“You have to take what the system delivers to you and not decide how you are going to trade the market. Many traders decide, “I am a day trader, or I only trade Dow futures etc. when they may have a perfectly good system in front of them and it would only take a small change in their behavior to accept it, but we repeatedly observe a refusal on the part of traders to make that change- In other words, traders form beliefs that prevent them from seeing or doing what they need to be to be successful-“

It never ceases to amaze me how traders that subscribe to our services categorize what kind of a trader they are and what specific markets they trade without a review of any kinds of facts. Perhaps they read a book that had a leaning towards a particular style of trading or a friend that has told them they had done well trading on a certain time frame or in a particular market. The point is, traders do make choices about how they trade. Often traders are not even aware of the implications of the choices they have made, or in many cases, they are not even aware they have even made a choice from a range of possible choices. One makes choices based on their goals or interests. For this reason, it is very important that you decide what you are in the game for, right out of the gate.

Here are some choices traders make in this regard:

To make money
For fun and excitement
To fulfill a secret desire to lose or fail (that is not a joke)

Trading is a very difficult game. You must know what you are doing to succeed. This is true because more often than not, you are losing if you are not winning. This makes it unlike most other businesses where you have a fixed cost, but do not generally lose if you do not have business in the moment.

What kind of trader you are ties directly to your goals. For example, if you want to make money, you may be inclined to take winning more seriously than a trader who trades for fun. The person who trades for fun, may rationalize to himself, it is alright to lose. He may be inclined to not manage his risk so tightly. The trader who comes to the game to make money, will also be more willing to adapt his style to what works, rather than trying to force himself into a mold like, “I only trade Russell futures”, or, “I only day-trade.” For this reason, the trader who comes to the game wanting to make money has a psychological advantage in that he is more willing to alter his behavior in order to achieve success. This trader profile has another advantage. He still gets to have fun and to deal with the incredible challenge trading brings. Of the four types of traders above, this trader, whether he is aware of it, is a winner.

A trader, who trades for fun and excitement, is most likely a very short term player who thinks of himself as a scalper, or day trader. This is where all the action is. This market participant trades very frequently and at various points through the session. This trader’s paradigm for trading puts the excitement before the profitability and business concern for lowering costs and maximizing return. This choice, as we mentioned, may or may not be conscious. This trader may tend to have a smaller account, and a natural concern for trying to keep what he perceives as risk minimized. He may not be aware of other choices available to him. It is natural for this trader to need to think this way, since he is forced to by the structure of the market. This implicit “forced” choice may be a huge disadvantage for him, as he may be taken out of his positions by small stops on “would be” winners and may spend excessive amounts on commissions and slippage when compared to a longer term player.

This is not to say it is not possible to be successful as a short term player. In fact there are entire firms set up around this kind of activity. They are well capitalized. These firms have excellent execution capability, information and can execute at little or no cost. Firms doing this can be highly profitable. The small trader does not have this kind of information or capability. We believe less than 1% of day-traders or scalpers can outperform longer term players in the long run.

By having the need to get a rush out of trading, one is in a worse psychological position than the person who does not care so much, or is trading longer term. The trader in this profile has made choices that work to his disadvantage. When combined with the idea described above, where you tend to be losing when you would otherwise be winning, it makes for a losing proposition in most cases. This is why we suggest small accounts use options to control risk. It gives the rush potential of having huge percentage winners when they happen, without risking the whole account.

Some traders come to trading with a hidden desire to defeat themselves. They beat themselves down when they trade. They most often do not have a plan. Then, they have a. “see, I told you so” attitude when they lose. Always remember the saying, “be careful what you wish for, you just might get it.” This trader is actually extremely successful, because he gets exactly what he asks for. This occurs even when he has an amazing trading system to work from. We could praise him for it, but he would not think it was very funny. If you find yourself in this mode, simply reverse your thinking. You will be amazed what will happen.

All of these trader types need to be conscious of their choices. In fact all of us have each of these tendencies welling up from inside us. We need to be aware of the behaviors, and the paradigm behind them, so we can identify when we are going astray. We all want to trade, make money and have fun. Slight variations in these categories and the way we think about them can result in a huge difference in the result we get.

