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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Each market is made up of different types of tradersMARKETS ARE A REFLECTION OF THE PEOPLE WHO TRADE THEM: IS YOUR COMPETITION WIRED ON STARBUCKS OR METHODICALLY FILLING IN A CROSSWORD PUZZLE? In addition to traders exposing themselves to a wider variety of potential trending markets, it's important to at least understand how these other markets work for three reasons. First, these other markets affect stock prices. A lasting rally in bonds can force large funds to start buying stocks in order to readjust their allocations. A surge in oil prices can place downward pressure on stocks. Rising lumber and steel costs can hurt some companies' earnings while help others. Second, there are going to be times when the stock market is dead in the water, and these other markets will provide opportunities for traders to continue making a living. Third, each market has its own personality. Traders who have been exposed only to stocks are betting ii all that this is the market which best suits their personality. There may be another one out there that fits like a glove, so to speak, which makes the traders'job thai much easier. In the end, all charts and all markets are the same. They always have been and they always will be, because all chart patterns depict the same thingemotional reactions and decisions made by human beings. Even if it is a mechanical system thai is making the trades, it was still written by a human. A trader is always trading other traders, no matter what the market. Yet each market is made up of different types of traders. What are these traders like? If they are S&P traders, then it's possible they are wired on Starbucks and are super aggressive. If they are trading bonds, it's possible they are busy methodically filling in a crossword puzzle in between trades. If they are trading corn, it is possible that they are napping at their desk. Which type of trader would you rather trade against? Compete against? One of the key differences between most successful traders and unsuccessful traders is this: Successful traders are in markets where their personalities shine. A stark example of this can be found in a friend of mine who trades 10-year notes. He routinely makes just over seven figures a year trading this market. A few years ago he got bored and decided to start trading the S&Ps. He liked the excitement and the action, and wanted to be a part of that game. Result? It was a struggle from the first trade, and he lost hundreds of thousand of dollars. Licking his wounds, he went back to trading 10-year notes and making just over seven figures a year. Boring is not necessarily a bad thing. I can't emphasize enough the importance of trading the right market for your personality. Also keep in mind that many firms realize there are many newer traders out there who are buying the latest software packages in order to beat the markets. These firms buy the same software and use it to trade against the newbies. This is in addition to these firms having a full-time research staff and access to tons of information. These types of firms usually focus on the S&P futures. Are you prepared to trade against these guys in the S&Ps and make a living off their occasional mistakes and bad judgment? I started off as a stocks and options trader I liked these markets, did well in these markets, and continue tu trade in these markets. However, I was always curious about the other markets that were available. For a long time I didn't do much about this curiosity. Why? Frankly they seemed scary. Yet I really just wanted to see how these other markets worked and at least to see how I did trading them. Maybe I would find something I liked better than stocks. However, I felt that futures and foreign exchange currency trading (forex) were suited only to traders sitting behind a desk at a large bank or institutional trading firm, so it took me a while to finally venture into these markets. This isn*t so much the case today because these markets have become more accessible. Ironically, however, some of these same institutional traders now visit me at my offices to learn the various trade setups I utilize in these markets. They had no problem trading these instruments with the firm's money, but when they left to try it with their own money, the psychological factors kicked in and they struggled. I eventually worked with some traders in these markets in the mid 1990s, and they helped to strip away the myths, showing me how these markets worked and how to reduce risk and create solid trading opportunities. In my search to understand the futures and forex markets, 1 had to pull bits and pieces together over the course of several months from different sources to Finally understand how all these trading instruments worked. Most of the information was elusive at besta more apt description would be worthless. 