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“How to Exploit the New Bull Market in Raw Materials without Getting Killed”
Publisher’s Cataloging-in-Publication data Nagy, Andras M. Trading 101 : how to exploit the new bull market in raw materials without getting killed / Andras Nagy. p. cm. ISBN 13 978-0-9753093-0-8 (pbk) ISBN 13 978-0-9753093-2-2 (hardcover) 1. Commodity futures. 2. Portfolio management. 3. Finance, personal. 4. Investments. 5. Foreign exchange market. 6. Futures. I. Title. HG179 .N33 .T73 2006 332.0242--dc22 2006927384
All Rights Reserved © 2005 by Andras Nagy No part of this book may be reproduced or transmitted in any form or by any means, graphic, electronic, or mechanical, including photocopying, recording, taping or by any information storage or retrieval system, without the permission in writing from the publisher.
Commodity Trading 101 “How to Exploit the New Bull Market in Raw Materials without Getting Killed” Revised First Edition By Andras M. Nagy ISBN 978-0-9753-0930-8 .
Other Titles by Andras Nagy Retire Worry Free – ISBN 978-1-4116-8878-0 iv .
Dedication To my daughter Dora v .
........................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................ 11 Background.......................................................................................................... vii Acknowledgements ................................................................................... 112 Lesson 11 ......................................................................................................................................................................................... 142 Conclusion ....................................................................................................................................... 96 Trading Plan 101 ............... 142 Appendix A ......................................................................................................................................................................................................................................................... 36 Lesson 4 ............................................................................................................................................................................................................................................................................................. 145 Options on Futures .......................................................................................................... 36 Charting and Indicators ............................................................. 29 Order Entry 101...................................................................................................................................................................... 135 Lesson 13 ...................................................................................................................................................................... 29 Lesson 3 ..................................................................... 98 Psychology ................................................................................................................................................................................................................................................................................... 112 Nuts and Bolts................................................................................ 108 Trading for a Living – Should I Tell the Boss........................................................................................................................................................ 108 Lesson 10 ........................................................................... 158 .................................................................... 105 Lesson 9 .................................................................................................................................................................................................................................................................................................................................................................................... 69 Lesson 5 ...................................................................................................................... 93 Lesson 6 .....................................iv Dedication ................................................... 17 Lesson 2 .................................................................................................... 98 Lesson 8 .......v Table of Contents.................. Nagy ................................................. 132 Lesson 12 ..........................................................................................................................................iii By Andras M.................... 96 Lesson 7 .............................................................. 145 Glossary ..............................................................Table of Contents Commodity Trading 101 ....................................................................................................................ix Introduction ...............................................................vi About The Author .........................................iii Other Titles by Andras Nagy................... viii Preface...................................... 69 Seasonal Trends............................................................................................................................................... 132 Computers and Technology ...................................................................................................................................................................................................... 135 Why Traders Fail.............. 11 Lesson 1 ....................................................................................................... 93 Money Management ........................................................................................................................................................................................................ 17 Basic Information ............................................................................................................ 105 How to Find a Good Futures Broker ..............................................................................................................................
com/ Editor . a software designer and contract engineer for various investment and trading firms. You can ask him questions via his web site http://www. Decimalization of course put many listed traders out of business. Now he mentors and consults with traders wanting to become professional or need help in developing strategies and systems. After New York he spent years of Computer software contracting and trading his retirement account. Andras has been licensed and registered with the NASD. He had met Robert Kanter President of Electronic Trading Group (ETG). he personally persuaded Andras to trade stocks instead of futures. He moved there with the notion of trading futures in New York but events turned him to the stock market.About The Author Andras Nagy has been in the investment and financial engineering field since 1986. Andras had spent the last 20 years working as a futures broker with Refco. He traded options on futures and the Dow Jones Stock Index Futures. This is an example that demonstrates his lack of hunger for wealth and his streak of independence. This move had puzzled many including him later.spread-traders. In the late 80’s after getting a grubstake together he purchased a membership at the MidAm Futures and later he became a member at the Chicago Board of Trade. He became a stockbroker despite a job offer from Microsoft. Andras saw that trading is moving more upstairs and becoming more electronic so he abandoned his floor trading and first traded from the CBOT cafeteria then later he moved off the floor altogether. NFA and CFTC. trading again. This was no different with Andras. He had to adjust and move on. After various computer-consulting assignments he found his true love. this time in New York City.
unfortunately he was closing their clearing business due to personal tragedy of illness and death in the Kern family. I like to thank Robert (Bobby) Kern in Chicago to allow countless telephone and in person dialogues to exchange ideas to see where individual futures may go. Reading is very important about trading but only experience and actual practicing can amount to a real value that you can lean on. I encourage you to use the software as much as possible. options strategies to gain a better insight how to be profitable. He traded family and clients money without live quotes and expensive quote machines. I also like to thank to Lan Turner who made this all possible. and you have fed him for a lifetime. Even after I left Chicago we kept in touch for many years via the phone and always talked about the world markets.”—Author unknown I like to thank to the traders I ran across during my career. Teach a man to sell fish and he eats steak. The book should be used in tandem with the software and the two (Printed material and software) should nicely complement each other. Teach a man to fish.Acknowledgements “Give a man a fish. I always made an attempt to talk and get a feel for traders their psychology in order to learn this craft. viii . Many authors were influential to my trading and naming them all would defeat the purpose. Despite my technology background I had to learn to keep trading simple and low overhead. The charts you will see in this book are from the courtesy of Gecko Software. I have met Bobby while I was looking for a clearing firm at the Board of Trade. you have fed him for today. It is available for 30-days for free! It is a tool for learning and experimenting with charts. Lan is the CEO of Gecko Software. Many great traders and money managers of course had the same approach as I learned later. he allowed me to use the Gecko Software – Track ‘N Trade.
If you are a novice or new to trading or spreads you will have to allow some time to absorb all this information. . .Napoleon Hill The best way to use this book Since this book is available electronically and in Print how you use it might depend on what type of content you have. Many traders had experiences with the markets and later after much soul searching they realize the mistakes they made prior and want to try again. This book is to dismiss any notion of a “Holy Grail” in trading. http://www. If you can get the Track and Trade software (hopefully with the spread plug-in) do that. The idea of writing a basic yet comprehensive book of modern spread trading was the goal of this book.spread-traders. Since I cover so much ground I decided to keep the chapters short and simple and understandable to a complete novice. It examines certain pet hang-ups and cautions you to broaden your horizon as early as possible. which fail.com/charting.Preface The majority of men meet with failure because of their lack of persistence in creating new plans to take the place of those. A $10 coupon is there for you. It will all sink in. You can get a free 30-day tryout from my web site.html Since many would be spread traders are also novices to futures I thought I give an introduction to futures and technical analysis as well. Focusing only on order entry or technical analysis is a mistake in my view if for example the trader completely ignores macroeconomics and fundamentals. I have noticed that many newcomers to speculation get hang up on either order entry or charts. Markets of course change in subtle ways. I must ask you however to read this book several times.
Good advice is hard to find. x .Who is this book written for? Ideally this is for a person who is thinking about trading futures and intrigued by the possibilities but afraid to start because of the stories we all hear. They had two alternatives enter a Prop firm and become series 7 licensed trader or trade e-Minis. How to use this book? This course consists of a book and software. This book is also for the thousands of traders who had a bad start and got hooked into “bad company” or looking to clarify whether abandon trading or employ different strategies. As the e-Mini traders found out day trading is hard no matter what you trade. This rule had effectively put small day traders who had accounts under 25k out of the stock business. after the pattern day trading rule lot of day-traders entered the futures arena. You will see how each piece fits in and forms complete and comprehensive futures spread trading course work.
There is some evidence that the Chinese traded rice futures as early as 6000 years ago. It is clear why commodity markets bring out fear and greed in people. Due to volatility of price movements the margin amount can evaporate.“the possibilities are horrendous but the downside is equally severe.” There are electronic futures markets and the traditional futures also called Pit Traded markets where open outcry still dominates. Large traders of commodity futures own baseball teams and enjoy the freedoms and independence not afforded to most people. the oldest known futures market. The speculative advantage is of course leverage. The need of futures stemmed from the problems of maintaining a supply of seasonal and storable commodities such as agricultural products and livestock. Why trade futures? Trading futures has tax and speculative advantages. if you have a favorable trade and experience a move of 5 percent in your favor then you had a 100% returns on your money. Modern American futures came into full speed in the 70’s when Chicago started trading futures on financial instruments such as Treasury bonds. To simply put it . 11 . Euro dollar and currencies. Rice futures have been traded in Japan as early as 17th century. If the margin is 5% and the commodity contract held experiences and adverse price movement of 2 percent you have just lost 40 percent of your margin money. Since futures contracts only require a small amount of money called “margin” to be deposited with the FCM (Futures Commission Merchant) this can translate into much larger windfall in terms of percentage of gain/loss relative to margin.Introduction Background Futures Markets have a long history. It as also the late 70’s when due to very high inflation gold and silver took off. This leverage is a double edge sword however. Conversely.
A real beauty of any trading business NEEDS NO CUSTOMERS! 12 . Massive advertising and giveaways are designed to do just that. shall we? Customers what customers? The biggest hurdle of any new venture is to gain a basic group of followers and establish clientele. There is even a book called “Swim with the Sharks”. Some ventures seem easy to start only to realize that your competition is massive and they can buy and sell you multiple times over. I will teach you how to cope with the risks by managing it and accept is as part of life. 1) No need for customers 2) Relatively low overhead 3) Expand by multiplying the contracts you buy Let’s look at these points in detail. trading is. How do you compete with such a group of competitors? Well You can start by distinguishing yourself from the group and offer exceptional service. It is hard to come by an opportunity sweet without some inherent costs and risks. Trading is a business and futures traders have it made once they are profitable and consistent. I do not wish to elaborate on this further but we can all agree on the competitive nature of business. Busting stops is another ingenious way of the local pit traders to liberate outside traders from their money. It is a common floor practice to trigger these stops by some very large orders and after the orders become market orders reverse the trend. Using Fibonacci and Stochastic most floor traders and brokers know where the customers’ stops are resting.The downside of the Pit Traded markets is the delay and the human intervention also begot some ‘funny business’ for locals to take advantage of the retail orders. Ideal for several reasons. If you think it over this is nature’s law. Even if you do the best job you can muster your competition will claim to be better whether it is true or not. It is an ideal business.
Expansion is with push of a button Robert Kanter the ex-president of ETG who taught me the fine art of exchange listed trading. Upfront investments can differ of course. You can even trade while keeping a day job. Once profitable he said you could expand your business by adding a zero. regardless of the actual holding period. I am not a tax professional so please check it with a CPA or EA but the last I heard the law was. Consider that a McDonald franchise is more than a million dollars and many other franchise and service ventures are quite expensive we can safely say – entry to trading can be done on a shoestring. 13 . In addition to be a good business – futures trading can be advantageous for tax reasons as well. The risk of failure in trading is no different from opening a restaurant or a business venue. Statistics show that the odds are roughly equal. He used to tell rookies to trade 50 shares of stocks and sometimes even less. I congratulate you on buying this course and investing a little in order perhaps to save a lot more. The current maximum capital gains rate is fifteen percent. In trading sooner you are on the right track lower is your “tuition” to enter into the trading business. Consider that other businesses must go though market analysis and borrow money to expand this seems easy in comparison.Relative low overhead A trading business is not a huge overhead if done properly. somewhat less than the maximum rate for ordinary income. commodity profits are automatically taxed as sixty percent long-term capital gains and forty percent short-term capital gains. You can’t do it with many other businesses since study shows that small business owner virtually work all the time.
Dumber the average player remains better off the inside players can do. There is no such problem with the futures markets. Longs are betting that the marker will go up. The easy of going short pales in comparison the hardships and pain to go short in stocks – it will depend on your broker. Shorts are betting that the market will go down. This is the misinformation permeated from Wall Street. To clarify the terminology let me spell it out. 14 . Imagine a casino that has the edge in all forms of betting activity. The average retail customer has no chance to execute shorts and conventional wisdom and sometimes stupidity frowns of shorts as doomsayers and Un-American. Would this Casino tell their customers the proper ways of gaming? Well the proper ways of gaming would be NOT PLAYING or limiting yourself to the few activities that can yield profits. This terminology is the same in the stock markets and futures. No in the millions years – Casinos would ban card counting and often do not even offer poker even so they can make modest profits from it.There are other advantages of futures versus buy and hold and stock market investing. Card Counting and Poker are the two. Going short in stock required the up tick rule. Taking positions in the falling market is what futures traders call short position. As you perhaps know or heard that the stock markets have historical upward bias namely caused by inflation and other considerations (such as politics) No such thing exists in the futures markets. The commodity markets are not upward bias and can and do go down as easy as up. In addition since stocks need to be ‘borrowed’ to be used as shorts not all firm has equal access to this “short list” this hindered many ‘bears’ and forced them to trade options or use expensive strategies called ‘bullets’. You can always go short as easy as you can go long. Namely one is the unbiased market direction. Wall Street Journal. Do not look from meaningful and informative comments from Wall Street insiders and that includes Media. The situation is no different from Wall Street.
I'm sure there are some honest traders out there. Do not let this stop you from following your dreams. Why trade Spreads? It is my not so humble opinion that being a pit trader is the same as being given a license to steal.I am not saying that there is some conspiracy or collusion out there. It is a great money machine to clearing firms. you can make money in day trading and by all means try it if that is what you want. “futures are inherently more dangerous than stocks” are all nonsense yet they were all invented and permeated to confuse and keep the average folk in the dark. Mutual fund can rip off and overcharge the public. But watch out for anything that is promoted and pushed too much in the mainstream. but being in a position where you make a trade. “mutual funds are the Holy Grail”. and stock trading can lose the greenback the same way as futures trading. “Big Brokers” and their LLP partner the day trading prop-shops. I place a limit order to buy at 101 11/32. not what you think. plain and simple. Livermore. One of the most important lessons I learned from all three was to trade what you see. then the price 5 15 . This course however has been updated to the 21st century and offers my 20-years of experience coupled with an excellent teaching tool. Simply said – much what is coming from the corner – “buy and hold is good”. Practically everything that's been written during the past fifty years has been a restatement of Wyckoff. The latest buzz is day trading. Track N’ Trade Pro. Trade the way your heart desires and follow your dream but do it with one foot at least on earn firmly grounded while you reach for the sky. Real life shows that “buy and hold” can put you in the poorhouse. Yes. It is often done with a false pretense. then can wait a minute or two to see where prices went before deciding if the trade will be your own trade or a trade for your client is just too big a temptation for most people. The floor broker makes this trade.
We should all be so lucky.... However. It's a guaranteed trade for the floor broker. He sells at 101 14/32 and I get back a "no fill".seconds later shoots to 101 14/32. He pockets the 3/32. if the price immediately drops to 101 8/32 then I get back my fill at 101 11/32 and I get to keep the loss. 16 .
Chop Wood Carry Water After Mastery . Only a relatively small amount of money is required to control assets having a much greater value.to provide a successful mechanism to manage price risks. foreign currencies and stock indexes. The interaction of long-term traders and short-term speculators has helped to provide active. The futures market continues to grow and diversify rapidly.Chop Wood Carry Water Futures markets can be described as continuous auction markets and as clearinghouses for the latest supply and demand information. liquid and competitive markets.Lesson 1 Basic Information Before Mastery . speculative participation in futures trading has become even more attractive. metals. Who are the futures market participants? Speculative investors are who accept the risks that others avoid. and financial instruments. but everyone cannot be comfortable with speculation in futures contracts. With no intention of taking delivery of the commodity. In other words. The meeting places of buyers and sellers. yet their primary purpose remains the same as it has been for nearly a century . speculators they seek profit from a change in the price. And with the availability of alternative methods of participation. Though the future’s contract trading volume increased from 14 million in 1970 to 179 million in 1985. the Futures market today includes an everexpanding list of commodities such as: agricultural products. petroleum. This is due to the possibility of large profits or losses in relation to the initial commitment of capital that stems principally from the fact that futures trading are a highly leveraged form of 17 . they buy when they anticipate rising prices and sell when they anticipate declining prices.
