4th June, Monday (DJIA & FBMKLCI)

DJIA

Bears taking Charge?

The DJIA suffered huge losses last Friday and closed below the important level that we are looking at – SMA 200 (12255). Will this be the indication that the bears will dominate? It is still at its early stage for us to gauge and get the confirmation, however, the downside risk is increasing and investors will need to take extra cautious. This may be the start of the free fall and the next reliable support level can only be seen at 11200 level.

For the week, the immediate support is seen at 12000, followed by 11500 and the immediate resistance is seen at 12255, followed by 12800 level (a tough resistance level).

FKLI

Immediate Support – 1550 Level!

More volatility is expected for this week as the world market remains fragile over the Europe debt crisis. At the moment, the index is expected to hover within the range that we are eyeing (1550 to 1580 levels). Nothing much that investors can do except to capture on the range trading (short when the FKLI approaches 1585 level and long when the FKLI approaches 1550 level).

Provided the 1585 level can be taken over convincingly, then, we will expect the FKLI to re-challenge the historical high, else, not much to be expected as the FKLI will remain trading in the range that we are looking at (1550 to 1585 levels).

For the week, the immediate support is seen at 1575 level, followed by 1550 level and the immediate resistance is seen at 1586 level, followed by 1590 level.

FCPO

Bears Won the Fight?

As mentioned, after taken into consideration of the volatility, any level more than 100 points below the SMA 200 (3155) should be considered as a confirmation of the bearishness for the FCPO. So long as 3000 level is not able to be held, free fall will set in and the next reliable support level can only be seen at 2750 level. We should patiently wait for another day for confirmation. Any initiation of short position should set your stop loss level around 3060 level.

For the week, the immediate support is seen at 3000 level, followed by 2850 level and immediate resistance is seen at 3040 level, followed by 3100 level.

Disclaimer:

The information herein was obtained or derived from the source that I believed are reliable. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute my judgment as of this date, not an invitation to buy and are subject to change without further notice.

Introduction of Futures (3 of 4)

For week 1, please click here.


For week 2, please click here.



Week 3

Fundamentals of Futures trading (Continued)

v)                  What is margin call? How to calculate margin call?

Margin call is simply being defined as:-

 Cash Balance < Initial Margin Required

When a margin call is triggered, the broker will usually inform the investor to fulfill the margin shortfall within a timeframe (usually 1 day). If the investor does not satisfy the margin call within the timeframe, the broker has the right to close his position and the investor will still be held responsible for whatever over losses incurred (if any).

Example below will show how to calculate a margin call for FKLI future contract:-

If Margin Rate = RM3000 for 1 FKLI contract; Investor’s Cash Balance = RM3000

Investor long 1 contract of FKLI @ 1500.

Market dropped to 1490 by day end

(1490-1500) x RM50 = RM500 (loss)

Thus, there is a margin call of RM500 by day end and investor needs to bank in the difference of RM500.

vi)                Settlement

Futures will expire at the end of each contract month and the unclosed contract will need to be settled. There are two types of settlement:-

a)      Cash settlement; and

b)      Physical delivery.

As defined last week, cash settlement means that all contracts upon expiry will be settled at cash price without delivery of physical goods. Meanwhile investor who opts for physical delivery will need to take the delivery or deliver the physical goods upon the contract expiry date.

Opportunity & Risk in Futures Trading

Opportunity

1)      Profiting from a bear market

Futures allow you to initiate a short position if you are of the view that the market will trade downwards and you can close the position by buying back later.

2)      Leverage

With a small amount of initial outlay, investors can earn higher return. For example, the margin required by Bursa to initiate a FKLI contract is only RM5000 while the full value of the FKLI is RM75,000 (1500 x RM50) assuming current FKLI’s index is at 1500.   

3)      Higher volatility

Higher volatility means higher probability than profit expectations can be met within a shorter time period.

4)      Higher liquidity

The two most traded products (FKLI & FCPO) are fairly liquid. Higher liquidity provides the means to exit the market at a reasonable price.

Risk

1)      Leverage

An investor may suffer huge percentage of losses in relation to the initial outlay committed, especially in a very volatile market. This is because futures is a leveraged product which could magnify both profit as well as losses.

2)      Higher volatility

Higher volatility could affect your cut-loss point faster as futures tend to reach your cut loss point easily.

Players of Futures

There are three types of Futures users:-

1)      Speculator

Speculators have the pure view of buying futures when the market is bullish and selling futures if the market is expected to be bearish. For example, speculators buy FKLI when they expect FKLI to rise and sell FKLI when FKLI is expected to fall.

2)      Arbitrageur

When ‘similar’ products have huge anomalies or price differences between them, arbitrageurs will trade to gain profits from the disparity to arbitrage between the two markets.

3)      Hedger

Hedger uses futures to reduce their price risk. For example, equity fund managers with a portfolio of stocks can short the FKLI to protect against decline in portfolio value in a falling stock market. (I will cover more on this topic next week.)

How Does One Get Started?

Simple, just walk in or call any of the licensed broking firm to open a futures trading account. In Malaysia, there are near to 20 broking houses available for you to choose from, the criteria to select a proper broking house is as follows (as a reference):-

i)                    The commission rate being charged;

ii)                  Trading platform provided;

iii)                Services provided;

iv)                Margin facility.

Correct Technique in Futures Trading

Trading in Futures market is different from trading in stock market simply because:-

1)      Stock does not have expiry date whereas futures contract will expire at the end of the contract month. You will need to take note of the month end expiry to avoid your trading strategy being interrupted.

2)      Futures have mark-to-market requirement where you may need to top up the differences to fulfill the margin required based on the market condition. Failure to fulfill the margin required will cause your position being liquidated and this may affect your trading strategy as well.

3)      As  futures has higher volatility compared to stocks, you must always have your stop loss level being set whenever you initiate any position and you must have a clear trading strategy (whether is long term or short term trading).

4)      Futures traders have shorter trading period as majority of traders are speculators. Speculators on average only hold on to a position from days to week.