as to futures markets and spot... basic things to remember that will explain what you see... futures are exchange traded, standarized, forward contracts that can be offset anytime before expiry and have no counter party risk due to the exchange.. futures and spot prices are indeed linked... a futures price is determined by the spot + basis, aka net carry ... which is made up of the costs to hold/carry the contract less any benefits (dividends, coupons, interest, etc) derived from holding the contract ... what you are referring to is basis arb... and not every future can be arb'ed (e.g. electricity, hogs, cattle, etc)... and the connection you are referring to is fair value range aka basis fair value... you should look at www.indexarb.com ... btw, please note that there isnt really much of a chance for retail to arb basis..
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it is not so much to limit, but to manage bad risk...
I believe this point of view to be true, IMO at the very least... I believe education is critical to ones success, but a high price does not mean quality... however, keep in mind that individuals abilities are never the same, and though a strategy might be implemented successfully by a trader, it might not be by another... as such regardless of the amount for a course, immediate results might never be seen... think about it this way... traders do make it to a prop desk within an institution, but not all traders last on that desk.. even though the strategies from the institutions are all profitable and they provide those traders with all the required training and support, they are the ones that fail to implement or apply the strategy successfully and get cut eventually.. top producing traders will remain at a desk and actually be in demand from other firms as their names become known as capable traders...
keep in mind that many, if not 95%, of these "educators" are not real professionals, but rather self-taught traders that claim/appear to be successful and consider themselves professionals... which is why any training that I take I personally take with a grain of salt... I only believe as the bible institutional training..
I very much agree; the challenge is that people like to take shortcuts because no-one likes to work hard at something and gain true expertise, and there is never a shortage of "educators" that are looking to fill that void to provide short-cuts to great success.. I have taken training from some educators, and I was always left with the feeling that they had no clue what they were talking about since they could not explain the mechanics of certain things... personally I have paid tuition to the markets whenever I have made mistakes due to lack of understanding, and I dont mean the assumed understand that most people have, but rather financial understanding of simple market mechanics... my personality requires to know and understand what I do.. no more or less..
I believe the best way to have good knowledge of the markets is to:
1) educate yourself, and I dont mean google things or assume anything said on this forum or any other is actually true. now-a-days one can take college classes online at very affordable rates, so that is one way to gain real education; it does not mean that a college course contains 100% real world experience.
2) surround yourself by people who are actual market participants, and I dont mean other "traders" that are learning; nothing like the blind leading the blind.
3) if truly serious, get yourself an internship or a job working for a trading firm and start at the bottom and work your way up. It is amazing the amount of information you will have access to by just working for that company.
anyhow, my 2 cents, and all my opinion.
Last edited by sysot1t; June 20th, 2011 at 12:18 AM.
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Oh yeah, I follow. I read about the Cost-of-Carry Theory which was at first (and still kinda is) an extremely intimidating theory. The complete formula of the cost and carry method and how "spot prices cannot be above/below X and futures prices can't be above/below X, and distant futures prices must not be above/below near futures prices so everything must equal Y or an arbitrary opportunity is available..." is enough to make someone give up on Futures theory lol.
It took me a few reads but eventually I grasped the concept. One alternative theory is the Expectations Theory, which is the idea that the price today for a futures contract is the expected price the contract will be at expiration. For example, the market price for the /ES Sep. contract as of 6/20/11 is the market's belief of what the /ES contract will be worth at September's expiration based on all the released information we have as of 6/20/11. Of course from here, there are potential arguments about the efficient market hypothesis and whether what everything that is known is reflected in market pricing (weak, semi-strong or strong) but we won't get into that lol.
I like the Expectations model a lot more than the cost-of-carry method because
1) I don't intend on ever holding a contract for an extended period of time and if my memory serves me right, the cost-of-carry analysis requires holding until expiration when the futures price and the spot price converge or two contracts with different expiration dates reach different maturation levels.