2 Yellow at par. For example Corn is deliverable in 5000 bushels that is equal 1 contract. The main US futures markets are in Chicago.speculation. The leverage of futures trading works in favor when prices move in the anticipated direction or against when prices move in the opposite direction. 1 yellow at 1 1/2 cents per bushel over contract price. 3 yellow at 1 1/2 cents per bushel under contract price This means that Corn has three grades and some grades can be substituted for the other if paid a premium. Contracts New futures contracts are established by the exchange after they petition it with the CFTC. delivery specification and price quote specifications. more established contracts are: Grains Corn Soybeans Wheat Meats Pork Bellies Live Pork Live Cattle and so on (please see the major contract specifications in Appendix A) The contract has size. upon approval the market can experiment and trade a standard contract that the exchange came up with. Ill and New York City. No. No. In addition to the main markets there are exchanges in Kansas City and Minneapolis as well. The older. The grade of delivery is: No. 18 .
He is afraid of the prices falling for the harvest so he will place a short position and unwind it at harvest time. Futures contracts are not made equal and the volatility and total contract size is represented by the margins the exchange requires to be put down. grain companies who deal in the cash commodity. Of course the magnitude of the moves is not equal so he may gain or lose a little but for the most part he is protected. In order to hedge market risk they will speculate in the futures market with the opposite direction as their cash position may be. This arbitrage is the Risk Management using the futures markets. A grain merchant on the other hand perhaps has it’s own farmland.So when you see a quote for Corn like 203 ¼ this means 2 dollars and 3 ¼ cents expressed in cents only. Hedgers (or Commercials) These are processors. If the grain prices indeed fall he will profit from the futures position that will be offset by the loss he will incur in the cash market. Should the prices rise he will gain in the cash market and lose in the futures. 19 . Players Who are the people participating in the markets? There are two classes of players The Hedgers sometimes also referred as Commercials and the Speculators who risk their funds in order to make profit. So a grain processor who will receive cash (real) grain in its silos in three months time will pay the forward cash price even so he signed a contract today. In order to hedge his position he will buy grain futures because the rise in grain prices is what he is afraid of.
Of course nowadays electronic. Ticks Tick is a smallest unit a futures contract can fluctuate. The active Eurodollar. hand held calculators and some technology exists. Pit traded futures versus electronic markets Traditionally commodities were traded in the pit. none for spot month.Daily limits in Price movements Since futures markets can get emotional and hectic adverse swings in prices can and do occur. and then a runner will take this order into the Pit and hands it to the broker. Corn has a daily Limit of 20 cents/bu ($1.000/contract). meaning the there is an open outcry and one on one human activity is involved with executing your trade.this means that orders are phoned in to the exchange and received by the floor clerk. Traditionally Chicago markets are open outcry . This means the most current month can move with no price restriction. Orders are also flashed into the pit from the side where the clerks sort them out. When the limit for the daily range has been reached trading will cease until the market moves away from the limit or the trading hours come to the end. Small orders have a way to be ignored in this hectic and archaic system. US Treasury Bond and most full-size contracts are still pit traded. In order to instill calm and rationale into the price action the exchanges restrict daily price movements. As we show in this course – 1 tick for Corn is ¼ cent ($12. Since the markets are affected by events happening on weekends and 24 hours a day but traders can only participate during market hour’s openings can occur with price gaps. The limits of each contract are posted on the website of the exchange and your broker can provide you with this information too. Since each commodity is different in total size each tick has different value.50). Critics of 20 . To some extent this is true even today. For example at the Chicago Board of Trade.
The market maker or scalper makes his living from the spread. This much is clear. Imagine the market like this. Eurex the European Futures exchange has opened an office in the US. In some markets you can actually bid yourself and offer so effective you can be a market maker but often no one will trade with you unless the market has drifted already. They have al electronic order matching. Mistakes or so-called out trades occur. Fortunately the exchanges are forced by the competition to adopt and change. On the floor and sometimes even off the floor they will abbreviate and use the last digit only so the quote for the market becomes Corn at 4 ¼ to 4 ½. Singapore trades Eurodollar contracts and since many bigger traders can rout their orders to Singapore the Chicago exchanges must slowly change and come into the 21st Century. If you put in an order to buy Corn at 4 ¼ he/she will only sell to you when the whole market has already moved to 4 bid – 4 ¼ offered on the floor.the exchanges have for a long time been critical of this system. 21 . Electronic trading is good for the small trader and the one lot operator.the asked price and he is willing to buy at ¼ the bid price. It is a great venue for the new trader learning to trade today. It is the futures while open outcry is the pass. Globex the electronic futures market is jointly owned by the CME and CBOT. Also the spread must be looked at. Corn bid at 224 ¼ bid – 224 ½ asked this means that the trader who is the market maker will sell Corn for 224 ½ . The spread The spread is the amount of ticks between the bids and asked prices. When looking to trade a contract first you should examine the volume and volatility.
all bar-charting techniques can be integrated with candle chart analysis. Thus.Bar The bar in the bar hart can represent one minute or one hour. This same bar can be represented in a candlestick mode as well. 22 . low price levels. The color and length of the real body reveals whether the bulls or the bears are in charge. high. last. Figure 1 Figure 1 Demonstrates the open. Figure 2 If the close is lower than the open the real body is black. The real body is white if the close is higher than the open. high. Note that the candle lines use the same data as a bar chart (the open. low and close).
is that an adverse price change may. 23 . The reason. It is also necessary to anticipate the timing of price changes. in the short run. being right about the direction of prices isn't enough. Timeframes There are three timeframes to look at using Track ‘N Trade Pro. In futures trading. and Daily.Chart 1 Timing In futures timing is everything. result in a greater loss than you are willing to accept in the hope of eventually being proven right in the long run. of course. There is Monthly. Weekly.
It is useful to gain long-term perspective.Chart 2 This is the gold chart taken weekly. We however will use mainly daily charts in this course-book. 24 .
Trend: intraday volatility < interday volatility Choppy: intraday volatility > interday volatility It is understood that constant calculation and number crunching may not be in your plans so there are other more subjective methods. The following formula is quite accurate. Trends are chart and Market specific 2. Is it trending. A picture is worth a thousand words. Look and see a specific chart. is it trendless and choppy? It is of paramount of importance and crucial. Price and Confirmed with Momentum Oscillation determine trends 25 .Major and Minor Trends Chart 3 Market Analysis The very first notion a novice trader should grasp is what state the market is. 1.
The price is allowed to increase or decrease by the limit amount each day. which may be involved. The limits are stated in terms of the previous day's closing price plus and minus so many cents or dollars per trading unit. So. Price creates Trends inside Trends or Minor Trends inside Extreme Trends. Because prices can become particularly volatile during the expiration month (also called the "delivery" or "spot" month). On the other hand.3. 5.90 or above $3. Markets are ALWAYS trending. The floor traders mainly do this activity and any new trader should be aware of this before risking a cent. sometimes in wide ranges and sometimes in tight ranges 4. at the very least. Once a futures price has increased by its daily limit. So the big money non-scarred traders will try to push the market. and activity often described as fishing for the stops.most scared money traders will place close stops and pretty much everyone knows about these. Slippage Slippage typically occurs in wild markets when resting orders become market orders. Number 3 is true but often you do not see these micro trends if only looking at end-of-day data. persons lacking experience in futures trading may wish to liquidate their positions prior to that time. there can be no trading at any lower price until the next day of trading. This event is a limit-down day. Minor Trends Confirm Extreme Trends. Imagine the scenario . once a futures price has declined by its daily limit. there can be no trading at any higher price until the next day of trading. daily price limits are eliminated during the month in which the contract expires.10. This day is also referred as a limit-up day. Or.00. For some contracts. 26 . there can not be trading during the current day at any price below $2. trade cautiously and with an understanding of the risks. if the daily limit for a particular grain is currently 10 cents a bushel and the previous day's settlement price was $3. Daily Price Limits Exchanges establish daily price limits for trading in futures contracts.
possible alternative strategies should be discussed with a broker. there may be occasions when it is not possible to liquidate an existing futures position at will. The equations are as follows: 27 .Daily price limits set by the exchanges are subject to change. There are several different methods for calculating pivot points. The easiest way to obtain the types of information just discussed is to ask your broker or other advisor to provide you with a copy of the contract specifications for the specific futures contracts you are thinking about trading. If the following day's market price falls below the pivot point. Position Limits Although the average trader is unlikely to ever approach them. This system uses the previous days high. They can. the most common of which is the five-point system. if the market price rises above the pivot point. for example. it may be then used as a new resistance level. be increased once the market price has increased or decreased by the existing limit for a given number of successive days. Conversely. Because of daily price limits. low and close. You can also obtain this information from the exchange where the contract is traded Pivot Points The pivot point is used as a predictive indicator. it may act as the new support level. In this event. along with two support levels and two resistance levels (totaling five price points) to derive a pivot point. exchanges and the CFTC establish limits on the maximum speculative position that any one person can have at one time in any one futures contract. The purpose is to prevent one buyer or seller from being able to exert undue influence on the price in either the establishment or liquidation of positions – in plain English it prevents cornering the markets. Position limits are stated in number of contracts or total units of the commodity.
" respectively. Chart 4 R2 .54.(H .55.53. "R" represents the resistance levels.L P = (H + L + C) / 3 S1 = (P x 2) .H S2 = P . low and close are represented by the "H." "L" and "C.S1) Here.L) = P + (R1 . "S" represents the support levels.10 S2 .49 R1 .50. High.L) = P .R2 = P + (H .(R1 . and "P" represents the pivot point.52.56 P .57 28 .S1) R1 = (P x 2) .03 S1 .
Traders use these when they pick the price and wait for the market to come to them instead of stepping up to the plate and follow the crowd. 29 . This is the bid and asked price for the contract in question. There is some controversy on using Market orders in pit traded (old style). The order would go as it follows: Corn Market – Dec Corn bid 234 ¼ . You can either use an electronic order platform or use the order desk of your broker to communicate your actions for the marketplace. I will get to this in detail… Limit Orders These orders are also called Resting orders. Stop Orders These orders execute when and only when the market price trades “through” the stop price. Market Orders The simplest order is sometimes the least used.this would mean that as the buyer of 1 Dec Corn would pay 234 ¾ If you were a seller of Corn the market would fetch 234 ¼ for your contract.Lesson 2 Order Entry 101 The need to communicate your intentions to buy or sell a futures contract is of some importance. This is a market order It communicates the floor or the electronic marketplace your wishes to buy or sell a number of futures contracts for the going market price.asked 234 ¾ .
The buy stop must be placed above the market price to be even accepted by the floor or the order entry system. A buy MIT order is placed below the current market price and it will establish a long position or close a short position. They become market orders once they are activated. Floors are noisy and hectic at times. Since the order can be entered as an initial position the name is Stop Order. The key is that these orders turn into a market order once they get triggered. This type of order can be used for two purposes: • • To establish a long position To get out of a short position that can turn out to be a loser (protective stop) The later type of order is also called a stop loss order. The activation occurs when the price levels reach a certain point. How do stop orders get triggered? The buy stop gets triggered when and if the market trades or is bid at or above the stop price. Floor clerks sometime accept them but it is always good to use the proper terminology and avoid confusion. 30 . They are used differently from the Stop orders in a way they are placed. 2. 1. The sell stop gets triggered when and if the market trades or is offered at or below the stop price. Market-if-touched orders (MIT) These orders are also called board orders and they are similar to stop order in two ways.
How so these orders differ? Essentially the trade will use the appropriate order depending his/hers current position (if he/she flat or has no open position) or currently in the market. There are success stories in both camps. To enter the market at a certain point one can use either order with the notable differences. Traders who trade anticipating changes in the short term trend use MIT orders to in a sense draw the line for a support or resistance of a given price action. My experience with traders shows those ones with the later philosophy trade for a little longer time frame and the traders who want to predict are the day-traders and scalpers. Neither is right or wrong but one or the other will suit your personality. Do you see the subtle difference in the philosophy of trading? We shall get into this later too when we discuss trading styles.The sell MIT order is placed above the current market price and it will establish a short position or close a long position. 31 . The stop order will work of you want to jump on a wave and see a move (either up or down) and want to come on board and surf that move. Establishing a methodology can never start too soon. The concept when to use MIT and Stop orders and why is often not mentioned in other books – we are unique in this. Even if you never traded a single futures contract you should ask yourself “what type of a trader will I be”? Can I anticipate and predict or I will look at facts of price action and act accordingly. You can see that the MIT can never be used to limit or “stop” losses incurring but the stop order can. MOO .Market on Open This is an order to exit or enter the trades on the first 5 minutes of the trading day. It is hard but not impossible to change. Since the buy stop is above the current market – initial position can be established of a certain resistance level is broken to the upside and it is perceived to safe buy since the price action is considered a breakout. Studying order process and appropriate techniques is the start for any new trader.
Further larger and more seasoned traders place their stops further away from the less savvy and weaker hands. The danger of not using stops is when the market is not just fishing for stops but genuinely reversed and going the other way and you are holding the bag.03 / -1. “I have a spread order to enter. Say. Stop. The problem with tight stops is that the floor or the professional market maker crowd will ‘gun’ for these stops and try to trigger them and then reverse.04.” 32 . Limit Spread Orders Spreads are traded just like the futures contracts in the pit. Market. –1. You should strive to execute a spread at your preferred entry level or better and do not worry about the intra day fluctuations. This is a recipe for losing in the futures markets.MOC – Market on Close This is an order to exit or enter the trades on the last 5 minutes of the trading day Stops or No Stops This is the million-dollar question bugging many novice traders and even experienced futures operators. MIT. Many larger professional traders use only mental stops and look at volume and other price action to gauge if the floor is truly moving the price or only fishing for stops. Typically you can get a bid and ask for the May/July Cotton as the difference of the two months traded. The spreads of course trade intra day and prices can be all over the charts. This phenomenon is as old as the hills. Orders have priority (highest to lowest) in the following sequence. Points to remember when entering spread orders. If you enter spread orders in person make sure you speak slowly and clearly.
When exiting a spread on a mental stop loss order you should always use MOC . When the Clerk calls you back with your fill. Trading MOC eliminates the need for all that hassle. expire at the end of the trading session).For example. Only after that point (upon receiving the email) he timestamps the order and it becomes an official order. Email Orders Spread traders who cannot be near computers can email their orders to their brokers who will enter the orders either by phone or electronic means. Email orders become ”real orders” as soon as the broker receives and enters them. I rather say December or September rather to use the abbreviated month. “Buy 3 May 05 Cotton.” Ask the clerk to repeat the order you just have given him back. This is more of a problem with inter market spreads and commodity 33 . Sell 3 July Cotton.If you abbreviate the months. Fill reporting Since many spread orders involve multiple exchanges fill reporting is sometimes not timely and can be a challenge. Unless you state otherwise your orders will be considered day orders (i.00 or better. and Dec are easy to confuse. Buy Apr 04 Lean Hogs (CME) / Sell Feb 04 Lean Hogs (CME) MOC The only thing you need to be concerned about is that the price I get are close to the published closing prices for each side of the spread. After stating and spelling your name and account number to the phone clerk – say. One thing should be understood in regards or email orders.e. keep in mind that Sep. always repeat it back and write it down on a piece of paper. Always say “fifteen – one five” or “fifty – five zero”. as a spread of –1.
1 When the database shows you a potential trade keyed off by the critical months search criteria you should refine your research and use TnT’s spreads and seasonal plug in to verify. Since crude oil and heating oil is related trading a crack spread can be a full time vocation even if you never trade any other commodity. Analyzing Spreads The concept of Critical Months During my research of seasonality in commodities it dawned on me that 15-20 years aggregate seasonality could be narrowed down to several key months. 1 The CD-ROM is available via the author’s web-site 34 . For samples of the critical months please review my historical seasonal database on the CD-ROM. These critical months are usually where the seasonal trends clash with technical support and resistance. gasoline and heating oil for one order.product spreads. When researching seasonal history the critical month can be an important facet is searching your database for optimal trades to look at. That is three different markets in NY where shenanigans of orders are notorious. The crack spread is a threelegged spread – imagine fill reporting for crude oil.