Ideally, the successful trader wants to make money as a number one goal. He wants, and needs to have fun doing it. He needs to be aware of behaviors that sabotage his efforts. He needs to be aware of choices that are available to him and their implications. He needs to manage his risk, his cost, and be capitalized properly to succeed, or trade using instruments that make all these things line up in his favor.

Your broker may not have decided to tell you, if you are a short term frequent trader, how commissions affect your account.  You probably won’t see articles put out by the industry either.  One of the most popular sites on the internet that has over 20,000 visits (and over 200,000 page views per day) provides the following statistics based on averages reported by their trader/subscribers:

We can see from the table above that a large percentage of these traders are making more than 6 trades per day, or better than 120 trades per month.  This is a rough guess, of course, but we can get an idea from this, what is going on out there in general; the brokers are making a killing.

Let’s analyze the effect of a hypothetical trader, Tom,  who has a commission rate of $6 per round turn, trades 6 times per day and see what kinds of forces influence his bottom line.

When you take a position in the market, whether you know it or not, you are spending a minimum of one tick in the bid-ask spread.  On the Emini contracts, this equates to $12.50.  When you exit the position, you pay the same minimum $12.50 plus $6.00 commission.  This total minimum expense comes to $31.00 per round turn and assumes no other slippage (which could actually be unreasonable but we’ll let that slide for now).  Now Tom is young, strong, educated, smart and motivated to succeed in his new-found career of trading the Eminis.  He is living the dream, so no problem, right?

But, let’s take a look at it from a little bigger perspective. Tom is devoting $3720.00 per month to expenses in terms of the Emini market.  The fact is, from the website statistics above, that 63% of the respondents traded more than 6 trades per day.  Imagine how much successful trading Tom has to do to recapture his $3750.00 each month, not to mention the risk it has added to his account…

If Tom is trading a $5000.00 account like many of the people I talk to on a daily basis, he is spending 74% of his account monthly in trading expenses. Tom may be having a heck of a good time, but there is a good chance he will not be trading in the very near future.  That is because his account exposure is much too high to sustain successfully for any length of time.  This is especially true when you consider that Tom many not be a better than break even trader.

The fact is, for Tom to be successful with this level of trading he should either have a much larger account for this amount of trading, or he should be trading a lot less or both.  Living your dream is a wonderful thing.  If everyone in the world truly did this, the world would be an incredible place.  Don’t forget to quantify the implicit things in the process of it all that can keep you from succeeding.

I recently spent around $90 on a book about candlesticks called High Profit Candlestick Patterns by Stephen W. Bigalow. I was very excited someone was finally going to show me all the benefits of these mysterious creatures called Candlesticks, but as I read on I realized his book had nothing to do with Candlesticks at all. Rather, it had to do with chart patterns. You see, I am a systems trader, and I code everything I hear about and read. I can’t help it; I have done that nonstop for close to 20 years. So, when I read something about things I have already tested, but called something else, then I know it isn’t that thing necessarily that leads to any success, it is the pattern itself that gets coded, not the name.

Stephen Bigalow is a successful trader as I understood at the time I bought the book. I would not have bought the book if he was not. In fact, I won’t even buy a trading book unless I have reason to believe (and verifiable reason) that person has done something remarkable trading. So I will listen to what he has to say.

As I went on reading, the text stressed how to use different patterns such as a Doji, Hammer, Hang Man, Harami, Shooting star, Morning Star etc. in conjunction with different moving averages and oscillators and other technical trading tools. If you have followed my other articles on oscillators and moving averages, you already know where I stand with these technical indicators. Does the existence of a Doji in some relation with a moving average portend a successful trade? Can a Doji (or any Candlestick pattern for that matter) be defined in some rigorous terms, or is it some funny notion that one cannot really define?

A Doji on a chart looks like this:

It is defined as a bar in a chart where the close and the open of the bar are very close together.

