June 2011

Inside Scoop
by Michelle Gebhardt, Executive Editor
A DVE R T I SE M E NT
WHO SAYS YOU CAN’T

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There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products.
Past performance is not indicative of future results.
VOLUME 10, NO. 6 | JUNE 2011
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There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past performance is not indicative of future results.
The information provided herein is taken from sources believed to be reliable. However, it is intended for purposes of information and education only and is not guaranteed by CME Group, Inc. or
any of its subsidiaries as to accuracy, completeness, nor any trading result and does not constitute trading advice or constitute a solicitation of the purchase or sale of any futures or options. The
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CONTENTS
18
PUBLISHER
By Kenneth Reid Wasendorf & Associates Inc.
Russell R. Wasendorf Sr., Chairman and CEO
Karris Golden, President and COO
P.O. Box 849 • Cedar Falls, IA 50613
EDITORIAL
32 THREATS LOOM FOR 51 WHO ARE YOU? EXECUTIVE EDITOR: Michelle Gebhardt
MANAGING EDITOR: Kira McCaffrey Brecht
GLOBAL OIL SUPPLY By Ruth Barrons Roosevelt EDITORIAL ASSISTANT: Erin Holmes
Phil Flynn CONTRIBUTING WRITERS

54 DOLLAR’S VALUE: A TIP PRODUCTION
40 RIDE THE FOREX WAVES FOR COMMODITIES? CREATIVE DIRECTOR: Sara Kies
WITH SWING TRADING By Elaine Kub

DESIGNER: Sarah Judisch
DESIGNER: Samantha Schmiesing
By James Chen WEB DEVELOPER: Jeff Kennedy
CONTACT SFO
Customer Service: 800.590.0919
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8 Trade of the Month 13 Ask Dr. Duke
Copyright 2011 by Wasendorf & Associates Inc. All rights reserved.
11 Technical Strategy 16 Eye on Futures
38
No part of this publication may be reproduced or transmitted in any
form by any means, electronic or mechanical including photocopying,
recording or by any informative storage and retrieval system without the
written permission of Wasendorf & Associates Inc.’s president.
This publication is strictly the opinion and conjecture of its writers
Fear &
and is intended solely for informative and educational purposes and
is not to be construed, under any circumstances, by implication or
otherwise, as an offer to sell or a solicitation to buy or trade in any
commodities or securities herein named. This publication is not meant
to recommend, promote or in any way imply the effectiveness of any
trading system, strategy or approach. Information is obtained from
sources believed to be reliable, but is in no way guaranteed. Further,
Frustration
there is no guarantee of any kind that is implied or possible
where projections of future conditions are attempted.
The publisher is not liable for typographical errors.
Commodity futures, securities, options and forex trading involve risk
can Doom Trading and are not suitable investments for everyone. Any investment should
be carefully considered in light of an investor’s personal financial
objectives and risk tolerance.
Articles and/or advertisements contained herein may provide

hypothetical or simulated performance results. Hypothetical or
simulated performance results have certain inherent limitations. Unlike
25
an actual performance record, simulated results do not represent
actual trading. Also, because the trades have not actually been executed,
the results may have over- or undercompensated for the impact, if any,
of certain market factors such as the lack of liquidity. Simulated trading
programs are also subject to the fact that they are designed with the benefit
By Robin Dayne of hindsight. No representation is being made that any account

will or is likely to achieve profits or losses similar to those shown.
Further, past performance does not guarantee future results.
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PROFITS came a global powerhouse,
acquiring Pacific Telesis Group
By Kelley Wright
in 1997, Southern New Eng-
land Telecommunications in
In 1876, Alexander Graham Bell 1998 and Ameritech Corp.
invented the telephone, which in 1999. In 2005, SBC Com- Order Paul Forchione’s
led to the development of the munications acquired AT&T latest titles from the
company that would become Corp., creating the “new” AT&T. Traders Press®
American Telephone & Tele- In 2006, AT&T Inc. acquired Maestro Series!
graph, now known as AT&T Inc. BellSouth and consolidated
(T). For much of its history, AT&T ownership of Cingular Wire- Get BOth
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reached a settlement whereby and distributes 1,250 Real
AT&T agreed to divest itself of Yellow Pages titles annually.
Also, it is the parent of YP.com
its local telephone operations
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but retain its long distance,
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more than 5 billion consumer
On Jan. 1, 1984, the once
searches each year when
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exist and in its place was a Yellow Pages. Finally, the Order nOw >>
new AT&T and seven regional company offers voice coverage
Bell operating companies (the in more than 220 countries,
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Inc. (formerly known as South- and mobile broadband in 130
western Bell Corp.) was born countries. Claiming the fastest
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TRADE OF THE MONTH
FIGURE 1: AT&T Chart
INVESTMENT QUALITIES
Quality Rank: B+
Inst. Holdings: 2671
50 Shares (in mil): 5911434
Div Paid Since: 1984 Overvalue Yield: 3.3%
Profit Margin: 16.0%
TTM Earnings: 3.34
P/E Ratio: 9.40419161676647
Book Value: 19
Div Payout: 51%
45
CURRENT POTENTIAL
Price: 31.41
Yield: 5.5%
OVERVALUE
40 Price: 52.1212 Pts Up: 20.7112121212121
Yield: 3.3% % Up: 66%
UNDERVALUE
Price: 30 Pts Dn: 1
Yield: 5.7% % Dn: 4%
35
Source: Stockcharts.com
30
25
Undervalue Yield: 5.7%

20
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
DI $1.07 $1.37 $1.25 $1.29 $1.33 $1.42 $1.60 $1.64 $1.6 $1.72
EPS $2.23 $1.80 $1.50 $1.42 $1.89 $1.94 $2.16 $2.12 $3.22 $3.34
Source: Value Trend Analysis
already, service will get even dividend of $1.72, the stock Kelley Wright is chief investment of-
faster with 4G. is attractive for acquisition ficer at IQ Trends Private Client As-
up to $33. Historically, the set Management. He does not own
THE TRADE stock reaches its overvalue the shares personally, but shares
AT&T Inc. historically offers area when the dividend yield
are held by his clients in separately
good value when the declines to 3.3%. Based on
managed accounts.
dividend yield is 5.7% or the current cash dividend,
better. Trading recently at that would be a price target
$31 with a current cash of $52.
9 JUNE 2011
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Technical strategy
Prevent a market’s corrective phase low-range or relative inactivity.
Early Exits begins. The same thing can A swing point is defined by the
By Shaun Downey occur when traders rely on third bar (of a consecutive set
calculations of a prior range to of five bars) on any time frame
A common practice when using achieve a more dynamic type chart. The actual swing point
trailing stops, (beyond money of trailing stop. can be either the high or low
management techniques) is to of that bar.
use popular indicators such as USE SWING POINTS That swing point value will
the parabolic, ADX, moving aver- My preferred method to tackle be valid until the next occur-
ages or volatility stop. this situation is to use swing rence. Years of extensive testing
While these methods do patterns that are manipulated reveals that breaking, on a clos-
have merits, a recurrent flaw in order to prevent exits being ing basis, below the swing low
is their inability to prevent a triggered when the corrective (if in an uptrend) is statistically
premature trade exit when phase is simply a byproduct of the most robust exit method.
risk reward =
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Trading in futures and options involves a high degree of risk and may not be suitable for everyone.
11 JUNE 2011
However, there are flaws. The Figure 1: Five-Minute S&P Chart
stop may be too far away for
comfort. This five-bar pattern is
by not a magic formula, but it A Swing crossover.
129200
The trend is strong.
can be manipulated depend-
129200
ing on the asset class or time 7 consecutive swings
down prior to regular
frame chart being used. hours opening. 129200
129200
QUIET MARKETS 129200
On very short-term charts, peri-