35 .Figure 3 The spread database is a way to keep records and maintain a ledger of seasonal spreads that work for you. The abovementioned critical months concept will become apparent by the view by date function of the database. Any chart can be loaded into this database not only Gecko’s.
It is also called correction. the demand. stay with the trade. This is because the price of a commodity at a given point are dependent on factors such as. Historical evidence shows that such indicators are far more unreliable and less in numbers than one would imagine. REACTION A reversal of the prevailing trend in price movement for a security. and is an important part of almost every aspect of human life. the supply. When this price action is already observed it can be acted upon with some assurance and certainty that it will yield profit.Lesson 3 Charting and Indicators PREDICTION Prediction of future events is an ancient human wish. Price Technical analysis in trading is based on price. the optimism or the pessimism of the population etc. A reaction is often considered beneficial for the long-term health of the market. the desire to make predictions remains as strong as ever. However. Price is considered to be a reliable indicator because it encompasses all these factors. the political climate. in that the prices had risen too quickly and the drop put them back to more realistic levels. The term is most often used to describe a decline after a period of rising prices. The predictive indicators are for example used to be able to make trading decisions and use such indicator to “predict” price movement. the general economic outlook. The trading mantra is as long as the price goes up. So. 36 . especially about the future". when the price of gold increases indicators that buying (demand) has increased. Apocryphal saying states: "it is difficult to make predictions.
Patterns Figure 3 Symmetrical Figure 3 is a formation in which the slope of price highs and lows are converging to a point so as to outline the pattern in a symmetrical triangle.Longer-term position traders trade all the markets. leaving your unfilled order as your stop loss. Spreads charts are point charts. Much of these charts are only for Academic reasons and to get you familiar with Futures in General. 37 . compared and studied by their individual price movements. In this trading system markets are measured. This does not mean that spreads do not have patters and technical indicators. they consider all markets are the same because of the price factor. Try trading this formation by placing a buy order on a break up and out of the triangle or a sell order on a break down and out of the triangle. where there are no bars and candlesticks visible. Therefore. position traders do not require understanding the trading markets. he only requires taking the price data and applying the rules.
The hypotenuse in an Ascending Triangle should be sloping from lower to higher and from left to right. You can try trading this formation by placing a buy order on a break up and out of the triangle or a sell order on a break down and out of the triangle. Figure 5 38 . leaving your unfilled order as your stop loss. Ascending triangles. are anticipated to break down and out. with a prior downtrend. rather than up and out.Figure 4 Ascending Triangle Figure4 is a formation in which the slope of price highs and lows come together at a point outlining the pattern of a Right Triangle.
Descending triangles. rather than down and out. leaving your unfilled order as your stop loss. rather than down and out. leaving your unfilled order as your stop loss. are anticipated to break up and out. Falling wedges. with a prior up trend. are anticipated to break up and out. One could trade this formation by placing an order on a break up and out of the wedge or a sell order on a break down and out the wedge. One could trade this formation by placing a buy order on a break up and out of the triangle or a sell order on a break down and out of the triangle. The slope of both lines is down with the upper line being steeper than the lower one. Wedges Figure 6 Declining Wedge This formation occurs when the slope of price bar highs and lows join at a point forming a declining wedge. with a prior up trend. 39 . The hypotenuse in a Descending Triangle should be sloping from higher to lower and left to right.Descending Triangle Figure 5 is a formation in which the slope of price highs and lows come together at a point outlining the pattern of a Right Triangle.
The slope of both lines is up with the lower line being steeper than the higher one. rather than up and out. Rising wedges.Figure 7 Rising Wedge This formation occurs when the slope of price bar highs and lows join at a point forming an inclining wedge. with a prior downtrend are anticipated to break down and out. Try trading this formation by placing an order on a break up and out of the wedge or a sell order on a break down and out the wedge. leaving your unfilled order as your stop loss. Figure 8 40 .
Unlike the sideways channel the declining channel has a downward trend. Figure 9 Declining The declining channel (figure 9) is a formation with parallel price barriers along both the price ceiling and floor. In the case of a Bear Flag the trend leading to the formation of the Bear Flag is down.Bear Flag Figure 8 is a formation consisting of a small number of price bars in which the slope of price bar highs and lows are parallel and inclining. Figure 10 41 . Bear Flags are identified by their characteristic pattern and by the context of the prior trend.
Unlike the sideways channel the inclining channel has upward trend.Inclining The inclining channel (figure 10) is a formation with parallel price barriers along both the price ceiling and floor. Support forms the low price bar. Figure 11 Horizontal or Sideways A horizontal or sideways channel (Figure 11) is a formation that features both resistance and support. while resistance provides the price ceiling as you can on many charts. Figure 12 Head and Shoulders Top Figure 12 anticipates a decline on a break below the Neckline. place 42 . place orders on the break up and break down points. leaving your unfilled order as your stop loss. To trade this formation. You could trade this formation.
place your stop loss order behind the head.your order to fill on a break down below the neckline. Chart 5 Figure 13 43 .
place your order to fill on a break up above the neckline.Head and Shoulders Bottom Figure 13 anticipates a rise in prices on a break above the Neckline. the new highs are quickly turned back and the downside is tested again (continuing neckline.) Buyers soon return to the market and ultimately push through to new highs (head.) Tentative buying re-emerges and the market rallies once more. To trade this formation. It is also most reliable when found in an up trend as well.) However. Chart 6 The head and shoulders pattern is generally regarded as a reversal pattern and it is most often seen in up-trends. Eventually. but fails to take out the previous high. Sellers come in at the highs (left shoulder) and the downside is probed (beginning neckline. (This last top is considered the right shoulder. the market begins to slow down and the forces of supply and demand are generally considered in balance. place your stop loss order behind the head.) Buying dries up and the 44 .
signaling that the buyers may have exhausted themselves.) The key is the size of the gap and to some extent the volume. Figure 14 Gaps can be traded very effectively. Volume generally follows the price higher on the left shoulder. the key is that gaps are almost always get filled (or the prices will be traded back to the price where the gaps occurred. Some bigger markets of course never (or very seldom) gap.market tests the downside yet again. some others quite frequently.) Gaps Gaps occur when the lowest price traded is above the high of the previous day or. (Volume has a greater importance in the head and shoulders pattern in comparison to other patterns. conversely. Statistically gaps are around 01 cent in magnitude from the last close price. However. the head is formed on diminished volume indicating the buyers aren't as aggressive as they once were. 45 . when the highest price traded is below the previous day’s low. And on the last rallying attempt-the left shoulder-volume is even lighter than on the head.) New selling comes in and previous buyers get out. Your trend-line for this pattern should be drawn from the beginning neckline to the continuing neckline. The pattern is complete when the market breaks the neckline. The underlying measure was taken using the grain markets but this figure is robust enough to be used across all commodities. (Volume should increase on the breakout but as you see Chart 6 trading is learning to deal with exceptions.
Use your own good judgment or better yet have an ace broker. fiscal panics and other calamities caused should be exempted from this strategy. Huge gaps . See Chart 7 Chart 7 46 . The runaway gaps that severe droughts.Smaller gaps fill sooner than the others. When prices break . Trends A trend is another important indicator in technical analysis. The up trend and downtrend comes with significant new lows and highs and a straight-line known as trend line connects the high or low points.these trend lines result in imperative trading signals. Runaway gaps occur in panic times and should not be confused with the good old everyday gaps we find in commodities. Bigger gaps 2 cent or more often have follow up weakness in the direction of the gap.4-cent or more are a safe bet to trade in the direction of the gap initially.
yet few others still buy at these dips if interest in the stock is high. this causes the price to reverse.Trend trading allows a trader to respond to market moves. Riding a trend just involves identifying a trend and applying strong money management strategies. but this concept is applied in reverse. This implies that they use a reactive technical indicator. few investors sell at the new highs to cash the profits they have made. Similarly the downtrends. The downtrends “V” Retracements pattern looks like this: 47 . Retracements Retracement occurs when prices pullback a portion of their previous trend just before resuming a trend. The pattern looks like this: Retracements occur because unlike trend traders. In up trends. prices hit a new high and then drop a bit before turning up again and hitting another new high.
Markets tend to spend most of their time in trading ranges. (See Chart 9) 48 . and this is the reason why this concept does not work in trend trading system.Chart 8 Trading Ranges A trading range is a horizontal strip that contains predictable price fluctuations for an extended period.
Chart 9 49 .
which is the number of periods used to calculate the indicator. Some popular trend-following indicators include moving averages and MACD. Moving Averages Moving average presents data series in a way that identifies the direction of the trend. MA's are calculated using 2 different methods: By finding the average price of a security over a set number of periods. Lagging Indicators The trend traders use lagging indicators.Types of Indicators Leading Indicators Leading indicators are designed to lead price movements. They work best when markets or securities develop strong trends and are designed to keep the traders in the trade as long as the trend is intact. EMA = [C * K] + [yesterday's EMA (P)]* (1-K)] 50 . the more weight that will be applied to the most recent price. Lagging indicators follow the price action and are commonly referred to as trend-following indicators. but rather follow behind the current trend. The shorter the exponential moving average is. Most represent a form of price momentum over a fixed period (both long and short term). We are going to discuss these indicators here. An exponential moving average weighs more on recent prices relative to older prices. Moving averages do not predict a change in trend.
P).P) x K) + P.P) x K) and the answer is added to the previous period's EMA. moving averages keeps the trader in. Moving averages identify and confirm trend.P). resulting in a new EMA that is lower ((C . and develop trading systems. identify support and resistance levels. Once in a trend. Moving averages helps to ensure that a trader is in line with the current trend. resulting in a new EMA that is higher ((C .Where K = 2/(1+N) N = Number of periods for EMA When the Price (C) is higher than yesterday’s EMA (P). 51 .P) x K) and the final result is added to the previous period's EMA. The positive difference is weighted by multiplying it by the constant ((C .P) x K) + P. but may also give late signals. then the difference is positive (C . The negative difference is weighted by multiplying it by the constant ((C . Chart 10 shows 10 and 18 day moving average. the difference will be negative (C . Similarly. when the current price is lower than the previous period's EMA.
Chart 10 52 .
A downtrend is established when a security forms a series of lower lows and lower highs. A trading range is established when a security neither establishes an up trend nor downtrend.Cw N days ago ROC subtracts today’s price from a price N days/weeks ago. calculated as: Cw / Cw X days ago (Cw is a MA of closing prices) We know that an up trend is established when a security forms a series of higher highs and higher lows. (Chart 11) Chart 11 53 .Rate of Change (ROC) and Momentum (MOM) Momentum divides today’s price by the price N days/weeks ago. calculated as: Cw .
It is vice versa when the MACD rises above the signal line. Moving Average Convergence-Divergence (MACD) The name of the indicator is implies that the shorter EMA continually converges toward and diverges away from the longer EMA.When the security diverges from the MACD it signals the end of the current trend. Divergence . If MACD is positive and rising. Chart 12 54 .Traders could buy when an MA turns up in a downtrend and when a short MA crosses above a long MA. a negative MACD is considered to be bearish. Overbought/Oversold .When the MACD falls below the signal line it is a signal to sell. A positive MACD indicates that the 12-day EMA is trading above the 26-day EMA. then the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving average. 12-day and 26-day MA's are common values for the short and long MA respectively. An increase in positive momentum is considered to be bullish. There are 3 common methods to interpret the MACD: Crossovers . MACD measures the difference between two moving averages.When the MACD rises dramatically (shorter moving average pulling away from longer term moving average) it is a signal the security is overbought and will soon return to normal levels. They should sell when MA turns down in an up trend and when a short MA crosses below a long MA. Similarly.
Channels (or Bands) These indicators determine trend boundaries. in a downtrend. trader would go short when the price turns down on or near the MA line. One famous band is the Bollinger Band 55 .Chart 12 Traders should buy when MACD turns up when < 0 and in a down trend and when MACD crosses above zero. They should sell when MACD turns down when > 0 and in an up trend and when MACD crosses below zero. Traders close the position when the price turns down at or near the upper line. Creating an upper and lower boundary that encloses all the points on the chart does this. Similarly. They set a stop on or one point above the last high at entry and close the position when the price turns up at or near the lower line.
Illustration of the Bollinger Band . 56 .Lw) * 100 Hw = highest close for a time window determined by the trader and Lw is the lowest close for the same time window.Close / Hw .Chart 13 Chart 13 Williams %R Williams %R is used to determine market entry and exit points. A Williams reading over 80% usually indicates a stock is oversold while readings below 20% is considered overbought. Williams %R is plotted as a single line and is calculated like this: Williams %R = (Hw .
A trade is signaled when the price bars and stop levels intersect: • • Go long when price meets the Parabolic SAR stop level. Parabolic SAR (see Chart 15) (Ideal for Spread Trading) J. Go short when price meets the Parabolic SAR stop level.Chart 14 The above chart (Chart 14) shows vertical lines drawn on crossover points. Welles Wilder Jr. The red lines indicate selling signals and the blue one shows buying signals. Traders could buy when Williams %R fails to reach the lower reference line in a downtrend and turns up. 57 . while long. They should sell when Williams %R fails to reach the upper reference line in an up trend and turns down. SAR developed the Parabolic SAR and it stands for stop and reverse. while short.
This is the reason why most people prefer slow stochastic. the main line is "%K" and the second line is "%D" . 58 . These are displayed as two lines. These indicators are of two types: fast and slow.Chart 15 Stochastic (Ideal for Spread Trading) In an upwardly trending market.moving average of %K. The Stochastic Oscillator compares where a security's price closed relative to its price range over a given time period. prices tend to close near their high and during a downward trending market. prices tend to close near their low. As the name suggest fast stochastic reacts quickly to price changes. is volatile and gives more bad signals than slow stochastic.
Lw is the lowest close for a specific time window. The Full Stochastic uses three parameters: the period for %K (fast). and the period of the SMA that forms %D (full).Lw / Hw . Hw is the highest close for the same time window. the period for the SMA that smoothes %K (fast). 59 .Lw) * 100 %D = %K smoothed with a 3 day MA Where.Fast stochastic is calculated as: %K = (Close . While the tool provides some excellent default values we shall not examine it in detail. Slow stochastic is calculated as: %K = %D from fast stochastic %D = %D from fast stochastic smoothed again with a 3 day MA %K and %D Recap • • • • • • %K (fast) = %K formula presented above using x periods %D (fast) = y-day SMA of %K (fast) %K (slow) = 3-day SMA of %K (fast) %D (slow) = y-day SMA of %K (slow) %K (full) = y-day SMA of %K (fast) %D (full) = z-day SMA of %K (full) There is a third type the Full Stochastic.
Traders should buy when either %K or %D falls below a specific level (e.g., 20) and then rises above that level. They should sell when the %K line rises above the %D line and when the Oscillator rises above a specific level (e.g., 80) and then falls below that level (or if the %K line falls below the %D line. (See Chart 17 for the fast stochastic.)
Relative Strength Index (RSI) RSI measures the ratio of up closings to down closings and ranges between 0 and 100. A popular method of analyzing the RSI is to look for a divergence in which the market index is making a new high, but the RSI is failing to surpass its previous high. This divergence is an indication of a reversal in the near future. RSI is calculated like this: RSI = 100 - (100 / 1 + R/S) R = an average of upward price change. S = an average of downward price change. Traders could buy when RSI breaks a down trend line and should sell when RSI breaks an up trend line. (See Chart 18)
+DI and -DI. When ADI is going up. When used with the up and down directional indicator values. (See Chart 19) Chart 19 Traders could buy when +DI is above -DI and ADX is rising and sell when sell when +DI is above -DI and ADX is falling. The chart below shows ADX line (in blue) and the +DI (green) and -DI (red) lines. the long position is liquidated and a short position is established. but also the strength of the trend. or ADX. It determines not only the trend of prices. 63 . determines the market trend. the strength of the trend is growing and indicates a more powerful trend and vice-versa.Directional Movement Indicator (DMI) DMI is one of the most complex indicators in technical analysis. A long position is established whenever the +DI crosses above the -DI. When the -DI crosses above the +DI. the average directional movement index.
when the down pressure is rising but still negative.EMA Down pressure = Low . It uses a combination of the current trend to give a signal. The market you are looking at may show a history of volatility years ago but may have been relatively calm the last few months. In up trends the upward pressure on the MA will be greater than the downward pressure and vice versa. Volatility This indicator is mainly used for option evaluation. 64 . Getting an idea of the markets behavior recently may be of no use to the trader that is looking at distant options and vice versa for the trader looking at near term options. ER is calculated like this: Calculate an MA of closing price Up pressure = High . The key to using historic volatility is determining the correct period of time for each market. They should sell when the trend is down and up pressure is rising but still positive.EMA Traders should buy when the trend is up.Elder-ray (ER) ER measures the upward and downward pressure on prices.
