Choosing a broker - reliability, commissions and margin requirements

Much of what I have to say is covered in this link and this link too. Even though both links pertain to forex brokers, much of the same criterion apply to choosing a futures broker.

I am based in Singapore, so additional considerations for me include "how much do they charge for wiring money?", and nowadays, "is my broker financially secure enough?", and perhaps whether they accept a base currency other than USD.

In choosing a futures broker, for me there are three primary considerations.

1. the broker's connection to the exchange must be reliable and fast
2. the commissions that I have to pay per roundturn must be competitive
3. the margin requirements should be low

The first requirement is a no-brainer. It is impossible to trade if you have no faith whether your orders are getting to the market or not.

The second requirement is a bit tricky. Roundturn commissions refer to the total cost per completed trade, i.e. the total fees (including exchange and miscellaneous fees) of entering and exiting the market. This is something that most people don't really pay heed to, especially when starting out, but arguably this is the most important thing to look at when choosing a broker. Why? Because commissions can eat into your profits, especially if you overtrade, and commissions scale up with your increased trading size.

For example: Suppose you are trading the CBOT corn contract, and you have a choice between two brokers. Broker A charges you a roundturn commission of $7 per contract, while Broker B charges you a roundturn commission of $6.50. The minimum price fluctuation ("tick value") of the contract is $12.50 per tick.

Suppose that you made $1,000 per contract from trading corn, which is 80 ticks. Suppose as well that you made this by making 1 tick per trade: therefore you got to the $1,000 by making 80 trades. With Broker A, your commissions will cost you $7 x 80 = $560, or a stunning 56% of your total profits. With Broker B, even though it is only $0.50 cheaper per round turn, your commissions will be $520, a full 4% less than with Broker A. If you can find a third broker Broker C to offer you commissions of $6.25 per round turn, under the same trading conditions your total commissions will be $500.

Bear in mind all this is per contract: if you scale up your size to trade in lots of 10+ contracts, your costs will have multiplied by 10.

Moral of the story: Undertrade, rather than overtrade, especially as a retail trader! And try to lower your commissions, as these are business costs that scale up with the size of your trading.

Tip: when you have been trading regularly for a while, call your broker to ask for a reduction in commissions.

The third requirement is about the margin requirements. Most people misunderstand the difference between margin in the stock market vs. futures margins. In the stock market, when you buy stocks on margin, you are basically borrowing money from the broker to buy/sell stocks.

In the futures and forex markets, a margin is really much more like an initial deposit with the market place, like the deposit one places with a real estate agent when you buy a house. It guarantees that you are able to pay for your losses, beyond which the broker and exchange will ask you to top up or (if you can't) to liquidate your position.

There are two margins that are described on most futures exchanges: initial margin and maintenance margin. Initial margin is the minimum amount that is required to trade a single contract. Suppose you trade and lose money consistently such that your margin falls below your maintenance margin, then you will get a call from your broker asking you to top up your margin account, or they will liquidate the position for you.

The key thing to note here is that some brokers list different margin requirements for interday vs. intraday trading. For example, the corn contract has an interday margin requirement of $1,600 or so; if I long corn, and decide to hold the position over a day or two after the two market sessions close, then I need to make sure I have at least $1,600 per contract traded, and that I don't lose enough on my position to get a margin call. If, however, I am focusing largely on intraday trading, some brokers allow me to trade for as little as $800 margin.

This is especially pertinent for certain expensive contracts, like the E-Mini S&P 500, which the Exchange charges around $5,600 as initial margin. If your broker does not distinguish between intraday vs. interday margins, the S&P Emini might be out of your reach if you are starting with a small account (like me).

The art of trading: The beginning. Choosing a market and style.

Trading as a profession is laden with randomness (see Nassim Taleb's book Fooled by Randomness, and it is quite impossible to distinguish between a lucky trader vs. a good trader just by looking at the results. In my opinion, though, it is quite possible to distinguish by looking at the generators of the results.