Now, here’s the thing. The open and close could be at the bottom of the bar, or at the top of the bar. Like this (in the bottom of the bar):

Now this particular bar is fairly short in height. It could be much taller. This bar is also a bit thicker (the difference between the open and the close is a little bigger than the previous image). What would happen if that thickness started getting thicker by any degree?

Well then that is called a Spinning Top. A Spinning Top then, is a Doji that is a little bit different. What specifically that difference is is not disclosed. It is a mystery.

None of these relationships seem to get too concerned with the amplitude of the bar except on two or 3 bar Candlestick patterns. Now, this article is not intended to be an exhaustive look into Candlesticks, because I could go on and on about where one candle relationship blends into another. If I am going to truly test such things, the computer will require I define what I am testing. For candles, this will be difficult.

I think the problem with candles as a study is the name and all the mystery turns it into something it is not. If I really want to define a Doji, I would have to do it by saying, a Doji is a bar where the close is within X percent of the open of the bar. Now if I fail to define it further, then I will not be differentiating, as we had discussed between the Doji and the Spinning top. As a result, it might be good to define that the Doji could, for example, only allow the open and close to be between the upper quarter of the bar and the lower three quarters of the bar. We might go one step further and define how much variance we would allow for the Doji to have between the open and the close as a function of the range. This could go on and on until we had completely defined the Doji mathematically. From that starting point, we could begin to test the efficacy of a Doji in various circumstances.

Let me address another topic while we are here in this important area that puzzled me for many years about technical analysis. If I create a 5 minute chart and have a Doji on the chart, by simply shifting the time one minute forward or back, it would create, in most cases, a completely different Candlestick pattern.

If I had put so much effort into defining the pattern only for it to be dramatically changed by a subtle shift in time, then what, I must ask myself, am I really defining?

I love the notion that patterns in data that can reveal what is going on in a larger time frame. I believe there is value in this, but unfortunately, such patterns become quickly meaningless when contextualized as they are with Candlesticks.

There are many two bar Candlestick patterns that are said to be indicative of a market turning up or down. The problem with these is the charts that point them out, have the same darned patterns occurring all over the chart in places that did not turn at all. So it becomes a matter of picking out what you want to see for that specific case. After working with computers for many years coding such things, any glimpse of hopefulness you might have in your eye is quickly extinguished when it comes to such scrutiny.

It is said that when certain Candlestick patterns show up, and a close occurs above a previous bar high, for example, that is a Candlestick buy (as in the third bar up from the bottom in the image below) . This is such a (very bullish) pattern:

Of course what really happened in this case is the market continued abruptly lower after a short rally upward. But here is what I really want you to see. On a shorter time frame, the chart really looks like this:

As you can see, the pattern of one set of Candlesticks from the above, longer term Candlestick chart, just blended into a whole other set of different candles on this shorter term Candlestick chart. To the left of center a bit, we see another buy before continuing lower.

You may wish to dispute my claim Candlesticks as a method of technical analysis are questionable (particularly) if not better defined. That is up to you. I do not intend to insinuate they are not of any value (afterall, they do help me to see my charts), but one should certainly not accept the conventional wisdom when it comes to these mysterious creatures (and their patterns) we call candlesticks without sufficient investigation.

The book High Profit Candlestick Patterns goes on to cover all kinds of areas from options to wave counting to Fibonacci retracements, support and resistance, moving averages, gaps etc. all in the context of candles. I am not really sure (actually I am) it would (not) hold up to the mathematical scrutiny of being coded into a computer even though it is all important stuff to know.

Maybe on a future article, I will dig into my old code and rigorously test some of these patterns using moving averages and Candlestick patterns associated with other technical indicators.

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Do you use MACD? Have you been successful at it? Have you changed your mind on MACD after reading this article? What indicators do you use? Would you like me to debunk any other indicators? i’d like to hear from you, leave a comment below.

When something has a name that has more syllables than I can count, it usually keys me in to the idea it could be a bunch of fluff. Moving averages are great if they are used correctly in technical trading. This is true for one reason; they introduce delay.

