This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com
Let me start by stating I lost $241.30 (commissions included) in the oil markets today.
Now I’m going to make a statement that I have believed since I began my quest to trade futures successfully. Futures trading is not harder than trading stocks.
My simple proof is these two charts. Pick any day, and the comparable stock index will trade the same as the futures counterpart. The main difference is leverage. If you can trade one, you can trade the other. My advice to anyone interested in learning to trade the eminis is to practice with a simulator, and/or the appropriate stock counterpart. SPY for the ES, DIA for the YM, and QQQQ for the NQ.
I keep reading posts on other blogs that talk about how futures trading is cut-throat, a zero-sum game, or whatever. They are right on both counts. Daytrading is cut-throat if you want to be dramatic. I also agree with the point about the zero-sum nature of the futures markets. However, if your time-frame is intraday, I don’t see how that matters. The only two requirements to trade any market are volatility and liquidity. That creates opportunity.
If a bear flag is printing on the NQ, it is also printing on the QQQQ’s. If you can trade a breakout on the SPY, you can do it on the ES. Leverage is a double-edged sword. The only difference between trading the different vehicles is the amount of money you will win/lose. So if you have a desire to learn to trade the eminis, start off trading 100 share lots of the stock counterpart. Your losses will be limited that way. Once you can successfully identify patterns that offer you an edge on a consistent basis, switch over to futures. If you find that the increased risk is messing you up mentally, then go back to stocks for a bit.
I have the luxury of not having to trade to feed my family. When going through a drawdown, I can always revert to paper trading. However, Phileo made the switch, and he is feeding his family quite well even with the added pressure of being a full-time trader. As far as I know, he jumped in with both feet as I did. Looking back I probably should have traded the QQQQ’s first. However, if you do that and are not a full-time trader there is one major drawback that I can see. Without the ability to claim Trader Status with the IRS, the wash-sale rule will be a nightmare if you make several trades per day in stocks. In fact that is one reason why I have not traded a stock in over four months.
If I’m wrong about my basic premise that futures trading is no different, then its only a matter of time before I’m broke, and publishing a porn blog (with ad revenue). If I’m right, then I will continue to trade the patterns that I see over and over. Any problems I have had trading futures has more to do with me than the instrument I chose to trade.
In no way am I trying to convince anyone to trade futures. However, there is a safe way to do it without jumping in with both feet.
On any given day, they look the same to me. But then again, I’m no rocket scientist. Maybe Prospectus (who is a rocket scientist) would like to give his thoughts. :-)
This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com
May 3rd, 2007 at 2:48 pm
On the surface, it would seem to be the same, but its not. Code a system against spy or qqqq’s and then test it on the equivilent futures. Its not the same. The difference in the stock market, where everyone can win (or lose) does make a big difference, as opposed to the futures where every winner has an eqivilent loser.
The slight difference is prices, fills, etc, does make a big difference. This is probably a bad anology, but the difference is probably the same as fighting over a hamburger and your opponent just ate, or has not for a week. The zero sum game causes this.
I’ve traded both and stocks are easier, especially if you trade stocks and not an index, though you need something like trade ideas to go after the stocks without alot of work, or at least a good way to whittle down the universe.
Today I made about $680 after commissions and botched 3 of 4 trades, though I made money on 3. In the futures market, I’m sure I would have been down.
I like this sight, you guys help my trading.
- TraderD
May 3rd, 2007 at 3:08 pm
D: as far as the zero-sum game goes, i don’t see how that applies for daytrading…over a longer time frame, that would apply…can u explain further?
it may be a personality thing, but i prefer watching a limited number of contracts vs. scanning for stocks…i guess that’s why i can’t see the difference…to me i would much rather watch oil all day, and maybe keep one eye on the equity indices
in no way am i trying to convert anyone…i just think people are being a bit dramatic…even in your example regarding fighting for the hamburger of a person who has not ate in a week…i may have to eat my words on this one, but for now, i don’t see it
btw, if u aren’t already blogging, get in contact with Richard regarding contributing to this site…i think u would be a welcome addition
- tapeworm
May 3rd, 2007 at 3:31 pm
Tape: I would trade futures if I thought I could be consistent, but no doubt its a trading style issue.
I’m not blogging though I have been thinking about it for the same reasons you guys blog. The trader blogs that are around are pretty helpful to see what other people are doing, getting ideas and learning new things, or better approaches. Its great to see the amount of good, useful information available.
If you guys would have me, it would save me from starting a blog from scratch. I day trade stocks, and use TradeStation, TradeIdeas, QuoteTracker and StockCharts. I have traded full time on and off since the late 80’s, spending the other time as a software developer in Silicon Valley. Now I live in Oregon and trade for a living.
