Futures Trading Demystified
Hello. Welcome to Futures Trading Demystified with Maverick Trading. My name is Robb Reinhold. It’s nice to see you. Let me give you a little quick background about myself if you don’t know anything about me.
I like long walks on the beach. I am a Virgo. Actually, that’s not true. I’m a Taurus. I don’t know why I said I was a Virgo. Anyway, that’s probably not what you wanted to know.
I’ve been trading for 21 years now. I started back in 1997. I started as a day trader on the SOES system and one of the very first direct-access trading systems, and I got into options in the late 90s. I got into Forex and futures in the, oh, let’s call it 2003, 2004, area. I can’t say that I’ve traded everything because that’s absolutely not true, but I’ve traded quite a bit.
I love topics like this, Futures Trading Demystified, because Futures is one of those things that people think is very exotic, and they think it’s very risky and dangerous, and they have all these preconceptions about what it is, and really what I want to do is I want to break everything down today and show you that it’s not that big of a deal. It’s not that mysterious. It’s simply another thing to trade, and it’s going to go up and down based on supply and demand. That’s really about it.
What I want to do is take you through, in this session, is take you through what are they, how do they work … We’re gonna go through a little bit of the history behind Futures, and then we’re gonna talk about actually trading Futures. What I want to do is, by the end of the session, not pump you up to where you run out and go do some Futures Trading because that’s not the purpose of it.
But I really want to illuminate exactly what it is and how you can eventually add it into your training system and your trading plan because, for some of you, there will be a place for Futures, and there’s gonna be something that you do want to add into your trading plan.
For some of you that aren’t currently trading, maybe this is the thing that gets you interested in getting a little bit more serious about trading and start working toward putting together a trading plan and a trading strategy. Whatever it is, I want to basically take this topic and make it to where you have a good understanding of exactly what it is and where to go from here.
Alright, well, let’s start off with what is a Futures contract. Now, a Futures contracts, in my guess, have been around for thousands and thousands of years. Now, the very first Futures exchange opened up in the early 1900s, so I think the oldest Futures exchange, first of all, is probably not even around anymore. There’s probably about 110 years. But in my opinion, people always have been doing Futures contracts.
Let me just take a basic Futures contract, and this really all started around agriculture. Let’s take two groups of people. Let’s take a farmer, and let’s take a business like Kellogg’s. Now, a farmer produces corn. Now, the farmer knows, “Okay, I’ve got to produce this crop. I’m going to … In the Spring, I need to till the soil. I need to plant the seeds. I need to water the seeds. I need to fertilize the seeds, and I need to harvest. I need to process it.” Again, I know very little about corn, so please excuse my ignorance if that’s not how it works to handle corn. But in the end, the farmer says or estimates that growing corn is gonna cost four dollars per bushel. Again, I also don’t know what a bushel is. We’re gonna talk about why that doesn’t really matter, but four dollars per bushel to grow for a season.
So the farmer knows that, at the end of all of that hard work, and that is hard work, and that is putting a lot of risk out. You’re putting money out front, and that farmer has no idea what the price of corn is going to be in the fall when they go to market to sell the corn. If it is three dollars per bushel, they’re gonna take a big loss, and they may not have enough money to plant again next year. If it’s seven dollars a bushel, then they’re gonna have a great year, and there’s gonna be a fantastic profit. But again, it’s a big risk for the farmer.
Let’s take the other side. Let’s take Kellogg’s. Kellogg’s makes their cornflakes. Again, they know that when they run all their numbers, that once corn gets more than five dollars per bushel, it starts to really eat into their profits and makes it to where their product is no longer profitable. So, Kellogg’s needs to buy corn for less than five dollars a bushel. Basically, these two parties come together, and they adopt a Futures contract.
In the Futures contract, they agree that they’re going to have a four dollars and fifty cent price, and they both enter into the agreement. Basically, what this says that in October, the farmer is going to deliver, again, whatever they agree upon, 100 bushels of corn, and they’re going to deliver for four dollars and fifty cents to Kellogg’s, and Kellogg’s is obligated to pay them four dollars and fifty cents. If you can see, this works out for both parties quite well. The farmer knows that he can sell this Futures contract in the Spring, and he’s guaranteed to have a profitable year. Kellogg’s knows that they can buy this Futures contract six or seven months out, and they know that, come the Fall, they’re going to have the right price for their product.
Each one of these parties is required to put up a margin deposit. This works just like in real estate when you make an offer on a house, and you have to put up earnest money. It basically is saying, “Hey, I’m serious about this. I’m serious about this. I’m gonna put some money on the line. I want to make sure that we all know we’re obligated to fulfill this agreement.”
That is just the basics of a Futures contract. You’ve got the buyer. You’ve got the seller. There’s a time, and there is a price, and there is an amount of whatever it is to be delivered.
Alright, now before we get into exactly what a Futures contract is and how it works, I want to go through this, and I’ve said this, and I know this doesn’t make any sense, and I don’t know any other way to say it, but I tell everyone trading is trading. Trading is trading. In the end, everything you trade is simply a symbol. It’s a current price, and that current price is gonna go up and down based on supply and demand period. That’s it.
Now, one of my pet peeves, and this is a big one, and sorry you’re going to have to listen to my rant and rave here for a bit. When I got started trading in the mid to late 90s, everyone on Wall Street … Everyone said you cannot make money trading. You could only make money in the market by buying and holding and being an investor. Whenever I told people what I did for a living, they said, “Oh, you’re just a gambler. Like, there’s no way. You can’t do it. It doesn’t work. You’ve gotta be a long-term investor, buy and hold.”
Well, it’s funny how over the years things have changed. We now have a show called Fast Money. We actually have a show on TV about options trading, and there’s tons and tons of books and resources about trading. Now, it’s actually generally accepted that you can be a trader, but it drives me crazy that Wall Street, and I say Wall Street, but I mean the whole financial system, has really kept this idea of fundamentals, and I just cannot stand it when I hear on Fast Money, or I hear Mr. Kramer say, “We like this company. We’re gonna trade this because it’s a good company. It’s got rising earnings. It’s got a good CEO,” and that bothers me so much because I think to myself, “What in the world does a good CEO have to do with trading?”
