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Why Futures for Stock Traders?

May 14, 2013 by Leslie Burton| Futures 101

Whether you have traded a stock account for years or have just begun stock trading, you may have mixed results. Perhaps you have taken a course or you are simply well-read in your investment choices. The questions that every investor, trader and wealth manager must ask are, “Am I diversified enough to produce a smooth equity curve with my portfolio?” and “Will this portfolio be weighted well enough to stand worst-case-scenario market conditions?” If you hesitate to answer those questions, then perhaps taking a look at other products may broaden your knowledge and enhance your current investment portfolio.

The beauty of trading stocks online is that it keeps overhead costs down by trading out of your home. You will have immediate access to market information along with your account to place trades as you check the stock earnings, operating costs and any news that may impact the company. Typically, the cost of doing business is your low commission rate, use of your home computer and any subscription material to keep you informed. Most trading occurs in expanded hours, giving the investor time to trade whether it is a full-time or secondary job. The online platform allows the trader convenient access to the funds in his/her account readily.

Now, one has to think, is this the most that can be done to capitalize on the market conditions and the funds available to trade? Have there been unanticipated moves within sectors or individual stocks that may have had adverse effects on the account? Have there been instances where the capital gains within the sector may be on the move and somehow the individual stocks selected have internal failings, perhaps due to company staff changes or focus/product changes? The buy and hold strategies for long periods of time may suffer from some severe down times where a million dollar portfolio may drop to $750,000 or less. The long-term strategies may be fruitful years from now, but during the down moves, one may garnish points from additional short-term trades in the market. The risk for individual stocks may be from a stock/company going bankrupt. The stock picker or trader is typically looking for appreciation of the stock and/or dividends, but there are no guarantees of either. The individual stocks may lack in transparency and may fall prey to unscrupulous companies. Exchange Traded Funds, or ETF’s, may mimic the performance of an index, but the risk is the same as an individual corporation. Stock typically means ownership, but participants holding common stock are usually at the bottom of the list in times of a bankruptcy while the preferred stock holders may rank better.

While stockholders may lose their entire investment, bondholders are guaranteed a return on their investments. While the stock may be viewed for the fundamental backdrop, a chart is a chart and many traders may technically trade the stock. Many believe that the price movement of a stock is the estimate of what a company may be worth according to investors, but the actual value is the market capitalization. This is derived from the stock price multiplied by the shares outstanding. The stock price is also comprised of what the investors estimate the stock to be worth in terms of growth and future productivity.

The New York Stock Exchange (NYSE) was founded in 1792 and is still regarded as the premier stock exchange. The market specialist would take the other side of the transaction as the buyer for every sell and the seller for every buy. Some exchanges, such as the NASDAQ, are totally electronic in matching the buyers and sellers for each transaction. The introduction of computers in the 1970’s changed the way people traded, and by the 1980’s, the stock trading system had begun.

With Earnings Season, there may be a number report. For example, the 381 Standard & Poor’s companies reporting, with 73 % having exceeded earnings expectations. What about the other 27%? If a trader wanted a better performance, would he/she just switch out the slack performers?

There may be about 450,000 futures accounts in existence at a given time compared to about 25 million stock accounts. In some instances, correlations may be noted and used for a premarket direction. Let’s say that the Treasuries have been gaining, but during the evening hours, there seems to be a downturn. However, there could be an upswing in the stocks or equities the next day. Correlations in some cases may be used as one would use their indicators to filter a trade. The more that a trade is filtered, the more it’s potential increases. Years ago, the copper market had a high correlation to the stock indexes. In commodity futures, there is no market maker so the fills may be instantaneous. The liquidity in most of the markets is extremely good, so traders can complete trades in milliseconds, allowing them to short on a downtick.

Trading the E-Mini S&P 500 and E-Mini Dow can be efficient and clean, benefiting from the leverage aspects of futures trading. A trader may in some cases control a contract in the E-Mini’s of the 500 stocks or companies in the S&P 500 for as little as a $500 deposit or margin on a day-trade. A stop-loss may be pre-set to minimize any potential losses and a profit target or limit order may be placed to garnish points. The bracket orders that may be used can automatically control the strategy by cancelling one side as the other is filled. The tax treatment in futures trading may be simply using one’s 1099 to post the December 31st end marked to market Profit/Loss. In stocks, a trader must typically list each trade. The E-Mini S&P 500 tick represents $12.50 and each full point equals $50.00, and the Mini Dow ticks are $5.00. They trade almost 24 hours and have good volume.

