I'm trying to learn to trade the futures more actively these days and have decided to try trading the /YM, with very small positions while I am learning. I am looking for some advice - here is a trade I placed today. When I look at it I think generally it should have been a good trade. I went short pretty close to the high and the market went down a fair amount after I went short. However, I lost money on the trade because my stop order hit at the absolute top. I was only trading 1 contract so the loss was only $90. Realistically I could have placed the stop 100 point above my entry (YM is $5/point so I would be risking a $500 loss, not something I want to take but it certainly wouldn't wipe me out). However, I did not do this because I am trying to develop good habits and everything I have read suggests that if you are trading futures you need to accept small losses, so my stop was placed a few points above the high of 1202 that was made at 13:54. My question is this: Is it better to place the stop at a much higher level, thereby accepting the risk of a much larger loss but lessening the chance of getting shaken out as happened to me on this trade, or did I play this well and should I just accept the bad outcome as the way it goes sometimes? I will gladly consider any advice/criticism about how I handled this trade. Thanks.
Hey Sandeep, I don't want to give advice necessarily, but I will tell you my similar experiences. I got tired of getting stopped out on trades only to see my profit target get hit shortly after. I didn't know if I was using a stop loss that was too conservative or if I just was jinxed, but I ended up with a bunch of small losses and that makes it tough to get anywhere. You need some nice gains just to offset the numerous small losses.
ReplyDeleteSo I stopped using a stop loss but kept my contract size to 1 or 2 max. That worked wonderful for six months and then I got too confident. I eventually moved up to 4 contracts with no stop and that's when I got killed. Especially in this current volatile environment, I would say that using a stop loss means you just have to accept what happened today in exchange for peace of mind that an adverse move won't wipe you out.
I'm currently back to using one futures contract with no stop and I'm willing to let it fluctuate. However, I do now have what I wold call a safety stop. This number is arbitrary, but based on my recent past experience I feel I now have to name a price level at which I have to admit that I'm just dead wrong and there isn't a reason to hang on just to hopefully break even. I tried that and it buried me.
I guess you have three choices. 1)Set stop losses where you think appropriate and just learn to deal with the death of a thousand cuts of being stopped out for small losses numerous times. 2)Don't set a stop but keep your position size so small that an adverse move doesn't affect your financial or psychological position. 3)Set a safety stop that will keep you from damaging your account but lets you stay in during volatile times like these.
There is no right or wrong answer here. It all comes down to your personal risk appetite. I have changed my risk appetites with regards to contract size and stop levels all the time. Just keep playing around until you find your personal comfort level. Literally just use one contract if you have to until you find your comfort zone.
I am pretty sure that I do not want to hold naked future contracts, but I am wondering if it is just pure coincidence that my 1 contract got taken out at the high of the day, or if having that stop out there just above the previous high is setting myself up for failure. So I am thinking now of using your choices 2 and 3 - continuing to trade very small (1 contract until I can prove that I can make money consistently), using a stop but placing it well away from the areas that everyone knows about - pivot points, value area highs and lows, recent highs, etc... The question is how far away to set the stop - this time I used 16 points on the YM, perhaps next time I'll try something like 40 points as a hard stop but reserve the right to manually pull the trigger earlier if I feel like the trade is not going the way it should be going.
ReplyDeleteGaining access to data is crucial. From a computer day trading, you will always have access to your data and at high speeds.c
ReplyDeleteDay trading stocks
Had the day off so was able to trade futures again today. Made a profit of $200 on two trades of ES using the small position,(1 contract) no stop loss technique. Would have been stopped out on my first trade for a $150 loss using the stops I was going to use before (3 point limit), but small position and confidence in where I had made my purchase allowed me to stay in the trade and take it off later with a $62.5 profit instead. Too early to make any definite conclusions but I think small position, wide stop is probably best for me.
ReplyDeleteI think I would just caution that trying to learn futures trading in the current environment is very different from what I've seen the last few years. A 3-pt stop loss here in my opinion drastically increases the chances of getting stopped out as the markets are just moving so quickly. Usually the overnight session is pretty tame but lately there are numerous 1%+ movements in the overnight session.