Trading … It doesn’t matter what the symbol is. It doesn’t matter. Your job as a trader is to make money from the price going up or down period. What the CEO did for breakfast, it doesn’t matter. What the product the company makes … It doesn’t matter. All that matters is that you have a symbol, a market price, and that you are on the right side of the trade, and it drives me crazy that Wall Street is now mixed in this, “Okay, you can trade now, but you still have to know about price earnings rations and this and this.” No, you don’t. As a trader, as a pure trader, all you care about is being on the right side of the trade. That’s it. Again, it drives me crazy that they’ve wrapped this up.
Here’s why it drives me crazy because what happens is people get into stuff for a trade, and hopefully you can see my sarcastic air quotes that I’m doing, and then it doesn’t go their way, and then they use fundamentals to justify not taking a loss. So they get into something they’re just gonna buy at 50 and sell at 52. Next thing you know, it goes down to 47. Now, they’re saying, “Oh, you know what? This company’s got good sales. It’s got a good CEO.” Blah, blah. Blah. No. As a trader, you take your loss. You move on. Period.
Here’s a great thing. Trading is trading. If you can trade one profitably, you can trade them all. Now, yes, they’re all going to have some different terminology. Liquidity, margin … We’re gonna go through all those things. But in the end, what you trade is actually not important. How you trade is important.
In this example … I always tell people this is like a car. Driving a car. In the end, driving a car is the same in every car. You’ve got the steering wheel. You’ve got the gas, the break. It’s the same. However, some cars are going to be different. Some cars are going to be faster than others. Some are going to have different bells and whistles. But in the end, if you can drive one car, you can drive them all.
The problem people get into, and we’re gonna talk about this in Futures Trading, is that some cars are quite fast, meaning they have more volatility, and they have more leverage. Now imagine you took your 15 year old, and you said, “You don’t need to get the Prius. You don’t even need to practice in the go-kart track. We’re gonna put you in a Lamborghini, and you’re gonna have no problem driving.” Obviously, that’s not going to work out. It’s no wonder people crash when they try these cars.
So, we’re gonna talk about Futures. We’re gonna talk about how they work. But just realize it’s just a little bit faster car. It’s mostly because of the leverage that Wall Street is willing to give them, but let’s go ahead and jump into the terminology, liquidity, margin, all those things, so you can get a good idea. But in the end, trading is trading. Period. Whatever it is you trade, it’s a symbol. It’s a market price, and that market price is gonna go up and down based on supply and demand. That’s it. I want every one of you to remember that trading is trading. You have to just look at it purely like that. Once you start adding in all the other garbage that Wall Street wants you to do, it starts to muddy the waters, and you’re no longer looking at trading the right way.
Alright, a Futures contract has these four things. It has an underlying asset. It has a quantity of the asset. It has a delivery location, and it has a delivery date. We’re gonna go through these, but let’s go ahead and just cover delivery location. Now, there’s some old wives tales. Now, again, they might be true. I doubt it, but there’s an old wives tale of a Futures trader in Chicago who left some long oil contracts open over the weekend. Next thing you know, three months later, he had to take delivery of like 1000 barrels of oil in his driveway. Now, that is …
Let’s just pretend that’s a story that happened because, look, that’s funny. Maybe back in the 80s, that actually could happen. Don’t worry. The brokerage accounts that you trade through … They are no way going to allow you to take delivery. You actually have to have a very special account to take delivery of the underlying asset. Let’s not even worry about delivery location. That’s part of the contract but, as a trader, we don’t have to worry about that at all.
What we do have to worry about is the underlying asset, the quantity of the asset, and the delivery date. Let’s break these all down here. Let’s take a look at the gold Futures thing. What we have again … The underlying asset. If you want to see the underlying asset for gold, it has a symbol. The symbol is GC. That is the underlying symbol for the Comex Gold Futures. Then, if you want to take a look at the expiration or the delivery date, that is Z18 which means December 2018. As you can see here, we now have a symbol. We now have a symbol where we know that, if we were to put in GCZ18 into a trading platform that has a feed to get the real-time quote on this, we’re going to get the market prices. It’s going to say this is the market price of the gold December 2018 Futures contract.
Now, one contract equals 100 ounces. So, 100 ounces of gold is what one contract equals. Every time you buy and sell one contract, you are literally buying or controlling 100 ounces of gold.
Now, next up is a minimum tick. now, the minimum tick … This is something that sounds strange, but don’t get too carried away with it. If you were trading a stock, stocks trade in dollars and cents. We all get dollars and cents. If you have a stock trading in 50 dollars and 12 cents, you know that the next move up is gonna be 50 dollars and 13 cents. You know that. Or if it takes a move down, the next tick is gonna be one penny lower. They just trade in pennies.
Well, Futures contracts trade in ticks. Now, when we talk about Forex, Forex trades in pips. A pip is point zero zero zero one. That’s a pip. Forex trades in pips. Every time it goes up or down one pip, that’s just a number moving. In the Futures market, each contract is going to have a minimum tick. What that means is the price of gold … Let’s say the price of gold is 1210 dollars and 20 cents. The next move on this is either going to be 1210.30, or it’s gonna be 1210.10. That is the minimum tick. It’s gonna move in basically 10 cent increments. Every symbol has different minimum ticks, and so you just have to learn that. Again, this is where google is your best friend. Anytime you want any information on this … Hey, what is the minimum tick on the Comex Gold Futures? Google it. It will tell you what’s the minimum tick on this. It’ll tell you.
The value of one tick is 10 dollars US. So that means every time this thing moves up or down on one contract, it’s going to be a 10 dollar gain or loss. Again, if it moves up to 1211.20, you’re going to have a 100 dollar profit. Again, that’s gonna be 10 ticks. Again, this is simply how it works. As you see, we have not really got anything weird here because, wow, this is kind of how stocks move. Stocks have a symbol. You have a market price. When they move up or down, okay, stocks move up a penny. The Gold Futures moves up 10 cents every time there’s a tick. Okay, still the same thing. Again, trading is trading.