My personal viewpoint is that trading is more of a performance art than a pure science, and the progress of a novice trader charts much the same path towards mastery as an apprentice artisan. At the start, any success by the novice trader will be due largely to luck. This is no different from the apprentice carpenter successfully creating his/her first piece of furniture, or an architect completing his first desireable home, or a sculptor creating his first sculpture: often, initial success is due to a fortunate accidental combination of factors, some of which are temporary.

Sustained mastery comes from a firm grasp of required skills. Like his/her artisanal counterparts, the novice trader needs to be dedicated to his craft, and will need to learn the mechanics required to be a successful trader, namely managing his/her own emotions, crafting a trading plan, executing the plan, knowing when to add to one's position, knowing when to take losses, etc.

But a huge element of luck comes from the choice of market (or product: both terms really mean the same thing). Why? Because like relationships and personal chemistry, the only real way you will know whether a market suits you or not is for you to try trading that market. This is especially pertinent if you're just starting out at trading, and you have no idea (a) what type of market suits you, and (b) what one means by different types of markets.

If a trader is lucky when starting out and there is a great fit between the trader's personality with the market in question, then the trader will make money very quickly and early in his/her career. If not, then the trader will experience big losses, frustration, loss of enthusiasm, and maybe even a loss of libido. There's a further danger that starting out with the wrong market will cause the novice trader to pick up damaging and bad habits due to fear.

So how, then, can one overcome this? According to Dr. Brett Steenbarger, the author of Psychology of Trading and (in my opinion) the seminal and groundbreaking Enhancing Trader Performance, it is important for a beginning trader who aspires to mastery of trading, to start by playing with different markets and different trading styles.

So for each week, one could paper trade different markets in different styles. For example, one week could be spent on the Chicago Board of Trade (CBOT)'s corn contract , doing day trading; the next week could be spent trying out swing trading on the corn and soybeans; the third week could be spent trying out inter-day trend trading on an equity index market like the E-Mini S&P 500 contract .

At this point, what you are trying to do is not make as much money as possible on the paper-trading account: what you are trying to identify is which market is fun and which market is interesting and challenging. That's your criterion.

While doing this, it will be useful to research and compile a sort of product matrix of possible markets that you want to trade. In this Excel spreadsheet, it will be good to have columns covering the trading hours, last trading days, expiration months, tick values, contract size, initial and maintenance margins for various brokers and other information in the contract specification. You might even want to include a column specifying the most liquid trading times. That way you have a personal reference at a glance, as to which markets you like trading, and the individual characteristics of each market.

Have fun experimenting!

Picture of computer setup

This is a pic of my computer setup at home: two screens, keyboard, mouse, and the CPU.

The two screens are very useful in allowing me to look at the market across different time frames, while also allowing me to track the cousin-markets. For example if you are trading corn like me, then it's good to keep an eye on the other agricultural commodities, like soybeans, wheat, oats, etc.

Two screens is useful. That said, anything more might be more a distraction than help, especially when you are just beginning to trade.

Computer setup

One of the necessary items in a novice trader's arsenal is a decent computer system.

You don't really need all the super-duper high end graphics stuff that dedicated computer gamers get: afterall, there are only so many colours that you can decipher on a candlestick chart. Given the law of diminishing marginal returns, you're likely to pay much more for a top-end system, but ultimately you'll probably be unable to distinguish between it and a recycled Apple II.

In my case I needed to get a new PC, preferably a desktop, as I'm a Mac user. Despite being a home Mac user, for Excel, I'm much more used to the keyboard shortcuts on Excel running on Windows XP, due to my banking background. Also, many forex brokers have trading platforms and software that isn't compatible with Mac (more on brokers at a later date). I've also tried to trade from my single screen Mac, and find the lack of screen real-estate to be quite inefficient: it's a lot easier to take in what all the markets are doing when you have at least two screens. In fact, there are studies and an article by the New York Times demonstrating that increased monitor real-estate increases productivity, possibly for the same reason I had for a two screen trading setup.

