Futures For You
| INSIDE THE FUTURES WORLD
Want to learn how the futures markets really work? Dan
O'Neil, a principal at online futures and forex broker XPRESSTRADE (www.xpresstrade.com),
responds to your questions about today's futures markets. |
Dan O'Neil of XPRESSTRADE |
WELCOME TO FUTURES FOR YOU
When I was invited to author a new column for STOCKS & COMMODITIES
devoted to the futures markets, I couldn't have been more enthusiastic.
Futures trading is a highly specialized niche within the larger financial
services industry, and our markets are often overlooked and misunderstood.
In this column, I'll share insight about the mechanics of the futures markets,
clear up misconceptions, explain advantages and drawbacks to futures, point
out potential opportunities, and respond to your questions. I look forward
to hearing from you!
TRADING VOLATILE ENERGY FUTURES
With both crude oil and unleaded gasoline futures recording all-time
highs, the current spotlight's on the energy sector. Today's volatile energy
markets make for excellent trading opportunities, but sharp turns in the
market also make these contracts treacherous and unsuitable for the faint
of heart. How can a new futures trader, or a trader with limited trading
capital, participate in the world's most active commodity market while
minimizing risk?
Emini crude oil futures are a good way to get started. The emini contract
is based on light, sweet crude oil - just like its big brother at the New
York Mercantile Exchange (NYMEX) - but at just 50% of the size of a standard
futures contract, the emini offers less exposure to the market and less
risk. Better still, with the NYMEX open-outcry pits occasionally clogged
due to heavy volume and volatility, emini crude futures trade totally electronically,
nearly 24 hours per day, on the Chicago Mercantile Exchange's Globex platform.
The beauty of this, of course, is quick and accurate order executions and
confirmations.
There's another benefit, even for those with larger accounts: emini
crude futures can help you develop a disciplined trading strategy without
excessively focusing on profits and losses. When trading full-size contracts,
many traders tend to fixate on their equity fluctuations and sometimes
base trading decisions on emotional reactions. It's not uncommon, for example,
for traders to resist closing out unsuccessful trades at a loss, because
they keep hoping the market will eventually turn in their favor. In contrast,
others immediately take profits when the market moves in the desired direction,
rather than allowing profits to run. With less capital at stake when trading
emini crude futures, though, you can focus on your trading methodology,
without the anxiety and distractions that come with large profit and loss
swings.
CANADIAN DOLLAR-CRUDE OIL LINK
We wish more traders would spend time thinking about intermarket relationships.
Most sophisticated currency futures traders realize, for instance, that
the Canadian dollar is a tremendous beneficiary of rising oil prices. As
of early 2005, Canada's total proven crude oil reserves trail only Saudi
Arabia, which holds the most proven crude oil reserves in the world. Most
Canadian oil inventory is trapped in the sands of Alberta. Some analysts
estimate that the region could contain as much as 300 billion barrels -
enough crude to supply US needs for more than 40 years!
Until recently, however, the cost of extraction has been prohibitive,
because of the need for massive filtration equipment. But recent advances
in extraction technology have lowered this cost substantially, making Alberta
oil sands ventures feasible given current market prices. If crude oil prices
continue to hit record highs in months ahead, it's conceivable that Canada
- already the single largest exporter of oil to the US, with 1.62 million
barrels per day in 2004 - will experience a tremendous economic boost.
The energy sector makes up 8% of the Canadian gross domestic product, while
its indirect contribution to the Canadian economy is far greater. If oil
extends its run, Canadian dollar futures may well follow.
ELECTRONIC GOLD FUTURES
When the Chicago Board of Trade first announced it would list gold futures
on its eCBOT electronic trading platform, thereby directly challenging
the open-outcry trading pits at the New York Mercantile Exchange's COMEX
division, there was substantial excitement. Electronic trading, after all,
is typically faster, more accurate, and more efficient. Both brokerage
firms and retail traders would benefit from the competition and the new,
electronic alternative.
The reality, though, is that in virtually every case where an exchange
has attempted to steal share from another, the challenger has had a difficult
time dislodging the incumbent. Traders send their orders to the marketplace
offering the best liquidity, because presumably this means the fairest
pricing, the best executions, and the best possibility of exiting positions
without difficulty. So far, gold futures on eCBOT have failed to gain much
traction, accounting for just 1.9% of the total volume in 100-ounce gold
futures trading on a recent day. While COMEX cranked out more than 56,000
contracts, Chicago managed only about 1,100.
Here's the point: Electronic futures trading is fantastic, and I'm a
big fan. But the inescapable truth is that some important futures markets
remain either mostly or only traded in the pits. Gold is a terrific example,
and there are many others, including crude oil, silver, corn, soybeans,
coffee, sugar, cotton, wheat, and live cattle, to name a few. If you trade
with an online broker that offers access only to the electronic markets,
understand that you may not be trading at the primary market, where the
liquidity, pricing, and execution are often superior. Worse, in some cases,
if your broker doesn't offer access to the open-outcry markets, you may
not be able to trade certain products at all, which means you're limiting
your trading opportunities.
To submit a question, post your question to our website
at http://Message-Boards.Traders.com. Answers will be posted there, and
selected questions will appear in a future issue of S&C.
Originally published in the October 2005 issue of Technical
Analysis of STOCKS & COMMODITIES magazine. All rights reserved. ©
Copyright 2005, Technical Analysis, Inc.
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