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Why futures instead of equities/ETFs/spot forex?
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Why futures instead of equities/ETFs/spot forex?

  #21 (permalink)
Trading for Fun
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ETFs or e-minis & e-micros

In a journal here when the topic came to capital required to day trade successfully, I noted that ETFs could be a satisfactory proxy for Futures. Not perfectly correlated, and some apparently decay if held too long, but OK for swing trading I reckon. Disclosure :- I am switching to ETFs from futures as I want to swing trade and am unwilling to risk the amounts needed to hold futures overnight.

The question was posed about using the e-mini and e-micro futures to work around the capital issue and still benefit from futures leverage. I did look at them last year but did not like the lack of liquidity. Anyway, yesterday's volume numbers in the order Main contract, mini/micro, ETF;

GC - 163,916
MGC - 639
GLD - 12,486,500

CL - 203,890
QM - 4,076
USO - 8,094,800

6E - 227,687
E7 - 4,224
FXE - 916,500

Has anyone had experience trading the minis/micros, and if so has the low liquidity affected trading?

Any views on ETFs as a proxy? One obvious benefit to me if you do not have deep pockets is the flexibility of position sizing with ETFs. It was also pointed out to me that you can get detailed exposure, like sectors instead of the whole S&P.

Thoughts?

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  #22 (permalink)
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justrading View Post
In a journal here when the topic came to capital required to day trade successfully, I noted that ETFs could be a satisfactory proxy for Futures. Not perfectly correlated, and some apparently decay if held too long, but OK for swing trading I reckon. Disclosure :- I am switching to ETFs from futures as I want to swing trade and am unwilling to risk the amounts needed to hold futures overnight.

The question was posed about using the e-mini and e-micro futures to work around the capital issue and still benefit from futures leverage. I did look at them last year but did not like the lack of liquidity. Anyway, yesterday's volume numbers in the order Main contract, mini/micro, ETF;

GC - 163,916
MGC - 639
GLD - 12,486,500

CL - 203,890
QM - 4,076
USO - 8,094,800

6E - 227,687
E7 - 4,224
FXE - 916,500

Has anyone had experience trading the minis/micros, and if so has the low liquidity affected trading?

Any views on ETFs as a proxy? One obvious benefit to me if you do not have deep pockets is the flexibility of position sizing with ETFs. It was also pointed out to me that you can get detailed exposure, like sectors instead of the whole S&P.

Thoughts?

I guess I fall more or less in a similar situation where I day trade the futures and never hold them overnight not only due to the higher margin requirement, but also the wider stop for trading a daily or weekly chart which I cannot afford.

On the other hand, I love swing trades too, and I do that on equities and ETF's exclusively.
I suggest you stay away from 2x and 3x tracking ETF's and everything linked to the volatilty index like the VXX for instance... The rest is OK.

My list of ETFs that I regularly trade is the following:
DIA, QQQ, SPY, IWM, TLT, UUP, FXE, JNK, XLF, USO, GLD, SLV, and JJC

Successful people will do what unsuccessful people won't or can't do!
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  #23 (permalink)
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justrading View Post
The question was posed about using the e-mini and e-micro futures to work around the capital issue and still benefit from futures leverage. I did look at them last year but did not like the lack of liquidity. Anyway, yesterday's volume numbers in the order Main contract, mini/micro, ETF;

GC - 163,916
MGC - 639
GLD - 12,486,500

CL - 203,890
QM - 4,076
USO - 8,094,800

6E - 227,687
E7 - 4,224
FXE - 916,500

Has anyone had experience trading the minis/micros, and if so has the low liquidity affected trading?

Any views on ETFs as a proxy? One obvious benefit to me if you do not have deep pockets is the flexibility of position sizing with ETFs. It was also pointed out to me that you can get detailed exposure, like sectors instead of the whole S&P.

Thoughts?

You can also have more flexbility in position sizing with micros/minis compared to full contracts. The liquidity requirements will depend on each traders size and style/frequency. If you are trading just a few lots, and entering/exiting over longer periods of time for swing trading, there may not be an issue. If you are trading many lots and liquidity is the biggest concern, it may make sense to move to a larger contract, ie micro to mini to full. Also, I believe the CME website stated they match the prices of the minis/micros to the full contract at each day's close.

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  #24 (permalink)
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I initially started with stocks at 9.99 a turn.
Then I realized I could get 3.50 trading futures so I hopped on that.
I was only trading 1 contract at the time. Now I'm at 2.50 a turn and mostly trading
2 or 3 contracts at a time but have done as much as 6.
I don't really have any reason to return to stocks at the moment.

Psychology > Strategy ≥ Money
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  #25 (permalink)
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Futures Operator View Post
You can also have more flexbility in position sizing with micros/minis compared to full contracts. The liquidity requirements will depend on each traders size and style/frequency. If you are trading just a few lots, and entering/exiting over longer periods of time for swing trading, there may not be an issue. If you are trading many lots and liquidity is the biggest concern, it may make sense to move to a larger contract, ie micro to mini to full. Also, I believe the CME website stated they match the prices of the minis/micros to the full contract at each day's close.

I believe this would very much depend on the size of the account and the style of risk management one adopts.

Here, I can only speak for myself. In swing trading, I typically set a stop about 2x the 20day ATR from entry. The current 20 day EMA of the daily true range for CL is 2.54, so 2x is 5.08, let's call it 5. That is $5,000 in the CL, $2,500 in the QM.

Is this an excessive stop? Well, I like to be away from the noise and the easy whipsaw. In swing trading a tight stop for me would be 1.5x 20d ATR. If I halve the stop to 1x 20d ATR, it is in a place where at least 40% of the time I could be taken out by the normal daily range, not a very comforting thought.

