Common Futures Market Misconceptions Explained and Clarified
Common Market Misconceptions Explained and Clarified
I've been crisscrossing the country teaching for Online Trading Academy in the last few weeks, and have met some terrific people (both students and staff) at the various centers. One thing I've found that they all have in common is their eagerness to gain more knowledge as to how the markets function, and how they can apply that information to their trading. I think it's commendable that these folks (students) are willing to make an investment of both time and money in an effort to improve their bottom line results.
The reasons people attend our classes are varied: Some simply want to take control of their own financial destiny. They've grown tired of so-called financial advisers continually losing money for them every time a bear market comes along. Others want to pursue trading as a full-time business, with aspirations of deriving their livelihood by extracting money from the market on a daily basis.
Regardless of their motivation for attending, what we as instructors have to do very early in the course is dispel most of what people have been led to believe through both the media and Wall Street. Many of the half-truths, and some outright falsehoods, have to do with the view that it's impossible to time the market and that the market always goes up in the long run. The second notion is partly correct - if you have a 20-year investment horizon. If not, you should have stringent risk control rules in order to weather those inevitable bear markets.
The market timing issue can be addressed by reviewing the audited long-term track records of highly successful hedge fund managers and professional traders who have consistently beaten the major averages for many years. They've achieved this by having a highly disciplined approach, which includes both buying and shorting, and more importantly, cutting losses quickly and taking profits when targets are attained. To readers that have been through the Online Trading Academy curriculum, this may sound familiar.
Another common misconception is that if you own only "good" companies, somehow this will shield you from losing money in market downturns. This couldn't be further from the truth. This idea can be easily corrected, however, by simply understanding the huge influence the major market averages and corresponding sectors have on an individual stock.
In reality, company specific changes such as earnings releases, management changes, or new product announcements, typically account for the smallest influence in the movement of share price. Indeed, there is the usual knee-jerk reaction immediately following the news, but ultimately market forces will take hold to dictate the direction of the stock.
Futures Are Risky
The next misapprehension is that trading Futures is much riskier than stocks. Just as is the case with any financial vehicle, certainly trading Futures has a degree of risk. Perhaps the fear of the unknown plays a part in the perception that there is inherently more danger in the derivatives market. If looked at from a SPECULATORS perspective, trading Futures is actually less risky.
First, the high leverage afforded in the Futures markets allows us to use a fraction of the capital for the same potential returns we would get from trading individual stocks, thus enhancing our ROI (return on investment). Moreover, the fact that most Futures markets trade globally (24/5) mitigates the overnight risk most people face when trading individual stocks.
By no means am I suggesting that everyone drop their stock trading for Futures. I'm simply raising the awareness of an alternate product for those intraday stock SPECULATORS who want more bang for their buck.
Lastly, far too many people see the stock market as a coincident indicator. In other words, they think that the market only reacts to the here and now, when in actuality the stock market is always looking forward, not backward. In the last several months, people have looked at the market's impressive rally in bewilderment because it was not consistent with what they were seeing on Main Street.
Now that the S&P 500 has rallied roughly 50% from its March lows, and the economic data is showing some improvement, those same people are finally coming around to buying stocks again. The problem here is that, just as the market discounted the worst possible economic scenario back in March, now the market is pricing in a recovery going forward. This means that in order to justify higher prices in the future, the economy has to continue to improve month after month.
That's not to say that it won't happen, and if it does, the market will most likely continue to gain. The point here is - getting into a move early means looking ahead. As an example, if you wait until the recession is officially deemed over, the market will have already discounted it with outsized gains. You will arrive late to the party and miss out on most of the fun.
In short, do your own work and always remember, just because they say it doesn't make it true.
Until next time, I hope everyone has a profitable week.
View Gabe Velazquez's post archive >