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Items you need to improve and protect your FCM or IB...

1.   Very important and useful forms and letters for different applications for the FCM and the Introducing Broker.  Visit our "forms" page.

FUTURES-OPTIONS-FAQs

Q. From David G.(Location: New York): I know I should have done better, but I started trading in mid 97, and other than my trade statements from the clearing FCM, I have not tracked my own performance.  Is there any trading software on the market that will help me track and perhaps analyze my performance?  I would like to see an overview of how I am doing, and in what markets I am better or worse.  Thanks.

A. David:  Your plan to track and analyze your trades is great.  Too many traders have no idea how they do in certain areas.  If they got a good look at a chart or sorted out the good and bad trades over a period of time, they would be able to choose their trades more wisely.  They may even avoid trading some markets that they first thought they did well in.  There is software, and in fact many quote programs have built-in portfolio tracking  software.  On the assumption that you don't receive live quotes, I am attaching, with this email, a copy of an old "Excel" program that I wrote for trade tracking.  It's nothing elaborate, but it works and it is a good starting point.  You can modify it further to suit your needs.  Good luck in '98.

Q. From Stephan G.(Location: Unknown): I have a series 3 and have been working for an IB for over a year. I have substantial experience in owning my own business. I owned a yacht brokerage for 15 years. I am interested in owning my own IB or branch office.  What's involved in terms of necessary years of experience and capitalization. I'm not interested in starting a large organization but rather a one or two person business.

A. I have received three such requests in the last two weeks, so thought I might as well add this to the FAQ section.  There is no stated requirement for when you can open your own IB.

You are thinking smart when you consider starting with only yourself and perhaps one or two other people. This gives you the time to gain experience in dealing with the daily work involved and in how to deal with your FCM and even with the NFA. The more registrations you have and the more people you have working as reps, the greater your liability and exposure to customer complaints and regulatory matters.

If you would be the only registered person at first, and handled the customers yourself, it wouldn't be too demanding. What you may want to do is start the business by getting registered, forming a Branch Office or Introducing Broker and see how it goes. After that you could add APs (reps) as you increase your business.

The general steps involved are not difficult, and you are welcome to call me to discuss these steps in more detail... (no charge).

1. Pass the series 3, (which you already have).

2. Find the FCM who will "guarantee" you and submit a 7-R (to form the Introducing Broker) along with an 8-R and fingerprint card (to register yourself as an AP and Principal of the firm.

3. Need quote equipment, separate phone line, time stamp machine and a fax machine, and you are in business.

4. Total required "start-up" cost (if it is within your existing home or office space) is probably $2,000.

I know this is very brief, but for details it is best to discuss this on the phone. Please call if you like.

Q. From Bastiaan V.(Location: Netherlands): Having been employed in the U.S. brokerage buz. since 1968 and having concluded positive all exams (3/5/7/15 principal/supervisor etc) I left the industry in 1989 to start my own investment buz. in the Netherlands. Member Amsterdam   Stock-Exchange/Eur. Option Exch. and Futures Exchange. I have been employed by Dean Witter/E.F.Hutton and latest by Prudential Bache, in all three positions as a branch manager and area manager. People employed approx. 40 at PruBache. In 1993 I sold my buz. and started together with a friend a venture-capital firm in Holland and Pakistan. Due to this I am most of the time in Pakistan and would like to open a brokerage office for an American firm. However what I don't know is if my registrations are still valid or do I have to do them all over again; or  can I be grandfathered?

A. Strictly speaking, if you are a branch office (foreign branch), or a Foreign Introducing Broker (FIB) of a domestic (U.S.) firm, trading on the U.S. markets, with foreign customers ONLY, there are no current registration requirements.  In other words, you can operate as a foreign broker without passing any exams or registering with the NFA.  Keep in mind, I don't know the rules with respect to Pakistan, and you had better check them out thoroughly before you set up shop. Another caution is that the Commodity Futures Trading Commission may have other ideas about your registration requirements, but when you become an office of an FCM in the U.S., they will tell you what they require which will obviously meet the requirements of the CFTC as they see them.

If the firm you affiliate with requires the series 3 exam, you will have to retest. The test results expire after two years of non-registration, and there is no grandfathering in this respect

Q. From Ron T. (Location: Unknown):  I have recently invented a tool for the electrical industry and have been told by people in the know that this tool is by far the best of its kind in the entire U.S.  I was wondering exactly what a disclosure document was all about and does it give a person any kind of protection or is it basically just another "scam".   I don't have much money but still don't want to make a mistake at this point, after so much hard work and painstaking planning.  So if you could I sure would appreciate a clear explanation of exactly what a disclosure document is all about. Thank you for your time and consideration.