Volume indicators create a running total of volume by adding or subtracting a portion of a day’s/week’s volume based on how the stock performed during that duration. Technical analysis in trading couples price and volume: when prices move sharply. and FI are all volume-based indicators that confirm or deny trends based on volume. and Force Index (FI) OBV. It is considered that volume is based on the price of a trade.Chart 20 Volume Volume is also one of the basic measures of trading activity. 65 . and Force Index are all volume indicators. We have a special lesson on volume and open interest. Defined as the number of shares that changed hands in a given period of time. Trading signals are generated when these indicators diverge (move opposite) the trend. Volume measures investor interest in a stock. Accumulation-Distribution (AD). Accumulation-Distribution. AD. volume should also be high. On-Balance Volume (OBV). On-balance Volume (OBV).
it only adds or subtracts a portion of the volume based on the following formula: A/D = (close . it calculates a running total of volume by adding a period's volume when the close is up and subtracting the period's volume when the close is down.low) * 66 . Based on the fact that volume precedes price.On-Balance Volume (OBV) OBV measures positive and negative volume flow. Accumulation/Distribution Accumulation/Distribution is similar to OBV but instead of adding the entire day's volume to the running total. Traders should buy when OBV breaks its trend line in a downtrend and sell when OBV breaks it's trend line in an up trend.open / high .
FI = volume * (today's close . Track ‘N Trade even helps with arrows pointing put the divergence.yesterday's close) 67 . (Chart 21) FI FI multiplies the day's volume by the difference between today's close and yesterday's close.Chart 21 Traders should buy when AD diverges from a new price high and sell when AD diverges from a new price low. The index increases with the gap.
Fibonacci. Predictive indicators such as. As we have studied earlier in this section that these indicators are all designed to predict what a market would do. The ability of the trader will be more defined by his/her visceral awareness of price dynamics within a trend or range as it compares to mathematical indications than by purely literal interpretation. For a trader to limit himself to technical analysis is like limiting to X-ray findings. Bollinger. nor is it related to the works of Gann or Elliott. moving average stochastic. MACD. but trading masters do not fixate on indicators. are sometimes depended too heavily and are not overly used by very successful traders. Market has no room for literal interpretation. RSI or ADX. For further treatment one has to get hold of other means of cures. Successful trading is not based on Fibonacci numbers. The role of technical indicators in a long-term trend following trading system is just as a part of a complete reactive trading system. 68 . Gann. The only thing that matters is the 'price'.Traders should buy when FI drops below zero when price is in an up trend and sell when FI crosses above zero when price is a downtrend. One cannot always accurately predict which way a market will move or how far it will go but trading only with a positive expectancy he should win over time. Technical analysis with trading acts like an Xray machine that generates pictures of market conditions. the golden mean. Williams. I have some studies in the Money management lesson that trading involves some real mathematics. It isn’t a holy grail in any sense. When trading like a true master knowing the exact odds of any one trade isn't as important as knowing whether or not the trade has a positive expectancy. Successful traders know the predictive limitations of mortal humans. The only true method for trading is a long-term trend following system that reacts to the market. Technical indicators are good for studying and have place in the market. Traders understand that there is no technical analysis that is a prerequisite to long term trading.
we can with some certainty depend on Seasonality in futures. Starting from July/August through November/December July beans tend to gain over January. Traders often fail to understand the fragility of these seasonal influences and place too much credence on them even when outside influence may have altered them for the season.” Indeed seasonal trends in futures are real and predictable. after which the spread relationship tends to reverse itself. Pork Bellies Late spring (third week of May – third week of June) is also very bearish. Only the first week of June – second week of July are bearish in the summer. Seasonal Trends are not made the same Chart 22 depicts a typical soybean spread. A war and other extreme conditions do alter and have impact on these trends. Crude Oil The Summer/early Fall (fourth week of July – first week of October is bullish for crude oil as driving and vacationing habits put more demand on energy.Lesson 4 Seasonal Trends According to Jake Bernstein “As long as summer will follow a winter. Tops and Bottoms 69 . Similarly long term seasonal patterns show bullish to very bullish trends for second week of March – third week of May. Grains The summer (second week of June – first week of July) is typically bearish for most grains except wheat.
Peak is usually July/August with the bottom typically coming at late November/early December Reliability Above average The ideal time entering this spread is early September with second opportunity coming late November. Chart 22 70 .
Tops and Bottoms Peak is usually May/June with the bottom typically coming at late September/October Reliability Above average The ideal time entering this spread is early September/October and runs until at least early December.Chart 23 depicts a typical soybean meal spread. Starting from September/October (of the old contract year) January bean meal tends to gain over May. Jan/May Meal Spread (Chart 23 on next page) 71 .
Chart 23 Chart 24. Reliability Above average 72 . Tops and Bottoms Peak is usually prior to December with the low being established just before May.Note the Dec. contract is from the old year. Is May/Dec Corn spread .
Tops and Bottoms The peak in late November and a second peak mid November follow the low in Dec. There is also a distinctive low in late Jan. early Feb.May/Dec Corn spread … (See Chart 24) Chart 24 Chart 24. Is Feb/Oct Live Cattle spread – This spread the months are far apart in time so the overlap is limited. 73 .
Reliability Above average Feb/Oct Live Cattle spread … (See Chart 25) Chart 25 Pork Belly Spreads July bellies typically gain over Feb from September through December. 74 .
There is a second peak in Dec. Reliability High Feb/July Pork Belly spread … (See Chart 26) Chart 26 75 . through late Jan. followed by the low in late Dec.Tops and Bottoms The top is September/October.
From the Nov. followed by the low in late March. Reliability High Risk and Profit Rating Average for risk and high for profit potential. Followed by a downtrend and a recovery July gaining over October.July/October Live Hogs Spread There are three rallies to the upside all very strong. 76 . This is followed by a rally until early to mid-June. Tops and Bottoms The low is mid November. which lasts until early Dec. peak there is a downtrend.
77 .Chart 27 Aug/October Live Hogs Spread (chart 28) From Nov. an up-trend. of the old year through the last week of July we could ride the ~9-month long seasonal move. Tops and Bottoms There are two distinct bottoms one in mid-November and the other in late March.
Sometimes this rally commences as early as late November.Reliability High Risk and Profit Rating Average for risk and high for profit potential. 78 . Chart 28 March/Sept Live Copper Spread (chart 29) Usually a fairly high reliable rally is staring in mid-January.
The spread tends to expire close to its peak on a fairly strong seasonal run. 79 . mid-October.Tops and Bottoms Lows are in mid-Sept. Reliability High Risk and Profit Rating Average.. and mid-November with only minor rallies seen between.
This starts early Dec. The first move is to the downside.Chart 29 May/July Cotton Spread (chart 30) This spread has two distinct seasonal moves. 80 . July favoring over May. The second is to the upside starting in March and ending in mid-April.
profit potential is high. A second peak in Oct. 81 . Reliability Above average Risk and Profit Rating Risk Average.Tops and Bottoms The mid-August peak is followed by a short period of low in Sept. followed by a brief low in November and a final peak in late Nov/early December.
82 . After October the relationship reverses with January gaining over May.Chart 30 Jan/May Lumber Spread (chart 31) Typically this spread declines until October. In other words May outperforms January. Tops and Bottoms The August peak is followed by a low in October with a possibility of a second peak in November.
Reliability Above Average Risk and Profit Rating High Chart 31 83 .
March/Sept Coffee Spread (chart 32) Typically this spread rallies from late-September/October until mid-to-late November. Tops and Bottoms A peak follows the October low in November and December. Reliability Above Average Risk and Profit Rating High 84 .
/Sept. take a look at this every year. 85 . another peak in late March and a low in May with a final peak commence in June/July period. All active coffee spreaders should Tops and Bottoms The January peak is followed by a low in mid-March.Chart 31 July/Dec Coffee Spread (chart 33) This is even a better coffee spread than the Mar.
Reliability High Risk and Profit Rating High Chart 32 86 .
July/Sept Cocoa Spread (chart 34) Beginning in January July likely to gain over September until the seasonal peak period which occurs in June. Tops and Bottoms Low is in Jan/Feb. Reliability Above average Risk and Profit Rating Average to high 87 . Peak is in late May early June.
Tops and Bottoms Low is in Jan.Chart 34 March/July Orange Juice Spread (chart 35) Beginning in January March likely to gain over July until the seasonal peak period which occurs in late Feb/early March. 88 . Peak is in mid/late July and final peak is in late Feb/early March.
High for profit potential Chart 35 89 .Reliability Above average Risk and Profit Rating Average for risk.
Tops and Bottoms See above. Average for profit potential 90 .March/July Sugar Spread (chart 36) March contract tends to gain over July starting in Sept and continue until late January. Reliability Average Risk and Profit Rating Average for risk.
Chart 36 Currency Spreads There are several ways to profit for a potential break in the US Dollar. Swiss/Euro spread 91 .
Chart 37 92 .
and therefore. you are risking 1. Suppose you want to hold your portfolio risk to a maximum of 3-x initial risk? I. There are very successful traders in both camps. Do not believe people who claim one is better that the other.5% of portfolio risk. I am not saying that one is better than the other to be perfectly clear. Portfolio Concept As a well-funded spread trader you likely will have a portfolio of spreads positions at one time.E. it is tied to some sort of a global rule. This is obviously not recommended upon just starting out but later as you have managed to convert the inns and outs of spread trading into a routine. Well. Averaging up – adding to positions after a winning trade is the proper way to build a position.5% per trade entry. Scaling out is done using "Multiplier". May traders miss this point and average down but I do not believe this is not right. portfolio equity is changing everyday due to all the open positions and each individual position in 93 . In Spread trading entering your position at one price is not advantageous. fiscal reasons and other factors. and you want to scale out of any market if it reaches more than 4. In fact many people need to change strategies during their quest due to changing market conditions.Lesson 5 Money Management Pyramiding and position sizing is paramount to a trading success. Dynamic Money Management One nice feature is doing either scale in or scale out's based on portfolio risk for example. The truth is one maybe easier than the other if your physiological make up is suited to the strategy you choose. Ultimately it is you who must decide if you wish a system that emotions cannot override or you have the discipline and mental make-up to trade using signals and discretion.
we tend to see the up trend confirmed by a little profit taking on Fridays close. 94 . then exit enough of the position to maintain group risk and position risk beneath their limits. What if you want to limit total portfolio risk in an algorithmic way? Such as. constantly. So if in a perfect world the effects of increasing supply effect contracts for delayed delivery differently. so liquidating causes Friday’s close to move slightly counter-trend. If this held true we would be closing on the high of the week and each week would close higher than the previous week. If you put a limit of portfolio heat or group heat. When we have a security rising steadily. I am experimenting with averaging up at the end of the week. So. All of us do not trade for the same time duration. it will just reject new trades that come along if “heat” is too high. Short-term traders have to be out at the end of the week so that they do not have to put margin at risk over the weekend. all of the portfolio money management is done on trade entry. We are trading on new weekly highs in the Seasonal window. Or perhaps you want to limit group risk (where a "group" may mean a set of somewhat correlated markets) in an on-going fashion such as if group risk > 7% of equity today and position risk is > 3% of equity. time in trade. so this actually becomes a rather involved issue. In most money management systems. etc. on average we expect a little incremental increase daily. if portfolio heat exceeds 25% of equity. Then we would expect the trend to continue during the week and over the weekend. Weekly Pyramiding In my own Spread Trading. These traders were on the same side of the spread as we were.the portfolio has changing risk each day. when we hit a new high during the week. then apply certain rules to open positions based on their open risk. Here is the thinking behind this.
First. The world still needs meats and grain to be fed. Third we have the built in market forces working in our favor for three days from when we get our fill on Friday to the next market close on Monday. Combine this with the increasing equity from last week’s position and you can see why we consider averaging up at the end of the week when we hit a new high during the week. Then I have the additional premium from off setting short-term traders. we have the break out of the previous weeks high suggesting continued momentum in the direction of the seasonal trend.Our very purpose for being in this game is to harvest premiums for providing additional liquidly when it is needed. 95 . assuring us that we will not have to chase the market to be filled.
Take a plunge and pray. I am not saying that one is better than the other to be perfectly clear. The truth is one maybe easier than the other if your physiological make up is suited to 96 . Many systems type-trading companies will offer you outside testing and verification services but I tell you why it is not a good idea in a minute. Ultimately it is you who must decide if you wish a system that emotions cannot override or you have the discipline and mental make-up to trade using signals and discretion. “trust but verify” when explained his attitude and dealings with President Gorbrachev in regards if the SALT treaties. Well that start is road to disaster. This is should be your motto as well. It is a tool to develop winning set-ups and methodology but not a rigid computer program to be blindly followed. It is better to avoid ad-hoc trading and start out with some guidance. Ad-hoc is the word I guess. Do not believe people who claim one is better that the other. In addition the trader himself must test the system. There are very successful traders in both camps. Of course to do that right you have to walk through a self-examination path. First of all not everybody is cut out to be a 100-percent mechanical systems type trader. Many software products need some programming know-how. President Reagan said. There are those who are phobic about computers and any programming. It gives signals but ultimately you need to sift through them and decide what and when to trade. There are countless traders who jump into trading without a clear plan or even the understanding how to approach the market. A trading plan is a set of actions that you distilled after examining your personality traits and goals. You do not need to be a systems trader to have a trading plan. For them it would be ill served to try to build systems and run computerized studies on Metastock for example. May traders feel the need to have a ‘system’ but use subjective methods to execute the trade.Lesson 6 Trading Plan 101 A trading plan is an elusive but crucial factor to be successful. A good example is Track “N Trade software. I know this because this is how I started. Any system or set up must be scrutinized and examined from different point of views.
My personal experience is that using a filter and your own timing is not only necessary but can separate you form all the other spread traders following this service. in reality the beginner can select any group of commodities and paper-trade them using Track ‘N Trade. Scanning for trades Once you know what type of trading you want to do and what setup are you looking for – in theory the rest should come easy. Picking the grains for just an example. In fact many people need to change strategies during their quest due to changing market conditions. 97 . Some traders use newsletters or web sites to pre-scan the markets and after a handful of candidates already selected – they go to work. When learning to trade one can forgo the trade selection and go right to the tradecraft of trading the grains on paper first. In practice however you have over 45 futures to choose from. fiscal reasons and other factors. In comparison the futures market is still better than the stock market where you have over 5000 stocks to find the one you trade.the strategy you choose. Moore Research Getting historical seasonal trade ideas is what Moore Research provides.
I honestly do not wish this book becoming a motivational piece. Having said this I do believe the enormous importance of discipline and the right frame of mind for trading. So we need a short Lesson on the trading mind. As I have alluded to this before, it is always a prudent and wise choice to ask - “why I am trading”. Do you trade because you hate your job? Or is it because you are bored and need some diversion? Asking these questions and asking them early can be of a huge help to get you started on the right mode. Whatever your motivation is the end result comes down to your result at the year end when you and your accountant sits down and sorts out what to report the IRS. Ideally your motive should be money and money only. As you are in a business – a trading business you can only measure your success, one way – with your account size. Ed Seykota, the legendary futures trader said this; “Everyone gets out of the market what they want and expect.” I believe this secretly implies that some people have the psychological make up to lose and they trade with an already defeatist attitude. Do not let this happen to you. Examine and always be in check with your mood, circumstance in life and finally your expectation of yourself. One good example is the trader who has the urge to be right all the time. When facing a loss many traders will look at the market with a cold, calculated notion and knowing the conditions are not optimal to trade quit for the day. Traders who decide to “make the money back” often lose more than the original loss was. Why? Because of their frame of mind is not optimal at that point. Trading right you will need two conditions to work in harmony… • • Your own mind and psychology AND The market conditions
…will have to exist in order to risk money and win. Getting even with the market or compounding problems when feeling anger, anxiety over losses is not a right frame of mind to trade in. This is a compulsive behavior.
