Introduction
The Stock Market evolved into a way for companies to raise capital. By
exchanging ownership in a company for cash, early business ventures were
able to raise capital to buy equipment, or build factories. Companies
hundreds of years ago, as well as today, primarily use the stock market
as a means to raise capital.
The modern futures market evolved not from a need to raise capital, but
from a need to transfer risk. The futures market makes it possible for
those who wish to manage price risk (hedgers) to transfer that risk to
those who are willing to accept it in the hopes of a profit
(speculators).
Futures markets are first and foremost a risk transference vehicle.
Futures markets also provide price information that the world looks to
as a benchmark in determining value of a particular commodity or
financial instrument on any given day or at any specific time of the
day. These benefits, risk transference and price discovery, reach every
sector of the economy of the world where changing market conditions
create economic risk. This includes such diverse fields as agricultural
products, foreign exchange, imports, exports, financing, and investment
vehicles.
What are Futures?
Futures contracts are standardized to meet the specific requirements of
buyers and sellers for a variety of commodities and financial
instruments. Quantity, quality, and delivery locations (all the
essential ingredients) are pre-established. The only variable is price,
which is discovered through an auction-like process on the trading floor
of an organized futures exchange.
For example, assume an individual buys one contract of March Corn at
$2.25 per bushel on January 2nd, initiating a long position. This
contract calls for the delivery of 5,000 bushels of Number 2 Yellow Corn
seven days before the last business day of the delivery month (March) at
an exchange-recognized facility. If on February 15th, the purchaser of
the March Corn contract wishes to exit his position, he can do so by
selling one March Corn contract.
Assuming that the contract was sold at $2.45 per bushel, the holder of
the March Corn contract would receive $1,000.00 before broker
commissions and fees for holding the position for six weeks:
Profit or Loss = Sale Price - Purchase Price * # of bushels
($2.45 - $2.25 = $0.20 * 5,000 = $1,000.00)
Our person in this example is $1,000.00 richer for the experience, and
has no further obligation in the Corn market because the sale of the
March Corn futures contract at $2.45 per bushel offset the earlier
purchase at $2.25 per bushel.
Notice in this example that all of the features of the contract were
predetermined by the exchange, except the price.
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Quantity: 5,000 bushels for Corn
futures |
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Quality of the Corn: #2 Yellow |
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Delivery time: 7th to last business
day of the contract month |
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Location: exchange-recognized
warehouse or transfer station |
Because futures contracts are
standardized (with the only variable being price) buyers and sellers are
able to exchange one contract for another and actually offset their
obligation to deliver or take delivery of the commodity underlying the
futures contract.
Offset means taking an equal and opposite position in the futures
market to one's initial position.
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Margins and Guaranteeing Futures
The exchanges and their members are able to guarantee all trades because
they require all parties in a transaction to deposit performance bond
margins.
Performance bond margins are financial guarantees required of both
parties (buyers and sellers) of futures contracts to ensure fulfillment
of the contract obligations.
That is, buyers and sellers are required to take or make delivery of the
commodity or financial instrument represented by the futures contract
unless the position is offset before the contract expiration.
Before entering into a transaction, both parties have to post an Initial
Margin Requirement. The Initial Margin Requirement is the amount of
money a party must have on account with a clearing firm (your broker) at
the time the order is placed.
Initial margin funds must be on deposit before any trade can be
accepted. Maintenance Margin is a set minimum margin (per outstanding
futures contract) that a party to a futures contract must maintain in
his/her margin account to hold a futures position.
Initial Margin Requirements vary from commodity to commodity, but are
generally between 5% and 10% of the total value of the contract.
For example, if March Corn futures are trading at $2.11/bushel,
the initial Margin Requirement for CBOT Corn futures is $405.00 per
contract, with a maintenance margin requirement of $300.00. Our
speculator would have to have at least $405.00 on deposit with his
broker before he could enter the market. He would need to have an
account liquidating value of at least $300.00 per contract in order to
stay in the position.
