Beyond Technical Analysis of Futures Markets

Posted On 08 Jul 2014
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Learning to be a professional Futures trader involves much more than just technical analysis. To become a whole brain trader one must understand how markets work, contract specifications, capital requirements, knowing which Futures Exchange your product trades on, Exchange holidays, suspended trading sessions in some Futures markets, etc…. in addition to a strong technical analysis education.

Another important feature is being familiar with your charting software. I would like to address a couple of items in this article pertaining to using Trade Station for Futures trading:

  • Where do your open orders reside?
  • Can a Trade Station user be assigned a delivery of a Futures contract?

Where do your open orders reside?

This is always a good question to ask your brokerage firm before you open your Futures account. The reason a trader would want to know this is some brokerage firms will leave your open orders on your computer. While platforms like Trade Station place your orders on their servers.

Why is this important? If orders are left on your computer and you have a power outage or loss of internet service your orders cannot be transmitted to the Futures Exchange when price is at your level of order execution. Trade Station users will have their orders sent to one of two places when orders are placed:

Trade Station Server: If you send in a bracket order (linked profit objective and protective stop order) then your initial entry order will go directly to the Exchange. While the bracket portion of the order will remain on Trade Stations servers. Once your initial entry order is filled Trade Stations server will monitor price action and whichever order (protective stop or profit objective) is closest to the current price then that order is sent to the Exchange server, but not both at the same time. In some cases when price is trading in the middle of both of these orders Trade Stations server is canceling and replacing both of your orders very quickly trying to keep only the order closest to current price active on the Exchange server.

Exchange Server:

A good suggestion is to always use a bracket order when trading. However, if you decide to place an independent protective stop and profit objective then both of these orders will go directly to the Exchange server. Make sure you remember to cancel the opposing order once one is filled because these will not be automatically cancelled if not.

Can a Trade Station user be assigned a delivery of a Futures contract?

Let’s say this, if a trader does not understand the Futures contract they are trading and places an order after First Notice Day (FND) I hope you have a big back yard when 40,000 pounds of Live Cattle are assigned for delivery to you. And this delivery also applies to markets like the Interest Rate and Currency markets because they are physically deliverable Futures contracts as well.

Trade Stations order desk will monitor your trades and if they see you are trading in a contract after FND they will get you out of the trade. However, if they miss seeing your trade because they are busy (not held) then technically the Exchange can assign a delivery for every Long position you have in that contract. If you are Short the market there is not a delivery concern, only Long positions will be delivered against. While the broker will do their best to get you out, in the end it is your responsibility to not be in a contract after FND.

For those of you thinking this is not important information let’s look at how much a Live Cattle contract would cost you.

The current price for Live Cattle is approximately $1.52 per pound. While this does not sound like a lot of money you must remember you are trading a contract that has 40,000 pounds of beef in it. This makes the contract worth $60,800! And yes you would be responsible for that full price plus other fees for delivery if you are assigned a delivery even if your account balance was only $5,000. If you are assigned a delivery by the Exchange your broker can work with the Exchange to buy back your delivery notice for approximately $600 per contract. Better than the full contract price, but still more than a trader should pay because they don’t take the time to understand the market they are trading in.

Recently a client of a broker friend of mine made a mistake and it cost him some money and a missed opportunity to trade in a market that went his way.

It seems the client was a swing trader in the Corn market. His analysis called for going long 5 Corn contracts at the market. Unfortunately it was during a delivery period of the spot month Corn contract. Not only that, but it was the last trading day with about a half hour left in it. The trader clicked on buy market and was instantly filled in the contract that will completely expire in less than 30 minutes. He forgot to change the contract month symbol on his order entry platform to the current front month contract. The Exchange sees the long position and assumes the trader wants delivery. He is assigned 5 contracts of 5,000 bushels each or 25,000 bushels of Corn!

At that time Corn was trading for approximately $4.70 per bushel. His approximate cost would have been about $117,500! All because he forgot to change the contract month symbol on his order entry screen (Matrix for Trade Station users).

The broker was able to get the Exchange to buy back his deliverable contracts, but the trader still had to pay approximately $3,000.

I bring these two lessons to you not to impart fear of the Futures markets, but to help you understand that you must respect these markets for what they are – A highly leveraged and challenging venture for all traders. The next time you are sitting in a Professional Futures class or listening to a lesson day in the Extended Learning Track (XLT), don’t tune out the discussions of contract specifications. There is more to trading than just understanding technical analysis. Become a whole brain trader and master the Futures markets by understanding the mechanics as well.

“If it doesn’t challenge you, it doesn’t change you” The Market Has Spoken

– Don Dawson

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Source: Beyond Technical Analysis of Futures Markets

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