How
to Make Consistent Profits Trading Futures
Part III
by Malcolm Robinson of TheMasteryOfTrading.com
A lot of traders are trading the stock indexes
like the FTSE, the DAX, the S&Ps, NASDAQ and the DOW,
but rather than use futures they are using spread betting
firms. The reasons for using these firms is that they
require very small amounts of capital to get started,
a trader can trade very small amounts (like £1 a
point on FTSE as opposed to £10 for FTSE futures)
and these firms make opening an account so easy.
I understand the lure of being able to open
an account with very little money and trading small amounts,
but I have some serious considerations about using spread
betting as a realistic vehicle for professional trading.
The two biggest selling points are no commissions and
no capital gains tax. There are many different costs to
trading, commissions are one and the spread is another
(especially when you have to trade at the market as you
do with spread betting, with futures you have the choice
of joining the bid or the offer).
Commissions are important for an active
trader and as an active trader you can get them very low,
but lets assume they are £8 per round turn for futures
and lets assume that the spread in FTSE futures is an
average of 2 points. If the spread with a spread betting
firm for FTSE is 6 points and assume that we are trading
£10 a point we can compare the two trading vehicles.
Last week (written Nov 2001) I made an average of 2.42
points per contract traded and I traded 48 times.
That is, for each contract I bought and
sold I made £24.20 before commissions, assuming
my commission rate is £8, I made a profit of £16.20
per contract traded, which is £777.60 net profit
if my average size per trade is one contract. Had I had
the same success trading with a spread-betting firm, with
a 6-point spread, I would have lost £1718.40! Now
I would rather pay tax on a profit that no tax on a loss.
There is one other very important reason for trading
the futures market rather than a non-exchange traded market
such as those offered by spread betting firms. The futures
markets are exchange traded and this means that they are
fully transparent, i.e. everything is visible and above
the table, I can see every single trade that happens.
Imagine the trading pit, as it used to be when traders
stood physically in a ring trading with each other.
When a trade is entered, the order goes into the pit
and is represented there, free to be taken by any other
market participant. We can all see what is happening,
we trade with the same information and with the same advantages/disadvantages.
Now assume you are a trader who can only trade with one
broker in the pit, you can trade as much as you like,
any size you like, but he sets the spread he is willing
to offer you and you have to trade at market (i.e. buy
at his offer and sell at his bid).
This broker doesn't want to lose money, naturally, so
he always makes his spread wider than the real market
spread, he also, naturally, puts his interests before
yours, so he won't always be willing to trade when the
market is moving fast and he is uncertain. Remember whenever
you make money he loses, so he is very careful to maintain
his advantage at all times. Who wouldn't want to be in
this brokers position (he isn't really a broker, though
he claims to be)?
When you trade with a real futures broker, all the broker
does is facilitate your trade; he gives you the ability
to have you orders represented in the pit. A real brokers
concern is that they execute your order as efficiently
as possible, that is their job, they do not take positions
and they do not take the opposite side to you. They naturally
want you to make money because by making money you become
a client who will continue to pay them commissions.
Trading with a spread betting firm is absurdly costly,
spread betting firms are like amusement arcades, they
can be fun, but to imagine you are going to make your
living from slot machines is illusory.
Malcolm Robinson
Copyright © 2002. Malcolm E Robinson.
All rights reserved.
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