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Futures And Options Trading Basics – The Basic Difference Between Futures and Options Trading Spelled Out

Futures And Options Trading Basics

Futures and options trading can be a risky business indeed and should only be undertaken with risk capital that won’t change your lifestyle if you should lose your investment. The potential for profits is almost unlimited while the potential for loss is almost equally unlimited. This means that if you are on the losing end of a naked futures trade you can stand to lose more money than you have in margin and you are responsible for the entire contract amount because of the highly leveraged nature of the investment. There are many ways to limit your risk and one of these is to use options as a hedge against a negative price movement away from your position whether it is on the long side or on the short side. Lets take a look at some of the differences between futures and options trading. Futures And Options Trading Basics

While I said that there is almost unlimited downside potential this is basically only true for an option if you sell that option without holding an opposite position. So if you were to sell a June 900 put gold option and the market went to 800 you are responsible for the 100 points that the gold contract has gone against your position. Your loss would be the difference minus the premium you collected for selling the gold put. Because of the volatile nature of the markets you should figure in how much you are willing to risk on any one trade and then open an opposite position to minimize your downside risk. This can be done with both futures and options trading.

Differences between futures and options trading

1. Premium vs margin

Options: When you buy an option you are not required to put up any margin because you are purchasing the option at a fixed price, which is also referred to as the premium. This premium can decline over the life of the option if the underlying commodity price moves against your position or remains flat. If the option isn’t exercised before expiration you will lose the premium you paid and the seller of the option will profit the amount of the premium paid.

Futures: While the premium for a futures option will waste away with time the futures contract will not. You can think of the margin on a futures contract as earnest money that will make you liable for the full amount of the futures contract. This is very risky if an offsetting position is not opened to help protect you against a negative price move. Futures And Options Trading Basics

2. Risk

Options: As an options purchaser you are only limited to the amount of the premium that you paid for the option therefore your risk is considered to be limited.

Futures: Regardless of whether you purchase a futures contract or you sell a futures contract you are liable for more than just the initial margin you were required to put up to make the trade. This makes this type of trade risk unlimited.

3. Expiration Dates

One last notable difference between futures and options trading is the expiration date of each particular contract. If you were going to exercise an option to control the underlying futures contract you should know that this has to be delivered approximately one month before the underlying futures is set to be delivered. This is for physical delivery of the commodity and doesn’t hold true for the indices, which are not physical commodities and allows the expiration dates to be the same as the delivery dates.

As you can see there are several fundamental differences between futures and options trading with regards to technical aspects of each contract. Trading these instruments is a whole other matter in terms of trading platforms and specialized risk management techniques. Use this article as a basic primer for further studies on futures trading and see if futures and options trading are right for you. Futures And Options Trading Basics

Futures Trading Secrets Course – Win Or Lose, It’s How You Play the Game

Futures Trading Secrets Course

You’ve heard the maxim: “A win is not always a win and a loss is not always a loss.” It’s true in many aspects of life and particularly in futures trading. Making a profit does not always indicate a textbook perfect trade. Likewise, losing money does not always indicate a wrong trade.What is essential for futures traders to realize is that the inherent rightness or wrongness of your trading method cannot be determined by the outcome of any one single trade. Those who incessantly tinker around with their system, trying to fine tune it to perfection after every trade, are setting themselves up for failure. Those who jump from system to system, searching for that elusive perfect system, are doomed.

Patterns, Not Single Results, Are Important

The perfect system is a myth. Even the most carefully planned and flawlessly executed trade can lose. And there will be times when you actually win with what you know was a faulty approach. While winning and losing are important, they cannot be the driving force behind your trading approach. You cannot base your trading tactics on a single win or loss. Tactics are best based on patterns, such as the results of 50 to 100 wins or losses. Futures Trading Secrets Course

Don’t get me wrong. It is important to learn from your trades. That’s why I recommend keeping a detailed trading log and taking a snapshot of each trade for future study and reference. You may need to make some adjustments to your system as you develop it. But traders who second guess every trade don’t have faith in themselves or their system and are headed for disaster. Futures trading is not for the timid and unsure.