Certain core psychology and mental condition can exist in the trader to slow progress and hinder their efforts to become profitable. It is easier to trade if you have an even and calm personality that lacks compulsive behavior and can use self-control. One can overcome these problems two ways. According to scientist the human is used only at 30-percent capacity. There are behavioral modification techniques and meditation that I will only address on the surface since my forte is commodity futures NOT THE HUMAN CONDITION. One such technique is NLP. “NLP - the name sounds complex, yet it is purely descriptive. Neuro refers to our nervous system - the mental pathways our five senses take which allow us to see, hear, feel, taste and smell. Linguistic refers to our language ability; how we put together words and phrases to express ourselves, as well as how our "silent language" of movement and gestures, our body language. Programming, taken from computer science, refers to the idea that our thoughts, feelings and actions are like computer software programs. When we change those programs, just as when we change or upgrade software, we immediately get positive changes in our performance. We get immediate improvements in how we think, feel, act and live.” Charles Faulkner of New Market Wizards NLP is about state management. We perform depending in the state we are in. Some also call that mental frame. NLP will make sure that when performing crucial tasks such as sports and trading one is in the best form possible. Others refer to NLP as self-hypnosis. No matter what you call it – empirical evidence show that it works.
Good rules to follow: • • • Do not trade when upset or when going through life altering changes Do no trade when suffering from a series of losses that may affect your trading Do no not trade under the influence of any drug (legal or illegal) unless it is prescribed by a doctor
This maybe a stretch but for a philosophical argument nothing should be strange or taboo. Understanding the problem and dealing with it is the first step to managing and controlling it. No methodology or system last forever. We need to constantly upgrade and evaluate our systems and trading techniques. Entropy, the second law of thermodynamics, allows that the amount of energy in a closed system will decline over time. This could also apply to human social systems. Entropy causes everything to go from what may have been a tight-knit beginning to utter chaos in the end. We have seen this happen with the birth, advance and death of civilizations. We see it in polar shifts, which cause the breakup of continents in which the tectonic plates split apart and join with others to form new continents. We observe it in politics, religion and family life. In fact, the earth and its humanity also operate as a closed system. To combat entropy, traders try to re-invent themselves, develop new goals, and revitalize the methodology they use, even crash and burn so, like the Phoenix, they can start over anew from their own ashes. People do the same thing. Every social structure, every person, anything with energy, ultimately decays. If this is so, what is the purpose of evolution? Are we as a people doomed to the hard life of the Phoenix? The fact is, every day we demonstrate that we really do not know the purpose of evolution. If we knew the purpose of evolution we would know that living life in a mode of "business as usual" is impossible; that evolutionary change is the order of the day, yea the minute and the second. But even change as we know it in life, i.e., physical regeneration,
After making a good trade the last thing you should do is to buy a new car. This is reality. Think of trading as war. Many people will deal with this as best they can – keep the day job and dabble into trading on the side. The attention humanity gives to making of life a toy store is a dynamic formula for the constant presence of entropy--everywhere and in everything. They spend your grandkid’s future away. If we turn our thoughts to the future. Often situations of your own making can hinder your progress as a trader. Trading with scared money This is a very typical problem with so many. Spending money from a trading account is not wise unless you need the money for your household. Therefore. then we should begin to understand that there is more to life than physical evolution. You might not get there. in order to understand the purpose of evolution we have to begin by understanding that there is no past and no present. In physical evolution. Making money is easier if you have more of it. the one who dies with the most toys wins? Thus all physical life is concentrated on the accumulation of toys. is doomed to ultimate entropy. Spending your ammunition and bullets in a war for a wasting asset (a car) is not right thinking. Wanting to trade and have this great business but not having enough funds to start. for every winner there must be a loser. Your mind should be adjusted 101 .within a closed system. Spend and spend on credit is the American Way. Yet many people will do just that. In futures especially more than the stock market. I do not blame the people – after all they are bombarded with adverts and the example their government shows is the worst. just the future. That is OK. Your personal saving habits should be adjusted and focus on making money should replace spending money. if you trade with money you can afford to lose. Lesson – handle your profits with care and do not get crazy to become the new George Soros. You do not need to be suffering from any disorder just to lose money. toys being whatever cannot be taken with us when we die. It is a zero sum game. This is also trading psychology.
Boredom Boredom. As I have said it. Trading a proper mindset is easier if you have a well-defined and well-tested methodology. Do not second-guess it and do not abandon it too soon. You can be on the right side of a blowout when egomaniacs’ trade or you can be the one who blows out. Do not through away that free time to idle pastimes. your kids doesn’t go to college and they've repossessed your Bentley. "You make no friends in the pits and you take no prisoners. Blowouts will happen. 102 . Beginning traders work on changing the way you think and try eliminating boredom as it is a danger to your business and finances. Learn and plan ahead. The guy who blinks last will win. Many full time traders dread the waiting between set-ups and find that idle time very distracting. Dan Akroyd who played Charles Winthorp the III depicted the best way the “war” in the classic comical movie “Trading Places”. Young males are full of Testosterone. One moment you're up half a mil in soybeans and the next. consistent returns until you disassociate money and ego from your trading method." Trading Size Much of the danger and ill notions of futures markets come from lack of education and improper practices. boom. This means that you have to trade only to trade well. Trading is War. Learn to use that time well. So far you have read my observations and I am not trained in psychology nor I understand other traders as some who spent years and talking and consulting with them. is a misuse of the mind. It is your choice. Sometimes this comes from the general lack of good trading education sometimes it is ego and pride. like any other negative emotion. Ego will be a major factor. You cannot truly achieve large. If you have a positive expectancy system and smart risk management. Of course trading size is what we all aspire and want. Then all you need to do is to follow the plan. the profits will come on their own. Many neophyte traders will trade bigger than they should.to this.
overconfidence takes the form of overtrading: actively trading 103 . however. turning winning trades into psychological failures. perfectionism is a repetitive emotional pattern of self-talk that says. If traders find they using the term “should” frequently when talking about their trading. The second vice is ego. Perfectionism is not about being achievement oriented or competitive. This leads traders to fade strong markets and buy falling ones. the tendency to set unreasonable goals and standards for oneself. there’s a good chance that perfectionism is lurking in the background. it sets them up for frustration. My experience. “What you’ve done isn’t good enough. better yet. Ego enters into our trading when we write a blank check for our self-esteem. videotape your trading) and ask the question: “What was my edge for this trade?” If you cannot identify a specific edge for the trade. If the need to be right—to beat the market—is stronger than the need to make money. the seeds of trading selfdestruction are sown. Hanging onto losing trades to avoid feeling like a loser: that’s one manifestation of ego. the odds are good that your trade is born of overconfidence. Traders often assert that their trading is hurt by a lack of confidence. Very often. Impulsively putting on a trade after a losing trade to make back your money— revenge trading--that’s ego at work as well.” Because their standard is unrealistic. The third vice is overconfidence. Brett Steenbarger. “The first vice is perfectionism. but inevitably leads to disastrous drawdowns in trending markets. A simple litmus test that distinguishes valid confidence from overconfidence is to keep a log of each trade placed during a day or week (or. “I should have been able to catch the absolute highs and lows.” What the trader is really saying is. This can work fine in range-bound markets.This is what some of the experts say. One of the most common but subtle examples of ego is the tendency to fight the market by picking tops and bottoms. allowing our feelings about ourselves to ride the ups and downs of our P/L statements. This is an excerpt from an interview with Dr. is that it is more common for traders to be hurt by their overconfidence. I can’t tell you how often I’ve heard a trader express frustration with a winning trade because “I should have taken more out of the move. one of the world’s leading authorities on trading psychology.
overconfidence is generally the culprit. Karma is an immutable law of nature and it will and can affect your performance as a trader. When that respect is missing. Great traders have an understanding of—and respect for—risk management. particularly to stop losses. trading position size that is inappropriate for one’s account size. 104 .. I believe in the path of least resistance. Ever notice that? I like to propose a little exercise for your mind.. It is easier to think about entries—the opportunities to make money—than face the possibility of loss or limits on profits. In many aspects of life when and if you force something too much it will not work. Try to give some money back. Overconfidence is also evident when traders focus on entries but fail to identify exits. Do some community service.this maybe the key of your shortcomings and limiting factors to be successful.. Finally….try to trade for the sake of trading not for the money... Examine your hidden motivation in trading. Try to think of your motivation as becoming the best trader given your circumstances.narrow.. trade with the least of overhead and even trade only part time if your trading style allows it. Be charitable and kind. This could entail avoiding losing days or limit the size of losses.. thin markets.
Human interaction and order analysis is more important with spreads than trading futures outright. write newsletters. and provide you trading software and advice. How much of this service you need it is entirely up to you. If you are a day-trader you do need to watch your commissions indeed. The other factor is the stops you use. If the broker is making a lot of money could it be because he/she maybe offering exceptional service and has many clients? 105 . not all brokers make the trading choices for the customers. The risk and the reward of the trade are born by the client. Frequency of trading is the key. Do research. Some newsletters are sold independently some are provided by the broker. More often brokers will make recommendations. What I am saying is once you have a position your trading frequency may not be entirely up to you. Nowadays we have software to enter spreads but some traders are not too trusting to software either. Ultimately what cost structure you choose will depend on the style of trading and amount of contracts you trade in a day. If you trade spread however smart broker selection is not a bad idea. Hold your hands while you are going through hard–times and more. Brokers can and do many things for you. send out newsletters and offer advice and service and not make the calls on buy or sell. Brokers who offer a system in a form of a newsletter or email alert want to be compensated for that service. That is called discretionary trading. Where are the customer’s yachts? I remember this book a very cynical piece suggesting that brokers have Yacht so should the customers. Some active traders do not use stops at all they watch the markets and they only have ‘mental stops’ usually in a form of an alert or signal.Lesson 8 How to Find a Good Futures Broker Love them or hate them unless you are a floor trader you cannot speculate with out an account with a broker. First of.
Typically day traders are such people. There are lots of traders who trade so frequently that for them making money or not will depend on the commissions.Broker selection should be viewed as a precarious and delicate matter. I was first talked into a trading style that was not suitable to me. Worst. You cannot expect both. Deep discount brokers Commissions are always under scrutiny and pressure when dealing with highly volatile markets such as futures. I hate to be thought of as a number. I had a contract to fulfill and stay beyond my desire to trade that way. What is important that your choices will reflect your personality and style of risk taking? I know.first and foremost Service (have desk (floor) access as well as technology) Open minded (will not tell you what is good for you and how you should trade) Be knowledgeable in all forms of futures even if you get the discount service Your own criteria may vary. Technology is not everything Computers and software are tools. However it is ultimately your choice and will have to match your trading style. If you want the cheapest commission you will get that and no service. One broker told me that index traders frown upon broker-assisted traders and will not take any advice from anybody. I’ve brought up some common sense ideas that many novice traders overlook but you are welcome to complement mine. This is how I feel about banks and other institutions. a file in a ‘system’. 106 . Many people want no interference and any input from brokers. This is fine and dandy. Personal attention and one-on-one service always gets me. ultimately it will not determine your success or failure as a trader. What to look for in a broker • • • • Honesty . Brokers discount or full service will not have the ultimate say whether you are going to make it in this business or not.
There are brokers who will offer access to markets but you are left to fend for yourself and there is no service whatsoever. Some deep discounters do not even have floor access or the floor desk is backed up and very hard to get through. Bad fills and any disputes with deep discounters is of course a moot point. Often due to bad advice the trader will trade markets that they have no business to and use trading styles that will beg the floor to rip them off. All of the sudden the $2.5 commission RT will be a $75 cost including slippage. Recently I have heard of a $2.5 slippage in gold – that is a $250 “commission”! I have learned many lessons throughout my 15-year trading career. The most important is that support positively affects outcome. Although trading is an individual pursuit, having a team to support your development and performance as a trader is imperative. Meaningful support, total professionalism and a commitment to deliver the best trading technologies make up the foundation upon which many successful brokerages were built, and through which many traders thrive.
A good broker for spreads understands what spreads are made a market on the floor and which ones are not. He will enter the orders specified by you the most effective way and avoid making any mistakes. Some spreads can easily be entered on the Computer if the client chooses to use Computer order entry. Some best be called into the desk. It can be slightly intimidating calling the desk first. The floor is sheer lunacy when busy. Do not let this discourage you. Repeat everything to the clerk. Since spreads changes during the day a lot you can call in the order anytime or have your broker do it for you. You can email the spread order to your broker, call him on the phone or enter it yourself. What matters is that you take your time, repeat everything and wait for the confirmation. If there is something I dislike about spread trading is the delay in some order confirmations. Often the conformation comes at the end of the day. Sometimes you can get a fill on your computer. It depends what market you happen to trade.
Trading for a Living – Should I Tell the Boss
The beauty in trading Commodity Spreads is the multiple source of income. It is the opinion of this author to best to keep your day-to-day needs for income separate from your program of wealth building. It is ideal to find a way to keep your spending from increasing just because you are making a bundle trading Futures. The little known reality is - Seasonal Spreads are how many new traders build up a large trading account in a short time, starting with a hardly any capital. I always ask people why they trade. Often I can’ get an answer or they mumble something evasive about early retirement and how they like the markets. The real truth is many people never ask themselves these uncomfortable questions. Often they subconsciously know the answer and rather not face up to it. Many traders trade because, let’s face it majority of people hate their jobs and even if the do not they feel insecure and unsure of the future and the prospect of the job market as they grow older. The godsend of a job – no matter how tedious it maybe is the steady income it affords us. Unless you are independently wealthy you will need money to live on and funds to trade. Actually it is a good idea to separate these two if you are planning to trade full time. While learning and if employed in a decent paying job I cannot emphasize the benefit of not depending on your trading income alone. It is a huge pressure and you do not need it in the top of the already exciting markets and ups and downs. Certain style of trading is impossible for a part-time trader others are quite possible to trade only taking one hour a day. People who quit jobs to move into trading are invariably mesmerized with day trading and the prospect of cash flow every day. They take the plunge only to realize that the vast majority of the day-traders lose and even the remainder is often only making minimum wage. If you have an education and marketable skills you are better off trading part time and earning a salary.
Just like a doctor and a lawyer needs long time to study and equal amount of time to practice and hone his/hers skills – a trader needs long practice and theoretical knowledge to come up against the crème de la crème. A good foundation, practical know-how and amble amount of money can set you on the right track. You too can be part of this phenomenal business that many only dream about. I would caution anyone after reading this study guide and trade a few trades part time to just waltz into the Boss office and tell him or her “to take this job and shove it”. Trading as a business is a little more complicated than that. First off - there are many mediocre doctors and lawyers who somehow get by because they show up in time. Unfortunately in trading this will not measure up. Unless you are Ivy-League order filler for a bank or Fidelity you are not going to make a salary and a living just by showing up in the mornings. I strongly caution people to speculate for a longer timeframe because it will allow them to keep that day-job and the paychecks coming. Of course some people will not listen to me and will enter trading as a full time business. The reason is that there are many business structures that allow traders to speculate in an office environment and will even bestow them the professional title. These companies are called “Prop. Firms” short version of proprietary trading. It would be useless to give my opinion or disseminate bias information. I used one prop firm in New York when it all started. They charged me $1500 a month for office and other expenses later what I fond out that money was to kick start the business that later flourished and grew. It was great for the owners a bad deal for some traders. Some traders flourished but it was very hard to overcome a $1500 loss every single month and come out ahead in New York. So I admit it here and now I am a little burnt and hold a little grudge. Now times are very different and no firm will ask you to put up $1500 a month. Only a slick New Yorker could do that with some office space in Manhattan. Times are very different. Decimalization also killed listed stock trading and even if you are looking hard Futures prop firms are harder to find since futures have a great leverage built in. Who needs the house’s money? Still there are prop firms for futures and some even offer floor trading positions and 100-percent financing. 109
It has become the buzzword for the Internet and for the myriad of entrepreneurial people who decided that 9-5 lifestyle and corporate politics was not for them. You may wonder why would anyone become a prop business and facilitate traders in a structures environment to trade. Some prop arrangements ask for part of your wins and take no risk themselves. The answer is simple – commission.I think if you are out of college and need money to start you are better off learning it from a decent. As I said it already – prop deal in Futures trading is much more of a rarity than in Stock trading where the $25000 limit put many day-traders out of business. actually most if not all recently want your money and use it against your trading losses. retired cops anyone who has some money coming to them on a regular basis risk free. Multiple source of income I do not know who invented this. It is a job. In this situation I can’t think of a good reason to trade with a prop firm. honest reputable prop firm than dabble into trading on your own. Trading is a great career for retired military. I know that the terminology was some goofy MLM sales pitch but I will take the liberty and use it here. 110 . The prop firms that need money against future losses. If you have adequate time to place trades with a robust system you can manage your own career and make some money in futures trading as well. What is in it for them? To evaluate a prop deal it always helps to examine it from the perspective of “what is in it for them?” If the firm has a genuine stake in making you a trader and split profits – like the floor arrangement some options traders had once – by all means it is a good deal. It is called a “cushion” some firms. It generates lots of commissions. Read the fine print and talk it over with someone before you sign on the dotted line. I think it has become quite clear that I am a proponent of longer term trading and reasonable leverage.