A. Thank you very much for the question, and I'm glad you asked.  First your answer, then some suggestions. If you plan to trade futures with a Commodity Trading Advisor (CTA) or Commodity Pool Operator (CPO), that person or company is required to furnish you with a disclosure document.   Before it can be used, the document has to be accepted by the National Futures Association (NFA).  They ensure the document conforms to the disclosure regulations.   They DO NOT however verify the information presented in the document.  Before you invest, do your "due diligence" and check the background of the Advisor.   Visit the NFA on the net at  www.nfa.futures.org (or you can get to them from our link page).  They have a feature called DIAL, which is a number you can call for disciplinary information on registered companies or persons.  Also, ask the firm if they could give you a couple of references of existing customers. This of course requires the permission of the customer, but sometimes it can settle your concerns.   Honestly speaking, no, the document is not a scam, and (guessing now) 90% of the CTAs and CPOs out there are honest.  When you read the document, if there is a performance section, check the heading.  The information presented can be "hypothetical" which means it is a tested model but has not been traded:   It can be "proprietary" meaning that it is the performance of the trading of the Advisor's own account,  or the performance can be "actual".   This means that the past performance presented is from actual trading and has been audited by an accountant to ensure its accuracy. Compare before you invest!

Now for my usual words of caution. Contrary to what many people want to tell you, the commodity business is a "clean" industry, but when you enter in, you must know it is a fast moving venture.  In fact don't let anyone tell you it's an "investment". It is a risk venture, and because of the high degree of leverage, you can lose or make money very fast.   Since you are concerned about trading with knowledge, your choice of getting the assistance of a professional by using a managed account program is a good decision.  You want to try to "get ahead" with the risk portion of your money... And there is the key statement... "risk capital".

You said you don't have much money, but I am assuming that you mean the risk portion. You can quickly calculate the MAXIMUM you should invest by subtracting your liabilities (including your normal living expenses) from your assets to get your net-worth. Then consider your risk capital to be about 10 to 20 percent of the remainder. This is a guideline, not carved in stone. You must make sure you don't touch your retirement planning or your emergency funds. If you are a more aggressive person, you may commit more. Please, be sure that once you have made the decision on the size of your commitment you don't change it. This is how people end up losing their life savings.   They become convinced that even though they lost, if they put more money in, certainly their luck will change.  Also, as you make profits, take some out!  You are trading to get ahead, so when you do, keep that money. Take out 30 to 50 percent of the profit you make and DON'T put it back into the market.  If you have further questions, I would be happy to answer them by phone to assist you in your decision.

Q. From Samuel K.(Location: San Francisco):  I spoke with you briefly early last year concerning training material for Series 3.  I finally passed the test during November of last year. I've been studying the futures market intensely since 12/96 and finally started trading myself during last October. I've done ok (about 20% return for the past two months) and I'm confident I'll improve as I gain more experience. I'm the logical, "need-proof" type of person (I'm an engineer right now). My plan is, if my own trading goes well, I want to become a CTA near the middle part of this year, and eventually an IB towards the end of this year (a complete change of career). I don't really want to trade a lot for people at the start unless I can prove to myself that my methods work. I've been keeping up with your webpage and I want to thank you for such helpful information. Since I've told you my plan, I need your advice - should I become an AP and a CTA at the same time (may be to save cost?), or should I just become an AP first? My other question is, if I become an AP and CTA with a FCM, does that mean that I have to share both commissions and profits with the FCM?  Also, how much would you charge for finding an FCM (someone reputable) and filing the paperwork for me?

A.  Congratulations on passing the exam!  To register as an AP to a firm will cost you $70, and that's it.  To register as a CTA will cost $100 per year.  Once you produce a disclosure document and start trading accounts as a CTA you must be an NFA "member CTA" which means an annual fee of $500, (plus the $100) for a total of $600 per year.  With that in mind, I suggest you register (with a 7-R) as a CTA, and with an 8-R and fingerprint cards as an AP to your own CTA.  Total cost $170. This gets the registrations active, then when you are ready to begin trading for customers, all you need do is produce the disclosure document and become an NFA member by sending the $500 for membership.

With regard to the FCM... You will not have to "join" any FCM. You will be an entity of your own, and that way your customers can open their accounts through any FCM they choose, as long as that FCM will accept your ddoc. Since you will be a CTA, the FCM can pay you commissions on the trades you do, and you simply bill the FCM on a monthly or quarterly basis for the incentive fees that you have earned (according to your ddoc).

