From icnet-l@ifcss.org Wed Nov 2 18:48:51 1994 Reply-To: icnet-l@ifcss.org Originator: icnet-l@ifcss.org Sender: icnet-l@ifcss.org From: Gray Zhu To: Multiple recipients of list Subject: IC941102: The Risk of the futures game X-Listprocessor-Version: 6.0c -- ListProcessor by Anastasios Kotsikonas X-Comment: Investment Club on network X-Mailer: ELM [version 2.4 PL23] Status: R ================== IC941102: Investment Club ====================== 1. The RISK of the Futures Games ............................ Gray Zhu 2. Why Newton proposed futures than stocks if they are similar as you are claiming .................. Gray Zhu 3. Introducing MATLAB ....................................... Gray Zhu 4. Can you send a copy of article? ......................... Gray Zhu 5. Does Newton have an upper limit? ......................... Gray Zhu _______________________________________________________________________ (be sure to read the Disclaimer in the end if you have not read) DON'T FEEL PRESSURED OR SOMETHING ELSE WHEN I MENTION "FUTURES". :-). ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ The likelihood is that there will be NO Newton Fund if there is no dramatic change in the indications, the reconfirmed capital is less than half the original indication. Without 600k+ capital, NO attempt will be made to start a fund. -Gray ------------------------------------------------------------ 1. The Risk of The Futures Game, comparing to SPX. I have heard enough about the high risk of the futures games. Since we have no more sales pressure, let's explore a little bit more about it. Here is a statement I like to make: THE RISK OF INVESTING 5% IN S&P 500 FUTURES IS COMPATIBLE WITH INVESTING 100% IN BLUE-CHIP STOCKS, or more actuately, similar to investing in SPX, which is the spot price of the index. Here is the argument: 1). S&P 500 index is the blue-chip index, behaves like most blue-chips, but much more stable. agreed? 2). S&P 500 futures moves in concert with the S&P 500 index spot price (market value). agreed? 3). Let's say S&P 500 futures is at 450. in the futures, every point up gain $500 for a long position, $500 loss for a short; every point down cost long $500, and make $500 for short. if S&P 500 goes from 450 to 0, you are long, you lose 450x$500= $225,000. Now, the gain or loss of ONE futures contract is similar to the gain or loss of $225,000 worth of SPX shares. Agreed? So, long a S&P 500 futures is similar to spend $225,000 to long SPX (the stock index). short a S&P 500 futures contract is similar to short $225,000 worth of SPX shares. Agreed? 4). You have to deposit margin $9000 for one position (contract) which is 5% of $180,000. It means, if you have $180,000 and deposit $9000 to buy one S&P 500 futures, you can achieve the similar effect as using all $225,000 investing in SPX stock shares. If you do not use the extra of $180,000 in addition to the $9000, and think the investment is $180,000. Don't you think the risk of loss or the gain is similar to $225,000 investment in SPX stocks? Agreed? 5). Now, what is the difference? It is the CASH FLOW. if you have $225,000 and all invested in SPX, you don't have any cash in hands. However, if you buy one futures contract and deposite $9000, the remaining is the cash flow, although you may have to meet the margin call, You can still spend the majority of them in other stocks or fund to diversify, or to hedge your futures position - can actually reduce your risk. If you are in business, you know the importance of cash-flow. You have cash, you are alive, no cash-flow, you die. No matter you are import/export, retail, or manufacturing. Agreed? 6). IN CONCLUSION, IF YOU HAVE $1 MILLION, YOU INVEST 5% IN S&P 500 FUTURES, THE RESULT IS SIMILAR TO SPEND 100% TO INVEST SPX, WHICH IS A "BONA FIDE" BLUE-CHIP STOCK. 7) The real risk in futures investments is that you do not understand. For example, Gold is selling like $400/oz, and each contract is 100 oz, and you need about $1000 to buy one contract. Someone who spend $1000 to buy one futures contract may think he bought $1000/$400=2.5 oz Gold for $1000, but he is actually depositing $1000 for 100 oz Gold, total value of $100,000. Now assume Gold goes from $400 to $380, the one who bought one contract loses $2000. It is confusing, but it is true, deposit $1000 for one contract could lose you $2000. You buy one contract, is similar to buy $100,000 cash gold. So, buy one gold contract, you should think it is a $100,000 investment, even though you have $99,000 cash flow in you hands. The general guide line is do not spend 50% (as margin deposit) of your capital speculating futures. Also, futures is a zero-sum game, someone made money, another one must lost money, the total is zero. Futures traders are mostly professionals, and are mostly day-traders. ------------------------------------------------------------------------ 2. Why the Newton Fund plans to invest 5% in futures rather than 100% in stocks, now you are saying they are similar? I have to go back to the sensitive point. it is not a cash-flow problem. a) Wash sale: SEC rule: if you sell a stock to realize a loss, and buy the same or similar back in 30 days, the loss cannot be used to deduct income for tax purpose. let me give you an example: You made money with QWE stock (sold already), and you are holding ERT long and it is down. Now it is time of the year you are worried about tax. You may think: why dont I sell ERT now to realize a loss and buy it back immedidately, so that the loss of ERT can reduce my tax burden of QWE gain. If you do buy it back in 30 days, it is a wash-sale. Not even the options, warrants or rights. There is no WASH SALE in the futures trading. That's why most day-traders are playing in the futures field. 