Actually I am driven to spread the message and help people. wait and learn this business well.When people ask me why I write instead of trading all the time I tell them the God’s honest truth. 111 . I have seen countless situations where the workplace was made hell to a naïve and talkative trader. because I believe this “Multiple source of income” theorem for speculation and trading is crucial to survival and prospering in the pool full of sharks. in assuring that you will get some mortgage money when you need it. So you see it is wise to strive for a business related to the markets. When you’ll make as much in the markets as your salary you take home from the job – that is the time to tell them about your new hobby. The nice part about spread trading is that you can do it if you can set aside one hour a day and invest in a good broker and a decent Internet connection and perhaps a decent spread charting and analysis software. Corporate culture is always weird and typically they want you all for themselves 24/7 if that would be possible. Do not do it. Study. People who knock others for teaching and offering advice are woefully ignorant of the life as a full time trader. Keep your Cards Close to the Vest If you trade spreads and have a career I would tell co-workers or bosses as little about my activities as possible. Playing with scared money is a curse.
112 . Spreads are more known for seasonal type speculations and intermediate time trading but spread can surely be applied to trend following and long term style trading as well.Lesson 10 Nuts and Bolts Spread trading is buying a commodity contract for one delivery month and selling a different month of the same commodity at the same time. the existence of a trend is obvious. The margins are set by the exchanges based on the volatility and perceived risk of holding a contract by the customer. Take a look at the Unleaded Gas Spread again (see Chart 38). Do you see how nicely this spread starts trending in the last week of May? Whether you are a beginner or an experienced trader. The obvious advantage using a spread is the margin requirement. whether you use chart formations or indicators.
113 .Chart 38 Margin requirement for the Gasoline (HU) trade is $405. Profit is $3600. Let’s look at the corn spread Dec 04 over May 05 (Chart 39) Look at the nice trend from May until Sep. Return on margin is 888-percent in less than 30-days.
Let us look for clues how we could have “predicted” this trade other than seasonal studies? 114 . The margin on one contract is $135 for the corn spread.Chart 39 How much would a move like this make? We can easily compute this with the Dollar calculator feature of Track ‘N Trade Pro. The whole move is worth approximately over $500.
Chart 40 Look at the slow stochastic crossovers. As some of you may recall gold and silver had a tremendous bull run in 1980.000 margin deposit a spread position could be put on for a measly $1500. We have two chances to enter this trade and make some meaningful returns. First came in early April (illustrated by the first flag) and the second came soon after in June. Holding one contract of silver took $50. To illustrate the power of spreads lets look back at the silver market in the 1980’s inflationary times. 115 . Some index futures are still prohibitively expensive for the average investor – using spreads makes speculating in these instruments affordable to almost anyone.
They trend without the interference and noise caused by computerized trading. and market movers. (Chart 42) 116 . Let’s look at June Live Cattle (Chart 41) Chart 41 Now look at the spread chart.Spreads tend to trend much more dramatically than outright futures contracts. scalpers.
The parabolic SAR can act as a visual tool and when markets turn for your spread you can just get out with a MOO (Market on Open on both legs). 117 .Chart 42 It is often asked how can one predict the spread trend when the chart is not filled with adverse price action and zigzag like the outright Parabolic SAR Some people feel uncomfortable about trading spreads since it cannot easily execute stop loss orders. Actually stop loss is a hassle that you may not even want to deal with.
Let us look at some fundamental characteristics of commodity spreads. If mini contracts can be traded in lieu of spreads and the underlying risk parameters and financials add up to the prospective speculator he/she may choose trading the mini contracts outright.Chart 43 At no time should the reader allude to think that spread trading is risk free only that spreads usually carry a much smaller risk as to outright long or short positions. 118 . (There are some other considerations when selecting to trade minis versus spreads and I will get to these further down in this Lesson) The additional benefit of trading spreads is the affordable way of getting live experience in futures trading with out risking a fortune and losing sleep and lots of money.
5 cents per bushel. However in normal times when rates are higher. So the full carrying charge is about 5. As you see the current time when interest rate is depression level low the interest rate portion of the carrying charge is negligible. The current prime rate + 1% are multiplied by the market price of the commodity using the price quoted for the nearest month. Bear spreads must be handled with care since the profit potential of such trades is limited by the carrying changes but their loss potential is unlimited should the trader have gauged the market wrong. A typical bullish spread the speculator would initiate by being long the nearest month and sell a further out month. Let is look at an example: At the time of the writing of this book July wheat is quoted at $4. further out futures.14 (414c) a bushel. 119 . Scarcity in the commodity can cause the carrying charge to be inverted that means that the nearby futures are priced at a premium over the deferred. This factor is called a carrying charge the following formula can be applied to calculate it.69 cent.06) / 12 = 2 cent. Storage and insurance is about 4. This typically applies to storable commodities only.02) / 12 = 0. the carrying charge is more comprises of the interest rate.0 cents. A typical bear market the speculator would initiate by being short the nearest and buy the more distant month. Let us look at a more normal 5 percent prime rate: Lets look at the same Wheat at $4. Consider prime rate at 1% (414 x . The carrying price is more realized in bearish markets and gets narrowed under bullish conditions.14 (414c) a bushel and prime rate at 5% (414 x .Normal markets the current prevailing interest rate has bearing on the price of the future. The full carrying price is seldom paid in real life. Divide the result by 12 and then the monthly storage and insurance cost is added.
000 lbs and the hog contract is only 30.000 lbs.This above synopsis show how most storable commodities behave that can be delivered and by no means can be applied as a general rule. So when we buy one contract of live hogs 67 cents and sell one contract of a cattle contract at 83 cents we can not only look at the price difference of 16 cents when in reality 1 cent move in cattle is worth $400 and 1 cent in hogs is worth $300.). For example stock indices like the SP 500 behave exactly the opposite and as a bull spread you should sell the nearby and buy the further out month. The fact is that the spread is a negative number (-10c) means that the July contract is 10c higher priced than the May contract. A typical inter-delivery spread would be May/July soybeans. If the price difference at the initiation of May minus July is minus 10 cents. The typical money spread involves live cattle versus live hogs. This tactic can be a little dangerous as the inverted spread can have an elasticity of a very large rubber band. 120 . This is a scenario when the contracts are in different contract sizes (a cattle contract is 40. (As we have seen it in the 80’s inflationary years) In those markets when wishing to jump on the bandwagon you should sell the nearby month and go long the further out months as the nearby is at a premium that premium is fluff. Stop loss order should be used especially with bear spreads where the profit potential is limited but the loss is in theory unlimited. Point Spreads and Money Spreads A typical Point Spread is when a buying and selling is measured in identical units. Gold and silver market typically behaves inverted in a great calamity where there is huge speculative interest and hoarding.
The leverage on spreads is inherently lower since one position always offsets the other.20).20) as each tick in the outright futures ($4. However. or we can buy the Swiss franc and sell the Euro. which are loss-limiting factors. Return on Margin (ROM) . Good markets to trade using inter-delivery spreads are energy. In metals it is typical to trade gold against silver or platinum against gold. The position may work out famously or may not. The other good spreading market to trade is currencies. Obviously one could think of this example as a great idea in light of mad cow disease and possible decent exports forecast of hogs to China for example. grains metals. The later position has smaller profit potential but takes less money to initiate and it also takes less antacid and sleepless nights. The only true limited risk spread is an inter-delivery spread initiated not too far from the factual carrying charges. 121 . That means that on a 100 tick favorable move in unleaded gas futures or a 100 tick favorable move in the spread. Buying hogs is only prudent when we have a tend signal for hogs and selling cattle only would muddy the waters. you would earn $420. Let us say for example that we are bearish the dollar.Let’s look at Unleaded Gas Futures Each tick in the spread carries the same value ($4.These examples are not suggestions to trade in light of true trend following. We could simply sell the dollar index and expect a rough ride and some volatility. Profit potential When calculating profit potential we should keep in mind the risk taken on via volatility and leverage. the difference in return on margin is extraordinary: . The platinum marker is so thin and tightly controlled by the Russians that trading it by itself could be a problem.
$420/$405 = 104% return on margin! Also keep in mind that theoretically you could trade 10 times as many spread contracts as you can outright futures contracts. In our example you would achieve a 115 times higher return on you margin. Spread trading is an art and a science. I am talking specifically about currencies. You won’t need an in depth knowledge of agriculture and planting metrology as a good stock trader does not need a CPA license or be an MBA. Remember there are no silver bullets.$420/$4. Seasonality Many people trade spreads based purely on seasonal patterns. You may not get the same “bang for the buck” but your timing can be a little off and volatility and margins will not hurt you as much either. This chapter is not intended to replace a serious book or familiarization with this subject. There are circumstances however when you get a trend signal and should use spreads. How should you trade spreads? Selecting a seasoned and professional broker or software can be a great asset. I suggest keeping and open mind if you decide to study spread trading. 122 . Do not box yourself into a perceived holly grail theory nor should you discard any theories based on my Book.Unleaded gas futures . Professionals trade on and off the floor spreads actively on and off the floor. Seasonal factors sometimes work but sometimes they do not.750 = 9% return on margin Unleaded gas spread . You should immerse and study it well. There is seldom any problem getting a quote for a given spread irrespective if the market is open outcry of electronic. Both ‘legs’ of the spreads should be traded at one time. You must make it clear with the prospective broker firm what you do and check the firm’s reputation and credentials carefully. Most brokers and pundits mention spread in a same breath are usually referring option spreads.
“15 – one five” or “50 – five zero”. As you see in the cattle spread (above) the differential is quoted as -3. after all you do not care where the individual was bought as long as the spread you got it is adequate to your plans. I will explain why in a moment. Say. Never mention the price on the individual contract legs. When you say the contract months. It does not make any sense to watch a spread trading intra day. you can have an order to exit a spread by doing so Market on Close (MOC) or leg out using two separate futures orders Market on Close. September and December are easy to mix-up. 123 . For example: This picture is how Track ‘N Trade explain the spread order. This is what you can also do. The legs of the spread will not trade equally and so the spread jumps all over the place during the day.20. Your order must clearly state the quantity and month of the contract.Spread order specifics The buy side always comes first. Always give the spread differential. Say instead: Sep or Dec and spell it out. Using MOC orders is a good idea for spreads. Spell out the numbers. Spell out your name and give the account number to the Clerk.
The same thing is true for exiting a spread. Over the period of a series of trades. Late reporting Spreads traded for grains on the CBOT floor have issues with late reporting and other annoyances. Many spreads. This can be very beneficial for those who took it upon themselves to study seasonal patterns in futures trading. Many spread which are exited during the day at a loss end up profitable by the end of the day. So when you get your spread order reported is anybody’s guess. entering and exiting based on the Close will prove statistically to be as successful as driving yourself crazy watching them during the day. Seasonality in Spreads Track ‘N Trade have seasonality plug-in with 10 and 15-year data provided for each commodity contract. if entered during the day will not be desirable by the end of the day. These markets are not electronic and flash fills are not yet offered. 124 .The only thing important about a spread as far as entry and exit are concerned is the Close.
125 . This means that October Cattle is not the contract months to trade with a seasonal bias.Chart 44 As you can see Oct. Cattle has a seasonal probability only ~30-percent on the 10-year data and about 75-percent on the 15-year data.
The SEAS charts show behavior on a relative basis. just the relative positions of the market versus its contract high and low. On the seasonal charts.0. and tend to rise through February and into the spring. For both the 10-year and 15-year the seasonal probability is much better. meaning the actual prices are not forecasted. Feeder Cattle prices reach their seasonal lows during October-November period. When the trend line is at 100% or 1.0 or 0%. By December prices begin to rise.0. and 15 years for Trend 2) and are analyzed in terms of where each day falls as a percentage of the highest and lowest price of either the last 12 months or the life of the contract for each specific contract. 126 .Chart 45 Aug. Cattle is much better as you can see on Chart 41. All similar trading days are lined up for X number of years (the default in Track ‘n Trade Pro are 10 years for Trend 1. These prices are then averaged and the average is showed in the indicator window. it indicates where the contract has on average been at its highest value for specified time range and scale period. the high is showed as 1. or 100%. while the low is showed as 0.
The Spreader Thought Process Why people do not trade spreads more often? The main reason is the seemingly difficult analysis and thought process that involves the market selection. volume and open interest of one futures contract. Lumber prices have strong seasonal tendencies.S. however this may wary. It is however complicated only on the surface. Most traders learn chart patters and set ups looking at price. late December may be the peaks for heating season. Just that exhausts some people. In other years. profit analysis and general decision-making process in spread trading. the interest rate factor can enlarge.Seasonality is usually reflected in spread trading as we buy or sell the carrying charge or the monthly differential between the two months. This means that traders can cap their losses when speculating carry-market situations but can really take a hit in non-carry-markets. February is the peak-heating season. Things to Remember in Seasonal Spreading Livestock has no carrying charge since by definition livestock is not a storable commodity. In metals the carrying charge is largely dependent on the cost of borrowing money i. interest rates. Wyckoff.e. 127 . For Energy complex. A spreader must look at the relative strength of each contract months. One trader who perfected his analysis was Richard D. It is typical to play off old crop against the new crop. the month of July marks the peak of U. cancel or reverse the seasonal price moves. This was very prominent in the 1980’s when prime rate was double digits and fell to single digits in a few months. but there is theoretical limit on an inversion. summer driving season. The energy markets never pay more than full carry.
Step 4: Determine each contract month’s readiness to move. Step 3: Using point and figure charts.Richard D. select those that are weaker than the market. short or neutral. Analyze the vertical and figure charts of the candidates with the help of the buying and selling tests. select those futures (or contract months) that have built up a potential count for a move in keeping with your goals. Step 5: Time your commitments with a turn in the market. 128 . Step 2: In a bull market. Wyckoff In his course. In a bear market. Wyckoff stated the basics of his method in five steps: Step 1: Determine the present position and probable future trend of the market. We do not need to use point and figure however this is obviously a technicality and very subjective issue. Richard D. select from those contract months or futures in harmony with the market the ones that are stronger than the market. I do not use point and figure while many people swear by them. Then decide how you are going to play it: long.
