Newbie Q about trading futures

[brett]

Hey all. I am a total newbie and have only traded stocks but because of the pattern day trading restrictions, I am interested now in futures. Can someone answer a couple of very basic questions for me? I am a little fuzzy on what a contract and tick is actually worth. For example, according to www.futurestraining.com:

Corn has an initial margin of $1350. A contract is for 5000 bushels at a minimum .0025 tick or $12.50. So far, I got it.

1.Does the margin of $1350 simply mean that $1350 will buy one contract and no more?

2.Now, how much can I actually buy on say $5000 with my broker? Can I buy 3 contracts that would be worth $37.50 per tick with $5000? Is that how it works since 12.50 x 3 = $37.50?

3. Is that the most I can buy with 5K?

No, I do not want to go crazy using all of my leverage but just want to understand how it works before jumping into any trade. Thanks a lot!

 

[new_trader]

Hey all. I am a total newbie and have only traded stocks but because of the pattern day trading restrictions, I am interested now in futures. Can someone answer a couple of very basic questions for me? I am a little fuzzy on what a contract and tick is actually worth. For example, according to www.futurestraining.com:

Corn has an initial margin of $1350. A contract is for 5000 bushels at a minimum .0025 tick or $12.50. So far, I got it.

1.Does the margin of $1350 simply mean that $1350 will buy one contract and no more?

2.Now, how much can I actually buy on say $5000 with my broker? Can I buy 3 contracts that would be worth $37.50 per tick with $5000? Is that how it works since 12.50 x 3 = $37.50?

3. Is that the most I can buy with 5K?

No, I do not want to go crazy using all of my leverage but just want to understand how it works before jumping into any trade. Thanks a lot!

A margin is normally the minimum account balance you must maintain with any open positions.

1. No. If your Margin is $1350 and you have say $5000 in your account and you open a position, it means your position can go against you by $3650 (5000-1350) before you receive a margin call or your position is involuntarily liquidated.

2. As far as I am aware, you are not limited to the number of contracts you can open so long as you maintain your margin. However, you wouldn't normally open more than 2 contracts on $5000- simply becuase the markets might move against you and blow your account.

Think of it like this:

Assuming you had $5000 in your account and must maintain a margin of £1350

1 tick = $12.50

This means that 1 contract can move against you by 3650/12.50 = 292 ticks before you get a margin call.
2 contracts can move against you by 292/2 = 146 ticks
4 contracts = 73 ticks
.....
292 contracts only 1 tick!

If you only trade 1 contract with a 1 tick stop it means you can have 292 losing trades in a row before you must top up your account.

Does that clear things up a little?


Edited to Add: My broker allows a $500 day trading margin. This means that if I have an open position and it goes against me, I can keep the position open as long as I have a $500 margin and close the position on the same day.

 

[brett]

ok

2. As far as I am aware, you are not limited to the number of contracts you can open so long as you maintain your margin. However, you wouldn't normally open more than 2 contracts on $5000- simply becuase the markets might move against you and blow your account.

Hmm, are you sure? I could have sworn the required trading margin meant per contract but what you say kind of makes sense too. Technically, someone could get whole lot of leverage (high risk) with that, amen?

Edited to Add: My broker allows a $500 day trading margin. This means that if I have an open position and it goes against me, I can keep the position open as long as I have a $500 margin and close the position on the same day.

According to what I think you are saying, it seems that each future has a required amount of trading margin but are you saying that a broker has their own requirements that could be above or below the corn example of $1350? Thanks.

 

[new_trader]

Hmm, are you sure? I could have sworn the required trading margin meant per contract but what you say kind of makes sense too. Technically, someone could get whole lot of leverage (high risk) with that, amen?



According to what I think you are saying, it seems that each future has a required amount of trading margin but are you saying that a broker has their own requirements that could be above or below the corn example of $1350? Thanks.

Brett,

I trade index Futures and to be honest I am nowhere near ready to trade more than 1 contract, so I've not researched this too deeply. My initial reply to you was mostly interred from what I have read.

Here are the details of my broker:

http://www.openecry.com/traderstoolbox/margins.cfm#id5

If you scroll right to the bottom you will see footnotes and none of them specify the number of contracts that apply to the margins. I maintain the margin specified and trade only 1 contract, so I would need to contact my broker to find out exactly how the margins apply. You should do the same.

 

[alexander]

1.Does the margin of $1350 simply mean that $1350 will buy one contract and no more?

The price of the contract equals: price per bushel x number of bushels. The margin is the percentage of the price for which you can buy the contract on leverage from your broker.

2.Now, how much can I actually buy on say $5000 with my broker? Can I buy 3 contracts that would be worth $37.50 per tick with $5000? Is that how it works since 12.50 x 3 = $37.50?

