Futures vs Equity Trading

Quite likely.

 

Although I'm gradually transitioning to futures, I still keep a few stock charts up and watch for a couple favorite setups, that usually work out well.

Counter-trend: If price establishes an uptrend or downtrend from the open, I wait for the 3rd push up or down, then fade the trend looking for a reversal. Very tight stop above the high or low of the day.

With new trend: Once an established trend stalls and leaves a lower high or higher low, I short the lower high or buy the higher low. Stop either just outside the HL/LH, or the high or low of the day, whichever is most comfortable for you.

 

One thing that helped me make the transition from stocks to futures was to start out treating the futures as if they were stocks. In the case of the S&P 500 e-minis, these would be stocks worth about $56,200 per share.

How would you fund a brokerage account if you wanted to buy a stock worth $56,200 a share? Well, you might start by assuming your margin maintenance requirement is 50%. That would mean you’d need $28,100 to start. You could buy and sell one futures contract at a time, and it would be a lot like trading the Ultra S&P 500 Proshares (SSO).

If you’re already used to trading on margin, you could kick things up a notch and go with 3x leverage. Fund your account with about $18,700 and trade one contract at a time. It would be like trading the Direxion Daily Large Cap Bull 3x Shares (BGU).

And, so on.

Just because you want to trade futures doesn’t mean you immediately need to become a day trader, use 50x leverage, and never hold a position overnight. Start out slow and small with something more familiar. Get used to how futures work and the marked-to-market accounting methods involved. Get used to there being a nearly 24-hour trading day. Get used to how you react, emotionally, to the effects of leverage. Once you are comfortable, and making money, with 3x, 4x or 5x leverage, keep going higher. A number of brokers will allow up to 9x leverage for overnight positions. Anything 10x and above is day trader territory.

I happen to be a swing trader, so I use about 3x – 5x leverage and hold positions overnight (in fact, I usually hold positions for about one to three weeks). The same models I use for trading SPY, SSO and BGU work exactly the same way for the S&P 500 e-mins. The only difference is the amplitude of the swings.

 

Yes, but for only 250K, you can have the holy grail trading system that Rcanfiel was trying to sell (in case you are wondering, that's TraderZones' old alias).

 

Leverage in futures is meaningless.

You are trading price and price only. If you are Long and price goes up, Guess what you are concerned about. DUH!!!

To worry about leverage when you trade futures is like taking a new bride and then worry she is cheating on you. Insecure people worry about what will bite them in the ass instead of living in the moment. In trading futures you are either in the moment or you are dead meat. BELIEVE IT!!!!

 

Interesting philosophy.

Saying leverage in futures is meaningless is equivalent to saying speed is meaningless when you drive a car.

The key to survival in this game is how quickly you can react when things go wrong, and how badly you get hurt when you don't react quickly enough.

 

Advantages of futures:

- More leverage ('conservative' money management means like 5x against 4x intraday for stocks, I use $10k per ES car)

- Better taxes

- Much more liquidity

- No need to watch dozens of different symbols

- Position sizing, targeting, stop etc. calculations are somewhat simpler, no need to adjust when you move from trading a $10 stock to a $50 stock.

As to whether they're 'easier' or 'harder'... depends on the nature of your edge I suppose, if it's something gimmicky that's specific to stocks, well then you'll probably have some trouble. Trading just one or two symbols also requires lots of patience. Some people want to always be taking entries or constantly feeling "active," for those the need/ability to track dozens of different stocks might seem like an advantage.

Also much easier to utterly blow out your account on futures if you overleverage. I highly recommend taking it very slow.

 

While learning to trade ES in my sim account, I tried many strategies. All worked very well except one: Averaging into a loser. If I had an "opinion" about where the market should go and decided to build up a position as it ran against me, it often ended up hitting my max loss. Because price would then reverse not long after that point, I had the thought that likely kills more traders than any other: "If only I didn't have that stop and had added to the position with size there..."

Fortunately, I learned early on the damage that thought can do, and I try not to forget what my friend jack8031 said to me earlier this year: "Stops are a very basic tool a trader has; without them one will never survive. My stops are hard stops, no compromise there."

 

the biggest drawdown in your backtest dictates your size. it shows how much you can afford to lose compared to your trading capital.

I didn't know this back then. but it was more like having no plan that made me lose in trading futures.

now I stick to stocks. every single stock is like a single market. so I have a greater choice of markets in trading equities than trading futures. I also don't have to watch too many symbols. I just pick my favorite market, and that's that.

while in futures-trading (in a liquid market) your style and capital dictates your size, in equities the paticuliar stock traded also dictates your size. because it doesn't make no sense at all trading 2000 shares at once at an average daily volume of only 1million shares for the stock. that would be too much exposure.

 

Absolutely. If you don't have a plan (a trading style, numerical model, etc.), which has been demonstrated to produce positive results, you might as well not even risk it.

That's why, if someone is interested in trading the index futures, like ES, YM, NQ, I suggest developing a plan and applying it to trading the index ETFs, first (especially the leveraged ones, like QLD, SSO, etc). If you are successful, there, there's a good chance you'll be successful trading the index futures. If you aren't successful trading the index ETFs, there's nothing about futures trading that will change a negative into a positive.

For someone who likes pure, technical trading, there's nothing that beats index futures. Time and price are your only variables. Everything else is derived from that.