1 never was able to find a consistent, easy-to-understand summary that told me all 1 needed to know about trading these instruments, and this process was frankly frustrating and annoying. As a trader* I just want to know the basicshow do 1 trade them, how much money do I need to trade them, and how does the price movement affect my P&L? I'll use the rest of this chapter to create the summary information I wish I'd had then. In the end, I'm glad [ tried these other markets out, as it is these other markets that allowed me to make the jump to trading fulltime for a living. FUTURES 101 Think of this as a quick blurb designed to help a trader better understand the futures markets. This account is by no means comprehensivethere are entire books written on the subject. However, to an individual who has traded only stocks, the futures markets are probably a mystery and maybe even a little menacing. Yet traders who have already learned the importance of strict money management will appreciate what futures trading has to offer. Typically, once people try trading futures, they simply stop trading stocks. The ease of entry on both the long and the short sides, ability to focus on a few markets instead of hundreds of stocks, and the lack of market maker games makes them a refreshing change from the world of stocks. Let's begin. First off, there are many types of futures contracts. A person can trade anything from copper to coffee, from stock indexes to silver, or from pork bellies to palladium. It's not important to worry about most of these contracts in the beginning, but it is important to understand a core group of these contracts and how they work. 1 know many traders who focus only on one of these contracts and are doing quite well. However, it took them time to find the right market and the right setup within that market that was best suited to their personality. This can be an often long and perilous journey, but once they found the right fit, they never looked back, These are the main futures markets that I follow and trade outside of stocks: Mini-sized Dow (YM) E-mini-S&P (ES) E-mini-Nasdaq (NQ) E-mini-Russell (ER) Full-sized 100-oz. electronic gold ZG) Mini-sized gold (YG) Full-sized 30-year bond (USpit, ZBelectronic) Ten-year notes (TYPit, 2Nelectronic) Soybeans(S) Corn (C) Wheat (W) Euro currency (EC) Crude oil (CL) Mini crude oil (QM) Various single stock futures (referred to later in the book as SSFs) Note that some of these are mini and some of these are fullsized. The letters in parentheses next to the names represent the symbol that is used to get a quote. There are full-sized contracts on the Dow (DJ), S&P 500 (SP)t and Nasdaq (ND) but ihese are pit-traded and I prefer to trade the smaller mini elearonic contracts. Why? Because orders from the pit take longer to process, and market orders often result in fills that, in the real world* would result in a search warrant. The minis on these stock indexes have huge volume and great liquidity. The new full-sized 100-oz. gold (ZG) contract, is a refreshing change from the pit-traded gold (GC) contract. Again, I much prefer to trade the electronic version of these contracts over the pit-traded versions. There are also mini-gold (YG) and mini-silver (YI) electronic contracts which are good to trade. Pit-traded products like the grains are fine to trade. However, the trend is that the volume is flowing out of the pit contracts and into the electronic contracts. The electronics are where the action is, and that is where you want to be trading. To gel charts on these, traders will have to instruct their quote vendor that they want to add quotes from the CBOT (Chicago Board of Trade) (for the mini-si zed Dow, bonds 10-year notes, gold, and grains), CME (Chicago Mercantile Exchange) (for the E-mini S&Pr E-mini Nasdaq, E-mini Russell and euro), and NYMEX (New York Mercantile Exchange) if they want quotes on oil and pit-traded gold. There is an E-mini only quote feed that is cheaper, but a trader will want the full version to get quotes on the full-sized contracts. It will cost around $80 a month for both full versions of the CME and CBOT. By the way, the word E-mini is branded by the CME, which is why the YM is called the mini-sized Dow instead of E-mini Dow because it trades on the CBOT, which is a different exchange. IN A NUTSHELLWHAT TRADERS NEED TO KNOW When traders buy a futures contract, they are not physically buying anything. This is simply a way of participating in the price movement of the market of their choice. If they think a market is going to move 10 points, they can buy a futures contract, long or short, and make money on the move if it goes in their direction. They can also obviously lose money on the move if it goes against them. Also, if they own a stock index futures contract that expires, they are not going to get a bunch of stock certificates dumped on their doorstep. The expired contract will be converted to cash, and they will see the cash deposited in their account Other contracts like soybeans ane deliverables, meaning that a person can be the proud owner of 5,000 bushels of soybeans per contract upon expiration. Is this really a worry? Brokers never like it when a contract expires in a trader's account. They will call and badger a trader to get them to close it out, so there is little worry of forgetting. If for some reason it still happens, there won't be a truckload of soybeans dumped on your doorstep. It's all handled on the brokerage end and people there can get the account back to normal. For price movement, if a trader has one contract in the E-mini S&P futures, for example, and it moves one point (i.e., from 1032.75 to 1033.75) that translates into $50 on his P&L. For the Nasdaq, a one point move equates to $20. For the mini-sized Dow, a one-point move is $5. Therefore, if a trader buys three E-mini S&Ps and catches a two-point move, that is $50 X 1 points X 3 contracts = $300. There is leverage here, indeed, but it is more manageable than most people think. Where traders get in trouble is when they trade too many contracts in relation to their account size, something I talk more about later. By the way, when the S&P moves a point, the Dow moves roughly JO points, so