Let's assume that our speculator has $1,000 in his account and decides
to buy 2 contracts of March Corn at $2.35/bushel on January 2nd. He is
able to buy 2 contracts of March Corn because he has more than the
initial margin requirement of $810.00 ($405.00 initial margin x 2
contracts = $810.00). With $50.00 round turn commission rate ($25.00 in,
$25.00 out) our speculator's broker would charge him $50.00 in
commissions as well. Assume that March Corn settled at his entry price
of $2.35/bushel. His account liquidating value would be $950.00, or
$1,000.00 initial deposit - $50.00 commission to buy 2 contracts of
Corn. Since the liquidating value of the speculators account (Funds on
Deposit + Open Position Profit or loss) is greater than the maintenance
margin requirement of $300.00 per contract or $600.00 for 2 March Corn,
he is able to stay in the trade.
The next day, much to our speculators detriment, Corn prices drop by 5
cents. Our speculator now has an open position loss of -$500.00 and an
account liquidating value of $450.00 ($1,000.00 - $50.00 commission -
$450.00 open position loss = $450.00). Since this value is less than the
Maintenance Margin requirement of $300.00 per contract, or $600.00, our
speculator is on a Margin Call.
In order to keep the position, the speculator must either send enough
money to bring the account back above the Initial Margin Requirement of
$810.00 or liquidate the position. The Maintenance Margin Requirement is
the minimum amount of money which must be in the account (including open
position profits and losses) to maintain an open position in the futures
market. If the value of the account dips below this level, then the
account holder must either send additional funds to his/her broker or
liquidate the position. Usually, traders have 5 business days to get
funds posted to the account, but in some cases the brokerage firm may
liquidate the futures positions in order to meet the Margin Call.
Note: Brokerages have the right to liquidate your position
immediately, and many may require you to wire funds immediately to avoid
liquidation. Also be aware that margin requirements are subject to
change without notice.
Remember, Initial Margin is the minimum amount of money you must have in
your account to open up a futures position. Maintenance Margin is the
minimum amount of money you must have in your account to maintain the
position. So in our Corn example, the initial margin was $405.00 per
contract, meaning that a trader must have at least $405.00 per contract
in his/her margin account before a Corn futures position can be entered
into. After the position is entered into a balance of $300.00 per
contract or the Maintenance Margin must be maintained in order for the
position to be left open. If the available funds in the account (funds
deposited + open position profit or loss) are less than the Maintenance
Margin Requirement, then more funds must be deposited or the futures
positions will be liquidated or offset by taking an opposite position in
the futures market.
Reminder: Long or buy positions are offset or closed by selling,
while short or sell positions are offset or closed out by buying.
The dual margining system (initial and maintenance) of the futures
market ensures that all positions are adequately financed, insuring the
integrity of the futures market. The exchanges set the minimum margin
requirement based on the volatility and dollar value of the contract.
Margin levels are subject to change both up and down at the discretion
of the Exchange. Most brokerage firms charge the exchange minimum
margin, but they are entitled to charge more, so be sure to check with
your broker before entering into any futures transaction.
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The Long and Short of Trading
There are two basic positions one can have in the futures markets:
1. A long position: This entails the purchase of futures contracts
in anticipation of rising prices. Purchasing a futures contract enters
into a long position. Long positions are profitable if the underlying
futures contract increases in price during the holding period. Selling
the same quantity and contract-month that one initially purchased
offsets a long position. Long positions are typically used by consumers
to hedge against rising prices, and initiated by speculators in
anticipation of higher prices.
2. A short position: This entails the sale of futures contracts
in anticipation of lower prices. A short position is entered into by
initially selling a futures contract. In the futures market, unlike the
stock market, it is just as easy to establish a short position as a long
position. Short positions are profitable if the underlying futures
contract decreases in price during the holding period. Buying the same
quantity and contract month that you initially sold offsets your short
positions. If the resulting purchase price is less than the original
sale price, a profit is achieved. However, if the resulting purchase
price is greater than the original sale price, a loss is incurred.