The FCM does not share in your incentive fee, profit, or commission.  They only get the clearing commission they charge the customer. As an example, say they charge $18. You could charge $40, and therefore get the difference of $22 per contract.  Then if you trade your customers into profits you have earned an incentive and can bill the customers' accounts through the FCM. It's all very easy, and if you would like to contact me by phone, I will help you through the steps at no charge. If you want me to create and submit your disclosure document for you, we charge the lowest rate in the industry and assure you it will be accepted by the NFA.  Call me for further information on the costs.

I hope this helps, and thank you for being a frequent visitor to the web page and for the nice comments on the page. When I get email of this kind, it makes me feel good to know that in some little way I am helping.

Q. From Anon.(Location: North Carolina):  I have developed a S&P daytrading system that looks statistically quite promising. I would like to trade this system in real time (real money) using the E-mini. Since this contract is traded virtually around the clock, I have a few questions with regard to this. I am currently using Metastock (end of day data) to generate next day buy or sell orders. My goal is to exploit every tick possible for the next days movement.

1. It is my understanding that the E-mini closes at 4:15pm(eastern) and reopens at 4:45. Does 4:45pm count as the opening price on the E-mini for the  next day?

2. If my system gives me a buy or sell signal, should I just enter the trade immediately at 4:45?

3. Are there wild overnight fluctuations in the S&P futures contract that I should be concerned about or at least familiarize myself with?

4. Is there a real time data service that provides tick data of the over night fluctuation on the S&P futures contract?

5. Stops are essential to my psychological well being; Are there any brokerage houses that take stop orders on the E-mini, and also cater to the daytrader(low RT's-under $20, low margin)?

A.  Much of the information you require can be found on the CME web page at http://www.cme.com, and some past charts can be found on their site at;   http://www.barchart.com/cme/cmesp.htm

Yes, the re-opening at 3:45 CST is the beginning of the next day of trading.

From my experience watching the trading, and from several traders I spoke with, I believe the activity on GLOBEX generally follows the trend that was created during the normal trading day. The contract doesn't seem to have much volume, and you could therefore be hurt with certain orders placed on the GLOBEX. The fluctuations haven't seemed that wild, but things change, and I have never been much of a fan of electronic trading. Before trading on the GLOBEX, you should definitely study the past charts of price movements that have occurred in the night sessions.

Nearly all of the companies that supply data have the ability to include GLOBEX, but generally you have to request it, and will obviously pay more for the service.

About stop orders: You can of course place stop orders on any market with any brokerage house for the regular trading session.  At this time, you cannot place stop orders on GLOBEX, (on any contracts).  Presently if you want to stop out of the market, you have to be watching the price, and when it "hits" your stop price, you then have to place the order, (just as if you were trading on a market order).  There are two solutions underway to correct this problem.  First, if the brokerage house you use has the TOPS computerized order entry system, they may soon be able to use stop orders.   The second solution being worked on is called the GLOBEX II system which is a revamp of the system and will be including stop orders.

I appreciate your interest in trying to exploit every possible tick, but for now, (unless you never need sleep), you may want to work with your system to see how it can handle just the daily sessions, and incorporate the night session when it becomes more "user friendly".

Q. From Keva M..(Location: Unknown): I am interested in taking the series 3 exam.  Please send me pricing information on the correspondence form of exam preparation. I was also told that I needed sponsorship, what does that mean?  Eventually I would   like to become an IB.  At this time I have no experience in futures trading, but have ordered books and video tapes from a trading course. Do you have any advice that would help me.?

A. You do NOT need sponsorship to take the series 3 exam. You call the National Futures Association at 800-621-3570. Ask the person answering the phone to send you a registration package for "Associated Person" (that is what you are testing for), and tell them to; (very important here), "Please include the U-10 form. when you receive the package, it is overwhelming, but take heart, the only thing you really need is the U-10.  Fill that out, (I'll help you if you have trouble, please just give me a call), and send it to the address on the bottom, with $75. Within a couple of weeks you will receive a "ticket" to test.  The ticket is good for 90 days, but only one exam. When you feel you are within about two weeks of testing, call the test center near you, (the list will be included in the ticket package from the NASD), and schedule your exam.   Try to test in the morning since that is when your brain power is at it's peak... (been proven). Also included in the package from the NFA is an outline of what is on the series 3 exam.  After you pass the exam, you are eligible to be registered with any futures trading firm in the world.

Nothing bad about the course you've selected, but take it all with a grain of salt.  Every course has it's good and bad points, and the one thing to be cautious about is the "hype" about how easy it is to make money for a living, by trading.   This can be scary especially when you think about how many of us there are in the industry, and we certainly are not all millionaires. If it were that easy, why aren't we all rich, and why are we still working for a living?   Just be careful and know that trading, as well as the job of being a broker is hard work, just like any job.   The IB is down the line, and we will talk before then.