If you are going to succeed as a futures trader, you must first and foremost have faith in yourself and your system. The analogy I often use with my students is that learning futures trading is a lot like learning to drive a car. You spend time in the classroom and in the simulator, but eventually you have to get behind the wheel of a real car, turn the key, step on the gas, and take that baby out for a spin. Preparation and practice can (usually!) keep you from crashing, but you’re bound to pick up a few dents and scratches along the way–and you don’t give up when that happens, do you? No, you trust your ability to apply the skills you’ve learned, and with time and experience, you’re soon cruising confidently down the highway.Professionals know that winning is in the details. If you concentrate on proper execution of the individual components of the trade — timing, entry, money management, exit, etc. — winning will take care of itself. Futures Trading Secrets Course

How To Trade Futures Successfully – What Are the Minimum Requirements For Successfully Day Trading Future Contracts?

How To Trade Futures Successfully

When I tell people I am a self employed futures trader, they often ask “What would I need to do to get into that?” They are attracted by the obvious life style benefits enjoyed by a successful day trader, but they have very little idea of what is involved. Here are the five most important things an aspiring trader must consider, and make decisions about, before leaping into the lions den. How To Trade Futures Successfully

Capital: You can only trade for a living if you have capital to trade with. That begs the question of how much capital is required? Before addressing that question, let me ask you what return on capital you would expect from any other business you invested in? How much return would you expect from a fast food business, or a taxi cab, or an engineering workshop? Then ask yourself what sort of returns the really smart money managers on Wall Street are producing in the various investment vehicles on offer. That is the reality check! You would be amazed how many people think they can put in a couple of thousand dollars trading capital, and immediately start earning a 6 figure income. It could happen, but it is not likely (to put it mildly!). When I work with clients, we aim at a return of 10% per month, which I regard as a real “stretch” target. That is a clue to the trading capital you need if you are going to live off your trading profits. If you need K per month to cover your living expenses, I recommend a trading capital of at least K. You also need to understand that trading income is “lumpy”. You might get a terrible month followed by a couple of great months. To be on the safe side, it really helps to have enough money in the bank to ride through one or two low income months without dipping into your trading capital. If you do not have this much capital, you can still trade – but you should keep your primary job until you build your capital nest egg.
Trading System: Trading is a business. When you operate a business, you need a business plan which shows clearly where your profits are coming from. For traders this is their trading plan or trading system. It clearly lays out all the elements of your trading activity – when you will enter a trade, how large a position you will take, how you will react to various scenarios as they unfold during the trade, and precisely when, and under what circumstances, you intend to close the trade.
Experience, or the Benefit of Experience: When you start a business, any business, you need to have some special expertise in your field of operation. This certainly applies to trading, as your competitors are very bright people, hand picked and carefully trained by some of the most prestigious financial institutions in the world. They have the further advantage of not having to trade their own capital, which reduces mental stress. It is the height of arrogance to think that just because you are a successful lawyer, or airline pilot, or a success in any other walk of life, you will be able to start trading and immediately be better than these people. And yet, it happens all the time… So, how do you overcome your lack of experience? Well, there is always the school of hard knocks. You can just start and learn as you go, but if you do that be prepared to spend quite a lot of money to gain your experience. When you sign up with a futures broker you will sign a document warning that you should only trade with money you can afford to lose. If you have no prior experience, you had better take that warning seriously! Another way of gaining experience is through education. There are many, many organisations offering trading training programmes, many excellent trading books, and a wealth of information on the Internet for a diligent researcher. Just make sure that the information, wherever you find it, is coming from a reliable source. Every good trader I have ever known realizes the value of education. It is only sensible to learn as much as you can about your business. Yet another way of gaining experience is to purchase a successful trading system. This is similar to the concept of buying a franchise in a conventional business. You may not know much about the fast food business, but buy a good franchise and you get a well designed, well supported business plan based on years of good experience put in by the franchise developer. But there are good franchises and bad franchises, and there are good and bad trading systems in the market place. Be sure to seek proof that any trading system you buy is truly performing as claimed. In particular, make sure that it is not just advertising results based on hypothetical historical trades. (It is the easiest thing in the world to construct a system that has spectacular results when you are working with historic data. After all, you already know what happened!) How To Trade Futures Successfully
A Good Broker: Your broker provides your window into the market, and you need to make sure you have the best there is. A search engine will quickly throw up scores of brokers and it can be hard for a novice to decide which one to go with. One very important criterion is cost, because like any other business, cost control is a vital element of trading success. (Particularly day trading, where you have a higher volume of trades than longer term traders.) You want the transaction fees for buying and selling futures contracts in your preferred market to be as low as possible. But that is not the entire picture, because some brokers supply free what others charge for. Check for platform costs, data costs, charting packages, withdrawal and deposit fees etc. You also have to consider functionality. What markets and what kinds of trading instruments are supported? What order types are supported? Are orders transmitted immediately to the market electronically, or is their a delay caused by manual intervention? Is it cumbersome and slow to enter orders, or is there a slick single-click order entry process? Every minute you put into researching your choice of broker is time well spent!
Infrastructure: Traders are fortunate because their necessary business infrastructure is not expensive. You will almost certainly be trading over the Internet, so you need a reliable computer and Internet connection. Often trading platforms are quite “busy” with a number of windows available, so a large screen is good. However, there is no requirement for high end processors or massive storage devices. Backups are handy. I normally trade on my desktop machine, but can switch to the laptop if I need to. I have a very reliable broadband ADSL Internet connection, but I have a backup dial-up service just in case…Trading demands a lot of concentration, so you will need a workspace where you can work without interruption How To Trade Futures Successfully