The amount of delay moving averages introduce is a function of their length. A 20 period moving average, for example, will introduce 10 periods of delay from the data on which it is based. If you want it to track the data closely, you will offset it by 10 periods (1/2 the average length). Then, when you look at it on your chart, it will track the data very closely. The tradeoff for getting this close tracking capability is that the data will then be current to only 10 bars ago. Let’s look at a graphic so we can see what this means (compliments of TradeStation):

The graph above shows a 10 minute chart with a 30 period moving average on it (the light blue line). As you can see, the turning point on the moving average that is on the edge of the ellipse on the left comes 15 bars after the actual price high. On the ellipse on the right, the low on the moving average also comes 15 bars after the actual low in price. On average, a 30 period moving average, will introduce 15 periods of delay. If we offset the moving average by this amount, it will perfectly coincide (on average with the turns in the market).

Now, with the 15 period offset (1/2 the 30 period moving average length), the moving average tracks the turns very accurately. This half wave delay that moving averages introduce is the single most important issue you need to understand when using moving averages in your trading.

Will the half wave moving average always track the data as perfectly as above? No, it will not. This is due to the fact that the length of the moving average length does not match the cycle length that is present in the original data. This means different base moving average lengths will track the underlying data more accurately at different times. Typically, the moving average length that will track the data most accurately is constantly changing. Keep this in mind as we proceed into our discussion of Moving Average Convergence Divergence.

The base Moving Average Convergence Divergence in most charting packages is made up of two moving averages that are 12 period and 26 periods in length (fixed). Then the computation is to take the difference between these two averages in order to generate what is called a “Signal Line.” The Signal Line is then delayed again by another (exponential) average of 9 periods. In plain English, a Signal Line is the delayed difference between two moving averages (delays). Basically then, when the faster moving average (12 period) is above the longer moving average, the difference will be positive and will indicate the market is going up. When the faster moving average is below the longer one, then the difference will become negative, indicating the market is declining.

To me, it is impossible to be a MACD user because simply looking a chart would tell me if the market is rising or falling. Looking at the chart also tells me this with no delay. This is particularly important when you add the complexities of having a computation made of two (delay introducing) moving averages that are not in sync with the cycle length of the market at all. These complexities can result in the MACD doing some very strange things, particularly in abruptly moving markets where the cycle length is changing or becoming longer than the base 12 and 26 period averages. Let’s take a look at one example:

In the graphic above, we can see the MACD on the bottom. It has both the 12 and 26 period averages in the graph and the signal line, which is shown as a histogram. As you can see, starting just before mid day, the MACD started trending down (when the shorter 12 period yellow line crossed below the longer 26 period line). The Signal Line goes negative at this time, while the market continues to go up. Due to wave length changes and delays introduced by the moving average components, the MACD has actually inverted from what the market was actually doing. It would take it around 26 bars, or periods (plus or minus) to correct this.

The question is this, is the inversion factor keying us in to a going inaccuracy in the MACD? Is there a better trend indicator that did not have these issues?

Let’s look at a simple trading system optimization grid based on trading the MACD and see how stable it is on its own. For simplicity, I will only optimize the 12 and 26 period lengths and not the MACD delay that is introduced by the 9 period exponential moving average. I will allow the system to simply stop and reverse, always being in the market.

Over a testing period of two years using the MACD strategy for generating buy and sell signals on the S&P Emini contracts on a 10 minute chart, the results are clear. Not one single parameter set was profitable ( a much larger test was conducted than is shown). Ouch!

What this tells us is that doing the exact opposite of the MACD is a better starting point for system development than what conventional wisdom would have us believe. Of course this will vary according to time frame (i.e. 5 minute, 10 minute daily data etc.). For fun, let’s flip the buy signals into sell signals and run our test again. Here are the results:

Wow! That is pretty amazing! Sorting to the top sets, we see a couple interesting things. One is the profit is remarkable. Two, many of the best sets optimize to a period of 2 on the short term moving average. This tells us the shorter period average portion of the MACD (as well as other delays in the Signal Line) could probably be eliminated, further discrediting the fancy design of the MACD. This is much beyond my personal expectations as to what we would find in these tests!