these two contracts are nearly identical to trade. If traders say they just made 50 points in the YM (mini-sized Dow) that is just like making 5 points in the ES (E-mini S&Ps). Figure 4.2 shows a mini-sized Dow trade with 10 contracts. The chart reflects a 27-point move, which is worth $1.350 to a trader's P&L. I summarize all these contract specifications for bonds, euro, soybeans, and so on, at the end of this chapter. Of course, these price fluctuations go both ways so money management is the absolute key to trading futures. It is imperative that traders know their stop before they enter the trade, and that they stick to it and not play any psychological games. In futures, as in stocks, hoping and praying can, and does, lead to ruin. However, the nice thing about futures is that they are so quick and the fills so clean that a trader can get stopped out, and then a few moments later get right back in. A trader can't be afraid to take small losses, period. Reentry is only a commission away. In addition, electronic contracts were set up specifically for traders: They are super liquid, and fills are instantaneous. There are no market maker games such as those that happen daily with individual stocks. And with electronic contracts a trader is out of the pit, where outsiders can sometimes be treated little better than a cockroach. Here are a few other things I like about futures: If traders think the market is going to break out, they can buy a stock like INTC (Intel Corp) and watch it sit there while the market roars on without them. They were right on the marketbut their stock pick didn't move with the market. With the stock index futures, a person is trading the market instead of watching the market. It is what it is. A trader can short on a downtickthis makes a huge difference in trying to get filled during a breakdown. If traders try to short the stock KLAC (KLA-TencorCorp) at the market on a breakdown, they may not get filled for 20 cents until it has an uptick. If they short the futures at the market on a breakdown, they get a quick fill at the current market price. Recently this is becoming less of an issue as the exchanges continue to see the wisdom of allowing more and more stocks to be shorted on downticks. I used to be a big trader of OEX (S&P 100 Index) options for day trades. After trading futures, I stopped trading OEX options. The spreads and premium of OEX options now look ridiculous. Where else can a person be dead right on an intraday move and still lose money? The OEX options market! Although I do use OEX options for swing trading, I wouldn't day-trade them with my mother-in-law's trading account. Not when the mini-sized Dow and E-mini S&P futures are so clean and efficient. A person can do most of his trades uat the market and get good fills* unlike stocks and especially unlike options. For stocks, a person needs $25,000 to day-trade. For futures a trader can open an account with $5,000 (or less) and day-trade. There are no day-trading rules or classifications. That said, I recommend that people start with a larger-sized trading account, but J also realize that everyone has to start somewhere. My first trading account was $2,000. Can people quit their job and open up a futures account with $5,000 and trade for a living? Absolutely .. .not. I talk more about this later To buy one of the futures contracts discussed in this book, traders generally need about $2,000 in their account. This varies by broker, and can be lower, but this is an average. This money is called margin, and a trader can think of it as placing a 4 percent down payment on a $50,000 house. By placing the down payment, the trader controls the house, so to speak, and benefits from any price increase, and loses on any price decrease, on the house itself So if traders have a $ 10,000 account, they can buy five mini-sized Dow contracts (five $50,000 houses) and sometimes more by utilizing lower intraday margin rates. However, for money management purposes, I heartily recommend giving some thought to how many contracts are traded in an account. This is a critical part of your trading plan, and something I discuss in more detail at the end of the book. You can certainly choose to trade five contracts in a $10,000 account. You can also choose to visit India without getting any shots in advance-but that doesn't mean it's a good idea. (My assistant, Priyanka, is from India, and she keeps daring me to visit.) I typically trade one contract for every $10,000 10 $15,000 that is in my account. This way the account swings will not be as severe, and I can trade with a level head. One trader friend of mine trades one contract for every $50,000 in his account. He makes money and is never stressed out. Conversely, I've seen programs that say to take a $5,000 account and trade five contracts, and by doing this a trader can make six figures a year. This is insane, and traders would be better off donating that $5,000 to charity, because they will lose it all trading it that way. There are few guarantees in the futures industry, but losing all of your money trading with this much maxed out margin is the one sure bet available today. Other key points about futures: There are also now futures available on stocks. Called single stock futures they are great to use as swing trades in combination with index futures. Although some of the symbols have low actual volume, the ltreal volume is based on that of the underlying stock. (I talk more about single stock futures in the chapter on propulsion plays.) |
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