Markets are powerful things. When you first start trading, you are likely to hear a lot about the risk that comes with the potential opportunities in trading. Don't just pay it a lip-service. It is important that before you risk one dollar, you understand and respect how the markets work and what your responsibilities are.
Understanding the mechanics of risk and reward will help you plan trades
One key thing to remember about futures trading is that you are leveraged in your positions. What is leverage? Well, you are basically able to control (buy or sell) an exponentially greater value of contract with a fraction of the overall price. You use a smaller deposit (margin) as a performance bond to trade a much larger total value.
Leverage can bring big dreams or big nightmares
If each trade is leveraged, then the risks as well as the potential rewards are multiplied accordingly and that means you are on the hook big time. Consider this scenario:
The S&P 500® Index is the most widely used barometer for large-cap U.S. stocks. Day trading is not done using the cash index itself, but instead using a futures contract that closely follows movements in the Index. This futures contract, dubbed the E-mini® S&P 500, is listed by CME Group, the largest futures and commodities exchange in the world. Each e-mini S&P contract is worth $50 multiplied by the index futures price. That means when the market is trading at 1275.00 that contract is worth 1275 x $50 or $63,750. So, for instance, if a day trader buys a September E-mini at 1275.00 and then sells it later in the day at 1278.00, then this would result in a profit of $150 (calculated as 3 points x $50 per point), minus fees and commissions. The minimum price fluctuation or "tick" is 0.25 points or $12.50.
Initial Futures Margin is the amount of money that is required to open a buy or sell position on a futures contract. Margin essentially acts as a good faith deposit demonstrating your financial ability to tolerate the risk of the trade - as well as cover any potential losses. Initial Futures Margin for the e-mini S&P is set by the CME Group and is currently $5000 per contract. Add another contract, and you have to have twice the amount on deposit. The good news is that margin for day trading is reduced considerably. You should check with your brokerage to inquire about their day trading margin requirements. Also keep in mind that margin rates are sometimes updated or adjusted according to market volatility.
So for every long or short position you have, a mere $5,000 (or in the case of day trading, considerably less) is enabling you to be in charge of over twelve times that value. Isn’t leverage great? Until it isn’t. It also means you can lose unlimited amounts of money, far greater values than you have on deposit. That responsibility is constant – you can lose money even while a position remains open. Every time your account dips below maintenance margin levels, you have to make an immediate deposit to bring it back up. If margin rates change while you have a position open, you are responsible to add funds to meet that level.
Consider the value per point and you will be able to respect the power of the market
If each point in the e-mini S&P 500 contract represents $50, it only takes 10 points for $500 or 100 point move to that $5,000 level. Some days have smaller trading ranges, or a tighter point spread between the high price and low price. Other days might have extremely volatile trading where 30 points can be given or taken away. 30 points is $1,500 per contract that you would have to celebrate if it is in your favor. It is also the amount you would have to deposit if you needed to bring an account up to margin levels. Trading more than one contract? Two will mean $3,000. Five contracts? You get it now – that means a large move in the market will cost you $250 per point. Things add up pretty quickly, and that is why it pays to appreciate and respect what you are getting into with every trade.
Never lose sight of the risks – it helps keep you grounded
It is easy to get carried away with the potentially glamorous parts of trading, but it pays to be aware of the real risks for every minute detail of a trade. I recommend planning every trade with these details in mind. I have specific targets for entry as well as profitable or losing exit strategies. Knowing when and where to pull the trigger every time is important whether the market it moving in my favor or against it. It helps me maintain a healthy respect for the power of the market, and keep me from letting my emotions dig me in too deep.
Best Trades to you,
Founder & President - Trading Advantage [more]
While some things change, most things stay the same. The sun came up this morning; Democrats and Republicans still hate each other; central bankers are still printing money with reckless abandon; Oprah Winfrey is still rich; the stock market made new highs on ridiculously low volume; and Greece was saved…again. The only thing that is different is the date on the calendar, which makes today Fat Tuesday.
What isn’t on the list above because it hasn’t happened yet (this time around) is the other part of the Greek bailout saga that never seems to change: as sure as Oprah will still be rich in a few days, yesterday’s Greek bailout will fall apart like a politician’s promise.
In the latest bank bailout via the Greek people, we learned that Puppet Papademos and Company agreed to more austerity for more cash - $172billion to be precise. In order to get this, private bondholders are being forced to accept higher losses without being paid on their insurance policies (CDSs), the ECB accepts no losses, the ECB retroactively changed all bond language so they wouldn’t lose money which radically changes all bond sales going forward, and Greece will be placed under a new wicked type of Financial Fascism by the EU that will make all decisions for the people of Greece.
There will be massive protests in the streets of Greece come Wednesday.
Here are a few comments about the latest bailout. I wonder which ones will be correct.
"It's an important result that removes immediate risks of contagion" - Italian Prime Minister Mario Monti.
"A nightmare scenario was avoided. It is maybe the most important (deal) in Greece's post-war history" - Greek Finance Minister Evangelos Venizelos.
"What's been done is a meaningful step forward” - Swedish Finance Minister Anders Borg.