Before getting too excited, is this tradable? No, unfortunately it is not. The average trade is only about $15, less than the expenses of trading. Ultimately what this tells us is we are at or about the threshold of randomness with our MACD study. Is this to say MACD has no value? That is up to you. As for me, next time I want to know if the market is going up or down, I will look at a chart. It is much easier to understand what is going on without introducing layers of delays and inability to track cycling properly. Training one’s eye to see things directly from the chart is the best way for me.

Could the MACD be used in other ways? Certainly it could, but perhaps a moving average alone could accomplish much the same thing without all the problems introduced by this fancy and verbosely named indicator.

Do you use MACD? Have you been successful at it? Have you changed your mind on MACD after reading this article? What indicators do you use? Would you like me to debunk any other indicators? i’d like to hear from you, leave a comment below.

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Part 2 -

What are your trading rules? Leave comment below -

It never ceases to amaze me how people put strange verbal terms to things that would otherwise be extremely painful.  Let’s take the trading term “Drawdown” for example.  What on earth is that supposed to mean?  I can tell you this.  When I lose money, I lost money.  It is just that simple.

You can call it anything you want, but somehow, calling it “drawdown” seems to make it all better again.  Yes, “drawdown” is a forward looking term and those of you who know me, know I approve of future thinking.  It is always the question, what is developing now, that makes the future likely to be as anticipated that makes all the difference in my trading.

If I am trading a trading system I developed, my first thought on parameter selection is what is the market condition likely to be in the near future?  Will it be more volatile?  Will it be choppy?  It is this kind of thinking that helps me to decide which systems I am going to be trading tomorrow and with which parameters.

I will run tests that show me how the parameters shift under various circumstances and I will anticipate this.  It is this kind of thinking that has made a huge difference for me; anticipatory thought.

But the term “drawdown” also carries with it, without regard to your method or its viability, the seemingly all saving idea that you will recover from where you are.  After all, it is just a drawdown.  Well, if it went down, it certainly will in all likelihood go back up, right?  After all, the great master did say, as you believe, so shall it be done.

So is “Drawdown” really a dangerous word to be using?   Yes, I believe it is.  Because it ignores that larger picture of what really is an efficacious approach to trading.  I think it is a conspiracy against newbie traders to keep them from realizing the big picture of money management.

If you really want to get real about it, go read this techno babble that detaches it even more from the experience (http://www.en.wikipedia.org/wiki/Drawdown_(economics)) of losing real money.  After getting your PhD in detached financial verbosity, you might be able to get a job teaching trading to a bunch of unsuspecting students to try to pay back all the money you lost trading in the real world ;-)

Traders have to deal with reality every day. If not winning, then you certainly are losing. It is just that simple!  Trading is the most basic game in the world, but it requires a solid understanding of oneself and the environment around you.  Challenge the terms that are being presented to you and the environment you operate in as a trader and free yourself from biases that can keep you down.

Let’s face it. Recently, the market is more anti-persistent than ever. It just doesn’t trend at all. If we can get a 2-3 day move in one direction, it is remarkable. Most of the time, it is just moving sideways. During these times money management becomes more important than ever; protecting the gains you have made.

When trading the forecasts from the EminiForecaster service, one of the first things I want to know is whether any key levels (from the updates section of the member’s area) have been hit during the week. If a key level is hit and a strong reaction occurs contrary to the forecasted direction, it tells me to get serious about my risk control.

There are really three components to the service that help users benefit the most. Many people believe it is just the G-lines (our forecasts). In fact, the forecasts we post on Sunday are just a generalized cycle we see going into the next week. Every little wave inside these forecasts is not intended to be followed to a “T.” It is a directional forecast and a graphical way of showing where we see the next market turn coming.

These two factors, direction and pivot time can be seen on the forecast, but due to the fact that the bigger wave is not seen on the weekly chart, we summarize the forecast in the updates section of the site.

Another factor that requires consideration is the management of gaps. When entering trades at or around large gaps in the price on the open of the day session, it is important to note whether the market is being driven by large participation into that gap. Breadth measures such as NYSE advancers/NYSE decliners can reveal much about this. Strong values can reveal there is wide participation supporting a gap. Another factor with gaps is the magnitude of it. When you see the market gapping over 1% on the open, it is a dangerous place. Often these gaps can run, but if they begin to fail, it is important to control your losses and preserve your gains as best you can.