Commodity producers who wish to avoid potentially lower prices - as a
short position increases in value and prices decline - usually establish
short positions. Speculators anticipating lower prices in the future
establish short positions.
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Calculating Profit/Loss
To figure out the profit or loss associated with a position is the same
regardless of either a long or short position. The profit or loss from a
futures position is calculated as follows:
Profit or Loss = Sell Price - Buy Price x Contract Size x Number of
Contracts
For example, assume a speculator thinks that Corn prices will go down in
the coming weeks. As such, he sells 2 March Corn contracts at 235 ($2.35
per bushel, but corn prices are quoted in cents per bushel, so the price
is said to be 235 cents per bushel), thus initiating a short position.
Having studied the behavior of Corn, using his Track 'n' Trade software,
our speculator was correct, and Corn prices fell from 235 to 220 over
the next two weeks. Given the -15 cent drop in Corn prices, our
speculator has a $1,500.00 open position profit, and decides to "cash
in" his winning by buying 2 March Corn futures at 220.
Profit or Loss = Sell Price - Buy Price x Contract Size x Number of
Contracts
= 235 - 220 = +15 cents
= $0.15 x 5,000 bushel contract size = $750.00 per contract
= $750.00 per contract x 2 contracts = $1,500.00 (before commissions and
fees.)
Now assume that another speculator buys (initiating a long position) 2
March Corn at 235. After two weeks, prices again drop by -.15 cents to
220, at which time he offsets the long position by selling 2 March Corn
at 220. His loss from the transaction would be -$1,500.00before
commissions and fees.
Profit or Loss = Sell Price - Buy Price x Contract Size x Number of
Contracts
= 220 - 235 = +15 cents
= -$0.15 x 5,000 bushel contract size = $750.00 per contract
= -$750.00 per contract x 2 contracts =- $1,500.00 (before commissions
and fees.)
As you can see, whether you are long or short, the basic idea of
speculating in the futures market is to "BUY LOW" and "SELL HIGH." In
the futures market this can be done in any order. You can initiate a
Long Position by buying the futures first and then at a later time
offsetting by selling, and you profit if the sale price (exit price) is
higher than the purchase price (entry price). Or, you can initiate a
Short Position by selling the futures first and then offsetting the
contract(s) at a later time by buying them. A profit will still occur if
the sale price (entry price) is higher than the purchase price (exit
price).
Of course the profit or loss amount is determined by the contract you
are trading. Each market is quoted differently. Some markets are quoted
in points, while others are quoted in cents.
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Points vs. Cents
Quoting Prices and Calculating Profit or Loss
Each futures contract is quoted in a slightly different manner, and as
such your profit or loss calculation for most markets is slightly
different. The following is a basic highlight of the major markets and
how they are quoted. Of course, Gecko Software's Track 'n Trade Pro
charting software has tools to convert price moves to profit or losses,
but we thought we would show you a few examples so you can understand
how they are quoted.
Grains: Corn, Wheat, Oats, and Soybeans are quoted in cents per
bushel. The contract size for all of these is 5,000 bushels. For
example, a Corn price of 235 is really $2.35 per bushel. Each of these
grains moves in 1/4-cent increments, which equates to $12.50 before
commissions and fees. The profit or loss of a one cent move = $50.00
before commissions and fees.
Meats: The contracts are quoted in cents per pound. So if Live
Cattle is trading at 74.00, the price is actually 0.74 cents per pound.
Meat prices move in 0.025 cents per pound increments, but usually the
last 0.005-cent per pound is dropped, so a price quote of 74.02 is
really 74.025, while a price quote of 74.17 is actually 74.175. Live
Cattle, Lean Hogs and Pork Bellies contracts all call for delivery of
40,000 pounds, thus a 0.025-cent per pound is worth $10.00 before
commissions and fees. The profit or loss of a one cent move = $400.00
before commissions and fees. Feeder Cattle prices are quoted the same
way, except that Feeder Cattle futures call for 50,000 pounds, thus a
0.025 cent move is worth $12.50 and a one cent move in Feeder Cattle =
$500.00 before commissions and fees.
