in their public reporting, but when they cut you a check, you can take it to the bank.

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