Been there, done that.
Hello all. I've skimmed this thread, and was struck by the thought that although it's a year old, the most recent contributions are some of the most valuable and insightful.
MichaelID has absolutely nailed it, and Newt (perhaps without realising?) has also introduced a critical issue:- the time to trade.
I switched from stocks to futures in 2001/02, and made a living from this for about eight years, having lived through the insane times pre-tech-wreck, and having the privilege of watching the 1987 crash unfold in real time. I've now "switched back to stocks", and have no regrets about either decision. They both suited my life goals at the time, and my current work continues to do so.
During my time with futures, I was perhaps the most boring person in the country. I stuck to two very simple policies:-
- Trade only index futures, and
- Employ the same tactics that brokers use for ticket-clipping.
The former is self-explanatory. The second perhaps needs expanding ...
The broking arms of "brokers" (however you define them nowadays) make their money from skimming a few bucks off the top of ANY trade made by clients. Sure, some of them trade on their house accounts or profit from making markets in various instruments, or book revenue from underwriting or other activities or whatever, but the bread and butter comes from brokerage fees. Apologies for patronising any of you who instantly understood what I meant in the first place, but this skim is known as ticket-clipping.
The theme is "lots of tiny amounts add up to something worthwhile". In another age, we might say "watch the pennies and the pounds will take care of themselves". LOL (No, I'm not actually that old)
My adaptation of this principle was to make lots and lots of tiny gains from LOTS and LOTS of low-risk futures trades, such that the total ended up being a little bit more than the tiny losses from those that didn't work out. Multiply that equation by a significant capital base, and you have a business model not unlike the stockbrokers themselves, sacrificing only some risk premium.
It involved trading the US indices and SPI overnight, because as somebody pointed out above, this (in those days) was what drove our ASX in the morning, and apart from precious few exceptions, that 10am position for the SPI more often than not described something close to the 4pm position of the XJO. Mean reversion.
[Hence my honourable mention of Newt's contribution]. If you can't afford the time to watch the overseas market overnight, there is no way imho you can reliably profit from index futures trading in Australia. It just turns into punting on direction during the few hours our market is open and everything else is closed, and that's not a whole level of sophistication above buying Keno tickets.
The key elements for success in this strategy were twofold:-
- Money Management. Having a plan for what you wanted out of each trade and ruthlesslessly executing it, and
- Controlling execution costs. The three bits of this problem are transaction fees, the spread and liquidity. Hence my preference for the US indices overnight:- the spreads were tighter and the liquidity more than adequate, neither of which were guaranteed for the SPI during our day. I used a local broker, but one with a 24-hour desk.
Penultimately, I'll offer one more insight that may be of use to somebody. When trading futures, I tried to visualise the whole thing as a video game. Anytime I started to draw a parallel between the numbers on the screen and the price of a nice lunch, my resolve evaporated and I started to worry about what profits and losses meant in the real world. As long as the numbers and charts didn't represent real money in my head, I was fine.
Finally, futures are nothing more than leverage, which by definition means increased risk. if I could have found a vehicle to trade the XJO with a similar cost and risk profile to using the US markets as a proxy, when Australians should be awake, there's no way I would have stayed up overnight for all those years.
If you want to go down that route, be sure you're 100% aware of, and committed to, the work involved Otherwise, futures trading will just be a way of accelerating your losses.
This post is a bit of an experiment:- it's my first one here. Just trying to see how the whole thing works at present. Apologies for the rubbish formatting - I haven't worked that out yet.
Snap.