Over the weekend, I had a discussion with a fellow futures trader who prefers to trade only stock index futures. More power to him! I wish him much success and generous profits! However, he consistently loses money or barely breaks even in his trading.
Several people have asked me why I don't trade stock futures very frequently. I started trading the futures market by trading the Russell 2000 stock futures exclusively. I liked them because they were exceptionally liquid and showed greater volatility than other stock indexes like the S&P500 and NASDAQ. However, I found it difficult to make money.
Liquidity and Consistency are My Criteria
However, as I began to examine the charts of more and more futures, I came to the conclusion that there were other futures that were very liquid but that showed much greater consistency in the trading patterns.
Treasuries and Grains
One of those futures that shows both liquidity and pattern consistency is the treasury futures. Others are the grains. The treasuries are just as liquid as the stock futures, but have about half the margin requirement and more reliable trading patterns. By the way, reliable trading patterns are a necessity for consistent profits.
Corn futures have more than 1/2 million contracts of Open Interest. So do sugar #11 futures. Soybean futures are the favorites of many experienced futures traders. There are good reasons for this. Between the beans themselves, the meal, and the oil, the Open Interest for the soybean complex is about equivalent to that of corn or sugar. Beans also show superior liquidity, good volatility and consistent trading patterns. That's why they are the #1 choice of most commodity traders.
Softs -- Sugar, Cotton, Coffee, Cocoa, Etc.
I haven't traded the softs very much -- yet. I plan to, however. The only softs futures that I believe are sufficiently liquid to trade are the ones I mentioned in the headline above this paragraph. The softs only began trading electronically about one year ago. Since that time, they have become much more liquid and the patterns have become progressively more and more reliable ever since. You should have seen the softs charts before they began trading electronically! They were awful! Yuch!
Crude Oil
I also like to trade crude oil. However, I have learned that while the patterns are good and liquidity is excellent, execution is extremely difficult for traders, and it is difficult to get good consistency. It is very difficult for me to enter and exit crude oil futures with reliability and consistent profits because of the difficulty of getting rapid and reliable executions. Crude oil futures prices simply move too rapidly for me to get in and out in a timely way to be consistently profitable.
Gold
I like to trade gold at times. However, gold also tends to trade somewhat erratically on a short-term basis. Gold also tends to be the futures vehicle that is almost excessively volatile. This is one of the unique aspects of gold futures. It has some of the wildest swings of any futures instrument.
This is probably due to its nature as a place of refuge during times of fear in the financial markets, as a hedge against inflation, and the rock solid loyalty and following of "gold bugs" who believe in buying gold no matter what the market is doing. I recently finished reading the book, "Empire of Debt" by Bill Bonner. It's an excellent book for studying the nature of empires throughout human history. It is superbly written and researched. I came away persuaded that the United States has become an empire, and that the empire is waning and will eventually collapse, probably sooner rather than later. However, one could avoid all the reading by simply skipping to the last page of the book and reading the last sentence, which is what Bill recommends in preparation for that collapse: "And buy gold." Bill must be a gold bug.
I own gold, and I believe in using it in my own long-term investment strategy. I believe in gold. However, the futures are a different matter. They are not as easy to trade. The one consistent thing about gold is that it always seems to go higher -- eventually! But the markets have a capacity to remain irrational much longer than the typical futures trader has enough money to wait for the market to turn around and become rational again. Thus, gold isn't my first -- or second -- choice for trading!
Stock Index Futures
I have noticed that the stock index futures tend to show more erratic trading patterns and much more market noise. I don't know the reason with any certainty. Perhaps this is partly due to the high volumes of inexperienced traders that enter and exit the markets erratically, causing greater market noise and negatively affecting the reliability of the chart patterns. That's a guess, but I still wonder why this phenomenon exists. The bottom line is that they are just more difficult to trade!
Another phenomenon in stock futures is that they have an overwhelmingly bullish bias. It seems that no matter how bad the news, stock futures always tend to rebound fairly quickly. Chick Goslin, in his book, Trading Day By Day, mentions this phenomenon and suggests that it is probably due to the influence of government interventions from the Fed and the President's Working Group on Financial Markets. The PWGFM is also affectionately known by some people as the "Plunge Protection Team", a term coined by Brett Fromson of the Washington Post. Chick Goslin, a very successful trader, says that these interventions tend to adversely affect the financial markets, and stock markets in particular.
I am not biased against trading stock index futures. However, the nature of the trading patterns, perhaps for some of the reasons I've mentioned here (and perhaps not), make it much more difficult for me to trade profitably with any consistency.
We as traders must never become so stuck on one pattern, one trading method, or one trading instrument that we are willing to sink the ship in loyalty to our own preferences and biases. Move on if what you are doing doesn't work.
