The transition to Futures trading

[pavilion103]

The purpose of this thread is to discuss how a trader would transition from stock trading to futures trading.

Questions such as: what background knowledge is needed, how trading futures differs from trading stocks in terms of strategy, price movement, risk etc.., and any other relevant points of discussion.

I myself am not ready to trade futures. I have purchased the book "Futures Made Simple" by Kel Butcher on the advice of someone and am looking at the FTSE (mainly 3 minute) chart here and there on the odd night. For me, at present, this is merely an interesting aside from my current stock trading education, however I would be interested in trading the FTSE or DAX in the future (pardon the pun) in the evenings after work.

Any input would be greatly appreciated. Thanks.

 

[captain black]

Great thread idea Pav. Bit busy with the Dax to post too much atm but from reading your previous posts I think you've done a lot of work with VSA? You'll find it works particularly well with futures. The feedback is instant and things like blow off tops, consolidation, absorption volume etc. stand out like my labrador's lipstick when you know what to look for.

Get a feed into your charting package and watch what happens on the high volume bars....and the low volume bars

 

[boofis]

If you haven't already, have a read into how they are priced. Look at contract specifications; tick size, $ value of tick, and your chosen markets open/close, and times economic figures/news generally come out that have an impact on your market.

 

[cbc1]

Hi Pav,

I also started futures trading a month ago,

Best of luck with it m8.

 

[chops_a_must]

The first strategy would be to look at mean reversion type trades.

Unless you have a big account, and can hold overnight, the money is in the opposite side of moves.

Which differs from basic stock trading.

And practice, test, practice, practice and more practice.

 

[pavilion103]

A couple of questions.

1) Can it be used as a hedge. For example if I'm holding some long positions in stocks and the market isn't trending upwards (current market conditions). Would people then consider taking a short (however many contracts) in say the FTSE?

2) Does the current volatility afford greater opportunities? e.g. if there are regular days where the FTSE is going down 60 points it could be beneficial taking a position at the start of the day to capitalise on this? It seems mathematically logical if you have a stop of say:
- 10 points - could afford approx 6 losing attempts to one winner
- 15 points - 4 losing attempts to one winner
- 20 points - 3 losing attempts to one winner.

I know this depends greatly on the entry timing and the tighter the stop the greater the chance of being stopped. It just seems to me that with good entry (with a reasonably tight stop) you could be right enough times to make it work.

Am I missing something? because I have zero idea about this to be honest....

 

[RADO]

A couple of questions.

1) Can it be used as a hedge. For example if I'm holding some long positions in stocks and the market isn't trending upwards (current market conditions). Would people then consider taking a short (however many contracts) in say the FTSE?

2) Does the current volatility afford greater opportunities? e.g. if there are regular days where the FTSE is going down 60 points it could be beneficial taking a position at the start of the day to capitalise on this? It seems mathematically logical if you have a stop of say:
- 10 points - could afford approx 6 losing attempts to one winner
- 15 points - 4 losing attempts to one winner
- 20 points - 3 losing attempts to one winner.

I know this depends greatly on the entry timing and the tighter the stop the greater the chance of being stopped. It just seems to me that with good entry (with a reasonably tight stop) you could be right enough times to make it work.

Am I missing something? because I have zero idea about this to be honest....

1. Yes you can use it as a hedge. But most people that hedge are invertors not traders, assuming your a long term holder after dividends.
2. Yes if you know what direction the market is going to go straight after the open. I've tried this before, as soon as the market opens and I have a feeling things are going south I would quickly place a limit sell order and before you know it i've made 20 points or more. But sometimes your order would quickly get filled and the market will start moving against you. I've been burnt many times trying this technique and wouldnt recommend it.

But dont just limit yoursef to the FTSE and DAX theres many others. Trading futures isnt to much different to stocks, the best thing is being able to go short one of the main differences is that the symbol changes after each contract expires. For eg. the march SPI futures contract symbol was "aps h3-sfe" which recently expired, its now
aps m3-sfe.

 

[chops_a_must]

A couple of questions.


2) Does the current volatility afford greater opportunities? e.g. if there are regular days where the FTSE is going down 60 points it could be beneficial taking a position at the start of the day to capitalise on this? It seems mathematically logical if you have a stop of say:
- 10 points - could afford approx 6 losing attempts to one winner
- 15 points - 4 losing attempts to one winner
- 20 points - 3 losing attempts to one winner.

