As an author on futures and options as well as a long time professional trader and adviser, I get asked plenty of questions on how to get into the markets; what kind of trading should beginners look at; what to buy, what not to buy etc…

This article is a collection of thoughts and answers to the questions relating to getting started in the markets. The title suggests a focus on futures and options, but the basis ideas apply to shares too.

The article assumes you have been looking around at different things and are not too sure where to put your money. The first thing to look at of course is whether or not you trade it yourself or give it to someone else.

Managed Funds

I’m not a fan of the brand name managed funds. Here’s why: years ago when I was involved with a small fund, I would go along to all the conferences where fund managers would get together, beat their chests and talk general garbage.

I found it amazing that no one ever talked about why they bought a certain stock or traded a certain way. There was never a mention exciting ideas in technical analysis or any other trading method. Instead all talk was about ‘funds under management’ and ‘management expense ratios’ (the fees you pay). The funds are there to make money for the customer, but no one seemed to care about that. It seemed all about being bigger than the next manager.

Have you heard about this thing called benchmarking? It is the biggest load of nonsense in the industry. Benchmarking is the way a fund manager shies away from telling you how much money you’ve lost while justifying his or her own existence.

Benchmarking is where funds will measure their returns against an index, such as the ASX200. Rather than talking about absolute returns, these fund managers will compare their returns to the index. “we outperformed by 2%” means their returns were 2% more than that of the index. Of course the index may have been down 30%, but they still outperformed.

It really is nonsense and I cannot see why anyone should give money to someone that cannot talk straight.

That said, there are some good funds out there, but make sure you know what you are investing in. In my experience, the smaller funds tend to be more transparent, but they do carry more risk.

 

Seminars

Over the years, I’ve been to a stack of seminars. Most of the time, I was better off saving my money.  Do not spend thousands of dollars on seminars. You just do not need to and quite often you can get more information from a $50 book.

The Traders Expo run in Las Vegas every November is a good one to go to. They have paid events from well known educators and traders.

Advisers and Research

Bottom line is everyone needs assistance in trading – whether it be from a paid adviser or a few of the myriad of newsletters out there. I’m not about to recommend anything here, since everyone has different needs. There are however a couple of things worth considering:

• Transparency – make sure the advice you receive is explained clearly. Be sure you understand the reasoning behind it. If you don’t understanding it, ask questions. I would never take a trade just because someone says so and without good logic.

• Conflicts of interest – it may be a logical thing to say, but if your broker is telling you what to buy, keep in mind he/she has an interest in you buying it. All brokers I know (and probably all brokers world wide) are paid on commission, so they want you to trade. In reality, brokers than can help you trade better are few and far between. You are better off using a broker for execution and getting your info elsewhere.

• Suitability – Again this sounds like an obvious thing to say, but make sure any advice you are getting is in line with the type of trading/investing you want to do. For example, there is no point getting a day trading newsletter when you do not have the time or are not comfortable with day trading.

 

Finding a Broker

You know, finding a broker you are happy with is difficult. Chances are we’ll all go through a few brokers until we find the right one.

The one thing to realise before you start talking to brokers, is you will not find trading success if you rely too heavily on advice from a broker. Brokers have a job to do and I know many that do it well, but their job is not to line your pockets.

Here are a few considerations when talking to prospective brokers:

• If you are trading overnight markets, does the broker have a night desk?
• If you are trading options, does the guys/gal you are speaking with know much about options? You’ll find this comes in handy when you accidentally place an incorrect and potentially costly order. Mistakes happen and someone knowledgeable can often pick them up for you and save you some money.
• Do they offer all the markets you want (e.g. non-electronic and overseas markets)?
• If you plan to use an electronic trading system, what are the costs including exchange fees?

Cheap brokerage is not as important as getting a capable broker. There are some brokers who will undercut anyone else, but their thin margins mean they have to get as many clients as possible just to pay the rent. Unfortunately, when this happens, personal attention and service suffers. That said, you don’t have to pay the most expensive brokerage either. Just do not be afraid to pay for a good service.

 

Software

Don’t go out and buy the fanciest looking piece of kit when you just don’t need it. There are a stack of great programs out there that do all sorts of things. Before you open your wallet, spend a little time thinking about what you want. Then look just for that.

As for what I use, I love my eSignal (www.esignal.com) for technical analysis and data. I’ve used OptionVue5 (www.optionvue.com) for options analysis – and it works very well with eSignal data.

The best advice here is to start with something cheap and upgrade when you grow out of it. Since futures and options trading is a specialist area, quality software packages can cost several thousand dollars. However, there are many small and limited packages for no more than a couple of hundred dollars. Keep in mind; however, you do often get what you pay for.

With regards to finding out what is available, try a Google search. Also, magazines such as Futures mag often review software packages and data services.

 

Your Reading List

Here is a short list of books relating to futures, options, technical analysis and general trading. It certainly not exhaustive, but any one of these will offer far more than any seminars out there.

Futures trading

• Trading Commodities and Financial Futures: A Step by Step Guide to Mastering the Markets. A good entry level book.

 Options trading

• Options: A Complete Guide, Guy Bower. Aimed at a beginner and intermediate level this book has everything that is worth readng about options.
  

• Options as a Strategic Investment, Larry McMillan. A good reference book covering everything from the elementary to advanced concepts. It’s a little more expensive than many books, but has plenty of content.

Technical analysis

• Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications, John Murphy. The perfect reference book and the only one you’ll need.
  

Psychology and general trading books

• Market Wizards and New Market Wizards, Jack Schwager. If there is one book that could be considered a modern classic, it is Market Wizards. The book is a series of interviews with top traders, who share their methods and the highs and lows of trading. The second book, New Market Wizards follows in the same footsteps as the first. Highly recommended!
  

• Bullseye: Tope Trader Thinking, Matt Kirk and Sari Mustonen-Kirk. Delves into the psychology behind successful trading and provides a simple guide to help you get the best from your trading. The book profiles traders including Larry Williams, Daryl Guppy and Guy Bower.
  

• Tricks of the Floor Trader, Neal Weintraub. This book has some great bits of information that would otherwise only be learnt from real experience. It is written by a real-time trader, adviser and educator.

 

 

Contributor information: Guy Bower is professional futures and options trader. Guy is the author of two books: Options: A Complete Guide and Hedging: Simple Strategies.

 

 

Disclaimer: There is a Risk of Loss in Futures Trading
DISCLAIMER HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED THE RESULTS MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. THE RISK OF LOSS IN FUTURES TRADING CAN BE SUBSTANTIAL. YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. PAST PROFITS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THERE IS A RISK OF LOSS IN FUTURES TRADING.THE INFORMATION CONTAINED HEREIN HAS BEEN OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE, HOWEVER IT CANNOT BE GUARANTEED AS TO ACCURACY OR COMPLETENESS, AND IT IS SUBJECT TO CHANGE WITHOUT NOTICE. IT SHOULD NOT BE ASSUMED THAT THE SEASONAL PRICE TENDENCIES SHOWN HEREIN OR THAT THE SUGGESTIONS REGARDING THEIR USE WILL BE PROFITABLE OR THAT THEY WILL NOT RESULT IN LOSSES. PROTRADER LLC, ITS MEMBERS OR EMPLOYEES ASSUME NO LIABILITY IN CONNECTION WITH THE USE OF THE INFORMATION CONTAINED HEREIN.