You can buy three contracts but you will be fully leveraged. This means that a small change in price against you can generate a margin call. Keep in mind that you must maintain always (number of contract x margin) in your account otherwise your broker will liquidate your positions.

3. Is that the most I can buy with 5K?

Yes but you do not want to do that due to above reference to probable liquidation. Also, $5,000 IMO is not a sufficient capital size to start futures trading. It is 95% probable that you will lose the money unless you keep a very low risk per position in the order of 1 - 2%. This means that if your stop is somewhat like 20 points, or $250 per contract, you need at least $250/0.02 for risking of 2% per position or $12,500 per contract traded.

The key to futures trading is taking a small risk as possible with a account as large as possible. Make a note of this for future reference. Listen to men that have been burned before because they did not listen to men that got burned before them.

Alex

 

[brett]

Thanks

Also, $5,000 IMO is not a sufficient capital size to start futures trading. It is 95% probable that you will lose the money unless you keep a very low risk per position in the order of 1 - 2%. This means that if your stop is somewhat like 20 points, or $250 per contract, you need at least $250/0.02 for risking of 2% per position or $12,500 per contract traded.

Alex

Alex, thanks a million for your help. What you taught me about number of contracts that I could trade is what I initially thought. I know all about over-leveraging so that is not an issue. I do believe in tight stops and letting winners run. I have had good success day trading stocks but am sick of being limited to the 3 trades per week. I am not looking to trade for a living any time soon but just want to get started slowly growing an account. THAnks again!

Brett

 

[alexander]

I do believe in tight stops and letting winners run. Brett

Brett, this is the key to success! If you manage to have in place a systematic trading methodology based on these principles you mentioned you will make a lots of money. Best of luck to you!

Alex

 

[zeddy197]

Futures certainly over daytrading stocks but why corn? If you know the answer, ignore and forgive the rest of this post. If not...Use some basic criteria before you choose. Whats the daily range....& how whippy is it? Are your stop and profit levels realistic/workable for the market you're looking at. Size or liquidity..how fast can u get out when it rains (it will, it always does) Cost per round turn Vs say 10 ticks in that particular maket ( I believe its also known as 'bang for buck';-) If its any help I too gave up stocks cos of MM manipulations Short rules etc. My 3 faves in order are Dax(Eurex) and USA Mini Russell/mini S&P....each has a different margin requirement/tick size/round turn cost/character or behaviour. Get the best live charting money can buy and watch, study compare....best of luck

 

[grantx]

Brett,

Zeddy makes essential points so I don't need to exapand (or can't). I would suggest liquidity is the key consideration in Zed's list - how many contracts are traded. I've no knowledge of the mini contracts but I think the DAX is for the more experienced trader - it is known for its volatility (perhaps the mini's would be more appropriate). Also look at CBOT's and Eurex's 2, 5 and 10-year fixed income futures - heavy volume but with less volatility compared to index futures.

For a beginner, I think commodities are best avoided. Don't be tempted by their massive gains of late - for every massive gain, someone has made a corresponding massive loss.

All the principle exchanges are good sources for free litereature - Eurex, CBOT, CME. Check them out

Grant.

 

[new_trader]

Futures certainly over daytrading stocks but why corn? If you know the answer, ignore and forgive the rest of this post. If not...Use some basic criteria before you choose. Whats the daily range....& how whippy is it? Are your stop and profit levels realistic/workable for the market you're looking at. Size or liquidity..how fast can u get out when it rains (it will, it always does) Cost per round turn Vs say 10 ticks in that particular maket ( I believe its also known as 'bang for buck';-) If its any help I too gave up stocks cos of MM manipulations Short rules etc. My 3 faves in order are Dax(Eurex) and USA Mini Russell/mini S&P....each has a different margin requirement/tick size/round turn cost/character or behaviour. Get the best live charting money can buy and watch, study compare....best of luck

I expect people prefer to trade commodities over stocks because they are generally immune from unexpected things that affect companies, like bad/illegal accounting, unscrupulous directors, undisclosed sub prime losses and/or exposure etc..etc..

 

[new_trader]

Brett,

Zeddy makes essential points so I don't need to exapand (or can't). I would suggest liquidity is the key consideration in Zed's list - how many contracts are traded. I've no knowledge of the mini contracts but I think the DAX is for the more experienced trader - it is known for its volatility (perhaps the mini's would be more appropriate). Also look at CBOT's and Eurex's 2, 5 and 10-year fixed income futures - heavy volume but with less volatility compared to index futures.

For a beginner, I think commodities are best avoided. Don't be tempted by their massive gains of late - for every massive gain, someone has made a corresponding massive loss.

All the principle exchanges are good sources for free litereature - Eurex, CBOT, CME. Check them out

Grant.