I know this depends greatly on the entry timing and the tighter the stop the greater the chance of being stopped. It just seems to me that with good entry (with a reasonably tight stop) you could be right enough times to make it work.

Am I missing something? because I have zero idea about this to be honest....

How do you know the market will go 60 points in your favour?

You have to remember that the majority of moves happen at the open of trading. So the sentiment etc is baked into that open. There is more money on the other side - fading opens etc. unless you are going to hold overnight.

Have a look at some charts, how they behave. And do some testing on moves after open. You'll need to find some stats to work with.

 

[cbc1]

you could be right enough times to make it work.

4 Sure pav. If you jump in the water you will get wet at some point:bath:

 

[pavilion103]

The reason I ask such questions is because I know trading future requires considerable skill and I know the people that have been there before have probably had similar questions. It's obviously not easy!

I've thought of saving a screen shot of the 3 minute chart on FTSE etc to my files each day and then reviewing the behavior to get an understanding of it.

 

[captain black]

I've thought of saving a screen shot of the 3 minute chart on FTSE etc to my files each day and then reviewing the behavior to get an understanding of it.

You'll gain a much better understanding and shorten the learning curve by watching it in real time. It's easy to look at a chart in hindsight and pick the swings or breakouts or fades but knowing when to pull the trigger in real time as a setup evolves is the key.

By all means look through charts for patterns etc. but you can't beat real time observation. IB has an excellent sim account. I use Zeroline trader for placing orders which has a sim account as well.

 

[pavilion103]

You'll gain a much better understanding and shorten the learning curve by watching it in real time. It's easy to look at a chart in hindsight and pick the swings or breakouts or fades but knowing when to pull the trigger in real time as a setup evolves is the key.

By all means look through charts for patterns etc. but you can't beat real time observation. IB has an excellent sim account. I use Zeroline trader for placing orders which has a sim account as well.

Yeh I've got IB. I was on there a bit last night on the sim account. I guess it's just a matter of apportioning my time. I have so much to learn with stocks still that I don't want to delve too deeply into this yet when stocks is my main focus.

I'll continue to have a bit of a look at the live action. It's like a whole new world to me.

The other thing I could do is print off those charts and put a piece of paper over the right side and look at bar by bar. But then my thinking is screwed by knowing where the chart finishes the day!

 

[captain black]

The other thing I could do is print off those charts and put a piece of paper over the right side and look at bar by bar. But then my thinking is screwed by knowing where the chart finishes the day!

Do you have Amibroker? It has a bar replay tool that allows you to play back a certain time period bar by bar. I found it quite useful when I first started looking at futures.

http://www.amibroker.com/guide/w_barreplay.html

I think there's mention of other software that can replay market depth as well, vague memories of CanOz mentioning it in another thread?

 

[pavilion103]

Yeh I do have Amibroker. I've done that with stocks before. My data package doesn't have futures I don't think, I only get it through the IB one. I'll take at my premium data package.

 

[boofis]

NT has market replay so you can record and run back through.

 

[captain black]

Yeh I do have Amibroker. I've done that with stocks before. My data package doesn't have futures I don't think, I only get it through the IB one. I'll take at my premium data package.

Amibroker has an Interactive Brokers data plugin so you can feed IB data straight into it.

 

[pavilion103]

Amibroker has an Interactive Brokers data plugin so you can feed IB data straight into it.

Ok I've gotta do that! Thanks mate. I'm not up to speed with this sort of stuff!

 

[CanOz]

If you want to just " look at charts", then IB with Amibroker is better than IB alone in that it's a little more friendly than the Java based TWS.

However, if I were a young whipper snapper looking to learn then why start with charts? Why wouldn't you open up the IB book trader and watch the DAX or EuroStoxx on the tape and the depth? What is on the chart has already printed, to learn the market properly you need to learn how the auction works from the inside.



CanOz

 

[pavilion103]

If you want to just " look at charts, then IB with Amibroker is better than IB alone in that it's a little more friendly than the Java based TWS.

However, if I were a young whipper snapper looking to learn then why start with charts? Why wouldn't you open up the IB book trader and watch the DAX or EuroStoxx on the tape and the depth? What is on the chart has already printed, to learn the market properly you need to learn how the auction works from the inside.



CanOz

Makes sense. I know there are no shortcuts. I'll have to put aside some screen time on some nights.

 

[Trembling Hand]

Why are you convinced that you should be using a 3 min chart?

Why just the FTSE?

Never try and take a trade as a hedge..................... EVER!