- TraderD
May 3rd, 2007 at 4:25 pm
D: if you email me your email address, I’ll set you up so you can post here.
May 3rd, 2007 at 4:30 pm
T’worm, your suggestion on wallstreak sounds like a very good one - watch the futures since they’ll have the best indicator of volume and activity, but trade the ETF. When I can swing my d*ck around like you and Phileo, then I may move over to the futures. As a Canadian, though, I don’t get any tax benefits from the futs. As well, the commissions for ETFs are cheaper than for futures, the spread is smaller, and I have no need for the extra leverage. Maybe I won’t move after all :)
TraderD - the “zero sum” debate is only relevant over much larger time frames, going weeks or months, where dividends and buybacks play a role. If you read what tapeworm said, he’s talking about trading the ETFs vs the futures, so the only difference would be the time value of the futures which does not give either side an advantage. If you make money trading SPY, you would probably make money trading ES and vice versa, unless you are dependent upon the penny spread in SPY.
May 3rd, 2007 at 4:44 pm
tyro: i wasn’t aware of the differences in canada…today, was quite cold if u know what i mean…experiencing a bit of “shrinkage”
D: it would be great to see u here
May 3rd, 2007 at 4:46 pm
@Tapeworm: Thanks for that perspective. They do look very similar, with only minor differences in some of the candles. There is something to be said for not having to look for things to trade, but sometimes finding a stock making a good setup is half the fun of trading. Saving the effort used to search for stocks would better let one analyze the chart and trade what they see.
As far as my “Rocket Scientist” words: Being an RS is such a double-edged sword! Engineering training taught me mathematics, computer programming, problem solving skills and analytical ability. That’s the big plus! When I started trading, I thought I would kill all the dim bulbs out there in the markets. Then they took my “smart” money.
It also taught me about physical laws which deal in absolutes. I can calculate the free return trajectory from the Earth to the Moon. It’s predictable and always the same. There is a “right” answer and an infinite set of “wrong” answers to any problem. Trading is all about probabilities and possible outcomes. I was psychologically ruined for trading by my engineering education! It’s taken me three years of trading just to get to the feeble point that I am today. So I hope nobody ever gets the idea that my degree makes me feel superior to anyone in the trading field. The only degree that counts in trading is earned through experience with the markets, and I look up to anyone who can trade successfully.
@TraderD: Welcome! We can always use more contributors, especially people who actually trade for a living. I’m the resident part-timer, so I offer the amateur view on MTM. :)
The zero-sum argument doesn’t mean much to me in the short term, since there is a buyer for every seller in stocks as well as futures. As far as the liquidity and slippage, I don’t have any experience there, but I can see that it would be an extra bump in the road of transitioning from ETF’s to Futures.
May 3rd, 2007 at 4:48 pm
John, i have a question about “investing” in futures. I am trying to build a well-constructed and diversified portfolio that i manage using medium-term trends. The idea is to allocate my portfolio across asset classes and sectors. Within each chunk i would diversify using several holdings. My goal is to establish positions in any holding as it starts a medium term trend. Within each asset class and sector i could be long, short or in cash depending on how the trends are forming.
One chunk of my portfolio is dedicated to “commodities”. For those i am using things like USO, GLD, PHO or related stocks (miners, refiners, etc…).
The problem with the USO and the like is that does not track the commodity well due to things like Contango, choice of contract, fees, etc.
Thus, i am thinking of using futures as a substitute for a chunk of my commodity exposure — which is a chunk of my overall portfolio –.
I have never done any work with futures. All what i read about is in the context of day trading.
I am looking for some pointers about futures but in the context of longer term holdings.
Any information would great. thanks.
May 3rd, 2007 at 5:17 pm
[...] reading TapeWorm’s thoughtful post on trading futures, I felt the urge to offer up my [...]
May 3rd, 2007 at 10:45 pm
prospectus: i think your comment would make a great post…i found it extremely insightful and interesting, and am sure others would as well
born2code: i’m probably not the best person to answer your question…its been a couple of years since i’ve held even a stock overnight…i’ve been trading futures for a relatively short amount of time, and would hate to give you any misguided advice
May 4th, 2007 at 7:07 am
Thanks, John, I’ll do that.
May 4th, 2007 at 12:01 pm
Climb aboard TraderD. The more programmers I can piss off with my complete lack of computer-based kowledge the better ;). My second series of dumb questions will be regarding purchasing a laptop. More later.
May 27th, 2007 at 8:25 pm
[...] background as an engineer has ruined my life in so many ways. ;) This comment from Tapeworm’s “Are Futures Harder Than Stocks?” article tells a bit about it: [...]