"Softs" or Exotics: Coffee, Sugar and Orange Juice are all quoted
in cents per pound, but each has a different contract size. For example,
a Coffee price of 50.40 is 50.40 cents per pound, while an Orange Juice
price of 89.95 is 89.95 cents per pound, and a Sugar price of 762 is
really 7.62 cents per pound (decimal is moved over in Sugar, as prices
are quoted in cents per hundred weight). Now, just to confuse everyone,
Cocoa prices are quoted in dollars per metric ton, so a price of 1301 is
really $1301 per ton.
The contract size for Coffee is 37,500 pounds, so a 1-cent move is worth
$375.00 before commissions and fees. Orange Juice futures call for
delivery of 15,000 pounds so a 1-cent move is worth $150.00 before
commissions and fees. Sugar is traded in 112,000-pound increments, so a
1-cent move in Sugar is equal to $1,120.00 before commissions and fees.
Cocoa contracts call for 10 tonnes at delivery so a $1 move in Cocoa is
worth $10.00 before commissions and fees.
Metals: Gold and Platinum prices are quoted in dollars per troy
ounce. Most quote vendors display their prices in this format as well,
so prices are easy to read. A Gold price of 285.10 is $285.10 per troy
ounce, while a Platinum price of 475.5 is $475.50 per troy ounce.
However, each contract has a different contract size. Each Gold futures
contract represents 100 troy ounces, so a $1.00 per troy ounce move
equates to $100.00 before commissions and fees. Platinum futures
represent only 50 troy ounces, as Platinum is much more rare than Gold.
Each $1.00 per toy ounce move in Platinum is equal to $50.00 before
commissions and fees.
Silver and Copper Futures are quoted in cents; cents per troy ounce in
Silver, and cents per pound in Copper. For example, a Silver price of
452.5 is actually $4.525 per ounce, while a Copper price of 70.20 is
really $0.7020 per pound. Each Silver contract represents 5,000 ounces;
therefore a 1.0-cent move equals $50.00 before commissions and fees.
Copper contracts control 25,000 pounds of copper; therefore a 1.00-cent
move equals $250.00 before commissions and fees.
Petroleum: Crude oil is quoted in dollars per barrel (bbl). A
price of 20.50 is $20.50 per barrel. Each contract represents 1,000
barrels of oil; therefore a $1.00/barrel move is equal to a $1,000.00
profit or loss before commissions and fees.
Heating Oil and Unleaded Gasoline are just like they are at the pump
(but lower as taxes are not included nor service station mark-ups), in
cents per gallon. Therefore a price of 52.46 is $0.5246 per gallon. Both
contracts call for delivery of 42,000 gallons, therefore a 1-cent per
gallon equates to $420.00 before commissions and fees.
Currencies: Currencies represent an exchange rate, or how many US
Dollars it takes to buy one Swiss Franc, Japanese Yen, Euro, or Mexican
Peso. Prices are quoted in many different fashions, but the basic
convention is that a 0.01 move in the Swiss Franc, or Yen equals $12.50
before commissions and fees because of the contract size. The Canadian
Dollar, US Dollar Index, and Euro have a different contract size, and
therefore a 0.01 move equates to $10.00 before commissions and fees.
Financials: The same basic principles apply to the financial
markets, which are generally quoted in terms of points. Prices are
usually read as is, though some, like the treasury securities (US, TY,
FV, TU), are traded in different combinations of 1/32nd or 1/64th. Each
of these markets has the dollars per point already calculated into Gecko
Software's Track 'n Trade Pro application, and a list of the different
contract sizes and pricing terms are available from the various
exchanges they trade on, as they do not follow a single convention.
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Margins, Cents, Points & the Power of
Leverage
Before entering into either a long or short position, one must post a
performance bond, or have the Initial Margin Requirement necessary.
Because it is only necessary to post a fraction of the underlying value
of the worth of the underlying contract, futures are a highly leveraged
trading vehicle.
