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The transition to Futures trading

Discussion in 'Derivatives' started by pavilion103, Mar 26, 2013.

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  1. DrapSnagon

    DrapSnagon

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    Hello again people,

    The last 10 pages have been interesting :)

    And WHY doesn't this forum have multiple threads? Lord, it's a nightmare trying to follow the conversation when several people are trying to talk to several others about several different topics. Sigh.​

    Anyhoo:- MichaelID particularly ...

    Please consider moving to the SPI ASAP. I won't claim any practical expertise with CFDs, because during the time I was trading futures, these guys were embryonic. Since then, the MF Global fiasco confirmed my initial view, which was that it's just plain wrong to have the settlement facility provided by the market maker in ANYTHING.

    I view the CFD market as the equivalent of Cash Converters, compared to the SFE (now ASX, obviously) being the equivalent of the Reserve Bank. In that model, a futures broker occupies a status not unlike the institutional or corporate arm of CBA or Westpac or whatever.

    A CFD Provider, as a market maker, values their offer on the basis of whatever they like:- much the same as Cash Converters will value your trumpet or guitar or family silverware. Competition means they will be more aggressive in CFDs, but the principle is the same.

    The SFE doesn't value the SPI at all:- it leaves that to 3rd party market makers for some instruments, or to the pool of buyers and sellers for others {most of the time}.

    An OTC CFD Provider settles your account only so long as it is able to do so from its own resources:- if it gets itself into trouble somehow {usually counterparty default or house trading}, you can stand in the queue to talk to the liquidator like everyone else.

    That's the risk.

    As for price, I used 25 SPI contracts as my "capital" and got a rate of less than $6/contract, many years ago. I can't recall how many trades I did annually, but it was in the hundreds, not the thousands. I wasn't a big player at all and had no cause to negotiate a particularly wonderful deal with my broker. Therefore, I assume this was about the going rate for a repeat customer:- perhaps one or two levels below the casual punter paying retail price.

    That's the cost argument.

    As for execution, I used the Marketcast feed, Prospecta for charting & data prep and LQuay was my broker. I suspect none of these exist anymore, sorry.

    The main attraction at the time was the ability to trade [almost] 24x7. This eliminated the most annoying feature of the ASX (stocks OR derivatives) which was the gap between yesterday's close and today's open [day sessions]. The SPI overnight tracked a hybrid of the DAX/CAC, then the FTSE, and then the DJIA/NYSE/NASDAQ. The icing on the cake was that it also responded to major moves in CBOT/CME/LME and other commodity markets while the ASX was dormant. Essentially, it aggregated all these into a single number which was tradeable because it had liquidity up to 25 SPI contracts at all hours of our night, and integrity in pricing to within a few pips of the underlying instruments.

    OK, this only worked well until about 2008, when a disconnect between our market and the rest of the world started to impact the model. However, I suspect {admittedly without any hard evidence} that as the rest of the world returns to something close to trend, the correlation between the ASX/SPI and everyone else is starting to re-assert itself. If that's true, then I reckon anyone who can meet the capital requirements of trading the SPI should do so in a heartbeat, and leave the CFD market to those who are thinking about graduating from Keno.

    Snap
     
  2. MichaelD

    MichaelD Not fooled by randomness

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    I have no problem at all with shorting a downtrend. It's what I do.

    The problem is in not following pre-thought out trading rules. First it's an unplanned entry ("not in my playbook"). Then it's a stop that's not taken ("It'll come good. The market's wrong"). Then it's ruin.

    The worst thing a trader can do is profit from a trade which doesn't follow their rules as it reinforces poor trader behaviour.


    I follow my rules. Always. With one *very rare* exception where I'll exit a trade early where;
    - my entire being is screaming at me to stay in the trade or to add to the trade
    - all the news screams at me to stay in the trade as its a sure thing
    - even better if the stockmarket makes it out of the Business section of the news and onto the front page screaming "the sky is falling" or "blue skies forever".
    - my palms are sweaty and my heart is racing as I close the trade and I'm cursing myself with every fibre of my being whilst I'm closing the trade as to how stupid I'm being
    THAT meets my "Hail Mary" rule criterion.

    Only happens once or twice a year.
     
  3. Ves

    Ves Beyond Good and Evil

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    I'm not sure, is Pav trading a mechanical system or is he a discretionary trader? He might not have hard rules as such in that case. You're right if he did, it would be a mistake to take something out of his rules. I'm just assuming that the line of questioning that he took means that he is a discretionary trader. I don't remember reading any hard trading rules if he has them, and I'm sorry for interfering in this discussion if he does, because I'm not a technical trader, but just an interested observer who uses a very different long-term style.