Let’s look at the transaction. Now, this is where not just anyone can go and make this transaction. You have to get approved for Futures Trading. You need to meet some minimum requirements. You have to meet some minimum standards set forth by the broker dealer and also by the government. But once you fulfill those requirements, you are now allowed and approved to trade Futures. If you put in an order that you’re going to buy the GCZ18. Again, that’s going to be the symbol you put in, and let’s just say the current market price of that contract is 1200 dollars. Again, you’re going to take the contract size which is 100 ounces, and every single contract that you buy is going to control 120000 dollars worth of gold.
This is what you really need to understand. Everything we kind of went through was just building up to this point. You need to understand that this is what you’re trading because, if gold goes up a percent, if it just goes up one percent, you’re going to make a rate of return. I always tell people, look, when you talk about trading, everyone looks at trading in dollars and cents, and it is just the dumbest way to look at it. It’s all percentages. It’s all percentages. Again, if this goes up one percent, this is going to be a 1200 dollar problem. That’s what it’s going to be. 1200 dollar problem. If it goes down one percent, it’s going to be a 1200 dollar loss.
When you are in any trade, if you are buying 100 shares of Apple, Apple’s at 120 bucks. That’s 12000 dollars. You’re going to make a percentage return on that amount. This is really what we’re talking about is … This is what you need to know. You are controlling 120000 dollars worth of gold.
Now, just like we talked about in Futures contract, you don’t need to bring in the whole amount, and this is where Futures get really exciting, and this is also where Futures gets really dangerous is that your margin requirements are going to be lower. You’re just going to need to put up a margin. You just need to put up a small risk deposit … Not risk deposit but a small … I’m trying to think of the real estate word.
Anyway, you gotta put up this deposit so it interacts brokers where we trade at Maverick Trading. The intraday is $3100. The overnight … I got this backward. The overnight is a little bit more. All they’re saying is if you see intraday and overnight, there’s going to be an intraday period which I believe is 8AM Eastern time to 4PM eastern time. That’s gonna be the intraday. Then if you want to hold it passed that time, they’re gonna have a little bit higher margin requirements.
But basically, you would need 4000 dollars. 4000 dollars to be able to hold this Futures contract for more than a day. All of a sudden, that gets exciting. Holy cow, are you telling me that I can control 120,000 dollars with 4,000 dollars? This is what attracts people to Futures.
Now, here’s the dumb thing. The people who are attracted for that reason … They probably don’t have a lot of experience with trading, and they probably don’t understand that day trading is a pretty difficult game, and it takes a lot of time and effort and experience to get good at it. What do they do? They go in with their four grand. They buy one Futures contract, and if this Futures contract moves three percent, and gold can move three percent in a day or two very easily. Gold today was up one and a half percent. This could completely wipe out someone’s money.
Now, look, it didn’t have anything to do about the trade. The trade was the trade. Stocks go up one and a half percent all the time. Their stocks would go up 10, 20, 40 percent. We saw that crazy marijuana stock, Tilray. That thing … I haven’t seen crazy activity like that since 1999. For any of you who didn’t see it, put in the symbol TRLY, and this is stock that started out in the 20s. It ran up to 150 dollars. In one day, it had a range of 150 dollars all the way up to 300. I had never seen a stock that had 100 percent move of its prior close. It’s crazy.
Stocks can move much more than this Gold Futures contract. But because of the leverage, because people don’t understand it, this is where they get themselves in trouble. It’s about leverage. It’s about position sizing. It’s about risk management. These are the things that we really preach at Maverick. Look, we always tell people there are 1000 ways to make money trading. By no means do we have the monopoly on how to make money trading and reading charts and doing some other things. There are so many ways to make money. It doesn’t really matter.
What matters is your risk management because what’s going to happen? This is one of my favorite things to show our new traders, and I call it my 10 Trades Analogy. Alright, so let’s say for the next month or two or however much time, you’re going to make 10 trades. That means that you researched it. That means that you looked at charts. You planned it all out, or maybe you didn’t. Maybe you’re one of those people that just clicks buttons and likes to lose money because of it, but you made 10 trades.
Here’s the irony. The only trades that you will take are the ones where you’re convinced you’re right. You’re convinced you’re right. Everything lines up perfectly. You’ve done your research. Now, we all know you’re not going to be right on all 10. We know that. Here’s the funny thing. I looked on the story. My first year or two of trading, if you asked me a question … Robb, do you think you’re going to be right on every single trade? I’d say, “Gosh, that’s ridiculous. Of course not. Of course I’m not going to be right on every single trade.” Okay, what about the trade you’re in right now? Oh, yeah. I’m definitely right on this one. I’m definitely right. Do you see how absolutely ridiculous that is? Of course I don’t know if I’m gonna be right on my trades, but I know for sure I’m going to be right on this one.
That’s the thing is we only take the trades that we’re convinced we’re gonna make it on. But let’s say that out of the 10 trades, and again I love my 10 Trade Analogy, you’re only going to be right on six. You’re only gonna be right on six, so that means on four of them, you’re going to take a loss. Again, this is again not to get too deep into statistics, but your results are going to be distributed among the bell curve. So any time you take a bunch of numbers or a bunch of results, you put into a bell curve.
What the bell curve says … Okay, 68 percent of your results are going to be somewhere in this range. One standard deviation. 95 percent of your results are going to be within two standard deviations. In the end, what you’re going to find is you’re going to find a bunch of stocks or a bunch of trades where, for the most part, you’re going to make a little money, lose a little money, but you’re gonna have one really terrible trade. Again, even though you did your research, even though you did all your stuff, you’re gonna have one terrible trade. Then you’re gonna have one absolutely fantastic trade in there. This is where money management is really the only thing that matters.
I’m a big believer at this point, 21 years later, that the exit is so much more important than the entry. The entry can be almost not even important. It’s the management of the trade, the position size. If you make this terrible one, too big on position size, it wipes you out.
