Futures For You
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Want to learn how the futures markets really work? Dan
O'Neil, a principal at online futures and forex broker Xpresstrade (www.xpresstrade.com),
responds to your questions about today's futures markets.
To submit a question, post your question to our website
at https://Message-Boards.Traders.com. Answers will be posted there, and
selected questions will appear in a future issue of S&C. |
Dan O'Neil |
MARKED-TO-MARKET
The Chicago Mercantile Exchange's popular emini stock index futures have triggered an influx of newcomers to the futures markets. Perhaps the most common source of confusion for stock traders migrating to the futures markets is the difference in settlement procedures.
Suppose a trader buys 100 shares of stock for $40 per share. The value of the stock would be $4,000, and the buyer would be responsible for paying this sum to the seller. If the price of the stock subsequently rises to $50, the owner of the stock will have an unrealized profit, meaning that he won't be able to actually spend his $1,000 profit until he formally liquidates his position by selling 100 shares at $50 per share. In the stock world, profits and losses aren't realized until the position is closed.
Now imagine a trader who establishes a long position in emini S&P futures, and suppose his entry price is 1230.00. Since the value of the contract is the index multiplied by $50, we're talking about something north of $60,000. But the futures trader doesn't actually buy the contract - rather, he's required only to deposit some amount of good-faith margin, which is designed to ensure that resources are on hand to cover any losses.
But here's where it gets interesting: If emini S&P futures rally to 1250.00, our trader will enjoy a profit of $1,000 (20.00 x $50). This profit will be immediately credited to his account, and he'll have immediate use of the funds-even if he hasn't yet offset the position! In the futures world, open futures positions are "marked-to-market"; this means that all profits and losses are considered realized, even before the position has been liquidated. In futures trading, there's no such thing as an unrealized profit or loss.
GOLD AND CURRENCY FUTURES
Look at a gold futures chart, and you'll see that the price of this "safe haven" investment has moved considerably higher the past five years. Could the market reach $500 or $600 per ounce?
If this were to happen, the global economy would likely find itself in the midst of a serious geopolitical conflict or facing the prospect of runaway inflation. During the last major gold bull market, precipitated by the Iran hostage crisis in the late 1970s, both factors combined to propel gold from $300 to more than $800. If you think gold's headed higher, the obvious play is to buy gold futures or call options. But are there other opportunities?
Switzerland's longtime political neutrality-as well as the fact that a significant percentage of its currency reserves traditionally has been backed by gold-means that no major currency is considered as safe or as stable as the Swiss franc. In fact, if you were to compare charts of gold and the Swiss franc, you'd see that the swissie's rise since mid-2001 correlates almost perfectly with the rally in gold. So if you expect a rally in gold, you might also consider establishing a long position in Swiss franc futures.
Canada and Australia are worth mentioning, too, since both countries possess substantial reserves of the precious metal and have very strong and well-developed mining sectors. Australia was the #2 gold producer in 2004, accounting for more than 10% of worldwide production, and mining represents approximately 5% of its Gross Domestic Product (GDP). In the case of Canada, gold is its single most important mineral in terms of production value, and mining accounts for more than 4% of GDP. If the price of gold maintains its uptrend this year, both the Australian and Canadian currencies could follow.
FIXATED ON COMMISSIONS
It's human nature to want the best possible deal, and there's no denying that commissions can have an impact on a trader's profitability. But our sense is that too many retail traders these days are focused exclusively on commissions. It makes us wonder if traders are choosing brokers as carefully as they should.
Think about just a few considerations to take into account when evaluating a broker: How do you feel about the website - is it good-looking, fast, secure, reliable, and easy to navigate? Is the trading system browser-based, or does it require software to be downloaded and periodically upgraded? Is the customer service quick, knowledgeable, friendly, and available 24 hours? Does the firm offer special contingent orders, access to electronic and open-outcry markets, overnight and foreign futures trading, and quality executions? What about the breadth of features - will you have free, unlimited real-time quotes, charts, news, and research? And how about the intangibles - is this a reputable and financially stable firm to which you can entrust your money, and do you have a good feeling the broker will honor its promises and treat you fairly? Only after answering these and other essential questions should the trader begin to think about commissions.
In futures brokerage, as in so many other industries, "You get what you pay for." Many of the futures brokers advertising rock-bottom commissions simply can't afford to deliver excellent customer support, and it's just not economically feasible for them to put powerful, yet user-friendly trading tools in your hands. If all you require is a cheap trade, then these firms might suit you. But if you want or need just a little more from your online broker, these firms may leave you disappointed.
Our recommendation is to go with an online broker that offers a complete
package of tools, resources, and services. Look for a great overall value.
Though you might expect to pay just a little more in commissions, most
futures traders will find that following this simple advice will result
in a more enjoyable and quite possibly more successful online trading experience.
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