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August 11, 2010 by 2 Comments

3 Risks of Using a Discount Futures Broker

Are you considering working with a discount futures broker to reduce commission costs?  If so, it’s important to understand there are additional factors, beyond commission, that can significantly impact the “cost” of your trading.  And regardless of your trading experience, the online futures broker that boasts the lowest commission rates may not be the most appropriate option for you.  In this article, I’ll discuss three of the main risks you assume when choosing to trade with a discount futures broker.

Risk 1: Insufficient Customer Service and Support

Trader on Hold with Discount Futures Broker

While you may find a discount futures broker that offers an extremely low commission rate, it’s prudent to learn more about the customer service and support you can expect to receive with that rate.  Generally speaking, a discount futures broker will provide you with a low commission rate, an online trading platform, and not much else.  Human interaction with this type of broker is typically minimal and the trade desk support staff has little or no vested interest in the individual account.  Salaried employees who lack incentive to provide additional help to clients beyond simply executing orders usually run these trade desks.  Help and individual attention will likely not be available when it’s needed most.

In contrast, at a full-service brokerage, the brokers in charge of individual accounts make their livings off of the commissions on their clients’ trading.  Therefore, a full-service broker has a vested interest in helping his or her clients, as the clients’ long-term success in the markets is directly correlated to the broker’s success.

Before choosing to open your account with a discount futures broker, consider the following questions:

  • What happens if the discount broker’s website goes down and you can’t access your account or trading resources?
  • Worse yet, what happens if the platform is down and you can’t place or exit a trade?
  • What if the trade desk isn’t answering the phone?
  • Do you have a dedicated contact you can call for assistance?  Probably not.

Like many things in life, with futures brokerage, you often get what you pay for.  And, there is likely a lot more money to be lost on the actual transaction than is being saved on commission costs.

Risk 2:  Insufficient Futures Trading Resources and Education

Again, a discount brokerage usually provides its customers with only a low commission rate and an online trading platform.  Key futures market research and news are normally not part of this package.  This type of information can potentially help traders earn big returns or prevent them from entering into positions of extreme risk.  When trading futures, it’s vitally important that you are aware of the events that may impact the markets.

With a full-service futures broker, this research is usually provided free of charge to all clients with open and funded accounts.  Additionally, a full-service broker often provides futures trading education as an added value to working with them.  Webinars on trading techniques and market opportunities, daily market research, and video tutorials are just a few examples of educational resources one will often find with a full-service broker but not with a discount futures broker.

Risk 3:  Insufficient Peace of Mind

Finally, consider your peace of mind before opening an account with a discount futures broker.  Paying a slightly higher commission rate can essentially buy an extra set of eyes to watch one’s account.  For instance, having a longer-term position on and being away from the computer for a period time, one may not be aware of a sharp spike in the market.  A full-service futures broker will generally call his or her client in this type of situation, potentially earning or saving him a substantial amount of money, where a discount broker would likely not.  What if you have a memory-lapse or an unexpected family issue that diverts your attention from trading?  Is the commission saved worth missing out on an opportunity or incurring a loss that may have been avoided?  Using a full-service futures broker may cost slightly more in commission, but the comfort gained from having an advocate watching your account can be worth much more.

Whether you’re new to futures trading or an experienced trader, you should seriously consider these three risks prior to open a trading account with any futures broker, especially a discount futures broker.  A few dollars saved in commission may ultimately cost you much more when it comes to your bottom line.

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August 6, 2010 by Leave a Comment

10 Things to Consider when Choosing a Futures Broker

Choosing a futures broker is one of the most important decisions you will make for your commodity futures and options trading account.   Whether you are an online trader, broker assisted, using automated systems, newsletters, or in managed futures, you want a brokerage firm that can best service your trading needs while providing a great value for your trading dollar.

Transactional vs. Relationship-Based Futures Brokers

Futures Broker on Phone

There are two types of business models in the futures brokerage business.  The first is the “Transactional Futures Broker’.  The transactional model usually has a one-size-fits-all approach.  Traders can sign up with the transactional broker and what you see is what you get.  This typically includes access to the exchanges, base level support, and clearing services.

“Relationship-Based Futures Brokers’ are heavily invested in giving their traders the best chance of success possible.  These futures brokers will service trading accounts based on what the clients needs for their trading.  Some traders will need more support, tools and resources than others.  The relationship-based futures broker will work with their clients in whatever capacity they require.

Commissions & Fees

Everyone wants the best deal they can get.  It is important to realize you get what you pay for.  When it comes to commission rates, make sure you have a clear understanding of the services and level of support that come with those rates, regardless if you are a self-directed online trader or broker-assisted trader.