For the last 106 trading days, these are the daily ranges for CL, using the Excel Histogram function

Range--------Frequency
1-----------------0
2----------------40
3----------------44
4----------------14
5------------------5
More-------------3

In terms of risk management, I typically risk 1%-2% of account value per trade. Taking the higher, if $2,500 represents 2% of the account, I would need to have $125,000 per contract, and of course double that if I want to be more conservative. Peter Brandt in Diary of a Professional Commodity Trader mentions he limits risk to 0.8% and often only 0.5%, so by his standards this would be pretty reckless.

So for me, with my style of risk management and my account size, there is no possibility of flexible position size or even sticking to my typical stop parameters. I would have to use a very tight stop, face frequent whipsaws for the volatile CL contract, and probably just be better off day trading.

By no means am I suggesting that this is the only way to look at and manage risk, but it is what I have spent countless hours developing and refining to suit my trading style, and for me at least, it works.

As I have made a decision to swing trade henceforth, my options are clear.

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  #26 (permalink)
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justrading View Post
I believe this would very much depend on the size of the account and the style of risk management one adopts.

Here, I can only speak for myself. In swing trading, I typically set a stop about 2x the 20day ATR from entry. The current 20 day EMA of the daily true range for CL is 2.54, so 2x is 5.08, let's call it 5. That is $5,000 in the CL, $2,500 in the QM.

Is this an excessive stop? Well, I like to be away from the noise and the easy whipsaw. In swing trading a tight stop for me would be 1.5x 20d ATR. If I halve the stop to 1x 20d ATR, it is in a place where at least 40% of the time I could be taken out by the normal daily range, not a very comforting thought.

For the last 106 trading days, these are the daily ranges for CL, using the Excel Histogram function

Range--------Frequency
1-----------------0
2----------------40
3----------------44
4----------------14
5------------------5
More-------------3

In terms of risk management, I typically risk 1%-2% of account value per trade. Taking the higher, if $2,500 represents 2% of the account, I would need to have $125,000 per contract, and of course double that if I want to be more conservative. Peter Brandt in Diary of a Professional Commodity Trader mentions he limits risk to 0.8% and often only 0.5%, so by his standards this would be pretty reckless.

So for me, with my style of risk management and my account size, there is no possibility of flexible position size or even sticking to my typical stop parameters. I would have to use a very tight stop, face frequent whipsaws for the volatile CL contract, and probably just be better off day trading.

By no means am I suggesting that this is the only way to look at and manage risk, but it is what I have spent countless hours developing and refining to suit my trading style, and for me at least, it works.

As I have made a decision to swing trade henceforth, my options are clear.

I apply a very similar money management logic as yours and it has served me and lead me to the profit land over the past 4 years
1. Max 1% of capital risked on any trade
2. Max 10% of capital on any position
3. Max 60% of total capital invested in the markets at any time

Call me conservative but better be safe than sorry, especially when your capital is the only thing you rely on to survive and put food on the table...

Also, for the stop I usually like to use the ATR(21) and 2 to 3 times that value for my initial stop.
It is actually based on the above three points that I select the time frame I can trade for a given instrument.

When the ATR is too large on the daily, I scale down to the 60min, or the 10min or the 5min until the 3x ATR(21) stop distance allows me to abide by the three above stated rules.
Sometimes it doesn't, so I simply do not trade that instrument and move on.

With time and as capital grows, I move up in the chart time frame from 5min to 10min to 60min or daily and weekly on some instruments.
This would liberate me from staying in front of the computer as I move into higher time frames because I only act on bar closure - and is probably my understanding and my way to complete flexibility or freedom (max profit at a minimum time investment)

Successful people will do what unsuccessful people won't or can't do!

Last edited by Fadi; September 20th, 2012 at 07:10 AM.
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  #27 (permalink)
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Fadi View Post
Call me conservative but better be safe than sorry, especially when your capital is the only thing you rely on to survive and put food on the table...

I have not looked much into narrowing the time frame, as I really prefer to minimise my time in front of the computer watching the market tick.

I must say that your view on capital preservation absolutely hits the nail on the head. Should be in big bold letters above every newbies trading desk.

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  #28 (permalink)
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Fadi View Post
Call me conservative but better be safe than sorry, especially when your capital is the only thing you rely on to survive and put food on the table...


justrading View Post
...
I must say that your view on capital preservation absolutely hits the nail on the head. Should be in big bold letters above every newbies trading desk.
...

If you are relying on your trading capital to survive and put food on the table, you should not be trading period. Trading should only be done with risk capital, meaning with money you can afford to lose.

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  #29 (permalink)
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monpere View Post
If you are relying on your trading capital to survive and put food on the table, you should not be trading period. Trading should only be done with risk capital, meaning with money you can afford to lose.

If you trade for a living, then that is what puts the food on your table. If you blow your capital, that is the end of trading and you need to find another way to put food on the table.

That's all it means.

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  #30 (permalink)
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Big Mike View Post
I wanted to get the discussion started first

I understand everyone always wants to project into the future, so they see futures as the most profitable and thus they want to start with them even though they are not profitable traders yet. It's like buying a Truck to pull your boat, even though you don't own a boat yet, you know you want one eventually.

But they haven't yet received their drivers license, and are going to kill themselves in a fiery car crash.

Mike

I think it is a different mindset for trading options and equities. For me personally, it is more fundamental analysis for equities and probabilities for options or combination of the two. I do look at a few technicals such as moving avg, support and resistance but these are more secondary indicators. I may be way off but day trading futures and forex seem to be mostly technical analysis. Just different animals and mindsets.

If anything trading options does teach money management which would be useful for day-trading. I do think futures are more straight forward than options, just more technical based but what do I know I have never day traded futures.

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