Q. From T.David T.(Location: Sarasota): I have been told several times by my broker that I should short certain markets.  He has been right on many occasions, but I admit I am hesitant.  I am an old stock trader and I understand the concept, but was always discouraged about shorting because of its difficulty and dangers.  What makes it any different in trading commodities?

A. I believe the old comment written sometime in the '20s, about shorting in the stock market said "He who sells what isn't his'in, must buy it back or go to prison".  Shorting a stock can be more difficult, and is definitely more involved.  If you own the stock, then you can "short against the box".   If you don't own the stock, you must borrow it from someone who does.  This arrangement is made by the securities firm and you will pay interest on the value of the stock you borrow.  Then, you can't actually go short until the price of the stock has an "up-tick"...(or zero-plus-tick).  Then when you do get short, the margin requirement, or Reg-T, is 50%.  Yes, it sure is more involved than shorting commodities.  In commodities, the short position is mechanically different from going long in two ways only.  First;  to initiate the trade you tell your broker to "sell" instead of buy.  Second; when you go "short" you are promising to MAKE delivery of the commodity versus promising to TAKE delivery if you go long..... That's it... the only differences.  Consider the risks which are equal per point movement, but when you are long, you lose as the price moves down.  Therefore you are liable only for the full price of the contract.  When you are short, you lose as the price goes up, and are at risk to whatever the price should move to (if you don't exit the short position first).  Give shorting a try, you'll soon see there is money to be made (and lost) playing both sides of the move.

Q. From Antonio S.(Location: Monaco): I would like to know the procedure in order to become a Commodity Trading Advisor.  I passed already Series 3 and 7 in 1987.

A.To become a CTA all you need do is register, and produce (and have accepted by the NFA) a disclosure document.  The process can be completed at the same time. You will need a 7-R, 8-R and fingerprint cards. Contact the NFA at 800-621-3570 in Chicago, IL, and request a package for Associated Person, and for CTA. The NFA will send you the required forms.

The 7-R is the form that registers you as a CTA, and the 8-R and fingerprints are necessary to register you as a Principal of your CTA.

You will then need the disclosure document which will be created and submitted to the NFA for acceptance. Once the registration is in place and the ddoc has been accepted, you can make arrangements with an FCM through whom you will do business. You are then ready to do business with any customer in the world.  If you choose to apply, we will assist you with your registration free as long as you choose us to prepare your CTA disclosure document. We will prepare, submit, correct and re-submit your document until the NFA accepts it.

Q. From Danny J.(Location: Bristol): I recently started trading with a company in New York.  I had heard you discuss the risks of trading on your video.  You say "trading is not for everyone", and one should only use "risk" capital.  It seems the exchanges made it easier for everyone to trade with the invention of the mini-S&P contract and the Dow index.  Does this mean there is more acceptance of commodity trading?

A. you pose a very good question.  It is obvious that such small contracts will probably not be used much by institutions, since they will continue to use the larger contracts to hedge their large portfolios.  It would seem then that the smaller contract is there only to attract the smaller investor.  Just my usual words of caution... these contracts can be as deadly as trading any other.  In fact, they can end up being more dangerous since they give the appearance of being safer with their "small dollar" moves.  Watch your positions carefully, and always use stop-loss orders.

Q. From Karen P.(Location: Miami): As a new trader I have been trying several recommended strategies of my broker.  At times I feel as though I am over-trading the account, how do I know if I am trading too frequently?

A. Well Karen, that's mostly up to you.  You didn't tell me about the amount of equity in your account, or the results of your "tests".  It sounds like you agree with your broker, so if you are comfortable with the trading, and you are not "destroying" your account, then it isn't over-trading.  The only thing I would advise is that you never let yourself feel pressured by your broker to do a trade, and that you never get greedy with a position.  By the way you state your question, it sounds as though you have a good relationship with your broker, and that you are not being pressured.  If you can afford the experimentation then continue.  It will soon lead you to the method of trading you like best, and you will stick to that.  If you are continually in losing positions, then slow down and take a breath and decide where your did the best and stay with that.

Q. From Mario S.(Location: Milan): I do my own trade analysis, and haven't done badly, but I would like to trade more commodities and will need information about the ones I choose.  Can you tell me where to get the best information?

A. Always start with the Exchange where the contracts trade.  The Exchanges are very helpful and will give you all the contract information you need.  A good deal of that information will be listed on their web sites, and you can get there from our "links" page.  Then, depending on the commodity, consider information from "trade" journals, newsletters, government reports, etc.

Get in touch with us by email.

THERE IS RISK OF LOSS IN TRADING FUTURES...  LOTS OF IT!!

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Last modified: April 05, 2008