S&P five minute chart 129200
ods of relatively low activity also

can cause a premature trade 129200
exit. This is especially prevalent 10:30 11:00 11:30 12:00 12:30 13:00 13:30 14:00 14:30 15:00
with the extension of trading The red line above price reveals the seven consecutive swings low. The red line moves down
seven times in a row, the last one being just before the opening of the cash market at 2.30
hours on futures and has been p.m. London time.
a perennial problem in spot Source: CQG
foreign exchange markets due
to their 24-hour nature.
on the markets being traded but in Figure 1 reveals price being
CALCULATE rarely moves beyond 100%. below the swings. It is a bearish
AVERAGE RANGE signal. Finally, the re-definition of
Any strategy that is active SWINGS IN ACTION data to include only the most ac-
around the globe risks being A lot of information can be ob- tive part of the trading day on a
stopped out during the Asian tained by analyzing swing patterns. five-minute chart allows analysis
trading session, where periods They can be used to qualify break- of how many trends can occur
of inactivity are at their greatest. outs and for trailing stops.A break- within one day and the limit of
Calculate the average range of out is signaled if the swing pattern continuous swing patterns within
each swing pattern to avoid the levels cross over each other after a that period.
problem. In order for the swing period of sideways movement. See
pattern to be valid, it must be at the example of a swing crossover Shaun Downey is technical
least 20% above that average (red lines) on Figure 1. analyst at CQG.
range over the last 1,000 bars. The crossover shows a lack of
This ratio can be adjusted based reaction to the new trend, which
The Official Advocate for Personal Investing 12

ASK DR. DUKE
DEAR DR. DUKE, has been taken into account
Q&A
spread that was less OTM than
I read Dr. Duke’s column every by that calculation. I would like because of overlap-
month in SFO magazine. His When IV is high, I will see that ping strikes of existing spreads.
commentaries on credit spreads my spreads are farther out-of-the- The iron condor spread is a
and iron condors are excellent. I money (OTM).That doesn’t mean classic example of a high risk/re-
use a 1 standard deviation (SD) the position is safer, because ward strategy. We are attracted to
to place my short option legs. increased IV tells us the market is these trades, because they have
I like to stagger my placement expecting wider price swings in high probabilities of success and
of the iron condors, using the 30- the near future. Using the standard low probabilities of loss.That loss
45 day period. I also like to place deviation calculation to place my may be improbable, but when it
the IC when implied volatility (IV) spreads incorporates IV and results occurs, it likely will overwhelm all
is high. When I do this, I get wider in consistent levels of risk exposure of your gains to date.Thus, a sys-
spreads and higher credits. I from month to month. tem of robust risk management
have found over the years that Iron condor spreads are nega- is crucial for long-term success.
placing an IC during a period of tive Vega positions and thus I devoted a section of my
low IV has caused me the great- suffer when IV increases. Some book, No-Hype Options Trading,
est losses. I largely have relied traders hedge the volatility risk to a variety of risk management
on the theory that the underlying of the iron condor by adding techniques for the iron condor.
will bounce off the 1SD. This one or more extra long puts to I also suggest listening to the
seemed to happen less than the put spreads or even buying archived SFO webinar, The
expected. I would appreciate Dr. an ATM put. If the market crash- Dangerous Iron Condor, for other
Duke’s comments on placement es and IV spikes, the extra long adjustment tips.
of iron condors using IV, stagger- puts will minimize your losses. Best wishes with your trading.
ing and stop losses. Your practice of staggering
— Jeff, Lake Worth, Fla. the condors through time is an Kerry W. Given,
excellent way of hedging what Ph.D. (aka Dr.
DEAR JEFF, might be called our time risk. Duke) is the
Increased implied volatility Sometimes we wish we had just founder and
is effectively self-correcting waited a few days before initiat- managing direc-
for the iron condor trader. If ing our position. The downside tor of Parkwood Capital LLC and the
I position my credit spreads is that it complicates our trade author of No Hype Options Trading.
using a standard deviation management. Sometimes I
calculation, then IV already have found myself forced into a
13 JUNE 2011
something
Big is coming.
can you guess?
here’s a few hints:

1. this new trade expresses simple
yes/no propositions.
2. the contract size is always $100.
3. your maximum risk on a trade is always

known in advance.
4. you can never be called upon for extra

funds or margin.
think you know? tell us.
there is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products.Past performance
is not indicative of future results.
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EYE ON FUTURES
PLAN COMES plan and journal requires great
time and effort.
egy was executed as designed.
Regarding the exit, record the
TOGETHER order type, fill price and the
By Curt Wagaman TESTING TACTICS criteria for exiting the trade.
Now, it’s time to begin testing
Journals evaluating past perfor- our tactics in real-time market THINGS TO TRACK
mances help you move forward conditions, albeit with a simu- Track profits and losses. Include
with a method of attack. lated account. Mark each trade trading costs. Finally, detail all
Software applications allow as an entry in your journal. pertinent information surround-
us to enter the technical pa- Compile information for both ing the trade:
rameters of a strategy and track entries and exits, including — • mood
performance. Past performance but not limited to — the date • distractions
isn’t indicative of future results, and time of the trade, ticket • economic reports
but we can assess if the plan number, buy or sell, what mar- • anything else that may have
would have worked up until now. ket and how many contracts. played a part in the result
In your plan, include what type Specific to the entry, record This initiates a track record
of performance is required to go the type of order, fill price, to draw performance results.
live.The trade journal records all predetermined exit parameters, Keep in mind the limitations of
aspects of your trading. Creating, criteria from the plan used to simulated trading:
maintaining and updating the enter the trade and if the strat- • no actual exchanges
• no real psychological factors
• no consequences
You’re the only one holding

yourself accountable and need
to do so diligently in prepara-
tion for live trading.
Curt Wagaman is an instruc-

tor and professional trading
mentor for the futures training
division of PFGBEST.
Curt Wagaman walks you through a trading plan.

