Futures For You
| INSIDE THE FUTURES
WORLD
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 |
YOU'RE ON MARGIN CALL
The market's moving in the wrong direction, losses are accumulating, and the value of your account is declining. By the time your broker issues a margin call, you're already feeling substantial frustration and anxiety. Under these circumstances, it's easy to see your broker as your adversary. But veteran traders know this couldn't be further from the truth.
For starters, nothing's more disappointing to us than to see a good client roughed up in the marketplace. We're not merely being altruistic-we want you to be successful and to earn profits because we'd like to see your account, your trading activity, and the commissions you generate grow over time. Ideally, if you've enjoyed a terrific trading experience, you'll introduce your friends and acquaintances to futures and options trading, and they'll open accounts with us, too. In other words, our interests are aligned, and our fortunes are closely tied to yours. When your trades aren't turning out as planned, it brings us absolutely no pleasure to issue a margin call.
Understand that margin calls also place pressure on us. You may not realize it, but futures brokers are responsible for all the accounts and directly to the various futures exchanges, while smaller brokers may be accountable to their clearing firms. But whatever the arrangement, it's a virtual certainty that your broker is the financial guarantor of your account. In the event you lose more money than you have available in your account, we're obligated to cover your shortfall. The only protection we have against this unpleasant possibility is the margin you've deposited. So if your equity falls below the prescribed margin level-remember that futures trading requires only about 3?8% of the contract value to be posted as collateral - there's good reason for our concern.
Finally, consider the possibility that by issuing a margin call and demanding that it be addressed without delay, your broker might very well be doing you a favor. Traders, by and large, tend to be competitive, independent, passionate personalities, and admitting that a trading idea's not working can be incredibly challenging. We see it all the time-even the most experienced, successful traders occasionally resist closing out unsuccessful trades at a loss, because they're absolutely convinced the market will turn in their favor. Sometimes a margin call can be the only thing that finally convinces a trader to cut his losses, exit a bad position, and begin looking for the next potential trading opportunity.
SPECIAL CONTINGENT ORDERS
Now's a great time to be an online futures trader, and one reason is the ever-expanding selection of special orders that give you more convenience and control. In addition to all the conventional order types, more and more online futures brokers have begun to offer a wide range of advanced and contingent orders. Let's look at just a few of the special orders now available at various online futures brokers:
One-Triggers-Others. Suppose you've identified a head-and-shoulders pattern in the crude oil market, and you enter a limit order to go short at $62. You're looking for an objective in the low to mid-$50s, and you see strong resistance around $66. Accordingly, you place three trades, all on a single order entry screen: you enter the primary limit order to sell at $62, a contingent limit order to take profits at $54, and a contingent stop order at $66 for protection. There's no need for you to sit in front of your computer all day-once the primary order has been filled, both contingent orders will be activated automatically. Many trading platforms even allow you to specify that if either contingent order is executed, the other should be canceled.
Trailing Stops. You've done your homework, you know that oat futures can lead significant grain market rallies, and that the solid upturn in oats futures may be an early clue that harvest lows are close at hand. You place a limit order to buy December oats at $1.64, a contingent limit order to take profits at $1.85, and a contingent trailing stop of $0.05 below the market, since a nickel is the most you're willing to risk on this trade. If your primary order is executed, both contingents activate.
Think of the market and the trailing stop as being linked by an imaginary chain. When the market moves in your favor, the chain tightens, and the trailing stop is dragged along automatically. When the market moves against you, however, slack builds in the chain, and the price on your trailing stop remains unchanged. This special order type allows you to profit from favorable movement in the market while having the protection of a stop order. And it frees you from having to constantly monitor the market and repetitively modify your stop order.
Alert-Triggered-Orders. Some futures brokers have taken
price alerts to the next level. Not only can you set up their trading systems
to notify you by email when an alert has been triggered-you also can attach
an order to your price alert, and when the market reaches your target,
the order will be automatically activated. Here's an example: Silver futures
have been strong and are now trading around $7.84. But the 14-day relative
strength index (RSI) indicates seriously overbought conditions, and momentum
appears to be fading. You feel that penetrating the $8.00 level will be
difficult. Thus, you enter an alert-triggered-order. If December silver
futures reach $7.92, you'd like a market order to sell 10 December $8.25
call options, to be automatically entered on your behalf.
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