In trading a stock portfolio, a trader may have to follow 50 individual stocks. With the E-Mini futures, a trader is controlling 500 stocks and/or 30 stocks through the market weighted average on one chart with all information on one average smoothing out the moves. These contracts trade in four months: June, September, December and March. The Chicago Mercantile Exchange (CME) began the first financial product around 1976, while the Chicago Board of Trade (CBOT) started trading in financial products around 1975. All of the financial products are sensitized to supply/demand, money and interest-rate fluctuations. Today’s trading is a global network of measuring surveys and assessments to gauge growth in the varied sectors. The instruments traded may be ideal in hedging or positioning for anticipated economic times and market conditions. In the concept of diversification, one is typically looking for a smooth equity curve from a multitude of products not anticipated to move in the same direction. Stocks may often be tied together as a “market line” – meaning that if one goes down, many will go down at the same time. With this in mind, stock diversification may be tricky and perhaps have little protection against risk of portfolio loss. In futures trading, there are volume, liquidity and fungible products; whereas in stock trading, there may be a delay for settlement such as t+3.

The E-Mini futures are traded through a regulated exchange where the trades are recorded in official time and sales. The host computers of the exchanges match the orders and return a fill in a second where there is no preference on size or firms. The clearing rules apply to all traders equally. There is complete transparency from the time you receive the platform with the live data, through the trade and in the statements that are sent. Through the trade, you may see the working order and actually note the price latter or depth of market to see your order fill. There are no interest rates on the balance of funds on a contract in futures trading. The margin is required to day-trade or position trade only. Actually, the exchange does not require any margin for a position until it is held overnight. The clearing firm themselves will impose a margin sufficient to prevent any debit balance situation. The CME volume is about 11.6 million contracts per day. The regulatory bodies, such as the Commodity Futures Trading Commission and the National Futures Association, govern these markets for integrity and safety. A trader may go long or short with equal efficiency. The components of these E-Mini products are some of the largest market capitalization companies represented, which allows traders to benefit from the performance.

Of course, each trader must select the optimal allocation in terms of performance deriving a trading plan with expected returns, standard deviations and correlation coefficients while maintaining a sustainable amount of risk.

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Filed Under: Futures 101

About Leslie Burton

“The best client is an informed client!” Leslie’s 32 years in the futures markets has been well spent monitoring the various indicator packages and systems that professional and retail clients use. There certainly is no “Holy Grail,” but there are basic parameters that potentially may warrant a higher probability of success on trades. She places a strong emphasis on a client’s financial goals and applies money management to keep those goals in perspective. Leslie’s personal desire to trade successfully was found in a trading room set up for the floor brokers coming off the CME floors after each trading day. Hand graphed charts were hanging out of their stuffed pockets. These charts were the only the technical guide that these “pit warriors” had in formulating their trades.

BACKGROUND: In 1984 Leslie began to get involved in the commodity markets by attending numerous classes in technical analysis. Then as a registered broker, Leslie attended Market Technicians Association functions. Leslie has been quoted in Concensus Newsletter, written for Inside Futures, Bar Chart, INO, Futures Knowledge, and has given market updates on Tiger Financial News Network and CFRN. She has also conducted webinars for FX Street on Fibonacci and Advanced Technical, and plans to continue sharing trading ideas and strategies through future webinars.

MARKET FOCUS: She primarily focuses on the more liquid markets. Execution is vital to implement strategies according to one’s trading model.

TRADING STRATEGIES: Leslie derives a trading model upon the initial client consultation. The most important part of the brokerage relationship is to be disciplined within the trade model. She uses seasonal guidelines and spread trades to garnish a differential between various commodities or months. She also believes in waiting for the ‘perfect’ scenario before entering the marketplace. In addition, each position has a stop loss strategy with a risk in mind, and trailing stops or timely exits in place upon the culmination of each trade.

RISK/MONEY MANAGEMENT VIEW: Leslie employs stops for outright futures positions. Options spread strategies may also be used, depending on the forecast for the market. Even in quiet, flat markets butterfly spreads may be used to take advantage of a small range of trading.

TECHNICAL AND/OR FUNDAMENTAL FOCUS: Leslie concentrates on technical analysis, primarily breaking down charts by using various moving averages, parabolic SAR, momentum, stochastics and RSI indicators. She reads and listens to any fundamental factors that may impact the markets. Market psychology is another factor that Leslie includes in her analysis.

Risk Disclosure

STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

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Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

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