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There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign
currency products. Past performance is not indicative of future results.
Where others see danger,
traders see opportunity.
However, traders are
natural-born risk takers
who need to know how to
manage stress. • Impatience threshold. This is the
• Impulsivity fuzzy line beyond which
GOOD STRESS-BAD STRESS the locus of control shifts
We all enjoy a little STRESSED BY RANDOMNESS from the rational pre-
adrenaline. In fact, Most investors consider frontal area to the more
stress guru Hans Selye day-to-day market move- primitive midbrain. Once
distinguishes two types ments to be random, a this shift away from pre-
of stress: healthy and theory popularized by frontal dominance hap-
unhealthy. Princeton economics pens, we are in a neu-
Healthy stress is in- professor Burton Malk- rological no man’s land,
vigorating and builds iel. Traders acknowledge and our ability to trade
strength. It has the same the element of random- rationally is degraded.
characteristics as a good ness in the markets but Our stress threshold
workout: time-limited, believe certain technical functions as a point of
appropriately intense and conditions give us an edge no return. Beyond our
followed by a recharge in predicting short-term stress threshold, all the
cycle so the system can price movement. good advice we have ever
restore itself. Randomness can in- heard becomes irrel-
During a trader’s learn- crease stress levels dra- evant, because we will
ing curve, which can matically and be toxic. have little practical ac-
take years, aspiring trad- When rats are given ran- cess to that information.
ers are likely to become dom rewards, they begin In this state, accounts
stressed out, putting to act like addicts. quickly go up in smoke.
traders’ plans in danger. When they are given
Unhealthy stress is asso- random punishments they MARGIN OF SAFETY
ciated with: can’t avoid, they literally Your priorities may be in
• Irritability go crazy. The trading en- this order:
• Lack of concentration vironment has both. • Money
• Memory issues • Market
• Hyperactivity STRESS THRESHOLD • Method
• Reactivity Your brain has a stress • Mindset
19 JUNE 2011
Unfortunately, the more
stressed out we become, STRESSORS TO AVOID!
the less attention we pay 1. RANDOMNESS – Unpredictable
to our own instability. rewards and punishments
This can lead to a vicious 2. UNCERTAINTY – We trade on the hard right edge
3. INTENSITY – Money matters to our sense of bio-
stress spiral. Just as most
logical security
large losses start out as
4. LOSSES – Losses have 2.5 times more emotional
small losses that we re- impact than wins
fused to take, meltdowns 5. MISSING OUT – A mental nightmare for some
generally are preceded people
by an incremental stress 6. BEING WRONG – Hard on the ego
buildup we tend to ignore. 7. ISOLATION – Exacerbates the effects of stress
Unfortunately, the slope 8. INEFFICIENCY – Results not commensurate with ef-
fort
of the stress curve can
9. COMPETITION – Adds internal pressure
rise exponentially due to
10. HUMILIATION – Being low in the trader hierarchy
a self-reinforcing feed- undermines confidence
back loop.
Stress leads to poor de-
cisions, more losses and
eventually more stress.
Maintaining prefrontal
dominance in order to Subscribe & get a
Tra
prevent the stress spi-
ral is critical for trading
success. Screen traders
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have sophisticated in-
dicators to track mar-
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neglect to monitor their Sign up to receive Traders Press Weekly and receive SFO
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PSyChOlOGy OF TRADING
(continued from front flap)
as their technical prowess. George Soros
talks about what his aching back tells
Some traders have found an edge in him, Ed Seykota says everyone gets what
an area that until recently generally
Unlock the secrets to your trading psychology! they ultimately want out of the market,
was considered nothing more than and Marty Schwartz became one of the
hocus pocus: sentiment. When best in the business when his desire to
OFF! OFF! OFF!

combined with fundamental and At some point, every trader encounters a mental block, makes a trade he or she regrets, or win outweighed his desire to be right. The
technical factors, sentiment can be faces an emotional challenge related to an investment. This collection of the top psychology- bottom line is that all the technical expertise
a powerful tool for analyzing stocks, related articles from SFO, The Official Journal for Personal Investing, will help you assess
in the world won’t help you succeed if you
sectors, or the market overall. what kind of trading is right for you and how to manage your personal mind games.
WINNING
don’t have the right mindset.
— Bernie Schaeffer Learning about the hard science behind economic decision making and how brain function
contributes to trading decisions can help give you an edge in your trading practice.
This collection of the top trading psychology
The market is a stern mistress whose • Market Wizard Van K. Tharp’s psychological inventory articles from SFO, The Official Journal
greatest tool is in teaching human beings of trading qualities. for Personal Investing, will help you find
The top trading
PSyChOlOGy OF TRADING
an appreciation for humility—a unique trait • Visionary options trader Bernie Schaeffer on using crowd your best trading mindset. This anthology
with
for a group of people who spend their days
waiting patiently for an opportunity to kill.
psychology to gain a trading edge.
• Technical analyst Christopher Terry on finding your
psychologists explores managing mind games, controlling
and behavioral emotions, behavioral economics, and the
t h e f or c h i on e
— John F. Carter trading niche.
economists internal workings of the trading brain. Learn
met h od • Flavia Cymbalista and Desmond MacRae on cracking
from the leading authorities on trading
OPTIONS
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Most traders fail at trading for the same
trading philosophy.
present effective psychology, including:
reason that dieters fail to lose weight.
It is much easier to initiate a directed
• Toni Turner on simple strategies to overcome common strategies on
Working on trading is a way of working
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effort than to sustain it.
cases of mental block, performance anxiety, and loss
remorse.
developing a on yourself. As you work on the trading, it
— Brett N. Steenbarger, PhD • John Carter, author of Mastering the Trade, on balancing winning mindset. forces you to deal with pressure in certain
and Doug Foster II the joys of family with a home trading practice. ways, and it improves you as a person.
• New Market Wizard Linda Bradford Raschke on — Brett N. Steenbarger, PhD
It is inevitable that investors will experience maintaining a healthy mindset and
loss and fear, frustration and self-doubt; keeping focused by keeping good records, developing reliable routines, and conducting
How to Speculate Effectively What makes a great trader? I start
but it is how these events are perceived thorough research. by looking for two qualities: personal
with Options
and managed on thatFutures
determines a place • Ned Gandevani, developer of the Winning Edge system, on how to pull the trigger.
responsibility and commitment. People
among the ninety-percent majority or ten • Internationally recognized human development and financial authority Adrienne Laris
who have these qualities are easy to
percent of profitable investors. Toghraie on how having a life beyond trading can help your bottom line.
• Eminent trading psychologist Brett N. Steenbarger and Mark D. Cook, winner of the
coach to greatness.
— Mike Elvin, PhD — Van K. Tharp, PhD
1992 U.S. Investing Championships, on becoming a more resilient trader.
• Securities trader Peter Kaplan on sticking to the
Personal Investor Series:
right trading plan for you. PSyChOlOGy OF TRADING Trading is not an ordinary profession,
SETHER
• Hong Kong-based investment advisor and traders do not lead ordinary lives. It
Philippa Huckle on improving your trading is possible to survive as a trader, but you
by understanding how people really make Introduction By cannot thrive as a trader if you are not
investment decisions. Russell R. Wasendorf, Sr. willing to stretch.
P.O. B ox 8 49 — Adrienne Laris Toghraie, MNLP, MCH
And much more!
C e d a r Fa l l s , Iowa 5 0 613
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& HOLDalton
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s madefor
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Prior s strate Mind
to co-authoring - OveronMarkets , Jim Dalton sponsored Pete
HOLd iNvstrateGie OptiON career the belief that with education,
options trading. to stock and options investing that every investor should know.” s Ors GO
LONG: New Mest
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a w: NewSteidlmayer’s iNves-work
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OptiON Buy & HOL G: understanding, and insight, options
Information
Dalton.Jones.Dalton
iNvest ateGies FOr : New Opt est Gies