Initial Margin Requirements vary from market to market, but generally
are only 3% to 18% of the value of the underlying contract value.
For example, with March Corn trading at 211 per bushel
($2.11/bushel), the current initial margin requirement is $405 per
contract. Each Corn futures contract represents 5,000 bushels of Corn,
so the underlying value of a contract of Corn at 211 is $10,550. In
other words, for $405 you can control $10,550 worth of Corn. Thus, by
putting up just 3.9% of the value of the contract, you can control 5,000
bushels of Corn (remember, margin requirements are subject to change
without notice).
In the above example, a 1-cent move in the price of Corn ($50.00 before
commissions and fees) represents a 12.3% return on the Initial Margin
Requirement. This is the power of leverage. A small move in the price of
the futures contract can mean a large move in your account.
Another example, a 3.9% move in the price of Corn could yield a 100%
return, double your money, or lose it all, if properly or improperly
positioned. The power of trading on margin is that a small move in the
price of the underlying equates to a large return (either positive or
negative) on the money posted.
Just as leverage magnifies the amount of force used, as in the case of
pulleys allowing men to lift very heavy objects, financial leverage
magnifies the amount of money, which can be made or lost in the markets.
As they say in Chicago... "The futures markets have made millionaires of
more young men than Rock and Roll."
However, we want to point out that leverage is a two-edged sword. Over
leveraging your trading is a sure fire way to lose your money...and
fast. Think about the leverage of a roulette wheel. Each bet in roulette
on a specific number pays off at 35 to 1. For example, if you bet "6"
and the ball bounces and lands on "6", every $1 you bet is paid back to
you with $35 dollars. 25 to 1 is great leverage.
Now, assume that you start off with $1 and bet "6" and win. You now have
$35 and bet it all on "6", which comes up again. You take your $1,225
winnings and let them ride on "6" again and win, reaping $42,875. "You
can win big, even if you don't bet big" as they say...let it ride again,
making a phenomenal $1,500,625. You let it ride one more time, and up
pops "00". You loose everything.
Though roulette is strictly a game of chance, the above results are
possible with futures due to the leverage involved. For example, you buy
1 Corn futures contract at 210 and the price goes up to 219, giving you
open position profit enough to post margin for a second contract. Prices
then rise another .04 cents, and you buy a third contract. With Corn
prices having risen .13 cents, you were able to buy 3 contracts with an
initial investment of only $405.00 However, all it takes is a .05 cent
decline in the price of Corn and all your profits are gone. Of course
another 5-cent rise would yield a $1,450.00 profit or a 358% return on
the initial margin.
It is possible to make highly leveraged, and possibly highly profitable
transactions in the futures markets by trading with relatively little
financial cushion and pyramiding contracts. However, it has been our
experience that those that practice this type of trading generally do
not "break the bank" unless of course you are referring to your own bank
account, which is usually drained quickly using this type of money
management.
Most people are attracted to trading futures because of the leverage
involved, and it is the leverage involved which seems to do in most
traders. Though futures trading should only be done with genuine risk
capital, this does not mean you should take undo risk.
As a general rule of thumb, traders should learn to diversify
their risk, only placing a small percentage of their capital at risk at
any given time.
Though this style of trade will reduce your "bang for your buck" in the
short run, it may prevent you from getting the "bust for your buck"
common to many futures traders. Remember, in order to learn this game,
you need to be able to stick around to learn all the rules (both written
and unwritten), and the only way to stick around is through prudent
money management.