2) I don't believe the average futures speculator understands the cost of carry method or factors it into their reasoning for trades
3) The market never gets out of wack enough for any arbitrage opportunities for the average retail traders to capitalize on. The market is imperfect and restrictions on short selling, transaction costs, differences in borrowing/lending rates all make arbitrage damn near impossible for retail traders (Note: Excuse the regurgitated answer. I had to reread some of my notes and that was a highlight section lol)
4) The basis behind the Expectations model reminds me of Options trading and that has helped me understand and make theories. For example, when market participants' expectations are irrationally high in futures trading, it is akin to buying an option with a large intrinsic value because you are paying a loftier price due to increased speculation on a financial product. If hedgers always have to be net short, to hedge their existing long positions in the physical product, then increases in prices are based predominantly on speculators.
I gotta get some shut eye but thanks for droppin a line sysot1t. Trying to explain my position on the market has definitely got me thinking about the relationship between futures speculation and options speculation.
Last edited by Bermudan Option; June 20th, 2011 at 02:06 AM.
Cool sysot1t. nice to hear your opinion, especially since we agreed on a lot of stuff haha.
I just wanted to add a further disclaimer to this statement. I have read a few Financial Textbooks and to borrow the term from the stock market, they often allows the reader to create a fundamental understanding of what the Futures markets do for the world and how they operate. With that said, imo none of them are geared towards anything that the retail trader can capitalize on... or any trader for that matter. The textbooks usually usually skim over Technical Analysis in an extremely quizzical fashion for laughably short analyses considering how popular and pivotal Technical Analysis is. For example In Kolb's Futures, Options and Swaps, Technical Analysis is given less than 20 lines of text in a 810 page book.
In addition to this, college textbooks focus more on the strategies for hedgers who have a pre-existing risk rather than speculators undertaking new risk. The speculation opportunities that they do highlight often requires an understanding of pre-existing relationships with intracommodity spreads or intercommodity spreads in order to create future trades. Furthermore, the trades often require capital that the average trader doesn't have, or require time periods that the average trader will not hold a position if he is attempting to make a living trading.
Long story short, in my opinion, college textbooks are written so that students are prepped for a financial firm and can hedge risk in the professional world, not so that you can go into the market and make your own money by speculating.
well... futures, options, swaps, etc... weren't created for the speculator but rather to offset risk within given markets... IMO, having a fundamental understanding of how the instruments function and how they operate is critical to being able to use them, just as having a true understanding of what an indicator is telling you about an underlying measurement is key to having a clue as to one is doing with technical analysis. I believe that only via fundamental and technical analysis, by that I mean having anunderstanding and some command, is that a speculator can profit.
you are correct, most strategies taught cant be usedby retail, and that is because they were not mean to be used by unaccredited investors, which get hurt and complain when something goes wrong with a trade, most retail is usually undercapitalized... think about it, why did you looked at futures? not everyone has $100k+ of at risk $$$$ sitting around, and no living can be extracted with 5k, unless you are living at home with your parents or basically someone else pays for everything.
anyhow, not to ramble on too much ... you should read katsanos book.. you might already have... someone recommended it to me and that opened myeyes and made me realize that I lacked understanding and put me on the path to acquiring that understanding vs chasing lagging indicators like many of the participants of this forum or any other who think the next indi, or better yet reading price action, will make them successful.
basis is simple, dont overcomplicate it too much... knowing it, will help you find price levels to trade, also .. it is the foundation of program trading.. so understand basis and you will understand market profile, support/resistance and program trading IMO... also, Expectations Theory can also be reflected on basis, specially for certain commodities...
as to your reasons for focusing on expectation model primarily ... following the herd, is basically what you are saying is more accurate, and I would disagree... I believe that retail always picks the tops and bottoms the wrong way because they follow the news and the remainder of the herd... I prefer not to get on the bus with the remainder of the people, and I rather follow what true professionals are looking at and manage my risk and expectations based on that... retail volume is extremely light in comparison to institutional volume... and retail vs. institutional expectations are completely off... institutions are quite happy with ROE of 25-50%, while retail shoots for 100%+ ... huge disconnect at any level..
options and futures are both hedging instruments... so they are very similar... only caveat, futures are delta 1 products... delta is all you can trade... while with options you get to trade vega, gamma, theta, rho and delta.. ... so you can take the risk you choose to trade and focus on it while offsetting the rest...