    - - - Updated - - -

    PS: nothing of use to add to your post. But hi, Kryton!!!
     
  4. DrapSnagon

    DrapSnagon

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    DO NOT MIS-SPELL MY NAME WITH "O" WHERE THERE SHOULD ONLY BE "E"

    OK, just joshing you. I guess after everyone else reads this response, there'll be yet another reason to structure this forum in a more readable format. Let's leave it there.

    Snap

    PS:- Just previewed this post and it looks ugly. Apologies for being too old to understand (or care).
     
  5. pavilion103

    pavilion103

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    I am a discretionary trader.

    I understand completely that not following my own setups and emotionally not being sure about entry is wrong.

    The purpose of posting this one is not really to ask "did I emotionally trade poorly". But is this a setup worthy of consideration (from other traders perspectives).

    I know people can't know how I trade within my system blah blah..... But as an isolated setup is it one worth considering adding to the playbook and trading when the context is right?

    Why do people always think that others a post charts for a pat on the back or validation? What a stupid assumption (no offense).
    Would have thought that I couldn't be any more direct and obvious in communicating that I'm seeking constructive criticism.
     
  6. Macro Polo

    Macro Polo

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    Just on this - are you saying index CFD's pay out dividends? Or, are you just talking about if you buy individual shares via CFD?

    Similarly do index futures pay out an aggregated dividend?

    I've found it difficult to get a clear answer on this, any info appreciated - cheers.
     
  7. CanOz

    CanOz Home runs feel good, but base hits pay bills!

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    I have no idea what the market did after this, but if you're going to short at the lows then the only thing I might have done differently is to try and get in on that up trust that would have a few longs trapped....that way if the ensuing stop run just trapped shorts you'd been in before most of them and able to get out easier....of course easy to say in hindsight....:2twocents
     
  8. tech/a

    tech/a No Ordinary Duck

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    Couple of things to add to your ponderings

    Test.gif

    Test 1.gif
     
  9. MichaelD

    MichaelD Not fooled by randomness

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    When a dividend is paid on any of the constituents of the index -->

    Index CFDs pay out a dividend if you are long. This is applied as a credit to your account.
    Index CFDs deduct a dividend if you are short. This is applied as a debit to your account.

    At the time of dividend application, the Index CFD price gaps down, usually trivially, rarely quite a few ticks (eg NAB dividend for the ASX200).


    I presume the same applies for Index Futures given the CFDs are pretending to be the real thing.
     
  10. pavilion103

    pavilion103

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    Thanks for that.
    Yeh I had that hard support area market out.
    I was under no illusions that there was not much more downside potential.
    Could have tried to hold for an extra 20 or 30 points but didn't bother (plus wanted to go to bed).

    One if the most beneficial thing you have taught me over my learning has been the larger context. I notice you just started a thread on this too (tops and bottoms). Understanding the bigger picture and the context in which one is trading is so important.
     
  11. MichaelD

    MichaelD Not fooled by randomness

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    The more I think about it, the more I agree with the advice of the experienced posters here.

    I stated before that the CFD spread doesn't hurt me but upon reflection; it doesn't hurt my entry to any significant degree, but it does affect my exit, particularly after hours where I have up to a 5 point spread to cross before I exit vs I believe a 1-2 point spread on the SPI.

    I can risk manage positions significantly better with a tighter spread.


    A second objection I had was that to stay the same size as I currently trade, I would need to increase my capital base x5, but that assumed I can't do better risk control. That's now a work in progress.


    Thinking about the counterparty risk is probably what has tipped me over the edge here.


    The first significant step for me is deciding whether the SPI is the instrument for me to go to (liquidity, spread, what's the same as the Australia 200 Cash CFD, what's different), so I am in the process of getting a data feed with DOM and will be watching the two markets in parallel for a while.
     
  12. Ves

    Ves Beyond Good and Evil

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    You SMMMMEEEEEE HEEEEEEEEEE!

    Hehe, good show. Been watching a few this month. :)
     
  13. Macro Polo

    Macro Polo

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    Thanks, that was what I was looking for :)
     
  14. skc

    skc Goldmember

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    Remember while it's called a "dividend" it's not really a dividend per se. It's a cash flow adjustment to your account mimicking the effects of a dividend being paid. In my past trading CFDs I've done a few calculations of the constituient's weighting in the index and my calculated amount of the ex-dividend effect on the index... and the cashflow adjustment made by IG was reasonably fair.

