I, for one, …

Posted on December 20th, 2006
Written by Richard
Posted in: N/A (old archives)

BrockmanI, for one, welcome our new futures-trading overlords…

Well, you gotta admire the enthusiasm of CalTrader, who wants to show you how to build wealth by simply making 20% every day you trade. Needless to say I’m skeptical. That doesn’t mean I’m a naysayer like he’s complaining about in his post. I know nothing about CalTrader, so I’m not opining on whether he can pull it off or not. But, I want to caution people about getting too swept up in all that enthusiasm.

The key red-flag, from my perspective, is that he’s not talking about the risk of ruin. With so much leverage in play, and so little starting capital, you are essentially banking on not having a losing streak, ever. I’d like to know more about the expectancy/win rate of the system being employed. Hopefully some of those details will come to light soon.

He’s not exactly saying it’s easy to make so much money, but if you are the type that is easily excited about wealth, think about this: it is practically impossible for a beginner to make “easy” money in a futures market, because it is a zero sum game. That means, you literally cannot make money unless someone else loses the same amount of money that you made. So, what is more likely… a small set of insanely rich people lose everything every single day, to fuel moderate gains for the majority of people? Or, a small set of rich people get even richer, as hopeful newbies are sucked dry. My guess is, it’s mostly that second one…

People think the stock markets are the same way, but that’s not true. The stock markets do act like a zero sum game to a degree, but the options and futures markets are designed that way. Leverage like that does not come free!

Comments

  • No DooDahs: You have a point. But not for newbies, or experienced newbies. I think the margin should be 0.1:1 for them. Woulda saved me money. Hey, I'm gonna srart a brokerage firm on that premise. Sometimes I really suprise myself on how smart I am ;)
  • John: have you been letting all that valuable experience slip through your fingers?
  • bill: i think we all know our "instruments" pretty well...one day i may figure something about my trading vehicle...if i had as much experience trading as i do with my "instrument" i would be rich
  • @Bill: thanks for all the thorough replies! I'm very interested in the result of the "why stocks?" plodding.
  • @moom: Regardless of what the equity markets do, or whether longs tend to win more often than shorts, the fact remains: every time I make money on a derivatives contract, someone else loses the exact same amount on the other side of the trade. And, vice-versa. It seems pretty clear-cut that this means it's a zero sum game, to me.

    Make sense? If not, can you explain more in terms of how the gains and losses add up to something other than $0 in some scenario? Every time I add it up, I get $0.
  • John: Only $1,000? Do you take PayPal?

    Born: Of course the clearing members are responsible for all cash settlements, but that is not different from the clearing members being responsible for settlements on any other contract. Hedging exists on the cash-settled index markets just as it does on the commodity markets; to a lesser degree, but it exists. I pointed to a copper example as one of the simplest to explain.

    Zoomie: "Do you really need more than 4:1?" Maybe. Depends on how many opportunities you want to exploit at one time, or how tight your stops can be.

    exengineer: Maybe the dummy day trades work on everything, maybe, but many strategies that work on one commodity don't work on another, and indices behave differently over periods of days or weeks than stocks do. Brett has pub'd some work on this, even the sector ETFs have different patterns than the overall index ETFs. I say we should know our instruments.

    Richard: "why are we still trading stocks?" I'm asking myself that, and investigating. It'll take me a while, I'm a plodder.

    All:

    The most tax-efficient trading strategies are LTTF in stocks, through buying new highs, or "value" methods that hold/discard around one year's holding time, like the "magic formula." Gains are almost always at 15%, loss credits always at income levels.

    Tax-efficiency is marginal compared to expectancy, winning percentage (psych reasons), and inventory turnover. Given equal expectancy, acceptable win%, and equal turnover levels, choose the tax-efficient route. I haven't seen too many tax-efficient strategies that can keep up with high-expectancy, high-turnover, inefficient strategies in terms of overall ROE.