ReplyDeleteQuestion - the contract size of the ES is $50 x (price of ES mini), which works out to 50 x 1223 currently = $61150. So suppose I have $61150 in cash in my account and I want to be fully invested in the market. If my choices were:
ReplyDeletea) buy $61150 worth of SPY
or
b) buy 1 ES contract
is there any good reason to choose a?
I am trying to figure out if there is any real disadvantage to using a buy and hold strategy with the ES - which is not something I really want to do but I can see myself getting stuck in a situation where I don't use a stop limit and the market tanks quickly to a level where I would prefer to just hold for the longer term rather than sell at a low. Aside from tying up the capital in the market (which would be the case anyways if one was fully invested in SPY) is there any major problem with using this approach that I am missing?
I understand where you are going with this. There are two things I would bring up as differences. The first is that if you hold SPY you get a dividend, which is currently about 2%. The second is futures gains are taxed at a different and more favorably rate than equities.
ReplyDeleteThe main reason people use ES over SPY is for the leverage. So if your assumption was that the market would never go down more than 50% for example, then why not be long 2 ES with the same dollar allotment you mentioned. Should you be correct, and the market goes up over time, then you are increasing your return on capital at a higher rate because of the leverage.
It's interesting that you bring this up because I've actually never heard of anyone doing this, though it sounds like it makes sense. So I'm thinking there is probably more to it than the obvious. Another consideration is that buy and hold investors who would be the type to just be long for the long haul usually don't understand or trade futures. All they know how to do is be long stock. Also, futures contracts have to be rolled every 90 days so there is roll risk involved and the buy and hold investor typically wouldn't want to pay the kind of attention that is necessary to do this.
I'm going to find out how this works with real experience. Went long 1 ES contract for 1213 this morning thinking that we would rally this afternoon like the guys on Tastytrade were talking about, but that never happened. Added 1 more later in the day at 1204.4 so net (and final) position is long 2 at 1208.75. I have no stops on these positions and I plan to hold them no matter how low they go from here. If the worst that happens is that I just have to roll from March to the next expiry 3 months from now it's just a small commission, no big deal. However if they become profitable I will place a stop limit to at least try to get out of the trade at a profit, hopefully this week, and then look to initiate a new trade at a better price.
ReplyDeleteMeant to write that the second trade was done at 1204.5. Have never been in a position that trades continuously like this, so I have decide to put a GTC order to sell 1 contract a little above my highest buy just in case the market rallies during Asia or Europe trading while I am asleep. So if I get lucky I wake up with a small realized gain and just hold 1 contract as originally planned, if not I just brace for the longer haul.
ReplyDeleteThis seems to have worked out okay, woke up early this morning to find that 1 contract got taken out while I was sleeping and just sold the other, so now I'm flat with a $350 gain. Even with a 6 point stop loss , both of my positions would have been stopped out for a total loss of $600 if I had used that technique.
ReplyDeleteThat's kind of a big difference so I'm sure you're currently happy. However, if we sold off hard and didn't rebound any time soon you would probably be second guessing yourself. I'm currently staying small playing with 1 ZB contract at a time with no stop. Unfortunately TOS is no longer offering weekly options on ZB so it gives me less flexibility to manage my position. I might have to use ES so I can have that weekly option advantage.
ReplyDeleteI thought about that and actually I don't think I would second guess. As you said, it's just a choice of whether you want to continually be stopped out or whether you are willing to accept the big loss that will eventually come. With no limit order it will certainly happen so I need to keep position size small enough so that I can still average down or trade after the market makes a big adverse move against me.
ReplyDeleteI was fully expecting the ES to be around 1190 when I turned on the computer this morning but I had confidence that it wouldn't be a permanent loss even if that were to happen. I haven't done any options on futures, will have to look into that next.
This reminds me of some trades I did a couple of years ago, I decided to day trade Google to just scalp whatever I could based purely on its random daily price fluctuations, no analysis whatsoever. I would buy 100 shares (traded around $550 at the time) and I could often make a few hundred dollars and be out of the trade the same day or the next day. Then one day it tanked and eventually went all the way down to $450. I ended up holding it for a year, sold options on it now and then, and after a year let it get called away for $560 or something like that. The nice thing about the futures is that you can do this but don't need to tie up nearly as much capital, and it should work out as long as you are never forced out of a position by a margin call.