    No. Index futures do not adjust for dividend. Futures also don't charge you for interests. That's why you see the real Mar14 SPI value is quite different to the ASX200 cash value at the moment.

    You should read up more on the nature of a futures contract while you are slowing making your migration.
     
  15. DrapSnagon

    DrapSnagon

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    skc is correct.

    Here's why ...

    The SPI is settled on the basis of a price index (ie:- the XJO), whereas the CFD equivalent is settled on the basis of a pseudo-accumulation index (the XNT). The idea is that the instrument reflects the primary asset if held to maturity. In the case of a CFD, the maturity is "never", so if they didn't credit you the cash-value of a dividend over time, in theory you would lose that value over time.

    In the SPI's case, contracts expire each quarter. Although you can hold a position in the SPI for much longer than this, you are actually de-facto settling one and buying another each quarter. Every time you do so, the value is "reset" to inherently include the effect on the XJO via dividends, capital movements and rebalancing. Because it is a futures contract, that effect flows into the price as we approach the end of each quarter and thus appears seamless prima facie. Much like an options position that self-adjusts its price for expiry.

    An analogy would be buying a car. You have two identical vehicles on offer:- one has 11 month's rego on it and the other has only a month. Would you pay more for the one with a longer dated rego? Of course you would. However, when the Red Book is being compiled, do the publishers take any notice of how many cars of that type changed hands with 11 month's rego vs those with only 1 month? No they don't. They just publish a single price.

    That's a way of describing the difference between a price index and an accumulation index. A pretty clumsy one, I admit, but it's late and I'm tired.

    To provoke further analysis, think about the rebalancing of the ASX200 every quarter. Does the SPI make any sort of internal adjustment for the fact that ABC has been deleted and XYZ has been included, even though the two companies might have slightly different market caps but enormously different earnings or dividend prospects? No, it doesn't. All it cares about is the numerical level of the index at settlement.

    I'm not explaining this very well, am I? Must be bedtime.

    Snap.
     
  16. MichaelD

    MichaelD Not fooled by randomness

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    (+DrapSnagon detailed info)

    Good information to know. I was wondering why there were differences in price there.

    It's the stuff like this that I need to understand before making the transition to the SPI. These are the quirks and characteristics of the instrument that differ from the Australia 200 Cash - what I was referring to when I described the SPI as a new instrument that I needed to learn. The Australia 200 Cash hasn't surprised me in quite a while.


    Interestingly, I have not the slightest hesitation in opening a 10 contract ($250/tick) position on the Australia 200, and yet right now the thought of doing the same size on the SPI fills me with dread.
     
  17. pavilion103

    pavilion103

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    I've got commitments 4 nights a week now.
    I'll only be on Thursdays.
    When daylight savings comes I will be able to trade at least the first 2 hours of each night.
    Most of my trades come in this time anyway so it works well.

    I took a sneaky one last night when I was out.
    I saw the setup and for 4 point risk I thought it was worth it.
    My only trade for the week.

    2014-02-12 - trap long setup near support in first 45 mins.png
     
  18. pavilion103

    pavilion103

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    Upwards momentum on the FTSE looks to be slowing down.
    I'm inclined to look for a short trade as my next trade to hold over a few days.
    Let's see how it consolidates from here.

    2014-02-12 - FTSE daily chart ending.png
     
  19. pavilion103

    pavilion103

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    Taking a short.
    Initial 6.5 point risk.
    Now reduced to 4.5 points.
    We'll see how it goes.
    If it breaks down I anticipate some potential.

    Opened near the short term support/resistance level.
    Fell and then consolidated.
    I was looking for a short near open which I didn't get.
    Waited for the consolidation and then took this one.

    Good RR potential. Especially given that the risk is down to 4.5 points now.

    Upward momentum stalling a little on daily chart.
    Looking to consider shorts if the RR is good enough.
    Will be aggressive with limiting risk on any potential trades long and short given the position of the daily chart.

    FTSE - 2014-02-13 2.png
     
  20. pavilion103

    pavilion103

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    Out 6606 - 1 point loss.

    Short again.
    6601.
    Bigger initial risk, so looking to move stop ASAP.

    Price 6597.
    Stop 6604 (3 point risk).

    - - - Updated - - -

    Didn't hold nerve on first position. Good that it was only a 1 point loss, but the initial stop I had of 6611.5 was perfect. Wouldn't have been touched.
    I guess the balance between minimising risk from the get go or holding firm.
    In the end worked out OK overall.
    Just had to be ready for the re-entry.

    - - - Updated - - -

    FTSE - 2014-02-13 3.png
     
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