Q&A
Futures For You
Inside The Futures World
Want to find out how the futures markets really work?
DeCarley Trading senior analyst and broker Carley Garner responds to your questions
about today’s futures markets. To submit a question, post your question
at https://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. Visit Garner at www.DeCarleyTrading.com. Her books, Commodity Options and A Trader’s First Book On Commodities, are available from FT Press.
Daytrading for you?
Daytrading seems to provide traders with less risk than position trading because there is no overnight exposure. How do you feel about the strategy?
Traders are often drawn to daytrading because it provides them with low barriers to entry, it lacks the overnight risk position that traders endure and, let’s face it, it is exciting. The idea of speeding up your trading results is appealing; after all, you will likely use the same technical indicators and oscillators for daytrading as you would for position trading, so why wait weeks for the outcome? Instead, you can determine whether you have what it takes to make money within a single trading day.
I’ve been a commodity broker since early 2004 and have had the privilege of a front-row seat to the game of retail trading. Based on my observations, daytrading is likely one of the most difficult strategies to employ successfully. Yet with difficulty comes potential reward for those who are capable of managing emotions and willing to put the time in to pay their dues.
Here are a few of the most common mistakes made by daytraders:
Undercapitalized
Most traders have come to the realization that margin requirements for intraday trading are set by the brokerage firm and not the exchange. Because brokers generate revenue based on commission, they often entice traders with low margin rates. You have probably seen ads claiming daytraders can trade an emini S&P with as little as $300 as a good-faith deposit.
Nonetheless, too much leverage doesn’t give traders an advantage; it gives them an incredible burden and dismally low probabilities of success. In addition, many of the discount firms offering low margins are quick to liquidate client positions, should their account equity dip (even slightly) below the stated daytrading margin rate. This too adds to the likelihood of failure.
Aside from the leverage factor, lightly capitalized accounts might not have the means to hold positions overnight when necessary. Stock index futures might close at 3:15 p.m. CT, but that doesn’t mean your technical setup has had a chance to play itself out. It might be crucial to hold positions into the overnight session, or even the next trading day, to give your strategy a chance to succeed.
Overtrading
Sometimes, those drawn to daytrading tend to have hyperactive personalities and this often affects their trading results in a negative way. Rather than exercising patience, many trade out of boredom; if they don’t lose money in the market, they end up with a hefty commission bill that eats away at their trading account.
Most people look at being flat the market as a missed opportunity, but I encourage them to see it another way. If you are on the sidelines, you aren’t losing money and will be in a much better position to take advantage of a promising opportunity should it come along.
Stop orders
Most trading books and courses will tell you to always use stop orders, but I am not convinced they are the best method of risk management. In my opinion, the use of stops often increases the odds of trading failure. Anybody who has experienced a stop order being filled just before the market reverses can understand the emotional turmoil it can cause. Not only was that particular trade a failure but it could have a negative impact on trader psychology going forward and affect future trades as well.
Position sizing
I would venture to say that most daytraders execute quantities in excess of what is ideal based on available trading capital. Brokerage firms are partly to blame for extending highly discounted margins to daytraders, but in the end, it is the trader’s choice whether to use it.
How many contracts you trade at a time should be based on personal risk tolerance and available capital. As a rule of thumb, I recommend traders initiate a position with a one-lot of a mini stock index futures contract per $10,000. Of course, you can easily trade 10 or more times this amount with the given account size but just because you can doesn’t mean you should.
Sound boring? Look at it this way: an average profit of $50 per day equates to $1,000 per month and $12,000 per year. Assuming you were skilled enough to do this and had started with a $10,000 account, you would have more than doubled your money in a year. It doesn’t take 10 lots to make $50 per day, but I believe trading 10 lots dramatically increases your odds of blowing an account out.
Price averaging
Most people will tell you not to add to your losers, but for those with well-capitalized accounts, I believe adding to a position as a means of adjusting your breakeven price makes sense. However, this is something you should treat with care. It doesn’t mean you should buy another emini S&P every handle it drops against you, but if the market falls five to seven handles beneath your entry, perhaps it is something to consider. Naturally, it would be wise to peel off contracts at various prices, should the market turn in your favor. If you scale into a trade, it is often best to scale out of it as well.