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- If you trade a market which is currently extremely volatile (you buy if everyone else is selling and vice versa).
(my experience: it ruined my profit from a day before within couple of minutes)
You always think "yeah, now the price goes further down and will never jump back"
- You think that the price goes up and up. Already the best situation a trader could have on a long trend. But you fear that the price goes down whenever you go in. And then the price really goes down because traders sell at their profit and you were just to late.
- You fear that the market or market maker is always against you hence you are always in a bad position.
- You trade with analyzing a 5 Minute chart but forgot to analyze the trend on an 1 hour chart. It can be that the hour chart says short and you trade long on a 5 Minute chart.
- You don't have access to an order book. You cannot see the number of orders placed at a specific price.
For me CFD Trading is more difficult than Future Trading because on Futures I have access to an order book but it is not for free.
A trending market could be the result of something like a short squeeze where prices are rising because people with losing short positions are getting stopped out (have to buy to exit), and as it continues, margin calls and forced liquidations (more buying), or possibly large traders / investors are taking huge positions, constantly buying for minutes, hours or days at a time, regardless of what forces are otherwise in the market.
In both of these cases (we're looking at long side trends in this example), as the market rises, when it comes to a normal sell signal, the forced liquidations, stops and/or repeated buying keeps the price going up no matter what the trading signals say.
At the same time, since price is not going down, there are few buying signals (pullbacks, for instance), so it is hard to get in. There are, however, selling signal after selling signal, signals that are normally very good, but are overshadowed by the trend.
If you are trying to enter based on signals, you are getting practically no buying signals, but many many selling signals.
This, I believe, is a primary reason so many of us end up on the wrong side of a trend.
Because you hold on to losers too long. (Stopping out when the pains the greatest = the worst possible time for you)
Because you cut your winners. (And you use a trialing stop, guaranteeing you'll always give some back, sometimes before it races back in your direction)
Because you think you can predict the market. (This is the foundation of the first two = YOU are doing what's necessary to put yourself on the wrong side as your prediction turns out wrong)
All these things taken together WILL put you on the wrong side of the market ALMOST ALL of the time.
If you think about it... that is the EXACT STRATEGY for continuing to stay on the wrong side of the market.
The competition is fierce in the futures market. For every dollar I make someone on the opposite side is losing. The larger the losses the more the price moves in the wrong direction. Trading is a negative sum game: a winner, loser and the fees make it a negative sum game. Limiting my losses are the only way to stay alive in this game.
1. I have never forced anyone to take the other side of my trade, against their will... every trade I've ever made was with someone who wanted to sell to me or buy from me. Because you and I and thousands of other traders were all there to help facilitate the trades of others, many of them were able to complete their trades at better prices than they would otherwise have gotten. I don't see where any of the participants were losers, based on what they were trying to accomplish at the time.
2. The futures market is designed to function as an insurance vehicle and/or a financing vehicle. The farmer who needs to sell some of his corn before the crop is in, because of a need to get the tractor fixed isn't concerned about whether he makes money or not. He needs the tractor. The hedge fund that has a big long position in stocks may have sold some futures in order to hedge the position. They may actually be hoping the futures trade will be a loser, because that may mean the main trade is highly successful. Anyone who purchases any kind of insurance expects to pay for it without reimbursement. It is a product like anything else, and we traders are the ones providing it for people.
Just because someone isn't making money on the insurance they are buying doesn't mean they are losers. They have received the benefit they wanted.
3. I love trading. I am endlessly fascinated by it. It is the ultimate computer game, and I get to compete against the most intelligent minds on the entire planet. To me this is the highest level of entertainment. All types of entertainment cost money. If we love what we do and we lose some money doing it, that's a cost, just like any other entertainment. It doesn't make us losers because we paid to be entertained.
What proportion of market participants does this apply to, though, and what proportion are pure speculators rather than farmers who need to sell some of their corn before the crop is in, to be able to get their tractors fixed?
Call me pedantic, if you want, but don't you think it might be a little fairer to say "Although the futures market was originally designed to function as an insurance vehicle and/or a financing vehicle, nowadays most of its trading volume is undoubtedly speculative as its primary purpose"?