ReplyDeleteThat's why a lot of people like to play the futures, small capital requirements can equal large ROC. Of course it could also mean large losses as well. It's also a great hedging tool to people who are or need to be long the actual underlying.
ReplyDeleteAfter thinking about this a bit more I am coming to the conclusion that my strategy of no stops and being willing to hold one of these futures positions long term if the market moves big against me is not very smart. If you look at a 10 year monthly chart of SPX, the period between 2000-2007 looks basically like 2008-2010. It is very hard to predict a top, and people who were scalping the futures like this in 2007 would have probably assumed that if they just held their long positions in a downturn it would eventually come back like it always does. It may but who knows when or if ever that will happen. Much better to just sell the position for the cheap commission and then re-enter at a lower price. I think the idea of refusing to get stopped out by smaller moves has a lot of merit so I'll employ a strategy of a wide stop. That should serve to force me to out of a bad trade with a manageable loss but keep me in the trade and avoid almost all of the "death by a thousand cuts" stop losses. I think my trades yesterday provide me some guidance - I thought the buy at 1213 was a decent position, but the ES went as low as 1198 overnight, so I would have needed a 15 point stop loss to keep me in that position which I still thought was good.
ReplyDeleteI'm with you on having a wide stop, I didn't have one in place on my short ZB trade back in July. In my head I had a number I never thought they would reach. But because I didn't have the order in ahead of time and didn't acknowledge to myself ahead of time that that price will be my stop, I never stopped myself out until much later when the psychological and financial pain was just too much. I should NEVER be in a situation like this. If you don't set the number ahead of time it's real easy to make even worse decisions later. At least for me that's how it played out.
ReplyDeleteThat helps, thanks. I know the ZB has its own peculiarity in pricing, like it goes in 1/16 or 1/32 increments or something like that. Pulled up a sample trade, selling the Jan 148 call for 1"310. TOS analyze shows it would pay $1484.38 at Jan expiration if ZB was below 148. - and if you are wrong you are just short 1 ZB at 148, right? Seems like a pretty reasonable way to play it if you want to be short bonds, do you have an opinion on a trade like that? Just want to make sure I'm not missing something here.
ReplyDeleteOops, meant to post this under the other topic.
ReplyDeleteBond futures options have a strange twist to them. The futures contract is priced in minimum tick of 1/32, but the options are 1/64. That's why you can see a quote of something like 0'57 and at first it looks confusing because it feels like it's more than a point.
ReplyDeleteMy opinion is worthless so I'll just share my experience instead. I have been short OTM calls on ZB in the past and done great, but in retrospect that was only because ZB was on its way down. Up until just a few days ago I was short the 145 call that expires a week from today. Thankfully I closed it out when ZB was at 142'16 recently as my opinion on the downside had changed. I know that at the moment that 148 strike looks safe, especially if your cost average would be 195.50 or so, but we were at 140 a few days ago and now we're near 146. I personally wouldn't be short OTM calls for a long duration like JAN expiration, too much can happen in just a few days right now. I prefer to just play directionally with one contract and willing to take a loss. Here we are again today at another all time high in bonds. I would now have thought it possible unless there was an actual global banking run going on, maybe it's coming.
Thanks - no worries, I'm just getting my feet wet with the ES now, have no intention of playing with the ZB except as paper trades for now.
ReplyDeleteI'm looking at these ZB option quotes again, and many of them are 3 digits after the ", like 3"380. What does that mean - after reading your posts I was expecting numbers up to 64. Does this really mean 3 and 38/64 ?
ReplyDeleteI think I answered my own question, did some calculations and it seems to work if you interpret 3"380 to mean 3 38/64. I may be missing something but this seems like an incredibly stupid way to price things.
ReplyDeleteThat is correct pricing, but I haven't figured out why there is what seems to be an unecessary 0 at the end. Perhaps they were once quoted in halfs? I really don't know. I also don't understand why bond futures themselves are still priced in 32nds rather than in decimals like everything else.
ReplyDelete