Again, I don’t want to get too much into trading because this is about Futures, but hopefully everyone gets that 10 Trade Analogy. You’re going to make 10 trades. You’re going to be wrong on probably half of them. Maybe a little bit better. Maybe a little bit worse. Maybe you’re right on seven out of 10, but you’re going to have your three losers. And if you don’t have a plan, then that’s where people lose. I’ve always said people don’t lose in trading. They don’t fail at trading because they didn’t know how to read a chart or they didn’t know about Futures. It’s very easy to learn this stuff. People fail in chart because they screw it up, and they don’t have a plan, and they don’t have systems in place. That’s why people lose. Again, I haven’t met one person that has said, “I lost because I didn’t know how to read a chart.” No. People say, “Hey, I lost because I knew how to read a chart, and I screwed up, and I got bull-headed. I didn’t cut my losses, and it actually broke me.”
Alright, wow, I got so off on a rant and rave there. I’m sorry about that. Right. Let’s get back to this.
What do we need to trade? Now, this is the question, and I get lots of questions from people especially around bitcoin. I get a lot of questions around bitcoin when bitcoin became popular. Here is what a professional trader needs in order to trade something properly.
Number one. Price discovery. Number two. Liquidity. And number three, a guaranteed counterparty. Let’s go through these real quick. Alright, price discovery. Price discovery is … Do you know exactly where you can buy and sell it now? And are you going to know that in the future? That was one of the problems that we had with bitcoin trading is that bitcoin trades on all these different exchanges, and the price on one exchange might be a couple 100 dollars different than a price on the exchange you’re at. Well, the question is which one is the proper price? We don’t know. We don’t know which one is the proper price.
Price discovery is just a big deal. When you don’t know at what price the underlying asset is right now or it’s mis-priced, that’s gonna cause you some issues as a trader. One of my favorite stories to tell about price discovery really happened back in 2008. So in 2008, credit default swaps were a new thing on Wall Street. They started about five or six years earlier. Now, a credit default swap … I don’t want to get too far into this. It’s basically an insurance contract that people sold and bought to protect underlying bond issues and mortgage-backed securities. Now, there was no market. There was no exchange for credit default swaps. If you wanted to buy or sell a credit default swap, you’d have to call your trading firm, your brokerage. You’d have to call Morgan and Stanley and say, “Hey, you know what? I want to buy 10 credit default swaps on this.”
Now, Morgan and Stanley … They had to call around to people they knew that were in the business. Hey, I’ve got a guy that wants to buy 10 contracts. Are you willing to sell 10 contracts? And they would have to call around, and then someone would say, “Yeah, I’ll sell 10 contracts, but at what price?” Then you would have to negotiate the price, and then you’d negotiate a price, and you’d make the trade. There was no way to know what the price was until you got on the phone and called around.
Here’s the problem. In 2008, whenever someone wanted to try to sell a credit default swap, nobody picked up the phone. Nobody picked up the phone. There was no buyers out there. So what happens is, in the financial markets, big firms have to do what’s called mark to market. Any time you’re holding an asset, you have to market to the market price. Here’s the problem. What was the market price on a credit default swap? Now, surely it wasn’t zero. Well, some of them were zero, but surely there was a value to them. But how do you know what the value is when there’s no market trading in it, when there’s no trades?
This is one of the things I really dislike about real estate is price discovery. You know, your realtor can give you an appraisal. They can run numbers. But in the end, when you go to buy a house, and a lot of people are finding this out recently, is that they’re seeing a house that’s listed for 250000. They said, “Oh, great. Well, let’s go in a little bit low. Let’s go in and put an offer at 240000.”
Here’s the problem. That house ends up selling at 290000 because it’s in a bidding war because there’s so much demand. So do you see how even on that real estate property, you didn’t know where the price was? Now, you did after the transaction went through and someone else bought it, but you didn’t get a chance to buy it.
Same thing when you went to sell your house. In 2009, let’s say you wanted or needed to sell your house. Where was the price? You had no idea. You had no idea where the buyers were if there even were going to be a buyer. Price discovery … I don’t think people understand how big of a deal this is. Price discovery is huge. It’s absolutely huge as a trader. Without it, I think it’s going to get you in a lot of trouble in the end.
Alright, liquidity is next. Liquidity is just how many market participants are there which is a huge deal that basically affects the speed of your order, the slippage of your order, and also the bid as spread that you’re going to pay on that transaction.
Then a guaranteed counterparty. This one’s really big too, and this is, again, the reason why we do not like regular trading in bitcoin. We do like the bitcoin futures. We’ve approved our traders to trade bitcoin futures because, in the bitcoin futures, there is a guaranteed counterparty. There are exchanges out there that only trade commodities or that only trade Futures contracts. We’ve got the CME group in Chicago, the Chicago Board of Trade. We’ve got the NYMEX, the New York Mercantile Exchange. This is where oil and gold is traded, and then we’ve got the ice exchange.
On these exchanges, you know exactly what the price is. They’re very liquid, and there’s a guaranteed counterparty. What that means is that, if there’s some panic that happens in the market, the market makers must make a market in this contract meaning, if you want to sell, you will be able to sell. Now, look, that doesn’t mean that the price isn’t gonna be dropping quickly. It doesn’t mean that you’re not gonna get slippage on your order, but it means that, in the end, there’s a guaranteed counterparty that will and has to, by law, take your trade. That’s what you need to trade something. You need to know what is the price. And when I want to buy or sell, can I do it at a reasonable time without reasonable slippage. You know what? As long as the contract is traded on one of these exchanges, then you’re going to see a very, very favorable execution.
Again, we love Futures Trading in this aspect is that it’s very easy to know the price. It’s very easy to get in and out, and the great thing is these are open. I’m just gonna say 24/5. Obviously, there’s rules for everything. Some of the lesser-traded Futures contracts may have different hours at the exchanges. They may be closed for several hours during the day, but the biggest contracts … They’re going to be pretty much open 23 and a half hours a day.
Again, your brokerage is going to control when these windows are open, and also the exchanges are going to control that as well. But as you can see here, this gives you the ability to trade pretty much around the clock, not that you should, but it gives you the ability to do it.
Let’s get into the types of Futures contracts. We’ve got financials. We’ve got hard commodities and soft commodities. Let me start off on soft commodities. Soft commodities is mostly agriculture and farming, cattle. It’s cotton, soybeans. I see absolutely no reason for anyone to trade the soft commodities. Every so often, I have a trader at Maverick say, “Hey, Robb, I want to trade the cotton Futures,” and I’ve said, “Why in the world, of all the symbols that you can trade, would you want to trade the cotton Futures?” It’s always because like, “Well, I know … My father used to be a cotton farmer.” That doesn’t matter. What does it matter? There are so many symbols out there.
