Archive for December, 2007

CFD’s versus Futures

Friday, December 28th, 2007

I have never traded CFDs (Contracts for Difference), but increasingly I am finding that my non-US clients have been attracted into trading by companies marketing CFD instruments. 

I say non-US companies because I understand that CFD trading is illegal in the US. I think there may be a good reason for that.

If you trade on a short term basis, you have to become paranoid about trading costs. If you are a long term position trader looking at, for example, a 90 or 100 point gain in a soybean trade, you are not too concerned about a bit of slippage on your entry, and a few dollars either way in the contract brokerage fee will not be too significant.

However, if you are a day-trader, you will be loading up with a lot more contracts looking to capitalize on just a few points of movement. Now slippage and brokerage costs are highly significant and have to be kept to an absolute minimum.

There was a time when a trader off the exchange floor had no chance in this game, but the advent of modern electronic brokerage companies has changed all that. Even though I trade from Australia, my brokerage company has very competitive fees and a platform that executes trades with minimum slippage.

Now, back to CFD companies. A little investigation showed they offer commodity trading in the grains, which is my speciality. What is more, there is NO brokerage fee on the contract, and no interest charge on long term holdings.

This seems too good to be true, but there is a catch. It is the spread.  In the real futures market I am usually trading with a half point spread, which means if I buy and immediately sell – or sell and immediately buy –  I am down half a point ($25 per contract).

However, the spread I am being quoted for a CFD is about five full points! If I go with them I have to make five points ($250 per contract) on the trade to break even.

No thank you! This could be a good deal for some trading styles, but it definitely would not suit mine. I am looking to be in and out of the market within a few minutes, participating for a short period in intraday trends. This spread would make it totally impractical.

It reminds me of the many forex brokers that popped up a few years ago offering commission free trades. Yes, they were commission free, but the spread back then was five pips! On top of that, there were interest charges payable each day you held the trade over night.

At about $12.50 per pip on the Euro contract, that was quite some alternative to commission! Give me a futures round trip commission of less than ten dollars on a currency contract, plus a nice tight spread and no daily interest charges, any day!

Nowadays, competition in Forex means that you can get two pip spreads in the major currency pairs, which is not too bad. But beware when the market moves quickly!

You see, if you trade with Forex or CFD companies, you are not in the real market. You are bidding in a market they make. They are in the real market and they make sure that they offset every position you take to their advantage. If you happen to hit a bid/ask in a fast moving market, and they can not offset it to their advantage, it will not be accepted. You will get a re-quote on the price.

The CFD may be illegal in the US, but there are better instruments available for the investor. For example, single stock futures (SSF) compete directly with the CFD and have a lower cost structure. Of course, international investors can access SSF products too.

I advise you to be very careful about assessing your trading costs before embarking on CFD trading. Carefully consider the alternative of trading in real markets with a transparent cost structure, where competitive pressure from thousands of participants keep trading costs to a minimum.

A key attraction of CFDs to investors is that they are leveraged instruments, but do be aware that there are many other leveraged financial instruments available to the trader. 

Face it, all that CFD advertising and those free seminars must be paid for by something! Believe me, day trading is a tough business. An absolute essential is to minimize your costs. Look at every investment vehicle through the cost prism before deciding which path to take. 


Sometimes things just don’t go right……

Friday, December 28th, 2007

I decided to stick with the wheat market last night, although soybeans would have been a better bet. 


I took two cracks at an aggressive entry for a short trade, anticipating a continuation pattern to the downside. They were both stopped out. If I had tried once more, I would have got in for an excellent trade, but I always stop after two losing trades.

Had I chosen the soybean market, an aggressive entry would have taken me short around 1237.5, which would have been a reasonable trade, although it would not have reached my downside target.


It’s always easy to spot these things after the event, but I followed my methodology, so I’m satisfied with the session, even though the outcome was poor. Trading is a game of probabilities, and sometimes you lose. It’s part of the business! 


Don’t Have Tunnel Vision…

Wednesday, December 26th, 2007

The grain markets tend to be highly correlated. A good day in wheat is usually a good day in beans and corn, but not necessarily so.

Even though the correlation is strong, the tone of the markets can be quite different. Often when you are watching them, you get the feeling that one of them is being dragged along reluctantly by the strong performance in one of the others.