24-Hour Trading Support

The futures markets are 24-hour markets, which means you need 24-hour support.  The more layers of support the better.  Having access to a dedicated future broker, the trade desk, and the overnight desk for after hours trading is a sign of superior futures trading support.

Dedicated Futures Broker Support

Even if you are a self-directed online trader, you’ll likely want to be able to talk to a futures broker when a high stakes situation arises.  Let’s say you are caught on the wrong side of a limit up or limit down move.  Chances are the support team will be unable to help you.  However, if you have an experience futures broker associated with your account, he can most likely get you out of the positions synthetically by the close when everyone else is locked out of the market.  That is no small feat when thousands of dollars are on the line.  This is one example, out of a very long list, of how a dedicated futures broker can help you when you need it most.  For online traders, it is one of the most valuable lifelines you hope to never need. 

Online Commodity Trading Technology

If you are an online trader, you want superior technology, quotes and charts, and direct market access.  Stability, reliability and speed are all important.  Look for a futures broker who offers multiple platforms and ask them which platform is best based on your trading style and objectives.  They will tell you point blank.  If you are looking at a brokerage firm with only one trading platform, keep in mind that they have no choice but to tell you their product is the best option for you, regardless of your needs.

If you are a broker-assisted trader, you will have to have access to quotes and charts, online account access, and a read only version of the firms trading platform.  While you many never use some of these resources, they are great to have if you need then down the road.

Futures Market Research & Reports

Whether you are a technical or fundamental trader, research and reports are an important part of your trading.  Make sure your broker has fundamental and technical research, as well as news reports and a calendar for major report releases.  Day traders don’t want to be in an Emini S&P 500 or 30 Yr Bond trade right as the US Fed meeting numbers come out.  Good brokerage firms will provide this valuable information.

Futures Commission Merchants

Different clearing firms specialize in different aspects of the commodity futures markets.  It is important to match your futures trading needs with the core competencies of the clearing firm.  Some FCMs specialize in online flat priced futures trading while other focus on offering their clients access to all markets and futures, options and spread strategies.  No clearing firm does all aspects of the futures and options trading industry great across the board.  Some excel in flat priced futures trading only, others have natural advantages on the floor with client option fills or the ability to get orders done in either great size or illiquid markets. 

The only real way to find out which is best for your trading style is to use a futures broker who has multiple clearing relationships.  Your broker will be able to tell you the pros and cons for each clearing firm –  their trading technology,  access to the pits, execution, customer service and many other important factors. 

Margins & Leverage

All brokers and clearing firms have to follow the overnight margin requirements set by the exchange.  If you are a swing or a position trader, the overnight margin should be the same no matter which futures broker or clearing firm you choose. 

The differences arise when we start talking about day trading margins.  Some brokers do not offer any discount on day margins.  This is usually because they don’t have the risk management infrastructure to handle the proper monitoring of day traders.  If a firm can not properly monitor day traders, they run the risk of incurring debits.  That is something clearing firms and brokers do not want to deal with. 

Many firms will offer a 50% discount for day trading.  If the trader is responsible and does not constantly incur margin calls for holding day trades after the close, the firm will let them trade with 50% day margin. 

Some brokers will offer special rates for the Emini S&P, like $500 day margins.  The leverage $500 day margins are a double edged sword.  Leverage can turn a little money into a lot of money, and it can also wipe away your account in a heartbeat.  Good futures brokers allow their clients to have access to $500 margins, but if the trader abuses the privilege or is reckless with the margin rules, the clearing firm can raise the day margin.  Purely transactional firms just let their client trade regardless of how reckless they are being, until they become a risk to the firms.

When it comes to margin and leverage, the more leverage you use, the greater the risk of ruin.  As we go from 50% reductions for day margin to 90% reductions, the risk of ruin probabilities grow exponentially.   This is one of the main reasons why the CFTC has forced FOREX companies to reduce the amount of leverage their traders can use.  Some firms offered leverage of 100:1, 200:1 and even 400:1.  Studies have showed that these levels of leverage greatly increase the probability of traders blowing out there accounts.  The CFTC now wants the max leverage to be 10:1, which I much closer to what the overnight margins are for the futures markets.

When choosing a futures broker, don’t just look for the lowest margins and highest leverage available.  Ask you broker how they manage risk, how they monitor leverage, and what is the maximum leverage you should be using.  Some futures brokers can set the risk controls on your account to make sure you don’t enter positions when you have reached a maximum leverage level.

Execution Services

Some futures brokerage firms only offer one kind of execution service.  Others offer all most or all executions services.  These execution services include self-directed online trading, broker-assisted execution, options execution, third-party trading advice or newsletter execution, automated system/strategy execution, and managed futures. 