Here’s the problem with the soft commodities that I just don’t like. In the Futures market, there’s something called down or up limit. We saw these kick into place in 2008 and 2009 when the financial markets were crumbling. There were nights where the Dow, the S&P, and the Nasdaq Futures were down limit. What that means is once something goes down limit, they shut down all trading. They don’t let any trades go through. It’s done. No more trades. Then that’s it. That’s it. There have been some stories where there were some of the soft commodities that were up or down limits seven days in a row. Can you imagine being on the sidelines, and every day it opens up down limit, and you can’t get rid of your position again? Then tomorrow it goes down limit again, and you can’t get out of your position?
What we talk about in liquidity … That’s the thing is you need to be able to get in and out of your trade. Now, look. These are stories back from the 80s and the 90s. We now have a much better functioning financial system. We’ve got technology. We’ve got algorithmic trading. We’ve got things that are helping this, but we still will have up or down limits on a lot of these things. The soft commodities are the most vulnerable to this.
You know, something like a freak storm comes through and wipes out all of the oranges in Florida. Forgive me. I know very little about oranges in Florida, but let’s say that happens. Well, look, any of your who’ve seen the moving Trading Spaces or Trading Places. Sorry, my wife watches way too much HGTV. It’s the only thing on in our house. I cannot believe I just made that mistake. But, look, I know some of you can sympathize with me. HGTV and Food Network … That’s the only thing that’s on in my house, and it drives me crazy. Nothing against Property Brothers, but I kind of hate it. I’m sure they’re great guys. I’m sure they’re great guys. I’ve just seen too much of it.
Alright, so, what could happen is that freak storm comes through, and there’s a drastic move. I don’t see any reason for anyone other than if you are an actual producer of the commodity to deal in soft commodities.
Hard commodities, metals and energy, are just perfectly fine. You can actually trade those. Gold, silver Futures, oil, natural gas … They’re perfectly fine, but where you’re going to see the most traders gravitate toward are the financials. Now, the S&P Futures, the Dow Futures, the Nasdaq Futures … They are just like ETFs, and they actually were way before ETFs were created. Again, if you don’t know what an ETF is, they’ve created a symbol called the SPY which is the Spyders, and that symbol will go up and down exactly in lock step with the S&P 500.
The Futures contract … It’s the same thing. You can literally go out and just buy the S&P Futures contract. Now, they have different sizes. They have the big size, and then they have what are called the e-minis. Most people will trade the e-minis. That’s where all the liquidity is. Again, if you’re going to be trading the index Futures, I would say look at the e-mini contracts. Again, if you want to know the symbols, go to google. The YM is the Dow Futures e-mini contracts. The ES is the S&P, and the NQ is the Nasdaq.
Bitcoin Futures. Same thing here. These are simply financial mechanisms to follow certain other aspects or certain other assets. They actually have a home prices Futures contract. You finally have a way to hedge out the exposure you have in owning your home. If you can go back to 2008, you saw real estate prices were crashing, you could literally have gone out and shorted or sold the home price Futures contract, and you could’ve completely hedged out the loss that you had in your house.
Now, look, that’s a little bit silly. We all know that real estate is local. This is just a national number, so it may not have actually protected you, but you actually could do that. You actually could go and hedge the price of your house by trading the Futures contract on home prices. Then there’s lots of volatility products. We’re gonna talk a little about these volatility products. They’re very dangerous. They’re very dangerous.
Here’s the problem is they become very, very popular lately. Hopefully, everyone’s Spidey sense is starting to tingle, the hairs on the back of your neck are starting to stand up a little bit. Whenever something is very popular, dot come stocks, bitcoin back in last November, December, short volatility trades … Whenever that happens, I’m telling you it’s about to get wiped out. It’s about to get wiped out. These volatility products … They’re very dangerous. I’m gonna show you something that people don’t even understand. That if you’re trading any of the volatility contracts that are Futures-based, there’s some real dangers in these. Again, like I said, most people don’t even understand.
Alright, so let’s quickly go through, again, everything. In the end, like I said, this is a symbol. This is the most recent chart I have on the December gold contract. This is the GC. This is the one we’ve been talking about, and basically you trade it. When it’s going up, you go long. When it’s going down, you go short. That’s really all there is to it.
So, let’s take a look at just some possible trades here. Again, everyone has a different trading style, but one of our favorite trading styles is what’s called the low base. The low base is when something is going down. Now, at Maverick, we are big adherence of trend following. I don’t have time in this session, but I have spent so much time looking for that edge. Where is that edge in the market? And study after study after study shows that stocks that have been strong in the past tend to be strong in the future. Stocks that are weak in the past tend to be weak in the future, and that goes for every asset class.
Here we have the price of gold was going down. Moving averages were headed lower, price was headed lower. This is what’s called a low base. It’s one of our favorite setups, and you can see you enter off the break of the low base. There was a 52 point move we talked about. Obviously, you don’t get the whole 52 points, but there was definitely an opportunity.
Another one of our favorite strategies is called just a bare rally, and this is where things that are downturn, they have bounces. Once those bounces are done, you can go ahead and enter a short. Again, there was a 40-point move from top to bottom on that move. So you can see, as a trader, you’re just simply looking to pick your entry points. Here’s another low base. It broke down off that low base. You could see there wasn’t much in this because it’s setup another low base. So there’s a small breakdown, maybe 10 points, a base for another seven or eight days, and then it had a 42 dollar break.
As you can see here, as a trader, again, you’re looking for these opportunities. We call them high percentage trades where you’re waiting. You’re waiting for certain patterns to develop. You do not guess. You wait for the confirmation. You take your position, and then you manage your trade. As you can see, there’s quite a bit of signals here on the downside, and there’s actually one more signal that just triggered about a month or two ago. Again, that one actually did not make a new low. Again, it had about a 12 dollar move, and then we can see that it went sideways.