FOrtime and s GO LON
advises two hedge canfunds and several trading firms. He is a
& HOLd d iNv tOr be a welcome addition to your
a graduate of Missouri southern
-David Kalt, founder of optionsXpress Holdings, Inc. and CEO of
Reverb Capital Opt iONs str estOrs GO LONGFOr Buy & HOL iON s strate d iNves discretionary Opt iONs
trader and along-term
long-time proponent of using the Market
s
Buy & HOL GO LON
New iNv Opt G: New portfolio.
University and an NasD series 3, 4, 7, 63, & HOLd ateGie LONG: New es
Gitrading.
FOr Buy OptiONs str estOrs GO Gi es FOr tOr s Profilestr
Ns
®
to ate
facilitate
&
He has been a member of the Chicago
ate d iNves New OptiO
and 65 Registered Representative, Mike’s
LONG: New Buy & HOLd iNv Ns str Boardes TradeBuy
of FOr and the Chicago Board
NewOptions
options Exchange,
strategies forwhich he
firsthand experience as a retail investor
Gies
FOr
G: New OptiO FOr Buy & HOLs GO LONG: Gi
ateserved d iN
- In Go Long:
vesduring
LON Gi es tOr Ns str as
& HOLvice president Buy & Hold
its Investors
formative , years.
Mike He
draws shares
on his his vast
and investment advisor makes him a
tOrs GO iONs strate & HOLd iNves G: New OptiO es FOr Buy experience s two LONG:Mind
GObooks, years of experience
Over Markets educating
and Marketsbeginning
in Profile, as
resource for all investors. He has several LON Gi tOrin GO
years experience in the financial industry
“when Mike introduced me to these strategies, i was amazed
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New Opt
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FOr Buy
vestOr
s GO
iONs str
ate iN ves
& HOLd well asiN FieldtOr
theves
s investors
of Vision DVD courseand
. veteran traders. Here, he James F. Dalton,
strate iN Opt Buy & HOLd GO LONG: New outlines his innovative buy and hold invest-
t o s aw
& HOLd GO LONG: New es FOr Eric T. Jones &

and is registered in all 50 states. He
exactly what i needed: capitaL preservatiON FOr Buy s ateGi d es FOr BuyvestOr s
tOrs GOment strategies, using concrete examples,
formerly served as director of education vestOr iONs str & HOL d iN d iNves Op-

at optionsXpress Holdings Inc. and now wHiLe GeNeratiNG aN iNcOMe. i also really HOLd iNLONG: New OptGies FOr Buy Buy & HOL Buy & HOL GO LONG: New at-
trading exercises, and easy to understand
Robert B. Dalton
tOrs GO iONs strate es FOr FOr s
ateGi HOLd iNes d iNvestOr OptiONs str
like the fact that Mike is so accessible. if i explanations. In the end, Go Long dem-
brings his experience to Know Your
New Opt Ns str & s
OptiO FOr Buy FOr Buy & HOL s GO LONG: New strateGie as one of the financial industry’s premier
onstrates how Mike earned his reputation
options customers. (Mike is a registered have a question, he is no more than a phone call or
LONG: NewstrateGies Gies tOr Ns FOr
iO eGies options
representative with brokersXpress, which email away.” ate ves
Ns Ns str Buy & HOLd iN w Opt 
& educators.
OptiO LONG: Ne Ns strat s FOr Buy
  
does business as Know Your options, OptiO
-Jane Fox, Intraday Market Analyst for OptionInvestor.
LONG: New ateGies
FOr
ves tOrs GO New OptiO eG ie d
strat FOr Buy & HOL
knowyouroptionsinc.com.)
str d iN G:
tiONs FOr Buy & HOL stOrs GO LON OptiONs ie s HOL d
es ve G: Ne w eG &
eGi HOLd iN GO LON
& Ns strat iO s FOr Buy
ie Buy &
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w
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probabilities is neces- In Richard Dennis’ highly intelligent, hand-
sary, it may be an insuf- Great Turtle experi- picked protégés. Curtis
ficient way for individual ment, for example, trad- Faith, the most success-
traders to deal with the ing performance varied ful of the turtles, attri-
stress of real trading. greatly among the 23 butes this to the fact that
many of his colleagues
did not leverage-up
when they were sup-
posed to. They all un-
derstood that the odds
were in their favor, but
many of the turtles sim-
ply could not get close to
the flame. Why not?
Individual traders vary
considerably with respect
to their personal toler-
ance for risk. Some of you
will be attracted to that
weekend fire walk or sky
dive, and others will say
“No way!”
In practical terms, risk
tolerance reflects one’s
qualitative (subjective)
estimation of the degree
to which the outcome
matters. The more the
outcome matters (M), the
more stress one feels, and
the risk (R) increases.
For reasons having to
Order your copy along with a bonus trial subscription do with the nature of
to the Option Seller Newsletter Today! Click here!
complex dynamic sys-
tems (such as the human
mind), the relationship

GET TO A RISK- SCORING THE TEST
FREE TRADE ASAP! If you answered YES to 1-2 items,
you probably have a low sensi-
How sensitive are you to stress? Take this tivity to stress and can maintain
simple test. prefrontal dominance when you
trade. Most likely you have a
steadily rising equity curve.
If you answered YES to 3-5
items, you probably have a
moderate sensitivity to stress,
suggesting that you periodically
lose prefrontal dominance when
trading. Most likely you are a
break-even trader.
If you answered YES to 6 or
more items, you probably have a
high sensitivity to stress, suggest-
ing that you may often lose pre-
frontal dominance when trading.
Most likely you have a boom-bust
pattern in your trading account
or a steady decline.
among these variables would increase stress daily routine will help you
probably is exponential, sixteenfold over baseline manage these issues.
not linear: Stress = MR. levels. No wonder so many
According to this equa- smart traders fail.
tion, if risk (R) doubles You may have a ten- Kenneth Reid holds a Ph.D. in
from one to two, stress dency to overestimate your clinical psychology. He has
increases four times. Den- abilities. If you have a low- been an independent trader
nis’ method required the stress threshold, you run since 1996 and a trading
turtles to quickly leverage- the risk of a stress-induced coach since 2002.
up to four units, which in flameout. Taking the next
this hypothetical model steps to improving your
23 JUNE 2011
Fear & Frustration
can Doom Trading
Common patterns plague unsuccessful

traders, while disciplined habits are
inherent to successful ones.
By Robin Dayne
The No. 1 challenge for any trader is Words make up thoughts, and thoughts
emotional management, as it makes up will manifest into actions — good or bad.
95% of one’s success. What the mind is thinking is critical.
Remember, any emotion is a no-no, but
STEP 1 the top two to avoid most are fear and
A personalized assessment is a good frustration. These tend to be universal
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Remember, great traders do what-
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til it is resolved. up. Questions are a trader’s best friend and
will shift the thought process rapidly. If
STEP 2 traders get scared of being wrong or be-
Take the obstacles and develop a plan come afraid of losing money, they may
to remove those emotional monsters. enter trades too late or exit too soon.
The power of thought is the first and By using a question, traders can shift
best weapon. their thinking, stop the emotion and gain
27 june 2011
control of the trade. It will release the
OptiOns
paralyzing effects of fear.
Emotions cannot occupy the mind at
traders!
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new trade if a lost trade isn’t analyzed cLicK Here!
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can have a dramatic impact and quan-
tum leap your success.
By digging at new solutions, it
strengthens the mind and confidence
with the added benefit of keeping the
mind busy and clear of emotions. Re-
member, losing is part of the game and
the meaning of loss is different for trad- There is a substantial risk of loss in trading commodity
ers than any other business, like an un- futures, options and off-exchange foreign currency products.
wanted strike for a baseball player.