It is also beneficial to know what is occurring on the news front. Lately though, it seems any good news at all is hyped into a short lived rally. This occurred several weeks ago when the revised GDP numbers were released on Thursday. The news releases can be found at the bottom of the training area of the site.

There is no doubt these news releases, with supporting participation can make our forecasts be off. If the story and participation is of sufficient magnitude, it can be by large margins too.
For those who trade on any time frame, we also recently added the updates/alerts feature to the platform. This is intended to help you to confirm if the forecast is running right at the current time. It can also be used as a standalone service, because it gives excellent forecasts in its own right. Forecasts that are shorter term than the weekly forecasted G-lines.

Used together, these update/alerts, in conjunction with the G-line forecasts and the Key levels, you really have tremendous flexibility as to how you can use the service to your benefit.

As we have mentioned in other articles, it is paramount you trade in a manner consistent with your own personality. These tools make it possible to do that relatively easily. You still have to manage your risk prudently though.

As mentioned, always be sure to tighten up as the market hits key levels, in strange gaps and at forecasted turning points. Often it appears the market is not following the forecasts early in the week and it comes back to be right (snap-back). Often when this occurs, it can be due to one day being off out of the five in the forecast. Because the market has been anti-persistent, these things are more important than ever to manage your risk and identify where things are not going your way in advance.

When using the service, be sure to read the updates carefully. We might describe an aspect of the G-line that will be important to you later in the week. We never put comments in there that are idle babble, so be sure to get the most of it.

Being a successful trader requires a lot more than just buying and selling. It is a battle with the forces of the market and a battle with you to deal with your own fear and greed. To make the right decisions in this context is tough to say the least. EminiForecaster provides the tools to help you be most effective in this way and to help make your money management decisions clearer.

One of the most important things about trading is the management of the risk on your trade positions.  Let’s face it, if the market just doesn’t go anywhere while you are in a position, you just cannot gain from it.  So, depending on market volatility, you really cannot control to any degree what your gains will be.   You can, however manage what your losses can be to some degree with good risk management techniques.

The principle is simple but it is really hard to do (all these examples will be based on a long trade, use the opposite for shorts).  When entering a trade, I simply do the opposite of what I feel.  That’s right, buy when the market is falling and sell, when it is rising.  If trading on a daily time frame, to buy for example, I might like to see the market at a 3-5 day low, or below a moving average of some reasonable length.  Then, I like the particular interval I am in to also be down.  For example, I will buy on a down day.

I have attended money manager conferences and listened to industry professionals talk about how they will buy into strength.  This is great in a bull market, but in today’s uncertain markets, in my opinion, it is a recipe for disaster.

Let’s look at the logic of it.  That stock market spends a good portion of its time alternating up and down without making any ground.  This is true on just about any time frame.  Research suggests this is true around 66% of the time.  That means you have a significant edge over random entry using this concept for trade entry alone.  Further, it tells us that as the market moves higher (on a buy) there is that much less to go before it turns around and continues back down again.  As a result,  it can be much lower risk to actually enter a buy when the market is declining (to some measure of its alternating range) because the amount I stand to lose is lessened.

So, even though it is very uncomfortable to buy while the market is declining, I know it is reducing the amount of risk I will take on the trade at the same time.

Let’s consider the psychological factors as well.  If I am feeling really scared that the market is falling when I am putting on a long trade, I know most other market participants are feeling the same thing.  This assures me that my fear to buy is really an indicator that measures current market sentiment.  If sentiment is really that low, then I reason we must be running out of sellers to drive the market lower.