Again, I don’t have time to go through charting. Charting is not so simple as a couple squiggly lines. There’s lots that goes into it. But basically, the gold contract to me is showing me signs of bottoming. Again, first thing is we have stopped making lower lows.
Our highs now are coming up right around this 12, 15, area. So 12, 15, seems to be a point where people are selling this contract. As you can see, these lines here, the purple and the aqua lines, are moving averages, and moving averages have always been above the price. You can see now we’re starting to get into the price. We’re definitely seeing some signs of bottoming here in the gold Futures contract.
Right now, to me, there’s no trade here. There’s no trade. Why? Because if I was to go long here, I’m guessing. I have no idea if this thing’s gonna go up. In the end, when I do make my trade, I still have no idea, but I’m making a high percentage trade, and I’m waiting for certain setups.
There is also no short here. We’ve stopped going down. We’ve stopped going down. We’re just simply trading in range here. Again, you could trade ranges. We have some traders that trade ranges. It’s not very lucrative. You end up making a lot more trades, a lot more commissions, a lot more time, and you’re not really making any money. We tell people, look, just put this symbol on the sideline and go find something that’s actually making a move. Put an alert. When the alert hits, when it goes above 12.15, if that’s your alert, then go back to trade the GC contract. But for me, right now, it looks like it wants to bottom, but there’s definitely no confirmation whatsoever.
Again, this is just how you trade this. Again, you put in the symbol. You enter the order. Again, this would be up to a 250 dollar move on one contract. You know, just adding two zeros. That’s gonna be your possible profit potential on one contract.
Alright, now let’s talk about contango. Now, this is a funny sounding word, and I remember the first time I heard it I thought, “What in the world is contango?” Then I heard it, and I still said, “Well, what in the world is contango?” Then someone explained it to me, and I said, “Okay, so what is contango?”
Now, look. I by no means am an expert in contango. There are people that are much better at this than me. But in a Futures contract, there’s what’s called backwardation. Now, obviously, the price today is called the spot price. Now, if you ever hear these terms, there is a gold market called the spot gold market. The spot gold market is different than a gold Future. Spot gold market is I want to buy the metal now. It’s not a Futures contract. You’re literally buying the metal now. That’s the spot price.
So what backwardation is is that in Futures contract, obviously the further out you go from delivery, basically the market says there’s a little bit more risk involved especially if you’re looking at a commodity. You know, oil commodity. If you’re making a trade on a one-year Futures contract, there’s gonna be a little bit more uncertainty. So again, what happens is it gets priced a little bit higher.
Now, this is very similar to an option. If you take a look at a time decay curve on an option, this is also very similar to that, but this is the normal movement of a Futures contract is backwardation where the spot price is a little lower than as you go further out on the time curve.
Now, there are people out there that will make these trades. It’s called spread trading on Futures, and what they’ll do is they’ll buy one and sell the other. Now, look at this. There is a small profit here. Let’s say they’re gonna make 15 cents here. If they buy this and sell this and just wait a month, there’s gonna be 15 dollars that’s pretty much guaranteed, well, until there’s something called contango.
Now, contango is where this all changes, and contango can go crazy. Now let’s say that there is a hurricane that’s bearing down on the major oil-producing area of the world, and it’s gonna be there in a week or two. When all the news announcements say this is gonna be bad, it’s gonna knock out production, do you know what’s gonna happen to the one-month-out price? It’s gonna spike up. Now everyone knows once the hurricane is over, they’re going to rebuild, and they’re gonna get production back online.
What can happen is this one-month Futures contract … It’s going to spike, and it’s going to be so much more expensive than all the others. Anyone who did a spread trade here … They’re gonna get crushed. They’re gonna lose … I’m just gonna throw out some numbers here. Nine dollars and 85 cents. So what they do … They play this game where they’re gonna make 15 cents every time. Oh, it’s easy money. It’s easy money. It’s easy money. Then one time, they get hit with contango. How many times do you need to make 15 cents to make up for that 10 dollar loss? You could be right 50 times in a row and still lose money because of this situation.
We saw this situation hit early this year in the volatility contracts. A lot of people found out they were trading stuff like the TVIX. The TVIX is the volatility Futures contracts. They’re trading the VXX, and they found out that, oh my gosh, things can go really wrong. They were out there trying to get their 15 cents. Short volatility traders. They’re going after that small amount of money, but they got creamed, and a lot of them lost a lot of money. I mean, they lost everything.
So, this is the trade I think I’m the most worried about. Also, the people that do wide condors or sell naked puts on the markets, and they say, “Well, I’m so wide, and I’m going to be right 95 percent of the time.” But again, you’re getting a nickel. You’re getting 15 cents in. All it takes is one move, and you’re done. That’s a big thing we talk about at Maverick is never put yourself in a situation where you can be wiped out because somewhere in your life there will be a move that goes against you that can wipe you out. If you put yourself in that place, you will lose your entire trading account.
My guess is some of you have already done that before. You put yourself in a situation where you could lose it all. And if you do that enough times, you’re gonna lose it all. That reminds me of one of my favorite sayings in poker. If you know poker turns, there’s a play where you put all of your chips in at once. It’s called all in. There’s a saying in poker that all in works every single time but once. I love that saying. It works every single time but once. Then you’re out of money. A lot of people are all-in traders. They put all in trades where they’re risking in, and eventually they’re going to get a bad beat, and they’re gone.
Again, money management is so key which brings me to what I do. Now, look, I’ve got no problem with Futures. But on every single Futures contract, there is going to be options. Now at Maverick Trading, we are an options trading firm, and we are a spot Forex trading firm, and we really like the use of options because options give you fixes loss amounts. They give you worst-case scenarios. As I just talked about, people never think about the worst-case scenarios. People are thinking, “Oh, I’m gonna sell a put contract 10 percent below the market price. I can’t get hurt.”
Guess what? 2007 and eight would’ve wiped them out. Would’ve absolutely wiped everything out. It will happen again, so we’re always thinking about worst-case scenario. So instead of buying the December gold Futures contract, how about buying options on that? Now I don’t have time to get into options. We spend a lot of time with our traders on options. I can’t really go anymore. But again, the trade would be to buy one contract at the December 2018 1200 calls. What that means is you have the right to buy the gold Futures contract at 1200. That means if the price of gold goes to 1300, you have the right to buy it at 1200, so that would be 100 dollars difference.