Grant,

You have mentioned before about certain instruments being suitable according to experience and I have been flippant with my reply. I trade the E-mini S&P500 and there is nothing easy about it. There is nothing easy about trading any instrument, otherwise everyone would be trading it. What makes you say that certain instruments ore only for the more experienced trader? What am I missing?

 

[grantx]

NT,

That's true but commodities are also subject to unique risks, broadly:

weather (how often does that change?), political instability (principal producers always seem to be located in dodgy areas), strikes, industrial accidents (mine, refinery explosions), sabotage, crop disease, earthquakes, landslides, and why not include climate change?

Regarding what’s suitable for the beginner, this is only my opinion.

Simply, you don’t want to trade anything that could wipe you out in a short period of time, ie has relatively high volatility. Therefore, I would go for lower volatility instruments, eg fixed income.

However, perhaps something like the DAX or E-mini’s may be OK as long as one prepares (as far as one can) prior to using hard cash via study, observation and familiarity of an appropriate strategy. Then there may be the psychological aspects (my killer at the moment). For a total beginner I reckon at least a year. Unfortunately, enthusiasm tends to override questions of readiness.

Some would say, go in at the deep-end and experience a blow-out to reinforce humility and the notion of respect for the market. I don’t wear this – in psychological terms it would be an example of ‘aversion therapy’, and for good reason.

Good Trading,

Grant.

 

[new_trader]

NT,

That's true but commodies also subject to unique risks, broadly:

weather (how often does that change?), political instability (prinipal producers always seem to be located in dodgy areas), strikes, industrial accidents (mine, refinery explosions), sabotage, crop disease, earthquakes, landslides, and why not include climate change?

Grant.

Agreed. But a glut isn't going to turn into dearth overnight and vice versa. Whereas companies, like Bear Stearns can go from A to Triple B credit rating in one stroke of a pen and lose 53% of it's stock value.

 

[grantx]

NT,

I think this is relative. Apart from natural demand by users the current high prices of commodities is also driven by the hedge funds and other institutions looking to park their money somehere other than the stock and bond markets.

"A to Triple B". It's a cruel world.

Grant.

 

[rathcoole_exile]

there is an old saying, something like "if you can't trade anything else successfully, try corn"

 

[Lucrum]

With futures what many refer to as "margin" is actually a performance bond.
The initial margin is the amount required to be in your account for each contract traded.
The maintenance margin is the amount per contract required to be in your account for each contract held. For example initial corn margin of $1350 means you can buy or sell 1 contract for every $1350 (plus commissions) you have in your account. Corn maintenance margin of $1000 means you have to have at least $1000 in your account for each contract held. In other words you can lose up to $350 per contract before either adding funds to your account or liquidating part or all of your position.

I would highly recommend someone with only a $5000 account limit themselves to a single contract.

 

[grantx]

RC,

"try corn"? Wtf have hats got do with anything? You'll be recommending trouser options next.

Markus has been quiet of late. Do you think he's counting his money in Lichtenstein (or getting it out)? That'll take some time. If you're reading this, Markus, I've given Merkel your details.

Grant.

 

[new_trader]

NT,

I think this is relative. Apart from natural demand by users the current high prices of commodities is also driven by the hedge funds and other institutions looking to park their money somehere other than the stock and bond markets.

"A to Triple B". It's a cruel world.

Grant.

Grant,

I think you agree with me

 

[grantx]

NT,

It wouldn't be the first time and it won't be the last.

Grant.

 

[black bear]

a few things that have helped me........

trade one market , get to no it like the back of your hand would be my advice.

Trade it with minimum size, funds with broker should be treated as only resource you have even if that is not your full bank.

The size of deposited funds should imho put you under a little pressure to perform.

Excess funds / an amount you have decided in advance to commencing trading must be removed on the 1st of every month and should be treated as costs regardless of your trading performance that month. (10 % works for me / every month my risk at the market is reduced and my account / deposited funds remains the same if I trade well and re-produce past performance)= Forces trader to confront and examine performance especially bad performance

Some one posted ~ best you can afford for what you want to achieve regards charts / platform, I agree 200 % execution instant is for me and anything else is no good. Take your time to check everything out = time well spent.

The spider does not need to "feed" everyday. He is content to wait until a morsel comes his way, patient and secure in the knowledge that he has taken the steps necessary for his survival. His carefully crafted web transmits to him all sorts of information. But he knows how to identify the false signals~ the wind vibrating his web, a drop of rain~ from the real thing enmeshed in it. Why does he know it so intimately? Because he has carefully constructed his web himself. No one else can build it for him. As a result, the configuration of his web is as uniquely his as his fingerprints. Most important, the spider is patient. He waits until he sees a convergence of most all of his indicators before he acts; but when he does, he pounces aggressively and without hesitation.

Good Luck :clover: