Home > The Business of Trading > Professional Trading > Most traders should avoid FX, options, futures

Most traders should avoid FX, options, futures

  1. Ranking the various financial instruments for difficulty in forecasting moves and trading the swings, stocks are the easiest, because they are the least efficient. The most efficient and liquid market is the FX market, and IMO, it is the hardest to predict.

    FX and futures seem more appealing, because there are only a few currencies/indexes/commodities needed to keep track of, there is a lot of volume and they are popular among traders. It is a lot "sexier" to trade ES or the euro compared to some no-name small cap stock that's trading 20 times normal volume because of some press release. In the stock universe, there are thousands of potential candidates to trade, and it seems like more work, and it is more work to search and filter out stocks to trade, but once they are filtered out, the moves are more predictable because there is a ton of retail money in stocks, especially popular small cap stocks where big money doesn't bother to swim in and the little fish are left to themselves to be eaten by bigger fish, i.e., sucessful retail traders. These markets are less efficient. Sharks, the sucessful fund managers and institutions don't even bother with most of these small cap plays that attract the daytraders due to the illiquidity.

    In the futures and FX universe, there is no such inefficiency, but there is one thing that big traders and institutions need, and that is liquidity, which is only available here, along with a few big cap stocks which usually just follow the market anyway.

    With options, the bid ask spread is a big bogie to overcome and options usually only exist for the bigger more liquid stocks anyway.

    Yet I see small time traders here trying to trade ES and the euro or yen and I have no idea why they even bother, because those are much more difficult markets to game than the daytrader flavor of the day small caps which trade on NASDAQ or AMEX which they can trade easily due to their small size.

    I'm sure most of my advice will fall on deaf ears by most small time traders who continue banging their head against the wall trying to make a few points per day on ES or some pips on the currency markets while having no edge using huge leverage to make up for the lack of volatility in those markets. My most valuable advice to these traders is simple: TRADE SMALL CAP STOCKS.
  2. Can you post few symbols to start with? Some that look good these days.
  3. I agree 100%. But to be honest, I don't care what other people do or if they lose money. I'd rather they not crowd stocks anyways.

    Most think they'll be flipping 1000 lots of the ES one day.
  4. Look for stocks that are trading unusual volume, big price gains or losses and whittle it down to a few that have had moves that seem unsustainable, or moves that seem to have a lot of momentum. Most decent streaming quotes software will have a list of the biggest movers, unusual volume filters, etc. Even delayed data available on Yahoo during the day will alert you to which stocks are on the move for that day. Its not hard work, but you've got to be willing to dig and see why stocks are moving, read press releases, look at what is being written on the message boards, dig into the company a bit to see if its legit or not, and also gain experience trading the runners and the dumpers and the news driven plays to see how they normally trade.

    It also depends on the kind of market you are in, bear markets are of course bad environments to trade speculative stocks, and bull markets are great environments to trade these plays. Unfortunately, we are in a bear market but there are "green shoots" in speculation without a doubt. I hate to say it, but what Tim Sykes is doing is what I would be doing trading a small account. He is a little bit crude in his approach but the general idea and concepts he holds when trading small caps and penny stocks is correct.
  5. I don't really see how stocks on a big move up or down on heavy volume is any easier to trade?

    The volatility works both ways, the whipsaws are going to be bigger also.

    If a stock is up 15%, it can easily go to being up 18% and just as easily go down to being up 12%.

    So how is this any different than trading the ES except for your gains AND LOSSES will be bigger?

  6. I disagree 100%. Your second to last sentence says it: Why not just trade the ES and Forex, but cut down on leverage?

    Small caps might be less efficient, but that doesn't mean that they are easier to time. They tend to be less liquid making the moves choppy and very hard to time. Also they are much more easily manipulated due to the their low liquidity and are prone to default risk.

    I would not recommend trading the ES or currencies with 1) high leverage (I use les than 1:1!) or 2) day-trading them.

    ES might be more efficient but over time it is clear when the trend will reverse and momentum wanes. You just have to be patient enough to wait for the right signals.

    But yes, if you use high leverage in those markets you wil not make it over time.
  7. In my experience, the manipulation actually makes it easier to play these stocks, if they manipulate it too high, you short and wait, if they manipulate it too low, you buy and wait. If you are willing to be flexible and go both long and short, and also be willing to hold on to these stocks for more than just 1 day. And the default risk? We're not talking about junk bonds here, these stocks will trade whether they go bankrupt or not, in fact, I've seen stocks actually rally huge in the pink sheets market after a chapter 11 announcement!

    You can say the moves in ES are cleaner and you can follow such and such signals. But you are playing with a bunch of other bigger players doing the exact same thing and probably doing it better than you are. And don't forget bots which are the leech of the futures market eating away at the profits of traders bit by bit.
  8. There is a huge difference between a stock that is being traded emotionally with big moves and a futures market that is being traded rationally with small moves. The more emotional and volatile the trading action, the easier it is to game. That is from my experience. And if the volatility is too high for your blood, you can always lower trading size. But if a stock's volatility is too low, there are limits to increasing trading size.
  9. But this doesn't tell me how irrational the move could get. I've seen small cap stocks go up 100%, what if you went short at up 50%? You'd be stopped out obviously.