I trade what works! And that's the only criteria I use! The bottom line:Several people have asked me why I don't trade stock futures very frequently. I started trading the futures market by trading the Russell 2000 stock futures exclusively. I liked them because they were exceptionally liquid and showed greater volatility than other stock indexes like the S&P500 and NASDAQ. However, I found it difficult to make money.
Liquidity and Consistency are My Criteria
However, as I began to examine the charts of more and more futures, I came to the conclusion that there were other futures that were very liquid but that showed much greater consistency in the trading patterns.
Treasuries and Grains
One of those futures that shows both liquidity and pattern consistency is the treasury futures. Others are the grains. The treasuries are just as liquid as the stock futures, but have about half the margin requirement and more reliable trading patterns. By the way, reliable trading patterns are a necessity for consistent profits.
Corn futures have more than 1/2 million contracts of Open Interest. So do sugar #11 futures. Soybean futures are the favorites of many experienced futures traders. There are good reasons for this. Between the beans themselves, the meal, and the oil, the Open Interest for the soybean complex is about equivalent to that of corn or sugar. Beans also show superior liquidity, good volatility and consistent trading patterns. That's why they are the #1 choice of most commodity traders.
Softs -- Sugar, Cotton, Coffee, Cocoa, Etc.
I haven't traded the softs very much -- yet. I plan to, however. The only softs futures that I believe are sufficiently liquid to trade are the ones I mentioned in the headline above this paragraph. The softs only began trading electronically about one year ago. Since that time, they have become much more liquid and the patterns have become progressively more and more reliable ever since. You should have seen the softs charts before they began trading electronically! They were awful! Yuch!
Crude Oil
I also like to trade crude oil. However, I have learned that while the patterns are good and liquidity is excellent, execution is extremely difficult for traders, and it is difficult to get good consistency. It is very difficult for me to enter and exit crude oil futures with reliability and consistent profits because of the difficulty of getting rapid and reliable executions. Crude oil futures prices simply move too rapidly for me to get in and out in a timely way to be consistently profitable.
Gold
I like to trade gold at times. However, gold also tends to trade somewhat erratically on a short-term basis. Gold also tends to be the futures vehicle that is almost excessively volatile. This is one of the unique aspects of gold futures. It has some of the wildest swings of any futures instrument.
This is probably due to its nature as a place of refuge during times of fear in the financial markets, as a hedge against inflation, and the rock solid loyalty and following of "gold bugs" who believe in buying gold no matter what the market is doing. I recently finished reading the book, "Empire of Debt" by Bill Bonner. It's an excellent book for studying the nature of empires throughout human history. It is superbly written and researched. I came away persuaded that the United States has become an empire, and that the empire is waning and will eventually collapse, probably sooner rather than later. However, one could avoid all the reading by simply skipping to the last page of the book and reading the last sentence, which is what Bill recommends in preparation for that collapse: "And buy gold." Bill must be a gold bug.
I own gold, and I believe in using it in my own long-term investment strategy. I believe in gold. However, the futures are a different matter. They are not as easy to trade. The one consistent thing about gold is that it always seems to go higher -- eventually! But the markets have a capacity to remain irrational much longer than the typical futures trader has enough money to wait for the market to turn around and become rational again. Thus, gold isn't my first -- or second -- choice for trading!
Stock Index Futures
I have noticed that the stock index futures tend to show more erratic trading patterns and much more market noise. I don't know the reason with any certainty. Perhaps this is partly due to the high volumes of inexperienced traders that enter and exit the markets erratically, causing greater market noise and negatively affecting the reliability of the chart patterns. That's a guess, but I still wonder why this phenomenon exists. The bottom line is that they are just more difficult to trade!
Another phenomenon in stock futures is that they have an overwhelmingly bullish bias. It seems that no matter how bad the news, stock futures always tend to rebound fairly quickly. Chick Goslin, in his book, Trading Day By Day, mentions this phenomenon and suggests that it is probably due to the influence of government interventions from the Fed and the President's Working Group on Financial Markets. The PWGFM is also affectionately known by some people as the "Plunge Protection Team", a term coined by Brett Fromson of the Washington Post. Chick Goslin, a very successful trader, says that these interventions tend to adversely affect the financial markets, and stock markets in particular.
I am not biased against trading stock index futures. However, the nature of the trading patterns, perhaps for some of the reasons I've mentioned here (and perhaps not), make it much more difficult for me to trade profitably with any consistency.
We as traders must never become so stuck on one pattern, one trading method, or one trading instrument that we are willing to sink the ship in loyalty to our own preferences and biases. Move on if what you are doing doesn't work.
Whatever works!