For a few months now, wheat has been the most dynamic market in the grain complex. Nevertheless, it pays to watch the other markets as well.

When I trade, I’m looking for breakout opportunities developing early in the session. Here are screenshots of the opening spell today for wheat, beans and corn. Which one would you rather trade?










Wheat is a messy opening, with no clear cut break out opportunity. Beans and corn both present nice opening continuation patterns.

However, beans has the shape best conforming to the patterns I use and also the greater range, meaning that you will not have to take as many contracts in your position.

Had you traded the early beans breakout, you would have banked a substantial profit in just six minutes! If you had been fixated on the "hot" wheat market, and forced a trade, it could well have turned out to be a loser.  

Exit Your Trade on a Spike in Volume

Wednesday, December 26th, 2007

Christmas Eve in the shortened wheat market session was always going to be a quiet time, and so it proved to be. However, it did have some points of interest.


I had missed the furst juicy breakout to the downside, and felt confident there was not going to be much more potential in that direction.

I watched for an inverse head and shoulders pattern to form, and eventually entered on the long side at 933.5. Early on I took some profits at 935.5 and then settled back to await developments.

What followed was an hour of smoothly rising prices. There was no dramatic move, just a steady upward grind. Volume, such as it was, was quite consistent.

Then, suddenly there were two longer positive candles with growing volume and strong price increases, followed by a huge upside candle on triple the volume seen for the majority of the move. Price moved almost vertically to a point very close to the high for the day.

When this happens, it is almost always a signal to exit your positions, or tighten your stops at the very least. It is the point in the life of a trend when euphoria sets in, everybody notices the price is doing well and they try to jump aboard. The professional trader sells into this euphoria.

On this chart you can see that the upward spike was met by a battery of selling up round the highs for the day, and price fell back sharply.

I didn’t quite catch the peak, but I was out at around 941.

Day Trading Exits are easier with Multiple Contracts

Monday, December 24th, 2007

The other night I was trading wheat and found myself long 4 contracts in an erratic trading session.

(Get used to me talking about trading at night. In Australia, the main Chicago session for grains starts well after midnight. Hence the name of this website.)


Sadly, I’d missed the first great breakout to the downside, and felt that the days lows had been made. Eventually I went long at about 944 with a target of around 954. I entered this trade during the eleventh candle on the chart.

Now the first thing to notice is that the very best thing I could have done is automated my exit and gone to bed!  This is the strategy recommended in my eBook whereby I would have entered a stop loss order at about 942 , a limit order at 954 and a market order to exit 30 seconds before the end of the day’s session. The orders are linked in a One Cancels Other group so that only one of them ever executes.

However, on this evening I did not take my own advice, and settled down to watch the progress of the trade.

As you can see, pretty early early on there was an exhilarating spike up to 951.75 followed by a distressing decline right back down to 944.5.Then we were off to the races again with a move up to 953, only to have our hopes dashed again as price declined to 946. Finally, after much sideways action there’s another burst up to 955 before a calamitous decline into the close.

I don’t know about you, but I can’t sit and watch a session like this!

I still say the best way is to automate your exits and walk away. What you don’t see, you don’t stress about. But if you must watch, there is something else you can do.

In this instance, I was long four contracts. When that first happy spike came, I sold a couple of them just over 50. Now, even if price declined and hit my stop for the other two contracts at 942, I’d still be in the black for the day.

Once I’ve done this, I quite enjoy watching the session. I know I can’t lose and there’s a chance of quite a big win, which is what happened in this case.

Of course, I’ve given away some profit. If I had held on I could have sold all four contracts at 954 instead of dumping two of them cheaper. But that’s a price I am happy to pay to reduce the stress of trading.

Anyway, trading is all about managing risk. The stop might have been hit today, and if I had taken no action I would have been down about a dozen points (allowing for slippage which is endemic in the wheat market). By taking the action I did, I ensured a profit of 6-8 points, with the possibility of an overall profit of around 30 points. So, without being prescriptive here, my advice to you is to trade a market where you can afford to enter positions with multiple contracts, then carefully consider what your exit strategy is going to be.

Keep in mind that you don’t have to sell all your positions at once, a point that is often forgotten in the heat of battle.

For that matter, you don’t have to buy all your positions at once either, but that’s a discussion for another day.