The market price of this is 23 bucks. So basically, your margin requirement is going to be 23 dollars because one options contract equals 100. Again, 2300 dollars. Now here’s a great thing. That’s it. That’s the most you can lose. Let’s say the craziest thing happens, and the price of gold plunges. I don’t even know what could make the price of gold plunge, but let’s say they found a cooler middle.
[00:51:28]Sorry. I know that sounds dumb, but I’ve always had a problem with why people think gold has value. Gold has no value. Gold has perceived value just like your currency. Your 100 dollar bill is a piece of paper. It’s all perceived value. And once that perceived value goes away, it’s not worth anything. Currencies have gone worthless all over the world in history. The Weimar Republic in Germany after World War 1. They were using their paper money to start fires because it was useless. Zimbabwe. Useless. I have 100 trillion dollar note that’s hanging on my office wall. I love it. It’s 100 trillion dollars. You know what it was worth? Seven dollars on Ebay. So it does have value. It’s worth seven dollars.
But here’s the great thing is that you completely control all the risk here. You know that the worst thing in the world happens. You’re gonna be out 2300 bucks. If that doesn’t fit your position size or your account size, then you can look at a different contract. You can maybe take a look at a 1250 call. The price of that one’s probably gonna be closer to five bucks, so that’ll be 500 dollars that you can take a risk.
Of course, those are gonna be different trades. I don’t have time to get into it. But the thing we love about options is that you can totally quantify exactly what you’re willing to risk and that’s it. That’s it. If it gaps down, no problem. if it goes limit down, no problem. We don’t care. Because of options, you fully quantified the amount of risks you can take, and the great thing is it gives you a lot of leverage on the upside. So when you’re wrong, you can lock in what your loss is. When you’re right, you get exponential growth because it’s multiplied by that leverage.
Again, if this thing goes up to 1300 … Probably fairly unlikely it goes up there, but let’s say 1300. You’re going to make probably 70 bucks on this contract. Maybe 80 bucks on the contract, so you’re looking at 8,000 dollars. Again, the trade is so much better using an options contract.
Here’s just an example. Now, again, don’t run out and make this trade because, as I said, the price of gold has not triggered yet. But let’s say that our point here is about 1218. That’s our trigger. And at 1218, we want to enter a bullish trade on gold. Well, one of the strategies we like to use is called the Bull Call Spread. It’s different. It’s a little bit different here than just a long call. But basically, we’re saying we want the right to buy it at 1220, but we are obligated to sell it at 1240. It’s called a spread. And options spread tree.
Basically, anywhere below 1220, the most you could lose is 300 bucks. Anywhere above, the most you will make is 700 dollars up above 1240. So look at how controlled this trade is. This is a very controlled trade. Now, of course, if you want to change how big these numbers are, again, instead of one contract, you can do two contracts. You can do five contracts. 10 contracts. You can do 10 contracts. You just add on a zero. This is your risk reward on this.
But as you can see here, if the worst thing in the world happens, you’re going to have a guaranteed loss amount. Now, yes, you do have a cap on the upside. If there’s some trades you do not want to cap on an upside, you simply do a different option strategy. There’s many of them that can do that, but this trade is just so much better. It’s so controlled. Alright, you only have 300 bucks at risk. If it goes against you, if it goes for you, you can make up to 700.
Imagine if you made that trade 1000 times. If you make that trade 1000 times, it’s gonna be much better than a lot of the trades that some people are making out there where they’re just buying it, putting it all in, and hoping it works. This is a very controlled professional trade where you quantified your risk.
We’re big fans, at Maverick, for options. Again, our whole options division, MaverickTrading.com, is really dedicated to these kind of plays. What we do at Maverick Trading is we do basket trading. So we’ll have one of those trades on. It’ll be one of maybe 20 or 30 different trades we have on. We’ll have a bunch of trades going on at once. Long on some, short on some, sideways on the others. It’s just a really cool way to trade. It’s really, really a great way.
Most of you that are trading, you’re putting all your eggs in one trade, and it’s going for you or against you, and you’re having these lumpy results. Again, I use the term lumpy, but you don’t have these consistent growths in your equity trend or your equity average.
By doing basket trading, you’re smoothing everything out, and what’s happening is you’re having more consistent, steady returns, and you’re not having those big draw-downs.
Alright, let’s finish this up with some hedging. Hedging is a great way to use Futures. As I said, Futures are great for hedging. Let’s say you have a large portfolio. Let’s say you have a large portfolio. Let’s say you have a million dollar portfolio, and let’s say you’re worried like you were back in 2008, but you didn’t know what to do. So let’s say your portfolio is most likely correlated to the S&P 500, so you own big cap stocks. So you want to find the most highly correlated Futures contract. If you own small cap, you’re gonna want to do the Russell.
But let’s say your million dollar portfolio is most likely correlated to S&P 500. What you need to do is you just need to sell the same amount. Right now, one Futures contract of the e-minis and ES contract, which is the S&P 500, is about 150,000. You basically would sell seven contracts. If you have a million dollar portfolio, you would sell seven contracts. At this point, you are long a million dollars worth of S&P-like stocks, and you’re short a million of S&P Futures. You’ve completely hedged out your risk. Completely hedged out your risk.
It’s actually a really cool way to use Futures, and it’s really the way the professionals, all the money managers … When they want to protect their portfolio, this is what they’re doing. They’re going out and buying or selling Futures contract against their long positions or long positions against their short positions. Hedging is just a fantastic way to use Futures contracts.
Outside of that, when we get into trading Futures, trading Futures is a leveraged way to take a directional trade. Let me break this down. This is where people … If you don’t have a lot of exposure to trading … Everyone, all they know is directional trading. I’m gonna buy a stock at 50, and it has to go up for me to make money. Everyone gets directional trading.