Lunch, ABC’s News 20/20, TheStreet.com, Business-
Great traders trade without emotion.
Week, TradingMarkets.com, newspapers, discussing
You can too.
the emotional challenges faced by all traders. For
details on workshops, tools and personal coaching,
Robin Dayne is a trader and former radio show host. visit her website.
Dayne has interviewed the top traders around the
country and has been featured on CNBC Power
Traders Test >>

>> Prone to Success or Failure? ©
• Do you hesitate on entries when you see • Do you feel anxious or get “hooked” into
your set-up? a low-odds trade and enter too soon for
• Are you missing a daily trading routine fear of missing out?
that keeps you in check? • Do your losing trades out-weight winning
• Do you jump into a trade with no set-up trades?
criteria? • Do you go into the “I don’t care zone”
• Do you take just any trade without having a and just watch your money slip away?
plan for the outcome? Copyright RDI all rights reserved 2011.
If you answered yes to >>

1-2 >> You are in good shape, have a helpful to gain control. You could continue
plan and are disciplined to succeed. You doing what you are doing now and may
have some emotions in your trading but survive, but you will be challenged in mov-
seem to be in control. You are a good trader ing forward in your trading.
with a small amount of work to do on your 5-7 >> You run the risk of being the next
emotions. For the most part you are in con- trading statistic. You are putting your money
trol, do not have big swings in your trading at risk. There are signs of an emotional block
losses and do not seem to be blocked. that is impacting all your trades. Coaching is
3-4 >> You are not in the amount of a necessity in order for you to gain control of
control needed to succeed. It is time to de- your trading. Be very cautious. You are not in
velop a plan and consider some coaching. control of your trades but are reacting from
There are too many emotions impacting subconscious triggers even though your logi-
your trading, and new techniques will be cal mind wants to do something different.
30 june 2011
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With dramatic world of historic economic stim- supply is at the gravest
changes, the risks for ulus in the aftermath of level since the Arab oil
global energy markets the global economic crisis embargo in the 1970s.
have changed since the has caused a ripple in the
beginning of the year. Old World order. THE ARAB SPRING
The rising price of food The growing desire for It is being called the
and energy was the tipping freedom has been the Arab spring [click here
point for the Arab world. In spark for discontent in up- for interactive timeline
countries long denied the risings from North Africa of events]. A spark of
type of freedoms Ameri- to the Middle East and discontent that began in
cans take for granted, even in places like China. Tunisia has spread like
joblessness and hopeless- A devastating earthquake wildfire across the region.
ness were magnified when in Japan and subsequent This could create a
the cost of basic necessities nuclear crisis has added to world of unprecedented
went through the roof. energy demand and un- promise or years of
Soaring food and ener- certainty at a time when dread. Osama bin Laden
gy prices as a byproduct the threat to global oil may roll over in his wa-
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33 JUNE 2011
tery grave as de-
The threat to oil supply
mocracy spreads. is at the gravest level
since the Arab oil
As of this writ-
ing in early May,
we have seen
two governments
embargo in the 1970s.
topple in war and
bloody street battles
in others. Yet the road SUEZ CANAL IS KEY traders that a closure of the
to democracy and stable However, oil traders did Suez Canal and SUMED
oil regimes is a treacher- react to the turmoil in pipeline would add an esti-
ous one. Egypt. The revolt was the mated 6,000 miles of transit
Tunisia was the first to first sign that these events around the continent of
fall. The authoritarian could impact oil and by Africa. Soon, however, this
regime of President Zine default shock the global issue was not a concern.
El Abidine Ben Ali, who economy. While Egypt is Hosni Mubarak fell from
was in power since 1987, not a major oil producer, it power. But while the sup-
fell as he fled the country. is a major oil transporta- ply of oil was untouched,
Tunisians rose up against tion hub. The Suez Canal the seeds of change contin-
tyranny, rising food and known as “The Highway to ued to sprout.
energy prices and an India” and the very im-
economy without pros- portant SUMED pipeline WATCHING LIBYA
pects or hope. Oil traders owned and maintained by Libya became the next
did not seem to notice the Egyptian Arab Repub- focal point, where sadly
how the success of the lic became an issue for oil Muammar Gaddafi doesn’t
overthrow inspired oth- traders as they realized oil know when it’s over. Gad-
ers throughout the region supply could be at risk. dafi’s slaughtering of the
equally dissatisfied with Traders had to face the innocent drove an interna-
the status quo and a belief supply threat. The canal’s tional coalition into a war
that they too could have total petroleum transit that was supposed to pro-
shot at controlling their volume was close to 2 mil- tect the people.
own destiny. Most signifi- lion barrels per day or just
cantly, these are countries below 5% of seaborne oil OIL IMPACT
that in large measure trade in 2010, according to This conflict led to the
control a major chunk of the International Energy actual loss of oil produc-
global oil supply. Agency. The IEA warned tion. It’s not just any oil,

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1. What key reports should beginning crude oil traders
near 6 million barrels,
monitor on a weekly basis?
was cut by a third almost
overnight. Also, the Inter-
national Energy Agency
2. Will the shift to driving season create opportunities in raised its demand outlook
the gasoline market this spring and summer? by 3 million barrels a day
by midsummer, leaving
the margin for error to
supply the tightest it has
3. How can traders identify spread opportunities in the been since 2008.
energy markets?
STILL SPREADING
The unrest continues to
spread. We have seen
4. What is your favorite energy market and why?
slaughter in Syria and
Iran as those governments
kill to stay in power. In Ye-
men, President Ali Abdul-
5. What advice do you have for someone considering
lah Saleh has promised to
trading the energy markets?
step down to end months
of political unrest.
Yemen, while not a ma-
jor oil producer, is a major
transporter like Egypt.
GET MORE! President Abdelaziz
Read Phil Flynn’s daily Energy Report here Bouteflika in Algeria,
another OPEC country, is
facing growing discontent
with clashes with students
but high-quality sweet oil. record set in the turmoil and the press asking for
European refiners desper- in the beginning of the more freedom.
ate for those easy-to-refine financial crisis in 2008. This may all pale in com-
blends drove Brent crude, Traders saw a major parison to the risk that is
and by default, West threat to global oil supply. playing out in Bahrain.
Texas Intermediate to the The world spare produc- In Bahrain, the Sunni-
highest levels since the tion capacity, which was led government is under