"The austerity measures it will have to implement and increased monitoring by the troika amidst public outrage will make things harder and drive it deeper into recession. There is a risk of a euro zone exit later this year" - Jennifer McKeown, senior European economist at Capital Economics.
"This program is not something to cheer about” - Dutch Finance Minister Jan Kees de Jager
“The new Greek government could refuse to follow through on its commitment” - David Mackie, chief European economist at JPM
"So what? Things will only get worse!” – 31-yr old Athens taxi driver.
"Without the rebound and growth of the economy ... not even the immediate fiscal targets can be met, nor can the debt become sustainable in the long-term” – Greek Conservative leader Antonis Samaras
The final two comments above are true right now. In order to get the Eurocrats to agree to this banker bailout and keep their constituents from howling, the Eurocrats did what all slimy politicians do at the end of the negotiating line: fudge the numbers. Mr. Samaras’ comment above is exactly correct – Greece has no chance of growing out of this burden.
Isn’t it odd that EVERY U.S. president in memory – on both sides of the isle – have promised that he could cut the deficit in half by the end of his first term? How can they all make such a statement? It usually boils down to rosy growth predictions. None of them ever propose real cuts in the budget, just fantasy cuts; however, the way they look you right in the face and lie without batting an eyelash is in their always-rosy GDP growth projections.
And that’s exactly what the slimy EU politicians have done: made preposterous GDP growth predictions that everyone knows is a lie – but must accept to keep the can-kicking exercise going down the road.
view chart: http://hosting-source.bm23.com/17735/public/chart_for_wed.png
As you can see on the chart above, Greece is in a depression. Yet on the chart we see the assumptions made by the EU politicians, who claim that Greece will magically halt this process this year and stage a staggering reversal of fortune. How this would happen, while the majority of the previous austerity demands have not even been implemented, is not explained by the Financial Fascists now ruling Greece. Even under the wild supposition above, Greece will only get to 159% of the required debt-to-GDP ratio and not the 120% needed for this to supposedly work.
In other news on this Fat Tuesday, the USSA posted its own new debt-to-GDP ratio…a record of course. It now stands at an official 101%. It will get worse with the coming 5 & 7-YR Note auctions over the next few days. But don’t worry; nothing bad ever happens to the USSA. Now if one were to consider the unfunded mandates made by our own home-grown slimy politicians, well, then the debt-to-GDP ratio would be somewhere around 730%. No worries, right?
Trade well and follow the trend, not the so-called “experts.”
President & Founder of Trading Advantage.
For most traders, charts are like their road maps to potential trades. Technicians see potential patterns, key clues that they interpret for trading opportunities. Fundamentalists see confirmation of news stories or supply and demand dynamics playing out in the price fluctuations. Charts are indispensible to traders
Understanding what a chart is telling you is paramount for traders
We are going to look at the two most common chart types, and the basics of their construction. The main thing to understand when you are looking at any given chart is that there is key info that shouldn't change. Each chart will be showing you prices on one axis and time periods on another. Most charts will show the prices on the vertical axis and time periods (e.g. daily, hourly, five minute) on the horizontal one, like this:
Past performance is not necessarily indicative of future results.
Chart courtesy of Gecko Software.
The filler in the middle of the chart is made up of the Price bars. Each mark corresponds to a trading period on the bottom and a price range on the right. On this chart, these are the little bars that show the opening price, the high price, the low price, and the closing price.
I tend to favor candlestick charts, which show the same information in a different way.
Past performance is not necessarily indicative of future results. Chart courtesy of Gecko Software.
Each candlestick shows the opening price, closing price, session high price, and low price and the color of each candlestick can tell you at a glance if the market closed higher or lower than the open i.e. if it was a down day or an up day.
Whether a bar chart or candlestick chart, people who analyze charts (also known as Technical analysis) are looking for clues to potential market direction. For them each new bar or candle can combine with one or several others to form patterns which they believe might forecast future price movements, or at the very least reveal possible trends.
Technical analysis involves looking for possible clues or patterns in charts
There are many different patterns that traders reading charts might be looking for. Some are simply patterns formed by the bars or candlesticks, others are more complex pattern which use other indicators. Let's take a look at some of the most basic:
Sometimes, a chart that is showing a sideways pattern is said to be a in a channel. Every movement higher meets with overhead resistance where selling comes in. Each move lower brings in buyers which creates support.
Candlestick charts also have special patterns that have been identified and named over a long history, said to stretch back to rice traders in Japan. Many of these patterns have fantastic Japanese names like doji or harami. Others have names which describe what is taking place in the pattern like engulfing patterns where the body of one candlestick overtakes the other. These are explored in more advanced Trading Tips.
Recognizing certain patterns or trends can help when planning trades
Technical analysis is one of the backbones for trading strategies. If you can correctly identify a trend, you might be able to spot a trading opportunity. If you can recognize and understand support and resistance, you might be able to use them when planning exit strategies. One of the key things to remember is that the history of a markets price action is no promise of future trading activity. Just because it went to a certain price level before, doesn't necessarily mean prices will move the same way again. Analysis is fallible. Another word of caution for traders - be careful not to let personal bias overrule chart observations. Sometimes we are guilty of seeing patterns to fit our desired forecasts.
