Returns achievable for Futures trading

[beachlife]

I dislike a lot about OTC CFDs but at the same time ASX CFDs really limit what you can do. The ASX CFDs only allow you to trade in 50 stocks while for OTC Commsec says you can trade 600.

It's difficult to find the cost for OTC CFDs though. It's not clear in the PDS. I am not sure why you incur a borrowing cost for OTC CFDs when shorting stocks. Is it something to do with them hedging? They don't explain what this cost is either.

Not sure what you mean by OTC but City Index has over 200 ASX listed stocks that can be traded.

 

[Valued]

Not sure what you mean by OTC but City Index has over 200 ASX listed stocks that can be traded.

OTC means over the counter as in a contract with the broker with the broker as the person on the other side of the contract. With ASX CFDs the ASX clearing house guarantees performance. With OTC CFDs since your contract is with your broker then you rely on your broker for performance of the contract. It's not regulated like ASX CFDs are.

The only ASX listed CFDs are the ones on their website:

http://www.asx.com.au/asx/markets/cfdPricesList.do

This is 50 stocks. OTC CFDs can comprise of whatever your broker wants to accept the risk of. Commsec offers three times the amount of stocks than city index offers. City Index must be OTC due to offering more than the ASX will allow on their CFDs. I would personally choose Commsec over City Index if going for OTC CFDs since you would need a reliable broker who isn't going to go insolvent or not perform their end of the contract. I also consider it somewhat of a conflict of interest if your broker is trading against you.

 

[cynic]

Not sure what you mean by OTC but City Index has over 200 ASX listed stocks that can be traded.

OTC = "Over The Counter"

OTC products are by definition traded off exchange. The OTC CFD provider is the counterparty to your trade. Whether or not they hedge their exposure against other client trades or via placement of trades in the underlying market is at their sole discretion.
As it happens the following statement has appeared on certain of City Index web pages and email correspondence:
"As a part of our market risk management we may take the opposite side of your trade."


My experience of City Index to date has been largely favourable, however, I still recommend extreme vigilance when trading any OTC CFD products offered by any provider. The clauses within the PDS and client agreement documentation are typically too liberal in that they allow wide scope for conflicts of interest within the client/provider relationship.

 

[Valued]

OTC = "Over The Counter"

OTC products are by definition traded off exchange. The OTC CFD provider is the counterparty to your trade. Whether or not they hedge their exposure against other client trades or via placement of trades in the underlying market is at their sole discretion.
As it happens the following statement has appeared on certain of City Index web pages and email correspondence:
"As a part of our market risk management we may take the opposite side of your trade."


My experience of City Index to date has been largely favourable, however, I still recommend extreme vigilance when trading any OTC CFD products offered by any provider. The clauses within the PDS and client agreement documentation are typically too liberal in that they allow wide scope for conflicts of interest within the client/provider relationship.

The clauses regarding them allowing to do anything with your money and positions at their sole discretion including not allowing you to withdraw money at sole discretion for any reason are generally absurd.

CFD providers have to be very careful they arn't in breach of fiduciary duties. So far, no one has had cause to sue one (or their loss was too low). If a CFD OTC provider does something unfair one day the legal aftermath will be extremely interesting, at least for me. I am of the opinion that they would owe a fiduciary duty to you that goes above and beyond the words of the contract/s. Any statement trying to restrict equitable rights in a contract is void so they can't get out of it by saying that you don't have any rights.

The costs and risks of OTC CFDs often seem unclear though. The PDS and FSG don't explain things completely in my opinion. In the Commsec OTC CFD PDS they give off the impression that their future CFDs are real futures but really they aim to mimic futures sort of except for spread and the fact that they admit that the price will almost never reflect the underlying asset. It doesn't fill me with confidence.

BTW Beachlife did you not read the Product Disclosure Statement and Financial Services Guide before you signed up for City Index? I am guessing most people don't. I like to read them. I am surprised you are trading CFDs without knowing the difference between OTC and ASX CFDs. The ongoing risk profile for each may differ. That being said, with OTC you have guaranteed stop losses. The ASX states that if you want the same effect with their product you need to hedge with options. Generally you will be stuck without the guaranteed stop loss which increases risk if you hold overnight. Normal stop loss orders should work ok, it just sucks if you get a huge gap on open adverse to your position.

 

[cynic]

...
CFD providers have to be very careful they arn't in breach of fiduciary duties. So far, no one has had cause to sue one (or their loss was too low). If a CFD OTC provider does something unfair one day the legal aftermath will be extremely interesting, at least for me. I am of the opinion that they would owe a fiduciary duty to you that goes above and beyond the words of the contract/s. Any statement trying to restrict equitable rights in a contract is void so they can't get out of it by saying that you don't have any rights.
...

Based upon my own personal experiences of a number of providers over recent years, I do not share your confidence in the integrity of this industry. I have encountered echoes of sentiments similar to my own within certain ASIC and FOS reports/submissions.

I again emphasize the need for extreme caution to any trader that chooses to trade OTC CFDs.

