Market Wizards: Interviews With Top Traders PDF

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Taking the Mystery Out of Futures

Of all the markets discussed in this book, the futures market is probably the one least understood by most investors. It is also one of the fastest-growing.

Trading volume in futures has expanded more than twentyfold during the past twenty years.

In 1988, the dollar value of all futures contracts traded in the U.S. exceeded $10 trillion! Obviously, there is a lot more than pork belly trading involved here.

Today’s futures markets encompass all of the world’s major market groups: interest rates (eg. T-bonds), stock indexes (e.g.. the S&P 500). currencies (e.g.. Japanese yen), precious metals (eg, gold), energy (e.g. crude oil), and agricultural commodities (e.g., com).

Although the fo tures markets had their origins in agricultural commodities, this sector now accounts for only about one-fifth of total futures trading.

During the past decade, the introduction and spectacular growth of many new contracts have resulted in the financial-type markets (currencies, interest rate instruments, and stock indexes) accounting for approximately 60 percent.

“This is a rough but conservative estimate based on 246 million contracts traded and assuming an average contract value well over $40.000, including short-term interest rate futures, such as Hamdollar, dongle contract values ranged from about $11,000 for sugar at 10.5 in $150X00 for the S&P 500 at an index value 300)

AuthorJack D Schwager
PDF Size1.04 MB


While hedgers, such as the above automobile manufacturer, participate in futures markets to reduce the risk of an adverse price move, traders participate in an effort to profit from anticipated price changes.

In fact, many traders will prefer the futures markets over their cash counterparts as trading vehicles for a variety of reasons:

Standardized contracts-Futures contracts are standardized (in terms of quantity and quality); thus, the trader does not have to find a specific buyer or seller in order to initiate or liquidate a position.

2. Liquidity-All of the major futures markets provide excellent liquid.

3. Ease of going short-The futures markets allow equal ease of going short as well as long. For example, the short seller in the stock market (who is actually borrowing stock to sell) must wait for an uptick before initiating a position; no such restriction exists in the futures markets.

LevenageThe futures markets offer tremendous leverage. Roughly speaking, Initial margin requirements are usually equal to 5 to 10 percent of the contract value.

Although high leverage is one of the attributes of futures markets for traders, it should be emphasized that leverage is a two-edged sword.

The undisciplined use of leverage is the single most important reason why most traders lose money in the futures markets In general, futures prices are no more volatile than the underlying cash prices or, for that matter, many stocks.

The high-risk reputation of futures is largely a consequence of the leverage factor.

Low transaction course futures markets provide very low transaction costs. For example, it is far less expensive for a stock portfolio manager to reduce market exposure by selling the equivalent dollar amount of stock index futures contracts than by selling individual stocks.

Ease of offer-A futures position can be offset at any time during market hours, providing prices are not locked at limit-up or limit down.

(Some futures markets specify daily maximum price changes. In cases in which free-market forces would normally seek an equilibrium price outside the range of boundaries implied by price limits. the market will simply move to the limit and virtually cease to trade)

Guaranteed by exchange-The futures trader does not have to be concerned about the financial stability of the person on the other side of the trade.

All futures transactions are guaranteed by the clearinghouse of the exchange.

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