Journal of Finance and Accounting – TanasiJournal

Archive for the ‘Futures Trade’ Category

Fundamental Analysis
Fundamental analysis is a methodology for analysis of a company as a viable stock that you want to hold for long term. Fundamental analysis is more widespread in the world of investing since you are going to hold your companies for 10 to 20 years, you do not wish that your companies go bankrupt the next day. Some of the common ratios used are P/E ratios (price earnings ratios) which measures the relative price of the stock to the earnings of the company, the EPS (earnings per share), the debt equity ratio and tons of other ratios.

Although I have spent considerable time studying such ratios I discovered that you do not really need such information to be successful in day trading. I repeat, fundamental analysis plays a marginal role in day trading. In fact, most of the time, I don’t follow it at all. If you still have reservations about ignoring fundamental analysis, I recommend trading ETFs (exchange traded funds) such as QQQQ which mirrors the movement of the NASDAQ 100. In essence, you are actually trading the index like a normal stock. Indexes usually have a huge number of stocks in them, making them less susceptible to company specific news. However if you are paranoid, then you might still want to follow the news of the major companies in the index.

here is no lack of information and no end to analysis. Knowing the fundamentals might seem cool when you discuss company so and so over a cocktail party, but it will not help you rip money off Wall Street in day trading. Being able to remove fundamental analysis from the decision making process is also one of the reasons why I recommend trading Emini index futures.

Paper Trading: Don’t Ever Underestimate it!
Paper trading refers to trading with virtual money, you do not use real money. You jot down in your notebook when you bought at what price and why. When you sell, you record in your notebook again why you sold and calculate the profit or loss associated with the trade.

If you cannot make money by paper trading, you can forget about making money in real trading. Always test a new trading idea with paper trading first before using real money. Also start with paper trading after a long period of break, to help you get back in touch with trading.

Although there is very little difference between paper trading and real trading in Emini, real trading is subjected to slippage and psychological factors come into play when you are using real money. Do not underestimate the impact of psychological factors on your trading. After you have a reasonable method and money management techniques, it is the psychological factors which will determine whether you make a profit or loss.

Some traders have created software to paper trade. You hit the buttons like you are doing real trading but only virtual money is involved and no real cash is used. The system will record down the time, price, symbol and the position opened or closed. This saves you the trouble of keeping a paper record.

Compared to cash contracts, which require payment against the physical delivery of goods immediately or after a specified period, a futures contract is a special type of agreement made strictly under the rules of a commodity exchange, which may or may not call for the actual delivery of goods and payment in cash on a future date.

According to Emery, a futures contract can be defined as a contract for the future delivery of some commodity without reference to specific lots, made under the rules of some commercial body, in a set form, by which the conditions as to unit of amount, the quality and time of delivery are stereotyped, and only the determination of the total amounts and the price is left open to the contracting parties.

Such contracts are meant exclusively for future settlement, though the exact date of the settlement is decided by reference to the wishes of the seller and the established rules of the commodity exchange. Such contracts do not specify the particular grade of a commodity, but impliedly refer to a basic grade called the contract grade, accepted as the common grade for all futures dealings. The details in respect to the amount, the time of settlement, the quality and so forth are mentioned in the rules and regulations, and are common to all such contracts. The contracting parties have to decide upon the price at which the contract is to be settled, sometime in one of the trading months specified by the exchange.

Futures contracts are made only in the ‘ring’ of the commodity exchanges, and not outside the exchanges. Only members of a commodity exchange can enter into such a deal. No outsider can become a party to a futures agreement. Such contracts can be made only in multiples of a fixed unit of trading. No such contracts can be made in fractions of these units.

If you don’t mind losing $5,000 in 10 minutes, you may enjoy trading commodity futures contracts. There’s an old saying among commodity traders: “It’s easy to make a small fortune in commodities. Just start with a large fortune!” This is not a business for people who are emotionally attached to their money, yet thousands of average “investors” get lured into the commodity markets year after year. Why? Because of the possibility of making high percentage gains using the built-in leverage that is available to commodity futures traders.

The commodity markets include wheat, corn, soybeans, pork-bellies, gold, silver, heating oil, lumber, and numerous other common trade items. The huge companies that operate in these markets use commodity “futures” contracts to lock in their selling prices for the product in advance of delivery. This practice is called “hedging.” On the other side of that transaction is the trader, who speculates on whether the priced of the commodity will go up or down before the contract is due for delivery. Because futures contracts may be purchased using leverage, these financial instruments lend themselves to speculation.

For example, control of a corn contract worth $5,000 may only requrie $500 of actual cash, or 10% of the face value of the contract. If the corn goes up in value, and the contract becomes worth, say, $5,500, the speculator has made $500 on his or her original $500, for a 100% return. Compare this with the regular stock market, which limits leverage to 50%, so that $5,000 worth of stock requires a minimum of $2,500 of capital. If the stock goes up to $5,500 in value, the $500 gain is against $2,500 invested, for a return of “only” 20%. The 100% return sure looks a lot better, right?

You can easily see why investors in search of quick gains are hypnotized by the lure of big profits using maximum leverage in commodity futures trading. The real problem, however, is that the leverage works in BOTH DIRECTIONS. You can lose your entire investment in a matter of minutes due to the wild price gyrations that sometimes occur in these volatile markets. Let’s say the $5,000 contract drops to $4,000 in value instead of increasing. You’ve not only lost the original $500 you put into the contract, but an additional $500. You can go broke quickly this way.

So why do people play this game? Average investors do not wake up in the morning and say to themselves, “Right, I think I’ll start trading commodities.” What happens is, they receive a sales pitch from a commodity trading “guru” claiming to have a “system” for generating sure-fire profits in these wild markets. These “systems” range in price from $25 all the way up to $5,000 or more, and are sold based on the promise of “huge profits” from a small starting investment.

Newsletter writers or commodity gurus regularly pitch the myth about turning $5,000 into a million bucks in less than a year. The typical commodity system pitch comes in a long sales letter or booklet that describes a method for winning on “9 out of 10″ trades or similar inflated claims.

Of course, if it was possible to correctly trade 90% of the time, a person could easily amass millions of dollars in a very short period of time. So why are these guys so eager for you to spend $195 on their super-duper trading course? Because they probably aren’t making any real money with their own trading program! There’s much safer money to be made selling others on the idea of getting into commodity futures trading.

There is no sure-fire way to consistently make money in these markets, simply because the underlying commodity prices can swing wildly back and forth depending on a complex set of variables, many of which are totally unpredictable. That’s why the only people consistently making money in the commodity markets are the brokers, who collect a commission for executing the trade regardless of whether it wins or loses.

There are also a handful of successful professional traders who make a living in these markets. But the vast majority of people who dabble in commodity futures lose money. Unfortunately, with the lure of huge returns and easy money, a fresh crop of innocent traders enters the market each year, only to be quickly fleeced out of their money.

Don’t be one of them! Leave commodity futures trading to the professionals and stick with the more boring forms of investment, such as mutual fund investing or stocks and bonds.