pressure from the more billion, which is about six global oil demand perhaps
radical Shiite population. months of the country’s oil by as much as 2 million
Iran has denounced Gulf profits, on giveaways to its barrels a day.
leaders for dispatching a citizens for cheap housing The explosion at the
Saudi-led military force to and religious and military Fukushima Daiichi nucle-
prop up Bahrain’s Sunni group goodies. ar power plant raised fears
monarchy. The military The oil price Saudi of widespread nuclear con-
forces also are trying to Arabia now needs is $84 a tamination. The Japanese
quell protests by Shiites. barrel to balance its bud- government injected $245
Shiites comprise 70% of get, up from $68.50 a year billion of additional capital
the population but are ago. If the current Saudi to pump up its economy,
excluded from key govern- government spending and the rebuilding of
ment and security posts. does not quell the dissent, Japan will impact demand
The conflict is dragging the Saudis will have to of many commodities.
in the world’s largest oil spend more and be less
producer. Saudi troops likely to provide a buffer UPSIDE RISK REMAINS
have gone into Bahrain at a time when the risk to The world is changing.
to restore order. Iran has oil supply is high. While we hope for an
denounced Saudi Arabia outcome that will make
because they back the RISING DEMAND the world a better place in
Shiites. It’s amazing that Demand is increasing, the short term, it is a more
the Iranians care about the and the Saudis currently dangerous one.
Shiites in Bahrain but kill do provide a buffer. The As we await and hope
the Shiites who dare pro- IEA says demand will for democracy to rise up in
test in the country of Iran. increase to levels that the Arab world and see the
could slice spare produc- land of the rising sun, Ja-
KEY TO THE REGION tion capacity in half. If pan, rise again, we still see
The biggest threat could the Saudis are drawn into significant upside risk for
be if we see this unrest a conflict, the price of oil oil and other commodities.
spread to Saudi Arabia. would explode.
Saudi Arabia, the world’s
Phil Flynn is senior market
largest oil producer, is JAPAN IMPACT
analyst and general market
spending billions to try In the aftermath of Ja-
analyst with PFGBEST.
to circumvent discontent pan’s nuclear disaster,
in their own country. The the pullback impact from
Saudis spent nearly $129 nuclear power will add to
37 JUNE 2011
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2010
DECEMBER
, NO. 12 |
VOLUME 9
Swing trading is one of the most common and effective methods
used by currency traders in the foreign exchange markets.
Often described as the middle approach somewhere between
long-term position trading and short-term day trading, swing trad-
ing is concerned primarily with exploiting the many swings (turns)
that characterize price action in all major financial markets.
These short- and me- The Time Factor ing trades for a matter
dium-term swings occur One of the key defining of days. The duration of
very frequently in the characteristics of swing swing trades can vary
foreign exchange markets, trading that differenti- enormously. There are
whether the particular ates it from other trad- far from any set guide-
currency traded happens ing approaches lies in lines, but a typical range
to be in strong-trending the duration of typical can fall between one and
mode or sideways range- trades. Whereas longer- five days.
trading mode. However, term trend followers and
the currency markets may position traders may Tool Kit
behave at any given time. hold trades open for The tools employed by
Swing traders usually can weeks or months and currency swing trad-
find a way to take advan- intraday traders tend to ers include some of the
tage of the inevitable ups hold trades open for only most useful and effec-
and downs in price action minutes or hours, swing tive tools used by all
by riding the waves of the traders normally take technical traders. These
market. the middle path by hold- tools represent some
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of the cornerstones of
technical analysis, like
support and resistance, One of the highest probability methods for ap-
trend, momentum and plying a swing trading approach to the currency
volatility. Specifically, markets involves seeking a confluence of technical
the tools used include factors that indicate potential market turns within
support/resistance lev- either horizontal (rangebound) or angled (trend-
els, trendlines/chan- ing) channels. A channel is simply a pair of paral-
nels, bar/candle patterns lel lines drawn on a chart that roughly contain the
and oscillators (for both outer bounds of a certain period of price action.
overbought/oversold
evaluations as well as for
price-oscillator diver-
gences).
represented on the price tional swings within
The Element of Time chart. There are two pri- every trend that present
Choose a charting time mary types of markets, the greatest opportu-
frame, or more specifical- but infinite variations of nity for the swing trader.
ly, the amount of time rep- these two types. The highest probability
resented by each bar or swings that should be
candlestick on a currency TRENDING MARKET traded during strong-
price chart. Typically, The first type is the trending markets are
swing traders in the forex trending market, where usually only those that
market tend to choose price is in the process are in the direction of the
time frames anywhere of moving on a net basis prevailing trend.
from the very short-term, in one general direc-
one-hour chart (each bar/ tion, up or down. There Moving Sideways
candle worth an hour) are countless degrees of The second type of mar-
to the longer-term, daily strength and magnitude ket is a range-bound mar-
chart (each bar/candle possible and is measured ket, which generally rep-
worth a day). Either of by the slope of a trendline resents a sustained period
these and others in be- or moving average. of sideways consolidation
tween, like the four-hour Although the net di- or general equilibrium.
chart, can be used. rection of a trend is ei- Perhaps it is during these
Next, determine what ther up or down, there types of trading ranges
type of market is being are invariably bidirec- that swing traders best

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FIGURE 1: Daily Euro/Dollar Chart
Channel
Reversal Candle
Intra-Channel Break
Divergence
Oscillator Cross
Source: FX Solutions —FX AccuCharts
exhibit the effectiveness a swing relative to the downside can be traded

of their craft. magnitude of risk as- effectively.
The optimal trading sumed. In contrast to
ranges for swing traders trading swings within PULLING THE TRIGGER
are those that display trending markets, swing A technical confluence is
relatively well-defined trading within range- a combination of two or
upper and lower bounds bound markets does not more technical factors,
(resistance and support, usually have a direc- or rationale, that lends
respectively). They are tional bias. Since the additional credibility and
wide, or tall, enough condition of trend is not reliability to a trading
to allow for substan- present, both swings to decision. For example, if
tial profit potential on the upside and to the price bounces off a key