Quote:
Just because someone isn't making money on the insurance they are buying doesn't mean they are losers. They have received the benefit they wanted.
Response:
Good questions.
1. They say High Frequency Traders (HFT) account for up to 70% of futures trading now, and it could be argued that because of many advantages they have over the rest of us, they are like a gambling casino, with the odds in their favor overall, so it's not purely speculative.
2. It could be argued that large institutional players (pension funds, for example) are in it as investors, not speculators. We retail traders are nowhere near a majority in the market, as far as I have heard.
3. The market, if looked at as a speculative venture, would be closely compared to a casino, but with the difference that we do provide the benefits listed to those who need them. However, even gamblers in casinos provide benefits, namely jobs for the employees and profits for the owners. It doesn't stop there - the entire city of Las Vegas owes its continuing existence to the gamblers who play there.
Perhaps I simply didn't understand you, but just taking what you wrote at face value, a farmer who enters a sell trade in futures is not selling any corn when he does that. He is entering into a contract to sell corn at settlement date, and puts up a small fraction of the settlement price essentially as a security deposit on the contract. No corn is sold at the time he makes the sell contract, and he doesn't get paid anything for selling it then. He can't fix his tractor with it, because he doesn't get paid anything.
He/she enters the contract to sell as a hedge against the eventual sale price of the corn, when the corn is sold at the settlement date. If it sells for less than the price it had when he sold on the futures market, he will lose on the cash sale compared to his expectation, but will make it up on the profit on the short futures position. It's a simple hedge, and that's why the futures market was established. If corn sells for higher than his futures sell price, he will make a gain on his cash sale, but will give it up on the loss in the futures short, which is the other side of the hedge. By going into futures, he locks in what his net sale price will be when the corn is actually sold on settlement.
If that's what you mean by "insurance", then we're on the same page on that. On "financing," I am not so sure.
Of course, the existence of traders who are willing to take either a long or short position at any time is what makes it possible for the producers to have these hedges, because they need to have someone take the other side. Traders will usually eventually close out their positions, but their activity is what makes markets liquid enough to function.
( @Tymbeline is correct the the greater volume of trading is speculative, and it has always been. But if there were no corn farmers and no buyers of physical corn, there would be no speculation in corn prices either. If there were no buyers and sellers of oil, there would be no oil futures; if there were no stock market and people who need to hedge their stock holdings, there would be no stock futures, etc. )
If I misunderstood you, I apologize. But people trading futures, reading these posts, do need to understand that no physical commodity changes hands when a futures contract is bought and sold. It's all about the price it will change hands at when it is actually bought and sold, at settlement.
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
Thank you for responding. These are interesting concepts, worthy of more discussion.
Some futures contracts, if they are still open at expiration, will require one party to physically deliver it and the other party to physically pay for it and transport it away. Some examples:
• Crude oil (/CL)
• Gold (/GC)
• 30-Year Treasury bonds (/ZB)
• Euro FX currency (/6E)
• Natural gas (/NG)
• Corn (/ZC)
No physical delivery is required for index futures, since an index is not a physical thing - it's kind of like a higher order derivative, the index itself being a derivative of the value of stocks in the index, and the futures contract being the higher derivative, providing a way to collateralize or hedge based on those stock values.
PHYSICAL DELIVERY:
The futures contract is an actual sales contract, and until a seller has found someone to take the other side of an exit trade, and assume responsibility for the contract, the seller is obligated to provide the physical commodity at expiration.
One example of the "financing" aspect is that a lender, in order to collateralize a future crop, must be able to prove the value of the crop. If the futures seller still holds the contract at expiration, someone is obligated to pay and take delivery. Usually another party holds their long position after expiration, wanting to take delivery.
The futures contract is the key part of the financing transaction that makes it all possible.
I believe there are people in those industries who can take physical delivery, who will purchase contracts at the last couple of days from people who are forced to exit at a price very favorable to the other party, to avoid taking delivery themselves.
)