Need some advice from paper traders

[Shelby-villian]

Tell me if this is feasible. I have almost zero experience trading commodities. I would like to trade paper gold, buying at Hong Kong open and selling at NY or London open. I would like to do this every trading day. I would be willing to invest in high 4, low 5 figure USD amount depending on transaction costs.

Would this be feasible in risk/reward with the transaction and spread costs, counterparty risk, and the U.S. capital gains tax?

Thanks in advance.

 

[DCFusor]

Depending on the flavor of paper you want to trade, you might only need an account with a broker who can trade all those markets, unlike mine (TDAmeritrade).

Interactive brokers, maybe? That should get you all the ETF kinds of paper. I'm not sure you can even do this with futures, as they kinda specify a particular delivery place if someone stands for delivery...I think. This is past my speed, maybe SA has an answer.

I look at the big swings between here and there myself, and wonder. It's just that I'm only a hardcore trader - not quite insane enough to do it 24 hours.

 

[swissaustrian]

Ok, here's what I can say:

1. Intraday trading: You would need an automatic trading system which places your daily buy+sell orders. This isn't cheap. Maybe some broker offers this also for retail investors in the US?

2. You have basicly three trading vehicles you can use: Globex futures, over the counter derivatives and pool accounts. The last 2 usually require a lot more money as a minimum investment than $10000. Globex gold futures are basicly your only choice. I haven't used them for a while (1,5 years), so I'm not up to date with all the recent developments.
Generally speaking, futures transactions fees are very low. Spreads are also minimal. Risk is HIGH. Futures require sophisticated monitoring and margin account management.

3. Counterparty risk is basicly the default risk of the exchange involved. Keep in mind that this is a fractional reserve exchange, meaning they don't have enough physical to back all contracts.

4. Another risk you didn't mention: Broker default. MF Global customers had to learn this the hard way. Their accounts were not seggregated and they lost their futures positions (e.g. Gerald Celente). Some even lost (hypothecated) physical metal.

5. Taxes: I'm not an American. I don't know anything about that.

6. Don't trade on options and futures expiries!

 

[Shelby-villian]

Thanks for the replies... I would like to keep it simple. Buy like 5oz of gold on HK open and sell the 5oz at close. Don't want to mess around with margins or any other leveraged trades. So for something like this, would Globex be appropriate?

Or is this something that is too much effort and/or risk for the small amounts being invested? After MFGlobal, I don't see how any amateur could invest anything more then a small amount...

FYI I did mention the MFGlobal factor... I lumped it all into "counterparty risk"

 

[DSAbug]

Honestly.. the costs of these transactions aren't worth doing it. If you were a HFT you could manage to do this but commissions and things of that nature could eat you alive.

 

[swissaustrian]

Globex only offers futures, therefore you have always margins.
As this would be considered overnight trade in US markets, margins would be higher than just for intraday (8 am - 17:15 pm ET).

 

[swissaustrian]

Honestly.. the costs of these transactions aren't worth doing it. If you were a HFT you could manage to do this but commissions and things of that nature could eat you alive.

I don't know about US conditions for retail traders, but the major futures brokers should offer pretty attractive cost models for active traders (decreasing fees per trade in relation to the amount of trades or trading packages with fixed prices regardless of volume). $.02

 

[DCFusor]

I'm not finding commissions a big deal for trades $10k or more at all - in the noise, sometimes less than the bid/ask spread.

Remember, the buy/sell premiums don't exist for paper - the one good thing about it, it's not at all like phyz in that way - it's very easy to trade it nimbly.

I just don't trust computers and the limited types of limit orders, so for me, I'd have to stay up late to do half the trading. That's probably the main reason I don't do this myself so far.

 

[swissaustrian]

@Shelby:
Looks like these guys are actually starting a fund based on your idea, so you could just put some money in this fund:
http://www.skoptionstrading.com/upd...-our-proposal-for-an-overnight-gold-fund.html

 

[DSAbug]

I don't know about US conditions for retail traders, but the major futures brokers should offer pretty attractive cost models for active traders (decreasing fees per trade in relation to the amount of trades or trading packages with fixed prices regardless of volume). $.02

Yeah but this guy is talking about trading 5 oz...

 

[Shelby-villian]

Nice link SA! I'll have to look into that. It's something I would look more into, if I wasn't so wary of the counterparty risks... an active form of "fighting" the manipulation.

 

[Shelby-villian]

Sounds like the entire plan is based around a minimal spread... seems tricky to implement... if its hard for a firm to do, definitely not for a novice such as myself. I will continue to monitor their progress though.

"However in practice we must keep in mind that reversing one’s position each day is not free. One would have to cross the bid/ask spread. Taking a $0.10 spread into account the short intraday and long overnight index would have increased from 100 to 1827.34 since 2001. This increase of 1727.4% outperforms the 593% increase in gold prices over the same period by almost 3 times. If a $0.20 spread is used on a short intraday and long overnight index, there is an increase of 530.4%, which slightly underperforms a buy and hold strategy. Therefore one would need to be able to reverse one’s position at the AM and PM fix for $0.10 spread for the strategy to work in practice."

 

[DCFusor]

The real problem is this. Yeah, there's a spread, and you have to take it every time if you robotic-ally do the same thing every day. And we all (should) know, that any simple scheme only works till enough other people find out about it anyway.

So you go to the next level. Instead of switching from short to long each day, when gold's in an obvious downtrend, you stay short, skip paying the spreads, and taking the long losses from the down trend. Great - in effect, that's what I try to do myself.

But history has shown that almost no one can pull this off consistently well enough to
"beat the odds". So when you start down that path, it's time to beware, or at least find a system that's harder to game once people know about it. The short-day/long-night trade has come and gone a couple of times since we started talking about it here - it's not always a good one, but sometimes it's sweet for weeks on end. So another "order" of complexity is called for, maybe just sitting out when it's not working until the next time it would have worked again...you miss some trades, but those are all losers, so why not miss them?

 

[DSAbug]

The real problem is this. Yeah, there's a spread, and you have to take it every time if you robotic-ally do the same thing every day. And we all (should) know, that any simple scheme only works till enough other people find out about it anyway.

If everyone here is talking about it, i'd imagine the Russians, Chinese and every other central bank in the world know about it.

 

[swissaustrian]

If everyone here is talking about it, i'd imagine the Russians, Chinese and every other central bank in the world know about it.

Russia had a representative at the GATA Gold Rush conference in 2005.