Best Trade to You,
Founder & President of Trading Advantage [more]
On the heels of another MASSIVE European continent sovereign downgrade, plus the
promise of UK & French downgrades, the market was saved again with a rumor. It
wasn't just any rumor though, but the same old nonsensical Greek bailout rumor
that never seems to grow old. With only a few minutes left in the day, the
usual rumor was released to the usual financial outlets, before the close, that
resulted in the usual change from a down day to a positive close.
Isn't it odd that the bad news like MASSIVE SOVEREIGN DOWNGRADES are always
released when the market is closed; however, good news is always released during
the trading day? If I wasn't so jaded from so many obviously and bullishly
rigged maneuvers by politicians and central banksters to achieve their
preconceived outcomes, I'd say this was a freak occurrence. From experience,
however, one must conclude that the timing of these things is completely
controlled by the "powers that be" (read: Fed, Treasury, ECB, IMF, BOE, World
Bank, BOJ, etc, etc). Any thoughts to the contrary show ones acute naiveté.
Of course there are others who share this frustration and not just in the USSA.
Another voice of reason comes from Godfrey Bloom of the UK Independence Party
who excoriates the EU with, among other things, "The day must surely come when
politicians, bureaucrats, and central bankers must be called to account by a
fiscal crimes tribunal and sent to prison for a VERY LONG TIME!"
Sadly, there isn't a single sorry politician (other than Ron Paul) or so-called
financial journalist that will stand up and say the same. No sir, in the USSA
it's all about "Go along to get along." After all, the slimy politicians need
their palms greased and the so-called financial journalists need advertising
Trade well and follow the trend, not the so-called "experts."
Founder & President of TradingAdvantagetm
(888) 755-3846 [more]
I think trading with a specific plan is one of the most sensible things a trader can do. It helps you learn and identify key areas to watch for in a market. More importantly, it helps you avoid sabotaging yourself because it helps keep your emotions in check. One of the key components of a trading plan is knowing your exits. One way to close an open trading position is with a limit order.
Limit orders target a specific price level – they won't be filled unless the market trades there
Limit orders are pretty straightforward once you get the hang of them. They are contingency orders. The market has to trade at a specified price level before it is even possible for the order to get filled. Even then, there is no guarantee that it will get filled.
Limit orders say that the trade can be executed at a specific price level or better, but not worse
Buy limit orders are used for an exit strategy on open short positions. Use these if you sold a contract to enter the market. Sell limit orders are used in a plan to exit open long positions. They are employed if you bought a contract to initiate a trade.
Basic limit orders specify the market and the price level and the action to take. For example:
Buy one December e-mini S&P futures contract at 1350.00 or better.
To be an effective limit order, the market would have to be trading above that price point at the time the order is placed. Why? Because if you were to put in an order like that and the market was already trading lower, it would already be a better price to buy at. That means the order would probably just be executed at the market.
The same kind of logic has to be played out when you are picking a price for a sell limit order. For example:
Sell one December e-mini S&P futures contract at 1355.00 or better.
For this order to work as it is intended, the market must be trading lower than the limit price, otherwise it is already at a "better" price to sell.
Limit orders are likely the "happy" exit plan for a trade. They represent better prices than the market will be trading at the time you place them. That means if you enter a market and then place an exit order at a "better" price, you are probably aiming to exit at a profit.
Past performance is not necessarily indicative of future results.
Chart courtesy of Gecko Software.
Once the limit order has been placed (buy limit to close an open short position, sell limit for an open long position), it is just a matter of waiting to see where the market goes. This part of a plan can help traders avoid those mental traps where they ride trades just a little too long, hoping to scoop up extra. Limit orders can prevent you from getting greedy. If you have other working orders at the same time, don't forget to cancel them if the other orders are filled.
Traders can use limit orders as part of a complete trading plan that covers the potential for the good and the bad
Limit orders only come into play when the market trades at or through your limit price. Otherwise, they remain in waiting. If the market trades through the price, you can only be filled at your limit price or better. It's that simple. These contingency orders can also be used to enter a market position, but I often recommend they work as part of an exit plan for trade design.
Best Trades to you,
Larry Levin [more]
Coming back from the weekend I see a higher start to the week with momentum from the Euro and crude helping more than internal sentiment. The biggest factor here is the Greek austerity vote passing. Glad to see a vote without the agreement of a rioting populace helps European outlooks. This is a joke and should be considered one but it is not so markets will likely move higher. This is sentiment more than reality.
The agricultural markets are followers to start the week lacking any news with many waiting for next week’s USDA outlook conference in Washington DC. This meeting will offer the first “official” numbers farmers can use for planting intentions and pricing models for the 12/13 crop year. Traders do get the USDA budget today which will show expected cuts across the board but this is a minor issue in the big picture. The fact is, there is little to direct the market this week so expect a choppy directionless chop with wild swings for no particular reason. This will hurt front end volatility but I stand by my statement that volatility is too cheap in May and deferred contracts. The spring is winding and when it snaps back it will be a vicious move. [more]