Last edited by sysot1t; June 20th, 2011 at 11:40 AM.
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Yeah I think that becoming skilled at fundamental analysis alone take more time and luck than the average is willing to sacrifice. Also, technical analysis based solely on oversold/overbought indicators or crossovers or whatever are extremely subjective and can be irrelevant in certain market cycles when the indicator becomes embedded or whatever.
I will definitely look into the Katsano book. Just searched it on Amazon. Strangely enough, I was going to read Intermarket Analysis by John L Murphy but have been procrastinating and dropped it to the bottom of my 'to read' list. I cannot comment on Intermarket Analysis because I am not well versed on the subject at all, however, it is worth mentioning that intelligent technical analysis might often result in purchasing around the same time as those using intramarket analysis. Although we purchase for different reasons, the herd of smart money will be evident through Technical Analysis and I can just ride their coattails until I get signs to the contrary.
Retail traders don't factor into my strategy because I focus on price action/volume and have a large minimum contract sizes on my Time of Sales prints that filters out the majority of retail traders aka noise.
One thing I have been thinking about lately is a point I read Gustav Le Bon's: The Crowd that recently was referenced in a trading text I have been reading. Le Bon contended that crowd-think or mob mentality afflicts everyone and that even if we allowed a group of the most intelligent people to make decisions, they would all eventually make terrible mistakes because their thought process will eventually become one-sided and lack diversity and innovation. It was a powerful statement that kind of stopped me in my tracks when I was reading because it is hard to comprehend how those who study something for a living can get it all wrong in politics or in courtrooms or whatever. However, something like Long Term Capital Management would be an excellent example of the smartest guys in the room all thinking the same way and getting smoked.
The difference between smart money and the general public is that smart money goes out of its way to purchase when the market has the least chance of putting up a fight, whereas the public often buy when the market is running out of steam. However, the public sentiment can still outmuscle the smart money if they are incorrect in their assumption. The smart money is stronger, more disciplined, and can hold onto losing positions and so I think the smartest traders follow the 'sheepdog as opposed to the herd itself, but we need to remember that the sheepdog is still not invincible to mistakes. much longer than the retail investor but they are still not immune to getting it all wrong.
Yes retailers often aim for the glory but they are in the position for absurdedly high ROE that Institutional traders are not privy to. Retail traders can get in and out of a positions the moment they see the tides turning for minimal damage. Institutional traders on the other hand, cannot sell their positions at the top of the move or at the bottom because their size will work against them and they will get terrible fill prices and the Market Makers will drop prices substantially, giving back a large portion of their profits or deepen the losses they have already endured.
Can't think of anything else to say for now. Thought provoking convo for sure
Last edited by Bermudan Option; June 20th, 2011 at 11:54 PM.
technical analysis is not the answer by itself, just like fundamental is not.. the two combined... and by fundamental I mean having a good understanding of what drives a given price within a market... as an example interest rates on a country will influence the direction of their currency... would you go against the interest rate change when trading or would you know to trade in the same direction of the resulting currency move? that is what I mean by fundamentals.. and by technical, where to jump into the trade...
Hmm. I see your point and I agree/disagree to an extent. I do think it is possible and that there are plenty of people trading for a living with just Technical Analysis. However, I also believe a fundamental understanding is required to take your trading to the next level. I don't believe a pure technical trader would be able to speculate in the same manner as someone with a fundamental understanding of the market. Although each have similar traits, overall I see Technical Analysis as more of a constant method used to gauge/react market participant's emotions, while Fundamental Analysis is more of an assessment as to whether the market's participants reactions are logical or illogical.
Thanks for the recommendation. I read the reviews on Amazon and it looks like quite a good read. A bit pricey for me but they have a copy in the reference section at the Chicago Public Library's downtown branch that I can check out in the near future.