Let’s look at it from a numerical standpoint on where I might place a stop loss order.  If the recent previous low on the S&P is at 1280 and the market is declining into that area,  I am thinking the market will likely react and go back up at that level.  If I buy near that level, I can place a stop beneath it by a reasonable margin, say 1275 and have that be a reasonable measure, if it gets hit, as to  whether I was really wrong or not.  So as the market declines to that level, my mind is oscillating between the greed of buying the absolute low and the fear of it continuing to fall.  But, for every point it falls, it is one more point reduced from my risk.  At some point in this equation and mental oscillation, I pull the trigger and buy (preferably at 1280 or so, if I can get it).

Using this mental exercise to enter a trade has taught me much.  I have done this for years and have been very successful with it.  Now, having trained myself in this way, I experience fear if these conditions are not true.  This is true because I want to get a good deal, and this translates into small stop sizes and smaller losses when I have them.

What does this mean in the big picture?   By keeping my losses reasonably small and going against the majority, I do not get demoralized by trading.  That keeps me in good spirits while the market is beating people up (which is just about the time it will take off for a really good move).  So the famous wisdom of Rudyard Kipling stands;  it is important to keep your head about you when all about you are losing theirs….

You can’t win if you don’t play the game.  The market has a way of demoralizing its participants just before the very best moves.  By keeping your risk managed, and your spirits high while trading, you will always be there when the market decides to deliver you a really big trade (the one thing you cannot control).  Make sure you are there to benefit from the spoils of the trading battle.

It always amazes me how people do not understand the financial implications of their trading activities. It is hard enough to be profitable, let alone having to deal with the IRS and trading expenses.  Knowing the various issues involved can help you to make significant differences in your bottom line.

Many people trade in and out of the market, not realizing the implications of trading expenses.  One such expense is commission. Commissions are quite different on stocks and futures ( Yes, many people say futures are risky, but that is not because of futures, it is because of the people who trade them and how they do it).

An Emini S&P contract, which is traded on the Chicago Mercantile Exchange out of Chicago, represents $50 times the index in value of the S&P 500 index.  If the index is trading at 1300 then, it is $65,000 worth of stock.  A small account can trade in and out of this market for only about $2.40 per side all expenses included (”all in”).

On the flip side, you can trade the Spyders, symbol SPY.  SPY is an Exchange Traded Fund or “ETF.”  ETFs are a fast growing market place and are attracting huge amounts of capital, as are the Emini S&Ps.  SPY would trade at or about $130 per share when the S&Ps were trading at 1300, so an equivalent purchase would be 500 shares ($500 * $130 = $65,000).  At a decent broker, you could trade that at around a penny a share, or $5.00 per side, almost twice as much as the Emini contracts.

Then there is the topic of slippage because you always pay the ask to buy and the bid to sell.  This is another hidden expense that, if you are trading frequently, will add up to a lot in time.  On the SPY this “spread” is typically a penny. At $130, this is another $5.00 per side, making a total of $10 per side on the SPY to get in.

For lower priced stocks, such as the Nasdaq ETF (QQQQ) the expense is substantially more on a percentage basis, because it trades at a much lower price (therefore you are trading more shares).  Most ETFs are lower priced that the SPY, making the SPY an excellent choice as a stock market based trading vehicle.

On the Emini S&Ps the minimum tick and expected slippage for a small account is $12.50.  Add the commission to that of $2.40 and you are at around $15.00 each side.  Substantially more than the SPY, but less than many other ETFs on the stock market side.

Then comes the taxation portion of the equation.  Of course you will want to check with your accountant on this, but stocks, or ETFs are taxed as short term capital gains. Futures are taxed a partially long term capital gains (60%) and partially short term (40%). As a result, the tax benefits of using futures as an investment vehicle for actively traded taxable accounts can be substantial.

One other factor influences my personal decision to trade futures over ETFs on my stock index trading and that is the nightmare of dealing with stock brokerage statements and my accountant.  If you trade actively, you will pay your accountant a lot to sort through all crazy ways your stock brokerage puts together statements making it difficult to reconstruct what happened for accounting.  To make it worse,  when you call the brokerage for assistance, they can’t seem to tell you what the statements mean either (I speak from experience- try it for yourself).

Deciding which vehicles to trade when you are an active trader can be a very important decision, hopefully this will help you as a guide to structure your trading activities to best benefit.  My choice stands with futures.