Anyway, a friend of a friend was building said-friend's computer, and I basically used his recommendations to assemble my own computer system setup at a Sim Lim Square shop. My trading setup is relatively simple computer system, consising of an Intel 2.6GHz dual core, plus 2GB of RAM, 250GB of hard disk space, two 21.5 inch full HD LCD screens (from LG), Microsoft wired mouse and keyboard, DVD writer, LAN connections, with the full suite of software (Windows XP, Norton Antivirus, and Microsoft Office 2007. All original software, by the way).

All told, the system cost me a total of S$1,231, which I thought was extremely cheap, especially since I didn't have to even lift a finger.

The vendor I patronized is on the sixth floor of Sim Lim. The shop is called Cashtronic, and it's run by these Indian chaps who are very friendly, and give very competitive prices. Their service is also top notch: I got the computer from them on Monday, and on Tuesday night the system suddenly wasn't able to start up: I got black screens, and there were also no signs of life from the keyboard and mouse lights. I took it back to them, with my receipt, and they basically helped me troubleshoot, and fixed the problem without any hesitation or extra charges (he had to replace the power unit).

When all their customers are going after them at the same time, they can get a little overwhelmed (it is a small operation afterall), but if you're in no hurry, the service is friendly and top notch, and they have integrity, and are competitively priced.

Next I'll talk about choice of brokers, choice of markets, etc.

First post - who (am I), why, what, how

The raison d'etre of the blog is to put my journey as a novice trader online, to serve as a sounding board for myself, and also to share my experience as the journey unfolds. I plan to list the trading reference books, resources, websites, links, and knowledge that I can find online.

In all honesty, this blog is less for any anticipated reader than it is for me: it's really a means for me to make sense of my own journey, as I try to make it on my own as a trader.

Who am I

I go by my initials, PJ. I'm Singaporean Chinese, 28 years old (as of May 2009). Aquarius, A+ blood type, and genially eccentric, with a propensity to use big words (like "propensity") unintentionally and unapologetically.

Previously I had worked in A*Star on Jurong Island, then went on to an "illustrious" one-year career with UBS Investment Bank on Hong Kong Island in 2007-2008. This stint abruptly ended after I realized banking, while it pays well, is really not what I want to do, and coincidentally also got let go. I then abandoned a job offer for a stint with a long-only fund in Shanghai for a trading stint as a trading trainee with Blue Water Financials, a prop trading firm in Singapore. Under the terms of my contract with them, I won't divulge any details of my time there, so don't expect a Michael-Lewis-Liar's-Poker-style exposé, as there won't be any.

One disclaimer, which reflects less on the firm than on me: I was let go by Blue Water, because I wasn't profitable, though I always felt that I was almost on the verge of taking off. The frustration I felt with regards to my P&L was akin to being unable to climax when having sex, a sentiment which most women will probably sympathize with.

Sex aside, I'm always grateful to Blue Water Financials for having given me a chance. Otherwise, I wouldn't have known that trading is truly my life's calling, so much so that I'm trying to trade on my own, using my own money.

Why are you doing this?

Because I like to write. And I like to trade. So it seems natural to put two and two together. While there might be genuine concerns about leaking my strategies and what not, I think if my trading edge stems from my trading experience and expertise, that is unlikely to be "stolen" and replicated by an algorithm.

Why "Daft Fader"?

In trading, we often speak of 'anger trading': when you lose money on a trade, the subsequent trades you make in order to make back that money tend to be accompanied by hot air, emotions, but no little piggies. Often you lose even more money. That is anger trading. My ex-boss once said, "Anger trading is good, but bear in mind what happened to Darth Vader."

And it's often very unwise to fade (i.e. trade against) the trend.

And so, in a moment of questionable wit and even more questionable sensibility, the two elements were combined and "Daft Fader" was born.

What will you say?

For now, I will use this site to describe my setting up process. I'll post pictures if I have any, and will also use this site to post my reviews on computer systems, brokers, trading books, etc.