Commodity Futures and Options Trading - How Efficient Is YOUR Trading? - PART 2

BY Thomas Cathey

When you think about it, many events need to be just right to make an efficient and profitable trade. Many new commodity traders think they will make up for sloppy trading on the "next big trade." But good trading is an "every time" thing. If you're looking to fine tune and squeeze every penny of expenses out of your trading, then read on. To ignore trading expenses is to be doomed to break-even results at best.

Let's add up our trading expenses. For the E-mini, if we buy at the market, we give up ¼ point buying at the offer, and later, another ¼ point selling at the bid. This means we need to make ½ point on the trade just to break even. The futures contract commissions will vary depending on whether you trade discount or full-service. If you are a profitable trader and are able to watch the market during the day on your own, then a self-directed discount account is the way to go. But if you are not yet profitable, then you need the guidance of a good commodity futures broker or mentor.

What you save in discount commissions for the year can easily be wiped out in a few weeks of poor trading or human errors. Depending on your rate, commissions can add an additional 1/8 -1/4 point to each trade for the S%26P futures contract. The bid and ask can be even wider for other less liquid futures markets. Commodity options can be very wide and illiquid in certain futures markets. This also applies to trading stocks. 

In my opinion, day trading should be done either through a self-directed discount account by the client himself, or as a managed futures account by a CTA on behalf of the client. Fast executions are mandatory and almost impossible if a client needs to be called at the moment of every trade. The third alternative is to give the full-service commodity broker wide berth like, "I authorize you to buy two Dec E-mini's for me between 9:30AM and 4:15PM  today, at the market." Once the broker makes the futures trade, he would call you with the report. You would then authorize him to liquidate it in the same manner.

So now that we've touched on the major "expenses" of commodity futures trading, lets look into specifics. Possibly the biggest drain on "swing efficiency" (what percentage of the perfect move you take out) is what is called slippage and skids. Once the decision is made to enter, this is how far the market moves before you get an execution. Sometimes it can be positive slippage where it helps to give you a better price. But much of the time it is negative slippage and eats away at your bottom line. Normal slippage is caused by time delays in the futures pit or other problems in the order chain.

Another form of slippage is what I call "trader slippage." This can be the result of procrastination and not pulling the trigger right away. There's also a common problem that plagues commodity brokers I call "client slippage." For standard non-discretionary retail accounts, sometimes clients will drag their feet when approving a trade or are difficult to reach. This is more important when day trading futures or options, and not so for long-term positions. It all depends on what the market is doing. It all adds up to reduce your bottom line.

Part Three of Three - Next!

There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.

Thomas Cathey - 27-year trading veteran, money manager and CEO of Thomas Capital Management, LLC. Get FREE, the complete 44%2B lesson, "Thomas Commodity Trading Course" by visiting: http://www.thomascapitalmanagement.com/commodity/welcome.htm It's a brand new "street-wise" trading e-course. Get an edge trading futures, day trading e-mini's and selling options. Main site: http://www.ThomasCapitalManagement.com

Thomas Cathey - 27-year trading veteran, money manager and CEO of Thomas Capital Management, LLC. Get FREE, the complete 44%2B lesson, "Thomas Commodity Trading Course" by visiting: http://www.thomascapitalmanagement.com/commodity/welcome.htm It's a brand new "street-wise" trading e-course. Get an edge trading futures, day trading e-mini's and selling options. Main site: http://www.ThomasCapitalManagement.com

1investmenthelp.com Copyright © 2007, All Rights Reserved