Apologies for going a little off topic, but I feel very strongly about elevating awareness of counterparty risks with these products.

 

[beachlife]

Based upon my own personal experiences of a number of providers over recent years, I do not share your confidence in the integrity of this industry. I have encountered echoes of sentiments similar to my own within certain ASIC and FOS reports/submissions.

I again emphasize the need for extreme caution to any trader that chooses to trade OTC CFDs.

Apologies for going a little off topic, but I feel very strongly about elevating awareness of counterparty risks with these products.

+1

The PDS didnt help the Sonray clients, and didn't keep the director out of jail either. I also know people that had shares with a full service broker, and lost the lot because the broker went off the rails. It's a risk giving money to anyone. I think I joined before ASX cfd's existed - not sure but never heard of them. The only thing I checked was segregated client accounts, and that spreads matched the market, other than that didnt read anything. Just meaningless legal ar*e coverering. I dont use guaranteed stops, cant get them in the real market so I dont bother.

So to get back to topic, I dont see futures as having any more risk or less than anything else, in terms of losses or broker collapse, provided stops and money management are used well.

 

[Valued]

+1

The PDS didnt help the Sonray clients, and didn't keep the director out of jail either. I also know people that had shares with a full service broker, and lost the lot because the broker went off the rails. It's a risk giving money to anyone. I think I joined before ASX cfd's existed - not sure but never heard of them. The only thing I checked was segregated client accounts, and that spreads matched the market, other than that didnt read anything. Just meaningless legal ar*e coverering. I dont use guaranteed stops, cant get them in the real market so I dont bother.

So to get back to topic, I dont see futures as having any more risk or less than anything else, in terms of losses or broker collapse, provided stops and money management are used well.

I am not saying the PDS will protect you. The PDS will inform you of the various fees and charges and when and why the broker may close your position etc. The PDS isn't designed to protect you. It's designed to tell you how you're going to be screwed over. You should read the PDS carefully for any derivative product to make sure you understand it. The risks of one broker may not be the same as the risks of the other broker.

If you don't use guaranteed stop losses have you had any circumstances where you have lost a lot more than you would have if you had? I suppose the real risk of huge losses is some sort of fire sale where people are selling at any price. That doesn't happen that often. Just don't invest in FGE if you go back in time...

 

[beachlife]

If you don't use guaranteed stop losses have you had any circumstances where you have lost a lot more than you would have if you had? I suppose the real risk of huge losses is some sort of fire sale where people are selling at any price. That doesn't happen that often. Just don't invest in FGE if you go back in time...

Yes. This year out of 52 trades I had one trade that lost 5.2% because of gappy might market spreads. My risk per trade is 4%. But I also had a couple of wins that gap opened past my target giving me more profit than I was expecting. I only scan top 50 ASX so FGE never came up, I wish it had, that gap was in the direction of the trend. Closest to big loss would have been QBE but I wasnt in it.

As for broker risk, that's again where cfd's are superior because the margins are so small. Say you want to trade a $100k account with 2% risk per trade. You can leave $80k in your bank and just put $20k with the broker to cover margin, but still trade to the full size of $2000 risk because the margins are so low, you can even then split it and have 2 accounts of $10k each, while the bulk of your account sits in the bank or in a mortage offset. If you have some losses you just top the account up. You dont need to put the whole $100k with one broker. Because futures require more margin, you have to give the broker more cash in order to trade.

 

[Valued]

If you only consider ASX50 stocks and don't use guaranteed stop losses then you have none of the advantages of OTC CFDs and all of the disadvantages. Imo ASX CFDs would be better for you since you can do the exact same thing but the entire process is safer since the ASX guarantees your contracts and it's far more regulated.

 

[pavilion103]

I'm not achieving this level of consistency but I've been thinking a bit more about the achievable returns from futures trading.

Please no one hang me for throwing around a few generalisatons and assumptions. I know this is not how the market behaves (and note these projections are for how I specifically trade).

Let's assume that 5 days a week, there are 10 reasonable opportunities (say 5 good moves from initial high/low, and 5 other opportunities - maybe a reversal after an obvious high/low is established).

10 reasonable opportunities

Let's say we capture 3 of those.
Break them down to 50 points, 30 points, 30 points. (no reason why it can't be more).

Total = 110 points

Minus BE trades = 0
Let's say we give ourselves another 30 point allowance for losses incurred trying to capture moves.

Net = 80 points

Profit = $1,500 approx per week.


Annual = $75,000 (for 1 contract)
Annual = $150,000 (for 2 contracts)


This is full of assumptions and is nothing concrete to go by. I admit that.

But I believe the above returns are quite reasonable for someoene of my level.
As I said I'm not quite here yet, but this is the short term goal for me.

Anyone else have any thoughts?

 

[pavilion103]

Even if we bumped the loss allowance up to 40 points.

That's roughly 6 opportunities of 7 points risk.

So that make our scenario:

3 wins from 9 attempts (33%) - quite achievable (not to mention the number of BE trades).