    Just my opinion, the value of margin is in having more, non-correlated positions in play at one time, for a given risk parameter per trade.
  • ah, the last piece of the puzzle. I suspected it was a shell site for some sort of scam... I just couldn't figure out what, exactly.
  • richard: leverage is not free...btw, TOTT is just a shell site to scam newbies into my 100% sure fire system that i will let my readers have for $1000
  • moom
    In the long-run the stock futures market isn't zero-sum as long as the stock market is rising. On net shorts will lose and longs win. If the market goes nowhere it is zero sum (ignoring commissions etc.). The actual trading per se though is zero-sum. In the actual stock market there are fewer shorts than longs and so it is more positive sum as long as the market is going up in the long-term.
  • exengineer
    People often say "If you can tradeone thing (stocks), then you can trade anything (futures, forex, etc.)", but I don't think that's true. Patterns and dynamics that exist in one market will be different in another. All these markets are just different animals, and anyone who rushes in thinking they've got it down will only take their account down. BUT--with proper study and application of universal pinciples like position sizing and risk management, I think a good trader can make a successful transition. You've got to go through several phases:

    1) Observation and study of your market
    2) Distill observations into an edge
    3) Practice and testing of edge
    4) Trade live, trade small

    Then you can get to "swinging your full line", as Jesse Livermore liked to say. There is a foundation of trading wisdom that is universal, but I truly believe that you have to go through these stages with every new market to be successful long term.
  • I daytraded SP 500 e-minis for about 4 months. The good thing is that it is one instrument. The bad thing is that it is one instrument. I find it easier to choose a trending instrument from thousands of stocks than to trade futures. Trading futures does have it's advantages, but leverage is not one of them. Do you need more than 4:1 leverage?

    I may go back to trading futures, but I see that many years in the future. A trader friend of mine said, who has 30 years experience trading equities, that once you have found a way to make money in the market, stick with it.
  • Born2Code
    Bill, i should've been clearer. I was describing the cash settlement Future contracts on the S&P, Nasdaq, Dow and Russel. My understanding is that these are the instruments everybody is getting excited about (e.g. CalTrader, Ugly, ...) and that's the topic of Richard's post. By definition and design, the CME acts as the other party in all open positions. That's not an opinion, it is just the way things are.

    I did not mean to oversimplify the commodities futures market, which is a completely different story in my opinion.
    Also, i understand the position hedging used by large players, but most of the discussion here applies to day trading the futures.
  • @John: yeah, I know about the tax advantages, and I see the charts. The main point of the post is that the CalTrader article is entirely focused on reward and entirely ignoring risk. Didn't mean to imply that it's impossible to trade futures responsibly! :-) I would like to learn more about the risks though... I still contend that leverage is never free. If it were, then why are any of us still trading stocks?

    @Bill: I've read about that hedging on commodities before, but I don't think about it often. Should be an interesting article you're cooking up.
  • Don't oversimplify the futures market by saying the exchange is the "house." A goodly portion of the participants in futures honestly don't care whether they win or lose money on their participation.

    A manufacturer needs copper, but they also need to budget and set prices for future production. They actually buy their copper on the scrap market; but they buy futures contracts to hedge their production costs. If their long contracts rise in value, they use the profits to buy copper in the scrap market. If their long contracts decrease in value, they DON'T CARE, because the loss is offset by the cheaper price they are getting in the scrap market. Their benefit is not through "winning" or "losing" bets in the futures markets, but through using the financial instrument to equalize their cost of production over time.

    The above is only one example.

    Index futures have hedging participants, as well.