Chart 46 Let’s compare these two charts and let’s also look at the spread. which continues throughout the chart. 129 .. is outperforming Oct. this within an up trend in the actual commodity since Feb. as the Spread is in a downtrend.Sugar Mar 05 spread in a little more detail. Using Wyckoff principles of relative strength we can attempt to analyze futures spreads. At the beginning of this chart Mar. Let look at Sugar Oct 04 .
making a lower high. At C the Spread is still in a downtrend.C is the only rally in the Spread as Oct rallies strongly off the spring at B while Mar rallies well off support. Mar. At F Oct drops below support. At H Mar consolidates into a tight apex near the top of the range while Oct breaks down completely. 130 . which quickly becomes resistance. At B. very strong divergence here. At E price goes into a trading range while the Spread remains in a downtrend.Chart 47 At A. Mar's much narrower bar range that finds support at the top of the consolidation. The rally at G takes Mar back to the trading range high while Oct makes a much shallower pullback of that high. From B . Oct drops well below the support line while Mar hangs right in there at support compare the ranges of the bars on that reaction. note October’s 4/28 wide-range bar closing on the low and back to the low of the consolidation vs. The pullback to D is very shallow in Mar and much more significant in Oct. following a tight 2-week consolidation. just not as sharply. Sugar breaks resistance earlier and then holds it much better than October. while Mar pivots around its support and resistance.
at that higher support. according to Wyckoff principles. one could remain short on this spread.Recently Oct has dropped out of the trading range and below previous support while Mar still remains within the range. 131 . Chart 48 So right now.
It happens all the time. Nowadays price sums can be spent on the most expensive software. member only web sites and other assortments of tools to make you a better trader are available for a price. The other factor is the cost. When the United States was in its infancy many people feverishly minded for gold. Generally speaking – more the frequency of your trades better you will need redundancy and real time information (including news). Two monitors and fancy real time quote service. Service becomes important when these things happen. Having said this . It is similar to any business. Now we can trade in and out of electronic markets with the ease of the locals on the floor. servers go down and Internet slows down due to viruses and other factors. two broadband Internet connections (one Cable. This is at least my experience. It all depends on your style and business plan. Some found a lot of gold. Chat-rooms. You know – shovels picks and dynamite. some have found nothing and many got killed. In additions .technology can fail. The people who survived and prospered were those who sold the supplies to the gold miners. Maybe people had more common sense back then. gold rush day the savvy marketers had invented the magic gold sniffing dogs and magic “turbo” shovel undoubtedly people would have bought that too. Redundancy is a godsend.futures traders are often in need of weather data for drought situations and storm conditions. It is nice when you can telephone your broker an order to get you out of the market due to problems with your Internet or local connection. Orders get stuck.Lesson 11 Computers and Technology This is a very subjective area. Less than 200 years ago we transmitted prices via ticker tapes and cabled buy sell instructions into brokers. computer hardware and other gadgets. one DSL). The Internet has made life very different for traders and information marketers. Many traders have no problem spending large sums on redundant computer systems. 132 . Add some first class news service and you are paying $1000/month before you made a dime trading. This is the fact of life. of course. If the old.
Having a computer is not a luxury nowadays. Do you need real-time quotes? It will largely depend on the trading style you select and the frequency of trades you need to make. Cleanliness and delay in “real-time” data This can be a very annoying problem to day-traders. This can cost you money and you are paying for the problem. Call trading buddy and compare real time prices.com and look for McSpread. Here you can create your spread and follow it real-time and place orders based on the calculated spread price. Spread traders usually do not need real time quotes unless they trade as exchange members and will trade spreads intra-day. After spending a pricey sum monthly of real time streaming data you find that real time is actually a 30-seconds delay and there are consistent inaccuracies in the prices reported. It is always a good idea to opt for a trial service with amble provisions to cancel and compare the prices and speed of streaming data with a comparable service.It may not be a bad idea to tally up the monthly expense and realize that you will need to make that every month – rain or shines just to break even. This is the only way I know to keep quote providers honest. Track ‘N Trade has a very good spread plug-in. You can find it: www. Since many good things in life come for free we cannot avoid mentioning. If you shop around carefully you will of course see huge variance in prices depending on whom you are buying from. Spread Execution Software J-Trader has a special function in the software called MEL (Multiple Exchange Legging). Some tools are of course a necessity.2hedge. 133 . Real time or end-of-day quotes Of course the real time will cost more. A college trader created specially designed software for EOD trading.
Seasonality Databases I am putting together a database based on Seasonality and historical patterns.http://www.com/ Brite Futures has a web based free spread charting service using EOD data. Preorder via the coaching website please. There is no need to sit in front of the computer. Of course there are those who relish this activity and love technology and trading (scalping) for small amounts. Conclusion Spread traders do not need real time data.britefutures. This can be a cost saving and convenience measure. Sample of this database will be available for viewing and the final product is to be release soon. 134 .
000 or more in their trading accounts can and do lose it all in a heartbeat if they trade too big relative to the capital. And. but are not perfect (see my section on stops). This Lesson however will focus on losing mindset and actions typically attributed to losing traders.ready to be eaten alive by the competition. Beginning futures traders that expect to quit their "day job" and make good living trading futures in their first few years of trading are usually disappointed. There are no perfect money-management tools in futures trading. I do not like to dwell upon failure as looking and adopting success is a better model sometimes. Protective stops are a good money-management tool. 3. 1. 4. Expectations that are too high. 2. Failure to have a trading plan. You don't become a successful doctor or lawyer or business owner in the first couple years of the practice. It takes hard work and perseverance to achieve success in any field of endeavor-and trading futures is no different. Traders with less than $5. Using protective buy stops or sell stops upon entering a trade provide a trader with a good idea of about how much money he or she is risking on that particular trade.Lesson 12 Why Traders Fail It is a good idea to study failure to avoid it. It does not take a fortune to trade futures markets with success. too soon. 135 . should it turn out to be a loser. Inadequate trading capital or improper money management.000 in their trading accounts can and do trade futures successfully. traders with $50. Failure to use protective stops or at least mental stops. A trader with no specific plan of action in place upon entry into a futures trade is like a business without a business plan .
Unfortunately.5. 9. and then act upon them in a prudent way. It takes keen focus and concentration to be a successful futures trader. and if it's hit they'll take their losses (usually minimal) and then move on to the next potential trading set up. Lack of "discipline. 7. 136 . then ask yourself why? You should make immediate changes that put you in firm control of your own trading destiny. "Over-trading. 8. that's not at all a proven means of making profits in futures trading. Trading against the trend-or trying to pick tops and bottoms in markets. Having too many open trades at one time is a mistake. Letting losing positions ride too long. who sit on a losing trade. even though there is the temptation to make more trades to recover the recently lost trading assets. You are the one who is responsible for your own success or failure in trading. If you feel you are not in firm control of your own trading. 6. Failure to accept complete responsibility for your own actions. If trading losses are piling up. Traders." Don't trade just for the sake of trading or just because you haven't traded for a while. "hoping" that the market will soon turn around in their favor. Let those very good trading "set-ups" come to you. It's human nature to want to buy low and sell high (or sell high and buy low for short-side traders). Most successful traders will not sit on a losing position very long at all. don't blame your broker or someone else." Trading too many markets at one time is a mistake-especially if you are racking up losses. When you have a losing trade or are in a losing streak. The market will do what the market wants to do-and nobody can force the market's hand. are usually doomed. Top pickers and bottom-pickers usually are trading against the trend. it's time to cut back on trading. which is a major mistake. They'll set a tight protective stop. You make the trading decisions.
What is the proper mindset of the winning trader? Well for one – never underestimate the market or think in terms of how much you can make on an individual trade. Even in very strong markets there are periods when there is an over-bought condition materialize and it is prudent to sell.10. Not getting a bigger-picture perspective on a market. In my opinion . when contemplating a trade. Let’s look at the major long-term trend in crude. Is the mode bullish or bearish? The tone is usually set at the opening and during that time you will gauge the mood for that day. Is this a buy here or a sell provided the market fails to follow through? 137 . One can look at a daily bar chart and get a shorter-term perspective on a market trend. for that larger perspective. There can be a long-term bullish chart for crude but intermediate trend can be very bearish and couple that with a bearish day you certainly will not profit by going long. That is a losing proposition. But a look at the longer-term weekly or monthly chart for that same market can reveal a completely different picture. Smart traders will always keep in mind the mode for the day. Fading over-bough and over-sold markets is not a totally bad idea provided absence of a strong trend. In other words even in the strongest markets prices never move up in a straight line. Instead a prudent speculator will ask and prod his mind what can go wrong in each and every position he/she enters BEFORE he committed any money. It will box you into this one particular trade and set you up for failure should something go wrong. So when people tell you next time that aged old fable “the trend is your friend” it is always are nice comeback to ask which trend they are specifically looking at. It is prudent to examine longer-term charts.positive thinking is not a prerequisite or even a good trait in trading.
The intermediate and short-term trend is bearish. So here is a long-term chart with an intermediate short-term reversal. Many novices fall into this trap and would buy only to be stopped out or worst lose more to the more experienced and more cautious traders.Chart 49 What would caution us from this trade is the volume has not fallen that much and open interest is also still high . 138 .a sign that the down move likely to continue. Other indicators all would tell us to stay pay or get short. Remember trading futures is a zero sum game.
Your take may vary. I suggest you read my take and study and investigate these markets before form you opinion. Any market you trade needs to be studies and investigated prior risking any money. That is no small change. The whole idea of my list is to show that not all markets are created equal and some are better than the others. The description below is only guidance and represents my opinion. Market selection Big mistake traders make is not selecting their markets carefully.Chart 50 Trading is not an exact science and many contradictions would exist to befuddle the novice trader. The difference of the move from the trend-line to where the market eventually turned was around $3200 on one contract. 139 .
very small contract size 7.Very Good 8. but beware of strong limit moves & gaps 5.OK .OK. Palladium.Yes 4. Coffee .better to follow gold/silver though 6.Historically a little difficult.Good. Cotton . Not liquid. British Libor . Euro . NYSE Composite Index .My view on markets 1. 16. Handle with care on API report days 9. Lumber . The classic.OK. I have had some good moves on it. Gold .No. but can be a strong “trender” 11. a bit seasonal 14. Eurodollar . Orange Juice . British Pound . Trade Euro/Yen/Swiss instead 3. Japanese Yen .very good 13.I didn't really get on with the old juice. Fairly liquid but chops sometimes 140 . boring most of the time. For the suicidal (or Russians with insider information) 18. Corn .Yes. but choppy. but probably best contract to have your metals section covered 12. 2.Very good 10.Good. Canadian Dollar . Pork Bellies. Copper .I would stay clear of stock indices for commodity trend trading when starting out. Crude-Oil .Does trend but can do nothing for long periods 15.Very liquid. Live Cattle . 17.
20. It can be a little choppy. 26. If the contract’s trading volume is not in several thousands you may not want to venture in there. Indeed when I look at the Palladium chart we can look up the daily volume and there are some days when the market trades on very light volume. 21. S&P 500 Index. Sugar – Good. Swiss Franc . T-Notes . T-Bonds .Good. Good.Illiquid 23. But there is no point trading all 3 of the soybean complexes unless you are spreading. 27. T-Bills .Very good 24. Forget it. This is a very simple test to gauge a market’s viability is to look at the daily volume. If I left out a contract and you feel it is easy to trade as a rookie and liquid enough please drop me a note.19.I would stick to crude oil. 141 . This is not a complete list since I put it together many electronic contracts opened up on GLOBEX trading.Very good 25.Very good 22. Wheat . It trends very nicely. Unleaded Gasoline . small contract size. as above. Soybean Oil. However look for leadership from this contract for the kick off of "summer driving season".
General propensity to gambling leads many people to the financial markets and eventually to spread trading. You may not need it. I have learned about commodities spreads and trading many years ago. In fact I have found an early book on Seasonal Spreads in the Board of Trade library reserved for the members. I used to write newsletters and articles for online and printed magazines so I became quite accustomed to TnT. During this journey I have lost a lot of money and endured financial and personal failure due to bad trading and poker. programmed. some ways to chart spreads and $10.Lesson 13 Conclusion I do not believe that this book will convince or convert traders into Star Spread Traders. I am personally using Track and Trade because it was given to me for free by Lan Turner.000 as seed money. I use my own database compiled partially from using Moore’s data and my personal observations and TnT charts but I still use their monthly subscription service. In fact I like it a lot. For authors the charts are easy to capture and handle.000-15. This book and software is complete as is.e. It is my experience that human nature will take us where we need to go i. The least I could do is to use it and ‘plug’ his software. I have decided to study the math and dynamics of spreads but I have not adopted it into my trading style early on. It had no impact on me. while I was a local at the Board of Trade. In reality you do not need anything special – only a good broker. 142 . If your disposition is different and do not share my views on trading and the markets this book will not change that. Software and Seasonal databases Do not think of this book as a marketing pitch to sell my services and promote my web site. I can personally attest to this. You do not need to spend a dime more and when mastered you are ready for this exciting new business.
The user can alter the data and even the chart in the database. It is far from complete.bmp files only. The only difference will be multiple positions and staggered multi contract entries. When you use incorrect timing in spread trading you can still come out ahead if the market will go your way eventually. If the spread conditions change as they always do the database can and should be adjusted. however there are people who prefer to control their source of data as much as it is possible and will maintain and use their own spread research. When you use incorrect timing in ‘naked’ futures trades you are wiped out quite often. This is not the best or worst year but an average for a seasoned and experienced spread trader.bmp. If you own TnT you save charts in . You can start out with a $5000 account or a $20. For example after a seasonal trade proves right you may ad to the position if the projected length of the move warrants it. I will maintain this database and will make it available to my clients. Also you can enter 2-3 lots initially if you have more funds in your account. I can only encourage this. Try to use your own timing using my technical tips from this course. Timing Correct timing will yield monetary difference in your results but with patience it will often self-correct errors in your entry. You will thank me later. 143 . For new chart data the user should use .The database has charts that are not quite in match with the optimal initial buy of the spreads. You can contact me for money and portfolio management. The database is a project that takes ongoing effort and maintenance.000 account. How much can I make? Typical and reasonable (long term) returns from spreads can be 40-50 percent per annum.png file format (standard) and should use paint tool to convert it to . WARNING Moore Research offers timing as well as the raw database. Use your own judgment and risk management criteria.
• • Never add to a loser Maintain a decent win: loss ratio. Never trade with borrowed money 144 . In spreads it is not uncommon to have a 1:1 win loss but note that winners are added on to and pyramided so the effective win loss ratio is much better that what you start with. • • Try to limit market exposure to 2-5 percent of your total account.This book did not cover a lot of money management but as a rule you should remembers this.
Proper strategies are very complex and could involve real time quite and volatility computation. Without getting involved in the options theory and strategies that could fill a book by itself I must address certain issues regarding options trading. margin capabilities of the broker as well as commissions. 145 . This implies the need for sophisticated software to calculate which option is over or under priced. An option is a wasting asset. This is especially true for the stock index futures.e sell the options rather than purchase them. without owning the underlying futures contract is dangerously expensive. Very few brokers are willing to cater to the semi professional options professional.e.Appendix A Options on Futures There is an influx of questions directed towards the author’s website about options trading in the Commodity Futures market. So without sounding too negative on options on futures I must emphasize that the importance of broker selection and education on the subject is as high as in spreads trading if not higher. The margin requirement of selling options naked i. This is mainly due to adverts on late night infomercials or cable TV from various brokerage houses mentioning gold or energy in hopes to entice the general public into capitalizing of the boom in the raw materials markets. Option strategies can be applied in directionless and both bull and bear markets. So most people realize that it is often more advantageous to sell options not purchase them. Time decay eats away the value and potential of the option contract. When dealing with options one must consider the execution. types of traders who are often rather short I. Many brokers who advertise for options clients are unscrupulous brokers who charge exorbitant commission and virtually guaranteeing that the novice trader will have no chance to profit from the trade.