For me, the key here is to identify these good opportunities and take them and to be patient and wait until they appear, rather than taking half-half setups.

 

[Trembling Hand]

Anyone else have any thoughts?

Yeah don't think like that. Aim for two things,

Good trading (you know blah blah)

&

To make $10,000 a day.


That way you may average $1000 a day. As soon as you start thinking my aim is Z amount what that does is cause you to be cautious once you reach that amount and therefore less likely to surpass it. Over time that capping greatly reduces your average day. When you are having a good day you never know what tomorrow or next week will be. If you stop at Z that actually makes you average amount a fraction of that.

Have a look at any scatter chart of trading and the Avg trade is about 5-10 times the max trade. Simple maths would therefore suggest that to avg $z per day you need to aim for $Z x 10 each day.

 

[pavilion103]

I agree that I can't just say I want, say, 100 points profit per week. I have no profit targets because it does have a psychological affect and doesn't improve trading.

Like you my number one aim is to trade well.


My example just shows what I believe I can average if I do trade well.

The key is to developing a method that can achieve good results and to trade it well.

 

[CanOz]

The key is to developing a method that can achieve good results and to trade it well.

So then, to get really good returns do you just 'size up' as much as possible without affecting your fills too much?

 

[pavilion103]

I haven't traded size as yet.
2 is the most I've ever taken.

More lessons ahead when I'm trading 4 or 5 I'm guessing.

 

[CanOz]

I haven't traded size as yet.
2 is the most I've ever taken.

More lessons ahead when I'm trading 4 or 5 I'm guessing.

Well i guess my point is and I'm waiting for TH to comment here, but say you find a little edge and it works well on 2-4 contracts. Obviously to me the way to increase the profitability is to increase the size to the maximum efficient size possible. This would take some practice, but both SKC and TH have had to do this. Curious as to how they did it.

 

[beachlife]

Your system and style will be unique so I think by now you will know what your trading method returns, so it should be a matter of scaling up as your account grows. Your results are telling you what your average $ per contract is. I cant see that changing much unless you plan to change your trading style or frequency.

There is a great example on the world futures comp site today. One trader has 3 of the top 5 positions. I assume he has a different system in each account and his returns in each vary. They are 88%, 80% and 43%. Same person, just different systems.

 

[pavilion103]

Well i guess my point is and I'm waiting for TH to comment here, but say you find a little edge and it works well on 2-4 contracts. Obviously to me the way to increase the profitability is to increase the size to the maximum efficient size possible. This would take some practice, but both SKC and TH have had to do this. Curious as to how they did it.

Interested to hear thoughts.

I'm not too fussed about going bigger and bigger and bigger. If I was consistently making a good number of points on average per week and I was trading 4 contracts, that would be more than enough for me.

My main goal is to make a few hundred thousand a year and then pour the money into both short term momentum ASX setups and a longer term low maintenance strategy also.

 

[beachlife]

After holidays and xmas new year there's about 240 worthwhile trading days per year, so you will need to average around $1000+ per day to reach your goal.

Have a look at your last 3 months results and your expectancy will tell you how many contracts you need to trade, or how much improvement is needed to get an acceptable result from 4 contracts.

 

[skc]

Well i guess my point is and I'm waiting for TH to comment here, but say you find a little edge and it works well on 2-4 contracts. Obviously to me the way to increase the profitability is to increase the size to the maximum efficient size possible. This would take some practice, but both SKC and TH have had to do this. Curious as to how they did it.

I don't trade futures so my lessons are probably not really applicable to Pav. The main difference in shares when it comes to size is definitely slippage. Most of the time I cannot get the full desired size with one click. So previously at smaller size, a trade may quickly go my way after I get my fill. Whereas now, I may only had 10% of my size and I need to make a decision on whether to chase it or leave it. Same decisions with exits. Same decisions with trades that go against me... do I average in to get my full size? Or has my % of success already diminished. So another layer of decisions.

And all these HFT and bots and phantom bids that melt away as soon as you hit them mean that I spend way more time micro managing entries and exits... and correspondingly less time to actually think about the trading.

But I believe the above returns are quite reasonable for someoene of my level.
As I said I'm not quite here yet, but this is the short term goal for me.

Anyone else have any thoughts?

I think everything you've said is correct... they are certainly realistic as in that's what the maths said. Number of contracts x number of trades x (win % x average win - loss% x average loss). Plug in some "realistic" numbers and out comes the annual P&L.

But until you have a few hundred trades as your sample size to actual calculate these parameters for yourself, any annual P&L projections are realistic but not applicable. How are your current parameters compare to your target? Is it R:R that needs improvement? Or trade frequency? Or win%?

And once you identify the area in need of work, you will need to watch how these parameters interact each other. If you try to improve your R:R by catching larger moves, it might mean fewer opportunities and lower win%. On the other hand, in keeping your losses small you might move your stop too quickly which in turn compromise your chance of catching a big move.

That's why, as Beachlife said, increasing the contract size (up until you hit issues like liquidity and slippage) is perhaps the easier way to increase overall profits.