established support level channel with three po-
but that support level tential turn warnings (re-
also happens to be a ma- versal candle, divergence
jor 38.2% Fibonacci level and oscillator cross) and
and in the close vicinity a trade trigger in the
The Front-End Choice for of the 200-period simple form of an intra-channel
Professional Traders Coast to moving average, there is trendline breakdown.
Coast and Around the Globe
a confluence of technical
factors providing support THE BACKDROP
for the bounce. It should The backdrop is the
result in a potentially channel, whether hori-
higher probability trade. zontal (rangebound)
The strongest confluence or angled (trending).
factors combine to form a All that is needed for
powerful and high-prob- one of these channels
ability approach to swing to exist are upper and
trading. These confluence lower boundaries that
factors include: roughly contain price
• support/resistance action. When swing trad-
(channel boundary ing within horizontal or
lines) angled channels, which
• intra-channel trend- are both prevalent in
lines the currency markets, a
• candlestick patterns swing trader should seek
X_Trader Pro is TT’s most ADVANCED (most notably hammers one of the following:
trading platform. In addition to all the
core features of X_Trader, Pro provides and shooting stars) • Turns to the downside
PROFESSIONAL GRADE trading system • oscillator confirmation at or near the top of
development tools
The components of a a horizontal channel
confluence swing trading • Turns to the upside at
setup are: or near the bottom of
• a backdrop a horizontal channel
• three potential turn • Turns to the upside
warnings at or near the bottom
www.pfgbest.com/platforms/x_trader
• entry trigger of an uptrend channel
There is substantial risk of loss in trading commodity futures, options and
off-exchange foreign currency products. Past performance is not indicative Figure 1 shows a hori- (trading with the
of future results.
zontal (rangebound) uptrend)
45 JUNE 2011
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Interview with James Chen , by FXstreet.com
• Turns to the down- long lower shadow) after strength index, stochas-
side at or near the top a bearish price run to tics, MACD, etc.) makes
of a downtrend chan- indicate an impending lower consecutive peaks
nel (trading with the upswing at or near the at or near the top of
downtrend) bottom of a channel; or a channel, indicating
a shooting star (small a loss of bullish price
The Warnings lower body/long upper momentum. Or price
The three turn warnings shadow) after a bullish makes lower consecutive
are three potential re- price run to indicate an troughs while an oscilla-
versal conditions within impending downswing tor makes higher consec-
the channel backdrop, at at or near the top of a utive troughs at or near
least one of which should channel. the bottom of a channel,
be present before the Another potential indicating a loss of bear-
trader begins seeking the turn warning is a price- ish price momentum.
trade trigger. One turn oscillator divergence The third turn warning
warning is a reversal — price makes higher also employs the use of
candle pattern—a ham- consecutive peaks while an oscillator. It uses an
mer (small upper body/ an oscillator (relative oscillator cross down be-
47 JUNE 2011
Figure 2: One Hour Euro/Dollar Chart
Bullish Channel
Intra-Channel Break
Divergence
Oscillator Cross
Source: FX Solutions —FX AccuCharts
low the overbought line least one of these three potential turn warnings
when price is at or near turn warnings, but pref- (divergence and oscil-
the top of a channel, in- erably more than one, lator cross) and a trade
dicating a loss of bullish should be present be- trigger in the form of an
price momentum. It uses fore the trade trigger intra-channel trendline
an oscillator cross up should be sought. See breakout.
above the oversold line Figure 2. The example
when price is at or near reveals a one-hour euro/ Putting It All Together
the bottom of a channel, dollar chart showing a The trade trigger, after it
indicating a loss of bear- bullish-angled (trend- has been determined that
ish price momentum. At ing) channel with two the channel backdrop is in

Underlying the swing trading approach is a unique philosophy that differenti-
ates it from other market trading approaches. The primary principle driving swing
traders in the foreign exchange markets is to identify and profit from the natural
price advances and declines —the ebbs and flows —that are integral of all freely
floating currencies.
Swing traders should seek to exploit these ebbs and flows without regard to
any planned duration of trades. There are always swing trading opportunities
in currencies, whether on the major currencies, currency crosses or even exotic
currency pairs.
place and at least one turn channels can be trig- swing trader into a given
warning has occurred, is gered on breakouts trade at a slightly later
a simple breakout play. A above intra-channel point than when the turn
typical trade trigger would downtrend resistance originally occurred, they
involve a breakout of an lines, while swing trades build confidence that the
intra-channel trendline. to the downside within turn is following through
Within channels, uptrend these channels can be and therefore contribute
support lines and down- triggered on breakdowns to a higher probability
trend resistance lines below intra-channel upswing trade.
often occur. trend support lines.
Swing trades to the Although these break-
upside within these out triggers may get the
James Chen is chief techni-
Essentials of Foreign Exchange Trading cal strategist at FX Solutions.
By James Chen He is the author of Essentials
This currency trading book shows readers how to of Foreign Exchange Trading
trade the foreign exchange market. It introduces the
(Wiley, 2009) and Essentials of
forex market, including basic trading mechanics
and the benefits of forex trading. It also describes Technical Analysis for Financial
specific currency trading methods and skills.
Markets (Wiley, 2010).
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WHO ARE YOU?

William James had been asked to speak of our lives. Our ideas about our identity
to a large professional gathering about organize our beliefs, capabilities and be-
everything we have learned about psy- haviors into a single system. Our percep-
chology in the last 200 years. After a long tion of who we are gives us our potential
introduction, he got up and said, “People, to realize our dreams as well as to limit
by and large, become what they think of our possibilities and efforts. Who are
themselves. Thank you, and goodnight.” you? More precisely, who do you perceive
And he left the auditorium. yourself to be? What is your essence as a
The reaction was mixed. Some thought person? As a trader?
it was brilliant. Others were incensed To get to your essence, ask yourself
that they’d traveled long distances to what words, sounds, movements repre-
hear a simple sentence. sent you? What metaphors would you use
The good news about self-concept is that to describe yourself? If you were a moun-
it is truly within our control. It is the contain, an animal, a flower, a tree, an ocean,
cept we hold about ourselves. Your self- which would you be? What metaphors
concept can be expanded and altered. would help you become a better trader or
When we reach the level of identity, we investor? Through personal metaphors,
are at the point of the organizing force we can expand our personal boundaries.
BY RUTH BARRONS ROOSEVELT

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DOLLAR’S VALUE: If you could only look at one piece of infor-
A TIP FOR
mation before making a grain trade one day,
what piece of information would that be?
Your best bet is the U.S. dollar index. There
COMMODITIES? are a number of reasons why it makes sense

for agriculture commodity futures to respond
to movements in the dollar, and it’s impressive
By Elaine Kub how consistently they do so.
SOLD IN DOLLARS own trading exposure?
Grains, meat and fiber may First, recognize that this
have global supply and relationship has been
demand points. However, known and built into the
most major cash commod- markets since their incep-
ity transactions ultimately tion, and the strong corre-
are made in American lations behind this rela-
Investors dollars. The largest futures tionship are like catnip to
& Traders markets for these com-

modities are in the United
speculative algorithmic
traders.
Subscribe FREE to States, and thus, their If we can expect corn
this newsletter series! benchmark prices get tied prices to move down 30%
to the dollar. of the time when the dol-
The traders who move lar moves up (a rough
vessels full of grain across interpretation of the fact
oceans like game pieces that the past decade’s
have their exposure weekly returns of corn
hedged against the dollar, futures and the U.S. dollar
and their buying and sell- index have a correlation
ing power is tied directly of -0.305), that’s sig-
to the value of that cur- nificant enough for some
rency at that time. funds to program certain
A stronger dollar index computers and throw a
means it takes few dollars bunch of money at some
for a trader to fill up a ves- trading programs. See
sel with grain. A weaker Figure 1.
dollar index means the The end result of this col-
same quantity of grain lective behavior, however,
takes relatively more dol- can become a self-fulfilling
lars to buy. prophesy. When specula-
tive money starts to flow in
CLOSER TO HOME or out of the agricultural
That’s the fundamental commodities due to the
There is a substantial risk of loss in trading commodity justification behind this movements of the dollar,
futures, options and off-exchange foreign currency prod-
ucts. Past performance is not indicative of future results. relationship, but can you the resulting price changes
see how it affects your can overheat.
55 JUNE 2011
FIGURE 1: Inverse Movement of Weekly Corn & USDX Price
750 118
650
108
550
Corn (cents per bushel)
U.S. Dollar Index