How To Trade Futures Market – Day Trade Futures Markets With Automatic Trading Software

How To Trade Futures Market

During my many years of day trading futures markets I have often wished I could get my PC to do my trading for me. Surely it should be possible to automate the process, saving countless hours sitting in front of a screen waiting for trading setups to occur. So, can it be done and, if so, how easy is it? The answer is yes, it is possible, but it is far from a trivial undertaking. Of course, much depends on the tasks you need to automate to implement your trading style. Good brokers offer order types which allow a fair bit of automation of your trading plan. How To Trade Futures Market

For example, say you want to BUY if the market drops to a certain level, you could enter an appropriate buy limit order before the market opens. What is more, you could stipulate that if the order is filled, a bracket order is to be created. The bracket order creates two sell orders, one a limit order at your target price, the other a stop loss order at whatever level you choose. When one of the sell orders is executed, the other is automatically cancelled. (Not all brokers offer this facility!).

Alternatively you may be able to submit your buy order with some kind of automatic trailing stop. The idea here is that after your order is filled, the system automatically submits a stop loss order at whatever distance you specify from your entry price. What is more, if price moves in your favour, the stop loss order is continuously adjusted to lock in some of the gains.

All traders should think very carefully about the type of orders which best implement their trading ideas, and look carefully at the types of orders offered by different brokers for the markets they want to trade. Some brokers only offer the limited set of order types provided by the trading exchange, but others offer a rich variety of order types over and above those provided on the trading exchange.

Generally the exchange only supports quite basic order types, so richer order types have to be implemented by brokers using software. As an example, the Globex electronic trading platform used by the CME Group, basically provides just market, limit and stop limit orders. If a broker offers more sophisticated order types, they have to implement them on their own trading platforms. The trading platforms are electronically linked to the Globex system, and translate the more complex orders into the simple order set supported by Globex. So, for example, if Globex does not provide a standard Stop order type, the broker can implement this function for its customers by monitoring market price in real time, and submitting a market order (supported by Globex) if the stop price is touched.

This is all excellent stuff, but over the years I have developed a trading style which requires me to watch the market charts during the trading session and recognize various patterns as they form around support and resistance levels. When I detect these patterns I enter the market with stop and target levels dependent on the patterns formed so far during the trading session. It is not terribly complicated, but it goes far beyond what can be automated using order types provided by even the most sophisticated brokers.

So for many years I have been resigned to watching the markets at whatever inconvenient times they may open and waiting to see if the setup patterns developed. If they did, I entered a trade and manually calculated the appropriate stop and target levels. I was then able to automate my exits by setting up my exit orders as an OCA group (a facility provided by many brokers which specifies that if any one order in the group is executed, the others are cancelled). So, in effect, my method used manual entries and automated exits.

Automating my exits like this meant that I gave up the opportunity to trail my stop loss orders. Rather than trail by fixed amounts, I prefer to trail behind support or resistance levels, and no order types provide this function automatically. So, if I were to trail my stops, I would have needed to watch the trade for its entire duration.

