Friday 29 Mar 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 25 - 31, 2016.


Futures trading has been traditionally viewed as high risk. But in volatile times such as these, the contracts can be used as a hedging tool. This allows investors to hold on to their investments until the market rebounds, says Straits Index Sdn Bhd director Yong Chen Chook.

 

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The short position investors take through futures trading provides them with more flexibility in their investment strategy. It helps them to be more versatile during an economic downturn. 

Genuine investors who are equipped with the knowledge of trading futures contracts and the risks involved use them as hedging tools. “You are a genuine investor, not a gambler looking to earn quick money. You want the value of your stocks to grow steadily in the long term. And you want to avoid volatility caused by events such as the weakening ringgit and falls in the index. You can hedge your position through trading futures contracts and continue to hold on to stocks that are fundamentally sound. When the short-term volatility is over, you could get maybe 10% per annum,” says Yong.

In Malaysia, retail investors are still wary of futures trading, mainly because of the negative news emanating from derivatives trading, and also the perception of high risks. “Investors should not see it as a form of gambling and shun trading in them,” says Yong. 

Investors who are interested to trade in crude palm oil (CPO) futures can consider using the calendar spread trading strategy, he suggests.

What is calendar spread trading? Yong says, to put it simply, this is when you buy and sell a pair of futures contracts that expire in different months on the same exchange. It is an arbitrage method used by traders to make a profit from the spread, which is the price difference between the two futures contracts.

The volatility and risk of calendar spread are much lower than the price of the futures contract’s underlying asset, which is the CPO price. “Based on my trading experience, [the calendar] spread moves 10 times lower than the price of the underlying asset. Thus, the risk is 10 times lower, based on my calculations. Spreads also move much slower than CPO prices,” says Yong.

“However, investors will have to equip themselves with the knowledge of calendar spread trading strategy and risk management. They can attend futures trading classes and start trading.”

A word of caution from Yong. Investors should be aware of classes conducted by “bloggers and scammers” who claim they can earn millions of ringgit a year. “That is not possible — maybe only the very few top traders are able to do it. These people who say they can earn a few million a year cannot even show a statement to prove they have been trading futures contracts over the years,” he points out. 

 

From software developer to full-time trader

Straits Index Sdn Bhd director Yong Chen Chook, who grew up in an oil palm estate in Tanjung Malim, Perak, did not think he would one day become a full-time trader. But he did have an interest in developing software for traders.

He recalls that in 1996, after graduating from college, where he had studied electrical and electronic engineering, he spent time developing charting software that would help traders and investors make better decisions when trading stocks.

Two years later, he set up Straits Index Sdn Bhd and started to market the software he had developed. It was not the perfect time to launch the product as the region was hit by the Asian financial crisis, which sent markets tumbling and several economies, including Malaysia, into a recession.

Even so, the software, which was available in Mandarin, managed to attract a pool of Chinese-educated investors. “Fortunately, the market started to recover and we became very popular among Chinese-speaking investors,” says Yong.

However, the capital markets saw rapid changes over the following years. The number of stocks increased tremendously and financial derivatives such as warrants were introduced by the local exchange. The behaviour and dynamics of the stock market changed, rendering Yong’s software no longer as useful. At the same time, competitors started to develop new products, causing his software to lose its edge. Finally, he decided to take a break in 2006.

“I stopped marketing my products and coaching on technical analysis. Instead, I focused on research and trading. At first, I traded stocks, which I always did. But later on, I rethought my strategy and started trading futures calendar spread,” he says.

It was not so much of a challenge for Yong to learn the ropes of futures trading, given his technical and analytical ability. In time to come, he set up his own proprietary trading firm.

“Back then, I had to meet traders and prop shops (proprietary firms) in Malaysia, China and Singapore. All the local traders were individual professional traders. But overseas, there were traders who set up their own prop shops and trading firms. This gave me the idea to start my own firm,” he says.

The opportunity came this year when Bursa Malaysia Derivatives came out with its programme to allow local participants to become associate participants. While the local participants are professional derivatives traders who trade their own account and are recognised by Bursa Malaysia Derivatives, associate participants are allowed to set up their own proprietary trading firms and hire their own traders.

Yong believes he is the first and only local participant who applied to be an associate participant. “I am the ‘strategist’ of the firm and also the mentor for the people I hire. Previously, I took care of my account. But now I am mentoring these traders. So, theoretically, the trade volume now can be five times bigger,” he says, adding that Bursa Malaysia Derivatives are doing this to create more liquidity for the derivatives market and to encourage more people to become professional traders.

Today, he has four traders under his wing and will hire more if he sees good candidates. He also conducts classes to teach people about trading futures contracts, which was what he used to do in the old days.

Yong is quick to debunk the perception that traders earn incomes that keep them in a luxurious lifestyle. Life as a professional trader can be tough, he says. To survive, full-time traders have to at least generate a 10% return a month, or 120% a year. As good as it seems, a large chunk of the money is used to cover their daily expenses. This includes living cost. There are times when they lose money on their trades.

 

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