More strategy ideas

Following on from last week where I commented on the number of emails I had been receiving about trading strategies for stock futures, I want to continue on the theme.

The biggest mover of the past 14 trading days as I write has been AstraZeneca - launching to over 2550 and a 11% rise. Now, if you had bought 5 stock futures in AstraZeneca, then since each one is the same as owning 1,000 shares, but without the stamp duty, you would have had a £12,500 profit in two weeks. Chances are, you would have only taken perhaps one stock futures contract so not to overextend yourself if the market went the other way.

But, how do you get an idea about direction?

Looking at the chart we have a classic reverse 'head and shoulder's pattern'. (For more on those read Net Trading )

It involves the breaking of a downtrend at March 2003, then a climb upwards.

Chart Pattern for Stock Futures Trades

Chart patterns are of course popular with stock traders. When they come along, trading in a product such as a Universal Stock Future has some distinct advantages.

Firstly, many chart patterns, such as the 'head and shoulders' patter predict a upside or downside. A stock future let's you profit from either direction trades of course.

Second, since such patterns are infrequent and place the odds in your favour more than usual, you probably want to drive home that advantage. In other words - you want to use a leveraged product such as a stock future to take advantage of the infrequent opportunity. But remember, no chart pattern is more than 70% accurate. When it doesn't look good, get outta there.

Third, patterns usually allow you to place a stop-loss or exit level. This is often neglected but vital for any, especially stock futures trader. It let's you know when to 'abort mission'. In the case of a head and shoulders pattern it's when the price fails.

Trends

Of course easier than chart patterns are futures positions placed just on good old fashioned trends. Tesco provides the best illustration of doing this at present.

It continues a steady rise from 155p around March and the trend direction is clear, although now weakening.

And at present, if you form your odds from examining the trend, as things stand it would be hard to find a trader who would not say that there remains at least a 70% chance of an upward move.

It being such a big liquid stock, the bid-ask spread will be nice and tight, meaning relatively small cost loss there. In fact I have received a few questions about bid-ask spreads. This is the calculation I do:

Allowing for the bid ask spread what is the total profit I could make doing the trade with stock futures and doing it with shares. Now, after allowing for stamp duty costs on shares, higher commissions usually, then I find it cheaper to use the stock future than the stock for active trading.