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Orders to Manage Your Future
The size of your account and the amount of risk you are personally able
to bear is a completely personal matter. Some very successful traders,
like Richard Dennis who is rumored to have parlayed $1,000.00 into
several million in the futures markets, have made fortunes starting with
relatively small sums of money. Most professional fund managers risk
as little as 1% of their account equity on any given trade. Though
both of these are probably out of the question for most people starting
out in the futures market, as the odds of turning $1,000.00 into several
million in a couple of years is akin to hitting "6" on the roulette
wheel 5 times in a row. Also, risking 1% of a $1,000 means only risking
$10.00 per trade, which just is not practical. However, by postponing
your entrance into the futures market until you have, for example, a
$5,000.00 minimum of genuine risk capital (not the kids college fund,
the rent, or your next mortgage payment), you could achieve a level of
diversity and risk, theoretically then risking 10% of your account
($500.00 before commissions and fees) on any one trade realistically.
This would greatly reduce your risk of ruin, increasing your ability to
trade longer and hopefully become more proficient in the long run.
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Types of Orders
At the core of all risk management and trading is using the appropriate
order for your market objective. The following are some basic
definitions of the common order types, all of which can be replicated in
Gecko Software's Track 'n Trade Pro charting software.
The
Market Order
The market order is the most common type of order. With a market order
the customer states the number of contracts of a particular delivery
month of a specific commodity he/she wishes to buy or sell. The price of
the order is not specified, as the market order is filled "at the
market" or at the current price when the order enters the trading pit.
Market orders are placed when the speculator or hedger wants in or out
of the market fast, since time is the most important factor in this type
of order, not price. Market on Close is a common variation of this type
of order, and is used when the trader wishes to have his/her order
executed during the closing of the market (closing range). The Market on
Open is another common variation, instructing the order to be filled
during the markets opening price range.
The Limit "Or
Better" Order
The limit order specifies a price limit at which the order can be
filled. The limit order can only be filled at the specified price "or
better". For example, a customer wishing to buy two July Corn contracts
at 210 when July Corn is trading at 211 would place the following order:
"Buy two July Corn at 210, limit."
Buy limit orders must be placed at the current market price or lower;
this is because when buying you want the lowest price. The lower the
price the better, and limit orders can only be filled at the specified
price or lower. Hence one can only place a limit buy order at the
current price or lower.
A customer wishing to sell two July Corn contracts at 215 when July Corn
is trading at 211 would place the following order: "Sell two July Corn
at 215, limit."
Sell limit orders must be placed at the current market price or higher;
this is because when selling you want the highest price possible. The
higher the price the better, and sell limit orders can only be filled at
the specified price or higher.
Note: It is important to know that limit orders is when a buy
limit is placed above the market it can turn into a market order, and
get filled immediately. This is because if the current price is below
the limit price, the market is in a better situation and it becomes a
market order. The same principle applies to sell limits: when a sell
limit is placed below the market, it becomes a market order, as the
higher market price is better.
Remember: Gecko Software's Track 'n Trade Program helps you learn
all these rules by allowing you to simulate placing these orders,
allowing you to practice, and make sure you have each order under your
belt, before ever moving on to trade the live markets.
Stop Order
A stop order is not executed until the market reaches the specified
price level.
Once the stop level is hit, the stop order becomes a market order. Buy
stops are always placed above the market, while sell stops are placed
below the market.
For example, a customer wishing to buy July Soybeans at 485 when the
current market price is 475 would place a stop order as follows: "Buy
one July Soybean at 485, stop." If the Soybean market trades as high as
485 or is bid at 485, the order would become a market order and would be
filled as quickly as possible.
A customer wishing to sell July Soybeans at 465 when the market is
currently priced at 475 would place a stop order as follows: "Sell one
July Soybean at 465, stop." If the Soybean market traded as low as 465
or was offered at 465, the order would become a market order and would
be filled as quickly as possible.
Stop orders are usually used to liquidate earlier transactions, to cut
losses, or protect profits. For example, let's assume that a speculator
bought three July Corn at 210 and the market is currently trading at
225. He/she may wish to protect some of his/her 15-cent profit per
contract ($2,250.00 profit before commissions and fees) by placing a
sell stop at 220, to protect 10 cents ($1,500 of the profit before
commissions and fees). Placing the following order would do this: "Sell
three July Corn at 220, stop."
There are many other different types of orders, such as stop limits and
market if touched orders, but the above orders are the most commonly
used and are really the only orders a beginning trader needs to learn.