Now, some people know about shorting. Shorting is where you sell first, and you buy second. So people that know shorting … They get it. Okay, well, I can make money either way. I can buy it at 50, and it goes up to 55, and I make money. I can short it at 50. It goes down to 45. I make money. This is called directional trading. Directional trading. This is it. You’re going in. You’re picking your timing. Your timing has to be very good. You must have a very good plan, a very good system, very good money management rules, very good positioning size, but this is directional trading.
Futures … I’ve got no problem with traders trading Futures. At Maverick Trading, we actually have Futures at level three. The big thing is … The problem with Futures is that, with smaller size accounts, the position and sizing is almost impossible. We just talked about a couple of Futures contracts. The gold Futures contract is 120000 worth of gold. If you are trading a 3000 dollar account, there’s no way to position size. Even if you have enough margin to enter that, you can’t properly position size. You’re gonna get wiped out with a move.
President Trump’s gonna come out and tweet something, and you’re done. You’re wiped out because you weren’t able to buy a half a contract or a fourth of a contract. You had to buy a full contract. An S&P e-mini contract is 145000. There’s no way for you to properly position size. What happens is people get attracted to Forex because of, hey, I can take my 10000 dollar. I can take my 5000 dollars or 10000 dollars and can control a lot with it. The problem is the position sizing is too big because they can’t do half contract.
We make sure, hey, our traders … Let’s make sure you have enough capital. Again, at Maverick Trading, we back traded with capital. Once they proved themselves, we give them more capital and more capital. At level three, that’s about 75000 dollars of capital, and that’s where we say, “You know what? You’ve got enough capital now that you can properly position size for Futures.”
Again, we make our traders turn in an updated trading plan, make sure they show us that they do have a good plan for trading Futures. That being said, Futures options … Have at it. Our level one traders have that Futures options. It works the same way as equities options and index options. We’ve got no problem with anyone trading Futures options right upon approval for our capital sharing program where we back our traders with capital.
Futures are a leveraged way to take a directional bet in the market. You have to have enough capital to trade Futures. The irony is Futures attracts people that don’t have a lot of capital. Does everyone see the irony? That’s why I say if you’re going to directionally trade, trade Forex. Trade the Forex market. It’s by far the best directional market. It has the best trends. It has the best moves. It has the best leverage, and you can position size to the penny. Sorry, not to the penny. To the dollar. You can get so granular. You can take a position of 10,421. You can get so precise on your position size that, hey, this is how much of this I’m going to control. I’m going to control 10,421 dollars exactly. So you can dial in exactly your position size.
If you have a smaller size account, to me, you should be trading in the Forex market for sure so this way you can actually properly position size. This is why, again, Futures contracts hopefully have illuminated a little bit, shown you it’s not so mysterious. It’s a symbol. It moves up and down. It does take a lot of capital to trade the Futures contracts. You do need enough capital to trade them.
But if you’re interested in directional trading, I would push everyone, and that’s what I do. I push everyone to Forex. Trade spot Forex. Much tighter spreads. It’s opened more. It’s got more consistent trends. I love the trends in the Forex.
Alright, so, let’s wrap this up. We’ve got two divisions at Maverick Trading. We have our options and Futures division. We also have our Forex division. Yes, at level three in Forex, you can also trade Futures.
But what you’ll find, and I’m telling you this. You will find that you don’t really want to at that point. You’re gonna say, “You know what? I like the Forex trading.” It’s really the same thing as trading. Trading is trading. Whatever the symbol is, it goes up and down. Some go up faster than others. Volatility. Forex is the most liquid market in the world. It’s perfect. It’s beautiful.
Again, we have two separate divisions. MaverickTrading.com if you want to check that out, and then our Forex division is MaverickFX.com. So Maverick and then just FX.com.
Alright, well let me invite you to do a couple things since you were so nice to come out and spend a little bit of your time with us. Please join us again. We’ll give you an invitation to join either our FX room which is for our Forex division, or we can join our trading room which is for our options division. Basically, we’ll give you an invitation. We’ll get you signed up, and you can join us. Oh, it says August. It’s supposed to mean October. Wow, I got terrible times here. We still have our summer hours.
Again, 10:15PM Eastern time for Forex, and it’s 9PM Eastern time for our options.
We also want to offer you just a seven-day free trial if you want to check out what we have to offer. Just so you know, all of our traders that we bring into Maverick, they have to meet what we call our qualification program. They have to pass tests. They have to develop a trading plan and submit it, and then they have to do two months of demo trading and submit that as well.
After that, we back our traders with capital. So, we want to give you just a week to go check it out. So go in and take some of our tests. If you’re an experienced trader, let’s see what you know. Let’s see what you know, and let’s see if you can pass some of our tests. Obviously, the more experience you have, the faster you’re gonna get through the whole program, but we also have training courses for people that are new. If you want to get into Forex or you want to get into options, we have full training to take you from step A to step Z all the way through.
Alright, so again, what’s gonna happen is after this, you’re going to get an email from one of our recruiters. We’ve got a bunch of people. We have a lot of people in this session, so give us 24 to 48 hours to reach out and get in touch with you. Basically, we’re gonna say, “Hey, this is a recruiter. I’ve been assigned to you. What do you want to do? Do you want to join us for the training room or the FX room? Do you want to take a look at our website for a seven-day trial? Or do you want to apply for a trading position?” So they’re gonna reach out to you and give you that choice of what you want to do.
Alright, well, that is all that I have. Sorry about these times. These times are incorrect. Our FX room is 10:15PM Eastern time, and our trading room for options is 9PM Eastern time. We go to summer hours from Memorial Day to Labor Day, and I obviously did not update this from the last time we had this session.
Alright, so yeah. Next Sunday is going to be FX at 10:15PM Eastern time. Again, this is where what we do is we break down the week. We talk about the week. We talk about, hey, this is what happened last week, and we plan out what are our trades going to be for the week ahead. What are some of the things we’re looking at? It’s basically all of our traders get together every Sunday night, and we basically gear up for battle for when the markets open. Again, Forex is already gonna be open for that time. We gear up, and we get our plan, and we get ready for the week.
Alright, hey, thank you very much for joining me. If you have any questions, please stick around, and just put your questions in the chat box, and we will get to it, and we’ll make sure that we’re here until the last person. Alright, thank you so much for joining me. Everyone take care. Goodbye.