Let’s look at the Silver chart and its option prices. This is an excellent visual training tool. In real life it happens infrequently that markets go adverse direction and get locked limit when some news jolts 146 . (Figure 15) Figure 15 The prices are downloaded as end-of-day price along with the underlying futures contract.So at any given time the option in relation to the underlying can at-the-money. Why trade options? In theory one can be liable for more than deposited in his account. in-the-money or out-of-the-money. Visual computation and strategy can be viewed in the software. Track and trade has an option plug in for pricing and gaining better understanding of options. This is based on the option’s strike price and the current close price of the underlying.
the market. Sellers of options are also required to place margin in an account to protect against price movements and the delivery of the underlying futures position. However a series of limit moves could eat up deposited funds. This is the brokers’ big sales point. If the broker cannot liquidate your position . Since it is a contract on a contract – it is often referred as a derivative. As the option is describer is as follows. The buyer pays the price of the option in full. December 203 Corn priced at 1 cent 147 . in theory be liable for more than you put in. Margins are not used for option buying. So December Corn will also have a December option along the underlying. The price of the option is derived from the price of the underlying futures. Usually one can hedge some back month or lay off the risk overseas.you can. Options on the Futures contract of course. Here in these chapters you will learn the reality. Options also have a lifecycle just like futures. There is an expiration month matching the futures expiration. An option is a contract to buy or sell a futures contract at a predetermined price – called a strike price. can limit any liability for the prospective speculator who purchases the options. The strike price A December Corn would have a series of options at different levels of prices. On the other hand a seller or (writer) of the call is obligated to deliver the futures contract so he/she naturally be assigned a short futures position. These prices are the option’s strike price. The right to buy the underlying futures is called a call and the right to sell the underlying futures is called a put.
Let’s look at Track N Trade Option module.e. It is normally quoted in the same denomination as the underlying futures contract. The Premium The premium is what the purchaser pays and the writer i. A picture is worth a thousand words and I find this software not only a great trading tool that can make you money but also a great educational piece that graphically demonstrates options strategies and pricing. The US Treasure bond is the exception. seller receives. The options are quotes in 64th while the futures are quoted in 32nd. Naturally this cheap price would imply that there is not much time value for this option and the strike price and the futures price are away from each other.This would mean that for that particular option in the series you would have to pay $50 plus commission. Call Example (Figure 16) Figure 16 148 . To simply put this is the price of the option.
market by red. It is in the money for 2 ¼ cents (this is also called the intrinsic value) and 10.25 (in cents).This chart above is an example of an in-the-money option. This means that they will trade two options instead of one. Strike is less than the Futures Price. (See Figure 17) Figure 17 This picture is to show a simple strategy with Corn options. You are selling one call and buying a more expensive call.25 is what the option is worth if the owner would exercise today. 149 . The call we are buying is in the money option since we are able to go long corn at 215 and have an instant profit.63 is the time value. The $656. Synthetic Futures These options positions are mainly constructed to hedge instead of using the outright futures contract. Why would they do that? It is simple to limit the cost and enhance the price potential. The ideal behind this is mainly to limit your cost of premium. As you see the option will be worth more should the market advance higher and the total possible loss is the premium paid ($1968. More than anywhere in trading people are using options as spreads. As you see at the closing Corn Futures were at 222.75) .
so this is a risk reward ratio of ~1:1. Considering that the market was already 222. This is always a good idea to keep that information and consider when contemplating which trades to take. above shows that the maximum loss on this position is 256.25 which is nearly the equal the amount that we can make (243. 150 .25 (which is the higher strike price) and beyond you will profit. On the other hand if the trader has very strong conviction that Corn will move up but has limited funds this is not a bad trade to double your money.75) . I think it is quite an attainable strategy. Option terminology Calls Futures Price greater than Strike Price = in-the-money Futures Price less than Strike Price = out-of-the-money Futures Price equals Strike Price = at-the-money Puts Futures Price greater than Strike Price = out-of-the-money Futures Price less than Strike Price = in-the-money Futures Price equals Strike Price = at-the-money Figure 17.Buy 1 put and sell 1 call = 1 Synthetic short position (assuming the same underlying) Buy 1 call and sell 1 put = 1 Synthetic long position (assuming the same underlying) For this to work the strike for the options must be at-the-money.25. As you see it does not take a excessively huge move (10 cents) in Corn to profit – once Corn rallies up to 225.
To put it in a different way . We will mention some but the list will not be all encompassing.the net cost of the spread In the case of our corn spread the difference of the 10c between the strike price (225-215) is $500 and the cost of the spread was 256. In order to understand this concept we must visit the formula to price options. The Pricing models of options The inputs required to calculate options prices are: Strike Price Interest Rate Maturity Implied volatility If trying to measure the implied volatility. This is why option’s trading is difficult and pricing models are closely guarded secrets.25 so the difference of $243.75 Spread Techniques There are many spread techniques and nuances in options trading that are too advanced and probably beyond the scope of this beginner course. Now let’s revisit the strategies. In general when once expects the market to become very volatile one would buy options outright or debit spreads that will increase in value as volatility increases. when and if the trader perceives volatile trading buying options might be the right idea. When however after tumultuous weeks of trading finally the 151 . then the forecasted market price of the option is input. I think it is better to understand the risk and rewards of trading options and spreads of options.The formula to calculate this spread’s potential is rather simple: Call Debit Spread (the strategy we are examining) Maximum profit = difference in the strike price . current volatility will only show is the options has been overpriced or under priced by the formula used. Using known.the implied volatility is future volatility of tomorrow’s trading.
152 . Instead the trader should be selling options. One can use nearly risk-less strategies in options but the amount of money you’ll make will also be smaller. Notice that we are losing on this position if the market goes up too drastically or if it goes down. One strategy just like that is the nice sounding Butterfly Spread: The Butterfly Spread is a strategy when the options trader is buying one at-the-money call. If we expect the market will remain in a trading range for a period of time – at least until expiration. (This activity is also called selling premium) See Figure 18 Figure 18 In this example we sold a call and a put – both out-of-the-money. and buying and out-of-the-money call. The amount of money lost is far more than the money gained by writing premium. In my opinion commission that you pay would hinder options trading unless you do it in a discount fashion. selling 2 out-of-the-money calls. we could employ this strategy. What is the good option strategy? Options can be a good way to cheaply get involved with the market.market quiets down option buying could be a wrong choice. Typically the traders employing strategies like this are floor traders and they are in and out of the underlying position so this is not the major income to them only as a complement to an otherwise complex strategy.
Let’s look at the strategy when we know a big move is likely but we are unsure of the direction: Chart 48 As you see the earlier triangle formation was followed by a move to the upside. Is this going to be similar this time around? See Figure 19 – Long Straddle 153 .
It will be greatest if the underlying is at the strike price at expiration. Break-even: Reached if the underlying rises or falls from the strike by the same amount as the premium cost of establishing the position.Figure 19 A long Straddle: Buy a put and a call at the same strike price. Loss: Limited to the premium paid in establishing the position. Profit: Unlimited for an increase or decrease in the underlying. Let’s look at the Long Strangle at the next page (Figure 20) 154 .
Loss: Occurs if the market is static. Break-even: Occurs if the market rises above the higher strike price by an amount equal to the cost of establishing the position. limited to the premium paid in establishing the position. or if the market falls below the lower strike price by the amount equal to the cost of establishing the position 155 .Figure 20 A long Strangle: Buy a call at a strike above and buy a put at a strike below where the market is currently trading. Profit: The profit potential is unlimited although a substantial directional movement is necessary to yield a profit for either a rise or fall in the underlying.
156 .Figure 21 The last strategy is the Long Iron Butterfly.
and is maximized if the underlying rises to strike or falls to strike the short Strangle. sell Strangle with strike prices above and below the strike price of the Straddle. A long Iron Butterfly: Buy Straddle. Break-even: Reached when underlying is above or below strike price by the same amount as the initial debit. Loss: Limited to the net debit in establishing the position. 157 .Figure 22 As you see the major problem with the Iron Butterfly is the ‘cap’ in the profit we can make on this trade. Profit: Limited.
See offer. Bull Market A market in which prices are rising. Bear Market A market in which prices are declining. 158 . Buy On Opening To buy at the beginning of a trading session at a price within the opening range. Bid The price that the market participants are willing to pay.Glossary Arbitrage Arbitrage is the simultaneous purchase and sale of identical or equivalent financial instruments or commodity futures in order to benefit from a discrepancy in their price relationship. Indicates a willingness to sell a futures contract at a given price.) Back Months The futures or options on futures months being traded that are furthest from expiration. Cabinet Trade or cab A trade that allows options traders to liquidate deep out-of-the-money options by trading the option at a price equal to one-half tick. Bull One who expects prices to rise. security or futures contract at a specified price anytime between now and the expiration date of the option contract. (See bid. Ask Also called "offer". Call An option to buy a commodity. Buy On Close To buy at the end of a trading session at a price within the closing range. Bear One who believes prices will move lower.
or bids and offers. thus ending the day with no established position in the market. Contract Month The month in which futures contracts may be satisfied by making or accepting delivery. Exercise Or Strike Price The price at which the holder (buyer) may purchase or sell the underlying futures contract upon the exercise of an option.) Day Order An order that is placed for execution during only one trading session.) Closing Range (or Range) The high and low prices. 159 . (See opening. Sometimes used to refer to the closing range. Contract Unit of trading for a financial or commodity future. (See settlement price. Close The period at the end of the trading session. (See delivery month. recorded during the period designated as the official close. it is automatically cancelled. Also.) Commission (or Round Turn) The one-time fee charged by a broker to a customer when a futures or options on futures position is liquidated either by offset or delivery. Deferred Another term for "back months." Delivery The tender and receipt of an actual commodity or financial instrument. the. Day Trading Refers to establishing and liquidating the same position or positions within one day's trading. actual bilateral agreement between the parties (buyer and seller) of a futures or options on futures transaction as defined by an exchange. CFTC The Commodity Futures Trading Commission as created by the Commodity Futures Trading Commission Act of 1974. or cash in settlement of a futures contract. If the order cannot be executed that day. This government agency currently regulates the nation's commodity futures industry.Cash Commodity The actual physical commodity as distinguished from a futures commodity.
Expiration Date The last day that an option may be exercised into the underlying futures contract. It is also, the last day of trading for a futures contract. Floor Broker An exchange member who is paid a fee for executing orders for Clearing Members or their customers. A Floor Broker executing orders must be licensed by the CFTC. Floor Trader An exchange member who generally trades only for his/her own account or for an account controlled by him/her. Also referred to as a "local." Futures A term used to designate all contracts covering the purchase and sale of financial instruments or physical commodities for future delivery on a commodity futures exchange. Futures Commission Merchant A firm or person engaged in soliciting or accepting and handling orders for the purchase or sale of futures contracts, subject to the rules of a futures exchange and, who, in connection with solicitation or acceptance of orders, accepts any money or securities to margin any resulting trades or contracts. The FCM must be licensed by the CFTC. Hedger or Commercial Commercial or business entity seeking to lay off risk and normalize price fluctuation by counter trading to the actual commodity holding to avoid a loss Hedge The purchase or sale of a futures contract as a temporary substitute for a cash market transaction to be made at a later date. Usually it involves opposite positions in the cash market and futures market at the same time. (See long hedge, short hedge.) Holder One who purchases an option. Initial Performance Bond The funds required when a futures position (or a short options on futures position) is opened. (Previously referred to as Initial Margin) Limit Order An order given to a broker by a customer that specifies a price; the order can be executed only if the market reaches or betters that price. Limit Price (See maximum price fluctuation.)
Liquidation Any transaction that offsets or closes out a long or short futures position. Locked Limit Daily limit of the commodity price has been reached and trading is suspended until new sellers/or buyers appear. If no new price action surfaces trading for the day is called ‘locked limit’ Long Longs is the person who has bought a futures or options on futures contract to establish a market position through an offsetting sale; the opposite of short. Long Hedge The purchase of a futures contract in anticipation of an actual purchase in the cash market. Used by processors or exporters as protection against and advance in the cash price. (See hedge, short hedge.) Margin (See Performance Bond) Maintenance Performance Bond (Previously referred as Maintenance Margin) A sum, usually smaller than--but part of--the initial performance bond, which must be maintained on deposit in the customer's account at all times. If a customer's equity in any futures position drops to, or under, the maintenance performance bond level, a "performance bond call" is issued for the amount of money required to restore the customer's equity in the account to the initial margin level. Mark-To-Market The daily adjustment of margin accounts to reflect profits and losses. Market Order An order for immediate execution given to a broker to buy or sell at the best obtainable price. Maximum Price Fluctuation The maximum amount the contract price can change, up or down, during one trading session, as stipulated by Exchange rules. Minimum Price Fluctuation Smallest increment of price movement possible in trading a given contract often referred to as a "tick." M.I.T. Market-If-Touched. A price order that automatically becomes a market order if the price is reached.
Nearby Nearby is the nearest active trading month of a futures or options on futures contract. Also referred to as "front-month." Offer Also called "ask". Indicates a willingness to sell a futures contract at a given price. (See bid.) Offset Selling if one has bought, or buying if one has sold, a futures or options on futures contract. Open Interest Total number of futures or options on futures contracts that have not yet been offset or fulfilled by delivery. OI is an indicator of the depth or liquidity of a market (the ability to buy or sell at or near a given price) and of the use of a market for risk- and/or assetmanagement. Open Order An order to a broker that is good until it is canceled or executed. Opening, The The period at the beginning of the trading session during which all transactions are considered made or first transactions were completed. Opening Price (Or Range) The range of prices at which the first bids and offers were made or first transactions were completed. Option A contract giving the holder the right, but not the obligation, hence, "option," to buy (call option) or sell (put option) a futures contract in a given commodity at a specified price at any time between now and the expiration of the option contract. Out-Trades A situation (typically on the floor) that results when there is some confusion or error on a trade consummated. A difference in pricing, with both traders thinking they were buying, for example, is a reason why out-trade may occur. Position An interest in the market, either long or short, in the form of open contracts. (See open interest.) Performance Bond (Previously referred to as Margin) Funds that must be deposited as a performance bond by a customer with his or her broker, by a broker with a clearing member, or by a clearing member, with the Clearing House. The performance bond helps to ensure the financial integrity of brokers, clearing members and the Exchange as a whole.
losses. This is the opposite of a rally. Pit Location on the floor where the individual commodity contracts are traded i. the opposite of long. or futures contract at a specified price at any time between now and the expiration of the option contract. Put An option to sell a commodity. Round-Turn Round Turn or RT is a procedure by which a long or short position is offset by an opposite transaction or by accepting or making delivery of the actual financial instrument or physical commodity. recorded during a specified time.purchasers pay the premium and sellers (writers) receive the premium.Performance Bond Call (Previously referred to as Margin Call) This is a demand for additional funds because of adverse price movement. Range The high and low prices or high and low bids and offers. and soliciting business for. Corn Pit. Registered Representative A person employed by. security. Scalping normally involves establishing and liquidating a position quickly. margin calls. Settlement Price A figure determined by the closing range that is used to calculate gains and losses in futures market accounts. Scalp To trade for small gains. Reaction A decline in prices following an advance. 163 . or over the cash market price. Rally An upward movement of prices following a decline.e. the opposite of a reaction. The amount agreed upon between the purchaser and seller for the purchase or sale of a futures option -. Soybean pit Premium The excess of one futures contract price over that of another. a commission house or Futures Commission Merchant. Settlement prices are used to determine gains. (See closing range. hour or even just a few minutes. and invoice prices for deliveries.) Short Short is the person who has sold a futures contract to establish a market position and who has not yet closed out this position through an offsetting purchase. usually within the same day.
either up or down. Slippage Slippage is a bad fill in open outcry markets. but only with the difference between the prices of each contract. Used to eliminate or lessen the possible decline in value of ownership of an approximately equal amount of the cash financial instrument or physical commodity. Stop Order (Or Stop) An order to buy or sell at the market when and if a specified price is reached. Spread The simultaneous purchase and sale of futures contracts for the same commodity or instrument for delivery in different months.) Trend The general direction of the market. 164 . Volume Volume is the number of transactions in a futures or options on futures contract made during a specified period of time. aims to make profits. The speculator usually has no interest in making or taking delivery. Writer An individual who sells (writes) an option. position size. (See hedge. (See minimum price fluctuation. processing. through buying and selling futures contracts. A spreader is not so much concerned with the direction in which the market moves. Tick Refers to a change in price.Short Hedge The sale of a futures contract in anticipation of a later cash market sale. Resting orders can become market orders and if there is a “fast market” condition slippage occurs Speculator One who attempts to anticipate price changes and.) Size Number of contracts traded. or in different but related markets. marketing or handling of a product. does not use the futures market in connection with the production. long hedge.
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