I have enjoyed this form of trading, but it does have drawbacks. If you live in an awkward time zone, as I do, it involves getting up in the middle of the night to trade. Even in less awkward time zones, trading times can clash with other daily activities. Markets move quickly at the open of trading sessions, so it is very easy to make mistakes when you enter trades manually. A few mistakes can make a huge difference to your returns. Psychologically, if you enter a trade manually, it is difficult to walk away from it even if you have automated your exit. So you often waste hours watching each tick of the market to see how the trade turns out. What is worse, you can easily be tempted to change your plan in the emotion of the moment, and not following their trading plan is one of the main reasons traders fail.

So the question became how could I automate the more complex decision making process required to implement my trade entries and determine optimum target and stop levels? It turns out that there are a few systems available which are geared towards setting up trading rules to automate trading processes, but when I looked closely at them they never seemed to be able to do just what I wanted. In the end I decided that the only way to get exactly what I wanted was to write my own software. How To Trade Futures Market

To understand how this can be done, you have to be aware that some brokers publish what is known as an API (applications programming interface) for their trading platforms. This is a defined set of protocols which a programmer can implement to connect to and utilize functions of the trading platform. So, for example, instead of logging onto the trading platform and manually entering an order, you can write a program which connects via the API and enters the order for you. This is not a task to be undertaken lightly and it should only be undertaken by an experienced programmer. Anybody unfamiliar with good programming and testing techniques could end up making some very expensive mistakes. Even with an IT background, I set off down this path with some trepidation.

It took me the best part of two to three months to get up to speed in the particular programming language required and to come to grips with the intricacies of the API provided by the broker. At that point, I wrote a pilot program that implemented a greatly simplified strategy and, after very careful testing, I traded it live for a month. It worked brilliantly, and motivated me to continue. A few months later I had a program that implemented all aspects of my strategy, entries, trailing stops (if required), and exits.

At first, I just used to alter program code if I wanted to trade differently. (For example, if I wanted to use 1 minute charts instead of 2 minute charts.) However, this was inconvenient and, while it was OK for me, it was not practical for anybody else using the program. So the next step was to define a control panel which allowed me to alter any of the system parameters without going near the program code.

I have been using the program for some time now, and I would find it very difficult to go back to trading manually. Some of the advantages are obvious. I can set up the PC for a trading session a few hours before the market opens, and leave it to trade automatically without my being present. (Because so little effort is involved, I have started trading two markets each day instead of confining myself to a single market, as I did in the past.) The program executes my strategy perfectly every time. Sometimes, I find myself looking at a chart wondering why it took a certain action, but I inevitably find it acted exactly as it should in the circumstances. If I had been trading manually, I would probably have made a mistake. (You have to have done a lot of testing before you gain this degree of trust!)

I firmly believe that trading success depends on consistently entering trades using a method with positive expectancy. By automating the trading process, I am achieving a level of consistency which was sometimes missing when I traded manually. No more errors due to time pressure, fatigue or inattention.

There are other benefits too which were not so obvious when I started the project. For instance, I am much less exposed to problems arising from internet connection problems than I was before. This may seem surprising, but it arises out of the different way I implement my entries. When trading manually, I use stop entry orders to get me into a trade quickly as soon as support or resistance breaks. This is fine, except for those rare occasions when I put in the order and then lose my connection. That engenders a frantic period trying to reestablish the connection, all the time wondering if the entry order has executed without my being able to put a stop loss order in place.

In contrast, the automated program operates so quickly that it is not necessary to use the stop entry method – it simply enters a market order to open the trade as soon as a break of support or resistance is detected. Then the stop loss and target orders are entered in a matter of milliseconds, as opposed to the minute or two required to enter them manually. So, unless I am immensely unlucky, the worst that can happen is that I miss a trade, if connection is lost before the trade signal occurs, or the program is unable to trail stops if connection is lost after the trade is open.

Another unexpected benefit is the ability to vary system parameters in ways which were impractical, or too error prone, when trading manually. A simple example is the time period of the chart bars monitored by the program to detect trading patterns. In the past I used 2 minute bars, because that was one of the time periods provided in my charting software, and also because if I used a shorter time period, my error rate increased. Now I am not confined to chart periods available in my charting software, and the entries are executed perfectly even with very short bar periods – if I wish to use them. How To Trade Futures Market