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Look Before You Leap
Getting Ready to Start Trading Futures
Before starting a business it is important to have a business plan and
have adequate capital. Most new businesses start off with a dream, and
the proprietor's willingness to work hard. Despite the hard work, they
fail because of unforeseen difficulties, poor preparation, or lack of
capital. Remember this when starting your trading business, and try to
have adequate capital, and plan for the unforeseen by developing and
testing a trading plan.
Before trading, it is imperative that you develop a trading plan.
Your trading plan should be capitalized with money you can afford to
lose. Generally trading funds are categorized as genuine risk capital if
it is money that you can afford to lose. Again, this is not your child's
college education fund, the mortgage money, or grocery money. Proper
planning and adequate capitalization are the cornerstones of any new
venture.
The first step in building a house is drawing up plans for the completed
house. The workmen who erect the house consult the blueprints when
placing walls, sinks, appliances, and electrical outlets. The transition
from bare ground to a finished home is laid out in the blueprints, or
the plan for the completed structure. Trades should be planed with as
much detail. Every situation should be planed for, so decisions are made
not in the heat of the moment when money is on the line.
The goal of your trading plan is to allow you to make decisions before
things happen, giving you a blueprint for trading before entering the
market. A basic trading plan should include the following features as a
minimum:
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Trade entry |
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Initial risk or stop loss point
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Criteria for stop loss movement |
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Criteria for profitable trade exit |
Once you have developed your trading plan, put it to the test by "Paper
Trading." Paper Trading is fictitious trading, or simulated trading,
best done using Gecko Software's Track 'n Trade Pro market simulator
program, in which you simulate buying and selling futures contracts,
therefore not risking real money. The whole purpose of paper trading is
to be as realistic as possible when doing it. It does no good to
practice trading with a million dollars, if you are going to start with
$10,000. Don't practice your trading in the S&P if you are intending to
actually trade Corn. Keep your practice as realistic as possible.
The one major downfall to paper trading is that it does not involve real
money. It is very easy to live through a fictitious losing streak but
quite different to live through it when it is your money on the line.
Because paper trading does not involve real money, your emotions are
kept at bay, but tend to creep up when real money is involved.
Gecko Software's Track 'n' Trade Pro Charting Program comes with over 25
years of historical data on over 50 different markets, allowing you to
learn the markets and develop a trading plan. Four different Plug-in are
available for Track 'n Trade Pro to help you maximize your trading
strategies. The Plug-ins are listed below:
Accounting Plug-in: Enables Track 'n Trade Pro users to simulate
placing life-like orders, applying deposits and making withdrawals.
Also, it keeps track of commissions paid to your simulated (or live)
broker, tracks orders placed, profits & losses, and even simulates
margin calls.
Options Plug-in: The order tools included with this Plug-in
automatically snap to the different strike prices then it shows you the
actual dollar value of the option on that particular day. Track 'n Trade
Pro users who have this Plug-in keep track of options profit and losses
concurrent with your futures orders, allowing them to practice mixing
futures and options strategies simultaneously.
Seasonal Plug-in: Comprised of three indicators for the seasonal
market, this plug-in assists the Track 'n Trade Pro user to calculate
Seasonal Trends, Market Probability, and gives Historical Averages. All
this information is based on what has happened to a particular seasonal
contract in the past.
Spreads Plug-in: Place orders directly on the spread chart and
let Track 'n Trade Pro automatically simulate placing both orders in the
opposing contracts, then calculates your daily profits and losses in the
Accounting and Simulation Plug-in module.
So, before ever attempting to trade in the futures market, develop a
strategic plan. Your trading plan should be realistic and well tested
over past history. Once it has been developed, take six months and paper
trade; "simulate" trading in "real time", using Track 'n Trade Pro. If
the plan still holds up, then remember the mantra of futures traders:
"Plan your Trade, and Trade Your Plan."
Good Luck,
Lan H. Turner, CEO
Gecko Software, Inc
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