2). Ask-bid. I have seen many illiquid (low-volume) stock bid like $12, and ask like $13.5. It means, if you buy the stock, you pay the ask, and you get the bid if you sell. It is too much (most than 10%) in many stocks. But not likely in the futures. 3). There are only limited futures contracts (about 30), you can very well follow them. With the wash-sale rule, you have to following a lot of different stocks all the times, it is much more difficult to do that. 4). Low commission. As I said, a round trip futures trade could be negociated to $10, it hasn't happened to any stocks, I believe. --------------------------------------------------------------------------- 3. Introducing MATLAB ............................................. Gray Zhu If you are a technical analysis hacker, MATLAB (Matrix Laboratory) is something you do not want to miss. I mean if you are developing new trading models, it is better than TradeStation or Ensign (those are the only ones you can programming as far as I know). Some people communicated with me about using neural network to recoginize patterns. This thing MATLAB has a Neuronet Toolbox, a Signal Processing Toolbox, a Fuzzy Logic Toolbox, which are bound to be very useful in establishing pattern recognition models. I am developing a indicator toolbox including: OBI, A/D, RSI, EMA/MACD, %R, Stochastics, etc.. Another nice thing about it is that it is a interactive plotting system (like PAW - Physics Analysis Workstation, MN-FIT if you are HEP), you can combine all the indicators you want to give a single BUY or SELL signal. So, Neuronet friends, we may have chances to discuss this in the future, and a few things I think may be important: 0. statistics, e.g.a. using simple EMA, how much is the winning rate looping through all stocks; e.g.b. When I see a gap, what is the percentage of the stock going to the gapped direction in the next few days. 1. differentiate trending/flat market, 2. recoginize support/resistence area, 3. recognize triangle, 4. ??? ------------------------------------------------------------------------- 4. Can you send a copy of article? .................... Gray Zhu >> If you are not afraid of terms like gamma functions, noise and >> signals, Mr. Ning Zhu had published an article 2 years ago on >> Technical Analysis (? - sorry I do not remember) magazine about some >> of the principles, you can probably find it from your library. - Gray. >Would you care to ask Mr. Ning Zhu a copy of his publication >for me if it's not too much trouble for you? My local library >doesn't carry TA magazine. I would like to learn about the >principles of his model. And I am actually facinated by the >process of finding out the facts behind theoretical terms. Sorry, the answer is no at this point, because we have no money to do so. -Gray. ------------------------------------------------------------------------ 5. Does Newton have an upper limit? .................... Gray Zhu >Don't you have an upper limit on how much money you want raise? In about a >month or so, I may get an investment group interested in the Newton Fund >Partnership. The money we can put in could be in millions($). >I'd suggest you avoid using such aggrevating words as 'bullship' on the net. There is NO upper limit, but certainly a lower limit. Keep contact! Sorry, I did say "bullshit". But I do not like to be a "pirate" either. -Gray. ========================================================================== Disclaimers: a) Material on ICnet is for general information only, and made available to voluntary subscribers (subscription is free). There is no guarantee of accuracy in either text or numbers, so please read with your own discretion. Opinion expressed by any author is his own, not necessarily his employer's. Nobody on the icnet-l or related (Hong Guang, Gray Zhu or their employers, or any other members, or ifcss.org which is the ftp provider) except yourself assumes any responsibility for any consequences of using the material. b) You are free to forward and copy the material for private use. 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There may be delay in posting your message. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ICnet - Investment Club on network __________________________________________________________________________ SUB/SIGNOFF to: LISTSERV@IFCSS.ORG, with mailbody as: SUB ICNET-L Firstname Lastname or: SIGNOFF ICNET-L Post mail to: ICNET-L@IFCSS.ORG Anonymous ftp: at ifcss.org, in direcctory: /org/icnet Gopher: /org/icnet on ifcss.org, /ifcss/org/icnet on cnd.org Managers: Guang Hong, HONG@opus.mco.edu Gray Zhu, grayzhu@panix.com __________________________________________________________________________ ALL INVESTMENTS INVOLVE RISK, STUDY CAREFULLY BEFORE INVESTING. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~