    I'm doing a post on futures vs etfs vs options for longer-term speculation (position not day trading) and I hope to have it proofed and up by tomorrow.
  • richard: i just noticed your disclaimer...lol
  • richard: as far as the taxes are concerned, futures are taxed at a lower rate (23%), because of the 60/40 rule...for those of us who work, and can't claim trader status, that is a plus...take a look at a futures chart...as u know, they are the same as any other...if you use the chart for stop placement, and manage your contract size accordingly, you can quantify your risk...unless u are trading an insane # of contracts for the size of your account, u should be ok

    what i question is this! many people are balking at the insane leverage employed in the futures markets...many of these same people have a $30,000 account, and are trading the maximum amount of shares their margin (and stop loss) allows...for example, if your risk tolerance is $100, and u buy 1000 shares of a $120 stock with a $1 stop -- how is that any less insane? the black swan event will wipe out most undercapitalized daytraders (myself included)...however, the only way to generate enough income to live on, u either need more capital, or take on more leverage...proper risk management keeps u in the game, as long as there are no black swans...i am not saying u are in this category, but i believe it applies to most of us pikers :-)
  • @xo: yeah, don't get us wrong... we're not saying that there aren't times when wealth is destroyed in the equity markets.

    But, destruction of wealth does not mean a market is a negative-sum game, even part of the time. Maybe you think that's too pedantic, but it's a fact. I don't think it can really be characterized as a debate, as long as everyone agrees on the definition of "negative sum game". Maybe we don't, and that's the problem.

    Regardless, thanks for the links... I'll check 'em out.
  • xo
    It's not particulary profitable debating whether or not the stock market is a zero sum game, however understanding that the market is a losing game can be.

    One final point however that I don't see mentioned often in the ZSG debate is the prevalence of naked short selling in the stock market.

    http://www.businessjive.com/nss/darkside.html

    The existance of naked short selling alone confirms the fact that there can exist times when the stock markets are in fact a negative sum game.

    Question is how can one profit from this?
    Anyone ever look at - http://www.buyins.net?
  • Born2Code
    the equity market is not a zero sum game because equity is being created (or destroyed) by the underlying companies. If nobody ever traded a share in the public market, yet we had a method to value companies correctly, the value of the stocks would rise and ebb with the value of the underlying.
    The futures are "fictional" instruments created for the purpose of trading. You are taking positions against the CME, not against other market participants. The CME is betting that people will lose more than they make. Much like a Casino. Every Casino operator knows that some players will make money, some players may even consistently make money. But in the long term, more money will be made by the Casino than the aggregate players.
  • @gx and phileo: I think that's the plan, no? At least on the $5k er2 account?

    In my opinion, he's not obligated to tell anyone anything, so it doesn't bother me as much as it bothers others. But, he isn't very credible as "motivation for all" unless he starts disclosing more about his trades and his trading. Should be interesting.
  • GX
    DITTO with Phileo comments.
  • @tyro: since you are only taxed on gains, by the time you pay taxes the chances you have gains are 100% in both cases. :-) But I think I know what you mean.

    I did say that they act a lot like a zero sum game, in my post. I'm not arguing that, except to say that everyone in the derivatives market is playing a screw or get screwed game. In the stock markets, on the other hand, I could be shorting shares to someone that just wants to own a fraction of the company. So, in a theoretical sense, that should make futures a more hostile game by definition. Whether that's a tangible difference, I can't say, since I've never traded derivatives in a serious way.
  • At the scale of a day trader or swing trader, the differences between the zero-sum futures and the non-zero equities are negligible. When you consider the tax differences between short term capital gains in equities and futures, you actually stand a better chance of gain with futures. (If by "gain" you mean "lower chance of loss" :) )
  • It is my most sincere desire to see CalTrader post all of his futures trades - the good AND the bad ones.
  • I should add that it's most typical (in the stuff I read, anyway), to include brokers as one of the game participants. So derivatives markets would be zero sum, from that perspective. If you consider the brokers as "outside" the game, I believe it would either be positive or negative sum, depending on whether the person who "won" paid more or less commissions than the person who "lost". [edit: actually, if you leave the brokers out, futures are always a negative sum game... I managed to confuse myself trying to think too fancy :-) ]
  • @xo: it's not a matter of what I think... stock markets are simply not a zero sum game. If you think about it some, or google around a bit, you will see that this is true. Googling for "why the stock markets are not a zero sum game" gives several links.
  • xo
    Curious, why do you think the stock markets are not a negative sum game?

    Are not all capital markets where there are buyers and sellers a negative sum game so long as we have brokers in the middle?
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