    Your advice doesn't explain the fact that you'll get stopped out just as much as trading an efficient market.
  10. If you are trading volatile small caps using stops, you either set them really wide or not use them and trade smaller to make up for the added risk. Personally, I think stops are for pussies or for those too lazy to keep track of the price action. And I don't mean that you should never cut losers. But if you have the discipline and experience, you can tell when a trade doesn't feel right or isn't acting the way it should and you get out of the position. No stop needed.

    I didn't say it was easy. Just easier. And during bull markets, a lot easier than trading index futures.
  11. I actually did trade this style years ago. I did have some success. Turned my 3K I had in my ameritrade account to 9K in about 5 months. :cool: If I remember correctly I would try to have a 4:1 r/r ratio. Risk a couple hundred in hopes to make about 800 with my tiny account.
  12. How do you set your profit targets? Is it based on how the stock behaves or TA point on the chart or fixed amount?

  13. Very true that it is easy to time (short) huge, over-extended rallies in small caps.

    However, this ease come with a nasty price:

    1) There are fewer stocks like these since most now correlate with the SP500.

    2) At one point you will experience a liquidity crunch like Timmy Sykes fund did (it almost blew his fund up).

    3) Also, what if the stock gaps down due to a bad news announcement (law-suit, etc.) and it blows right past your stop. Just because it hasn't happened yet doesn't mean it won't in the future. And this is a risk you carry whenever you have small cap exposure. The Fx and futures market are almost 24/7 so you can always manage your position.

    I was talking about long term trading. If we are talking day-trading I absolutely agree with you.
  14. detective, could you give us an example of a recent small cap trade? I am asking since most of the stocks I find correlate with the SP500. Very few are independent of it.

    I would like to also mention that fx and ES are markets for very well capitalized traders (100,000 USD at least).
  15. This is actually a good thread and gets to the core of the issue. Although I am arguing against your position, I see the following:

    I think it will be important to invest in or trade asset classes that do not correlate with the general market and are independent of a large demographic trend (i.e. boomers).

    It could be that we are in for a 10-20 year period of choppy ranges on the SP500 and currencies in general. SP500 and other world indices could easily turn into Nikkei and since most CBs are adopting a ZIRP, there really isn't any strong pull in either direction in fx (i.e. carry trade).

    In short, there is a strong indication that the long term trends in fx and futures will not be returning any time soon.
  16. Let me guess. You have never implemented let alone contemplated a disciplined system of trading?

    Good luck. You're going to need it.
  17. Once you develop your technique the reverse becomes true.
  18. I trade the ES by monitoring bar closes on four timeframes. The 4-hour, 2-hour, 30-min and 5-min.

    For example, a key reversal on the 4-hour that closes above a major level may be concurrent with a double bottom on the 30-min which may be concurrent with several rejections of the low on the 5-min. That's a trade.

    I find the ES adheres to these types of patterns far more than stocks.
  19. I disagree with the notion that currency futures are the most difficult to swing trade. Technical analysis is a huge tool for FX traders...from bank dealers down through retail traders. Learn the trade and you can do fine.
  20. HA good luck with this argument. I've been stating this on ET for years.

    You guys who dream of making it in any other market than stocks, take a good long look at the P&L threads to see who is (and isn't) making money.
  21. The statement that fx is efficient is completely false. However, one should not assume that a revision to the mean exists in forex (there is no such thing as value investing in this market).

    But it is true that small caps can be even less efficient.
  22. You know I respect your posts on ET. One of the few. I still struggle with futures somewhat, but I do see more than a few making a decent to good living in it to so I stick with it. Stocks confuse me frankly. Multiple routing methods, earnings, news, etc. Seems much more to know. Not to mention no leverage unless you go prop. I do completely agree that they appear to me much less efficient.
  23. That seems to be a subjective statement.

    First it is all about information accessible. If you can get additional (valuable) information you have an edge, not just a probability.

    It can be seen that you discovered this principle for yourself because you recommend not to enter blindly but first to look into news etc. Unfortunately you don't seem to have discovered the additional sources of information for FX and futures that make the difference.

    Then for FX there is this pattern:
    Something principal changes in the global financial structure. That changes the valuation of currencies against each other drastically. Now the big boys begin to steer their super tanker in the new direction. How do they do it? They cannot go there right away because this would mean everybody could jump aboard and make free money. Sudden moves also would lead to unwanted side effects. Therefore they steer into the new direction by making lots of headfakes using everything they can to shake people out of their positions if they are correct and thereby taking the money of smaller participants. And they take time for their task - weeks or months - because they have to rearrange huge amounts of money. That's the reason why it is so hard to predict on a smaller timeframe.
  24. Dude, You can trade anything with price.

    Currency, Futures, Stocks, Options, Bonds, Commodities, and even Weather.

    Just use proper money management.
    You don't need to max out on the leverage, use 1% of total trade account on a position.

    So if you trade FX, you would trade 1 mini lot per 10k of capital. Or somewhere between 1-5 mini lots.

    But yeah, MOST traders SHOULD avoid those high leverage instruments, because the temptation to "Lever Up" can be too much...