Commodity Futures and Options Trading - How Efficient Is YOUR Trading? - PART 1
By: Thomas Cathey | Posted: 20th February 2007
When you think about it, many events need to be just right to make an efficient and profitable trade. You must pull the trigger. The entry must be good. The exit must be good. The futures market must act as you expect. The orders must be accurate and without errors. The order and quote system must not fail throughout the complete chain. And there are more variables and fixed costs we’ll discuss later. All these things take a slice out of perfection.
Perfection is getting 100% of the move. This is impossible and fantasy since our fixed costs always limit us to less than 100% efficiency. Plus, do to forecasting errors and execution slop, we are lucky to get 50% of a commodity futures contract move on average. Sometimes we get more and sometimes less.
The fixed costs are always there no matter how well we trade. It’s like running in the mud. Futures contract commissions effectively take a chop out of the move. Another hit that most traders forget to consider is the bid and offer, or “spread”. We usually don't notice the spread when buying and selling “at the market”. The spread is more obvious when we’re watching the screen while electronically trading a market like the E-mini. Even the pit traders work with the same bid and offer prices as you and me.
Let’s say the exact high of the move is now 1300.00 offered for the S&P 500 or E-mini futures contract. If you sell, “at the market”, you will get a price no better than 1299.75. Why? Because that is the normal E-mini spread; a ¼ point lower bid. You would need to place a limit order to sell at 1300.00 to get 1300.00. But there may be a line of orders ahead of you at that price and there’s a chance you will not get your order filled.
If the futures market trades at 1300.25 offered, you will most likely get your price of 1300.00. Putting in specific limit orders is an art and you must expect to miss some moves as a result. Is it worth missing a big move for ¼ point? Maybe and maybe not. It all depends on how often you trade and the methods you use.
The more you trade for small gains, the more important it is to get these small slivers of price. In contrast, a long-term commodity futures position trader would never see the difference in overall performance, so he should probably go in “at the market”. He wants to be sure he gets positioned. The biggest risk for a long-term trader is missing a major move.
A short-term futures trader can afford to miss some moves and make it up over time by constantly grabbing the spread. Again, it all depends on your method and trading goals. Capturing the spread can cover day trading expenses. It’s the equivalent of “stealing the blinds” when bluffing in poker. This means winning the pot even though your have an inferior hand. You may need the spreads to cover your expenses if you are a very active futures contract day-trader.
Part Two of Three Next!
There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.
About the Author
Occupation: CEO and Money Manager
Thomas Cathey - 27-year trading veteran heads the managed futures division of Thomas Capital Management, LLC. View his TimeLine Trading market predictions and get his complete 44+ lesson, "Thomas Commodity Trading Course." http://www.thomascapitalmanagement.com/commodity/welcome.htm Main site: http://www.ThomasCapitalManagement.com
There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.
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Tags: variables, mud, commissions, efficiency, execution, fantasy, quote system, futures market, trades, slop, futures contract, chop, commodity futures, limit order, profitable trade