98
450
88
350
78
250
150 68
3
1
9
0
00
7
8
5
6
2
01
00
01
00
00
00
00
00
00
2
1/
1/2
/2
/2
/2
/2
/2
1/2
/2
/2
1
11
11
11
11
11
3/
11
11
3/1
3/1
3/
3/
3/
3/
3/
3/
3/
Corn U.S. Dollar Index
1.0
0.8
10-week moving correlation

0.6
0.4
0.2
0
-0.2
-0.4
-0.6
-0.8
-1.0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: data from Telvent DTN’s ProphetX
THE RISK TRADE out “safer” assets, like the the dollar in their steady
There is also the tendency U.S. dollar. That buying tango. The dollar steps
of risk-hungry money to and selling pattern works forward; the ags step back.
flow into commodities and in tandem to keep the We see that flow of mon-
risk-averse money to seek agricultural markets and ey and its response most

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FIGURE 2: U.S. Dollar Index Versus Front-month Cotton Futures
82 190
U.S. Dollar Index
81 180
80 170
79 160
78 150
77 140
76 130
Front-month Cotton Futures
75 120
74 110
73 100
Sept-10 Oct-10 Nov-10 Dec-10 Jan-11 1 Day
Source: Prophet X
strongly when the dollar whether you’re interested est corn exporter, and the
index is reaching new in this phenomenon as a USDA estimates it will ex-
highs or lows, as it did trading opportunity or, port about 16% of the corn
when it bottomed out just conversely, if you’re trying it produced in 2010. Other
above 75 in early Novem- to mitigate this phenom- agricultural markets with
ber 2010. (See Figure 2.) enon’s effect on your port- a strong negative correla-
If you were going to pick folio. Either way, it’s nice to tion to the movement of
a time to gain exposure to know which markets have the dollar include soy-
this relationship, volatile a stronger reaction to the beans, all classes of wheat
peaks or troughs would dollar than others. and cotton (all of them
be a good time to do it. Looking at weekly re- with a correlation between
turns since 2002, corn -0.21 and -0.26).
RISK/REWARD was the agricultural com-
However, when picking modity with the strongest WEAKER CORRELATIONS
your trade, some agricul- negative correlation to the Across the agricultural
tural markets will offer you U.S. dollar index’s returns. board, negative correla-
more bang for your buck That’s reasonable. The tions to the U.S. dollar
than others. This is true U.S. is the world’s larg- index are consistent, but

the relationships are not to see if the correlation tural commodities against
strong enough to have will grow stronger. those of the U.S. dollar
statistical significance Exports are projected to index since June 2009, cot-
in trading. For example, trend toward a larger pro- ton was the market with
oats, live cattle and lean portion of the overall meat the strongest negative cor-
hogs have weak nega- trade in future years. relation (-0.308), but the
tive correlations to the grains also had significant
weekly returns of the MINUTE-BY-MINUTE relationships to the dol-
dollar (between -0.05 Those weekly returns may lar over the past two years
and -0.17). give us the broadest pic- (between -0.22 and -0.28).
Again, that’s reasonable. ture of this relationship’s The livestock futures pits,
Exports don’t make up as consistency over the past again, seemed relatively
much of these markets. decade, but it’s a phenom- more able to ignore the
The USDA estimates the enon that also can affect dollar’s daily jumps and
nation has exported about day-to-day futures move- tantrums. Hogs and cattle
8% of 2010’s beef produc- ment. Analyzing the daily futures were still negative-
tion. It will be interesting returns of various agricul- ly correlated to the dollar
(between -0.03 and -0.07).
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There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products.
seem to be more influ-
59 JUNE 2011
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THERE IS A SUBSTANTIAL RISK OF LOSS IN TRADING COMMODITY FUTURES, OPTIONS AND OFF-EXCHANGE FOREIGN CURRENCY PRODUCTS. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
EQUITIES AND EQUITIES OPTIONS ARE OFFERED BY BEST DIRECT SECURITIES, LLC. MEMBER FINRA & SIPC
FIGURE 3: Average enced by any one group of WATCH THE DOLLAR
Participation Since 2006 traders than another. People trading the agri-
cultural commodity mar-
Cotton Futures Open Interest
UNDERLYING DNYAMICS kets, whether they are
The two agricultural com- farmers hedging their
modity markets with the crops or retail investors
strongest negative correla- looking to diversify their
tions with the dollar – corn portfolios, need to be
and cotton – have notably aware of how these mar-
Managed Producers All Others
Money different populations of kets are likely to behave,
traders. According to the given how the U.S. dollar
Corn Futures Open Interest
Commodity Futures Trad- is expected to change. It’s
ing Commission’s weekly important to know how
Commitments of Traders strongly a given market
(COT) reports, the corn is related to the dollar,
futures market is popu- and it’s also important to
lated mostly by commercial watch how that strength
Money traders (producers, mer- is changing over time.
chandisers, exporters, etc.), Corn, for instance, can
Live Cattle Futures Open Interest but it attracts a significant act as a benchmark to
proportion of speculative show us that the agricul-
(managed money) partici- tural markets may not
pation, as well. move in a perfect inverse
We might be tempted to to the dollar every week,
say those speculators are but they’ve been growing
Money
the ones whipsawing corn more likely over the past
futures according to the decade to respond in step
CBOT Wheat Futures Open Interest whims of the dollar, except to the dollar’s movements.
that when we look at the
cotton market’s makeup,
we see a market similarly
Elaine Kub is a market adviser
entranced with the gyra-
with the Agricultural Risk
tions of the dollar, even
Managed Producers Consulting Group LLC.
Money
without a large proportion
of managed money trading
Source: data from CFTC’s Commitments of Traders
it. See Figure 3.
61 JUNE 2011
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June 2011

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Inside Scoop

by Michelle Gebhardt, Executive Editor

WHO SAYS YOU CAN’T

FREE OptiOns ToolkiT!

• 25 PROVEN STRATEGIES for trading options on • SFO magazine subscription

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Phil Flynn CONTRIBUTING WRITERS

WITH SWING TRADING By Elaine Kub

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This publication is strictly the opinion and conjecture of its writers

Commodity futures, securities, options and forex trading involve risk

Articles and/or advertisements contained herein may provide

By Robin Dayne of hindsight. No representation is being made that any account

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QUIET MARKETS 129200

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The Official Advocate for Personal Investing 12

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