Futures Scalping Part 2: 21 Good Ideas

One thing I hope I’ve gotten across with this blog is that there are lots of ways to trade successfully.  It’s not that there’s one magical formula, and once you have that formula it rains money.  Rather, there’s a lot of little things that you can do wrong or right.  This is very much true in futures scalping.  If you do enough of them right, you start to make money.  As you get more right, you can make more money with less downside risk.  Here’s a list of 21 good ideas that helped me move from being a losing trader to a winner.  I’m not going to provide excruciating detail on each aspect right now.  Just enough info to get you thinking about a given topic. Continue reading

A Bucket Full O’ Arbitrages

An arbitrage is a trade that produces near risk-free and near guaranteed profits.  In general, independent and retail traders are not successful as arbitrageurs.  We’ll get into the reasons why in a bit.  But it’s still important to understand how arbitrages work, because they’re a fundamental part of the structure of the market.  Each arbitrage defines an equation, for lack of a better word, of how the prices of various instruments should be related to each other and to interest rates.  Some of these relationships are trivial to understand, but others are far from obvious. Continue reading

Know Your Instrument

OK, you’re new to trading.  You’ve read what new traders are supposed to do.  You know about the trading system development process.  Now it’s time to pick a trading instrument and start learning.  But what do you need to learn?  The short answer is “as much as you can”.  But if you’re new, you probably don’t know what there is to know. So I’ve put together a list of key information you should know about an instrument to get you started.  And for example’s sake I’ve answered those questions for two popular instruments: the NYMEX WTI crude oil contract and Apple stock. Continue reading

The Surprising Effect of Small Edges

Imagine you have a trading method which trades the GLOBEX west Texas crude oil contract (ticker:CL).  This is a futures contract that represents 1000 barrels of crude oil.  At current oil prices, the contract has a value of about $100,000.  Price for CL is specified in dollars per barrel, and the tick is one cent per barrel, or $10 for the contract.  Now, let’s say this method has very simple trade management – once a trade is entered, a stop loss order is placed 10 ticks away from the entry price, and a limit order to exit is placed 10 ticks the other direction.  These orders are set up as a “one cancels all” or OCA group, meaning that if one of the two exit orders executes, the other is canceled.

This is a very simple type of trade setup, and is common for very short term trades.  In this example once you enter a trade (assume a 1 contract position) you should get one of two resuls:

  1. You win $100 minus fees
  2. You lose $100 plus fees + slippage

Fees in this example are simply your transaction fees.  Slippage is the cost associated with stop orders executing at a price worse than the trigger price, which they can do since they trigger market orders.  For now, let’s assume that the round trip transaction fees for 1 contract of CL are $4 (my broker charges $4.01 for some strange reason) and that slippage is zero.  The slippage assumption is unrealistic and I’ll address it in a subsequent post, but for now I want to get at a different aspect of the situation.  I want to know:

How often do you have to place your trade in the right direction in order to make good money here? Continue reading