Value

Once you have reviewed the previous nine items to consider when choosing a futures broker, you need to find out what the costs are for having those services and determine the value you are receiving.  All traders are different and will have different needs.   Don’t expect the industry low cost provider to offer much value.  That doesn’t mean you need to pay top dollar for the best services either.  The most important thing is to find the best fit for your trading account for the money.

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August 4, 2010 by Leave a Comment

10 Guidelines for Online Futures Trading

Online Commodity Trading

Online futures trading platforms give individuals equal access to the futures markets, whether you’re a first time futures trader or experienced hedge fund manager.  Platforms now offer real-time quotes, charts, depth-of-market, order entry and management, as well as increased liquidity making it easier than ever to trade.  However, it is critical that the online futures trader understands how the platform works and be aware of potential pitfalls by interfacing with the market directly.

Here are 10 important aspects of online futures trading to consider:

Choose a futures broker who will work with you.

Will your broker work with you as you get to understand the online futures trading platform?  Your broker should be able to help you understand the platform and its functionality based on your needs.  If you use specific order entry, make sure the platform can support it.  If you need charting technical indicators, ensure they are available through the platform.

Try a demo version of the online futures trading software.

Can you use a demo version of the platform?  A good demo should closely simulate the live platform to increase your comfort and confidence.  It’s important to familiarize yourself with all the features you need to make confident trades.  Ensure you’re comfortable with your order entry: are you using a manual order entry? Trading off the charts? Trading off the DOM? Know the ins-and-outs.  The time to learn a key feature of the platform is not while a live trade is on.

Understand your support options.

It’s important that the futures broker and trader have an understanding of expectations before opening a futures trading account.  If your platform crashes (remember, all technology is fallible), can your futures broker take your order?  Do you have a specific broker to call or a “general order desk”?  Discount firms may not have the staff available when you most need them.

Review your orders before you place them!

It only takes a second to review and it’s not worth making costly, avoidable errors.  Remember, a platform will execute the order as you place it – so make sure it’s correct.

Always know when you have an active position and any working orders.

While it is not difficult for most traders to keep track of active trades, it’s easy to forget about working orders and walk away.  Also, I recommend keeping track of your order numbers if your platform goes down and/or you need to talk to your futures broker.

Make sure you know what you’re trading!

It sounds foolish, but I can’t tell you the number of times I’ve seen client’s trade old contract months or illiquid markets.  Know what contract month is the front-month (typically the most liquid contract month).  If using market orders, take a look at the bid/ask before placing the order.  The last trade may have occurred some time ago and not reflect where you could buy or sell the contract now.  Simply put, trade where the volume is.  If you don’t know, call your futures broker.

Know the difference between order types and order flags.

Examples of order types are: buy stops/limits, sell stop/limits, stop-limit, etc.  It’s important to know what they mean and when to use them.  Examples of order flags are “day orders” and “GTC” (good-til’-cancelled).  Day orders simply work until the close of the session.  GTC orders work until they are filled or cancelled by you.

Know the proper margin for your position.

If trading “overnight” or past the close of the day, know the proper margin for your position.  The overnight margin is typically higher than the day margin, sometimes by a factor of ten or more.  Thus, it’s important to avoid margin calls.  Most importantly, it’s dangerous to take on too much risk if you do not have the capital reserves in your account.  Here in Chicago, most Asian markets open at 8:30 PM CST and most European markets open at 2:30 AM CST.  As such, your position can move drastically exposing yourself to much more risk than you anticipated.

Actively manage your positions and use stops.

Trading online gives you to flexibility to actively manage your position(s).  As such, do it! You should know how much risk you’re willing to take before entering a trade.  I always recommend for a trader to use stops.  Even if it’s a wide “worst-case scenario” stop.  The use of “mental stops” can be potentially dangerous as the trader re-accesses risk emotionally and let’s the trade stay on instead of sticking to the trading plan.  When brought to an extreme, emotional traders can begin to pyramid their trades, with the hope of a market turning around and making all losses back and possibly more.  Do not succumb to emotional trading!  Use stops!

Examine your risk upfront.

As a corollary to #9, I cannot stress this enough: truly examine your risk before putting on a trade.  Know the typical and extreme volatility in the contract you’re trading.  Remember, you’re interfacing with the market directly.  If a position were to go limit up or down, where would your position and account stand? These days happen (e.g., the Flash Crash on 5/6/10) and there are times when extreme circumstances cause you’re stops and/or limits to go unfilled!  Know your risk.

Trading futures online can make for an enjoyable and hopefully profitable experience.  However, don’t let simple pitfalls cause trade errors that cost you time and ultimately money.  To learn more about the online futures trading and compare platforms, I invite you to visit the Daniels Trading website at: http://www.danielstrading.com/platforms/.

Good trading!

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