How will you trade? Fundamental traders base their trades on information external to the market. In other words, thing like; weather, strength of the dollar, cattle-on-feed reports, slaughter count, political events, etc. Technical traders base their trades on information internal to the market. Things like; chart patterns including trend lines, channels, waves, double tops and bottoms, etc. Also considered are stochastic, moving averages and the like. I'm not sure who makes the most money (that has been debated forever), but I think it is difficult to be 100% one or the other now days. There are others who do quite well using Astrology, Numerology, and just plain "gut feel". In any case... Choose your weapon, the battle is about to begin.
Fundamental trading means more than just reading the Investor's Business Daily. As a fundamental trader you must become familiar with all the factors involving your trades. If you are trading grains, you should be on the mailing list of the Department of Agriculture and several other sources. You should receive reports from all agencies and companies that will publish information such as visible supply, acreage planted, weather reports, cattle on feed and hog reports, etc. This is only an example, and you should carry it through with each "family" of commodities you trade. You must work to be informed, you can't expect to win if your not properly armed.
As a chartist, when you find a pattern, be sure it is what you think. When you have worked with charting, and believe you see an important formation (head-and-shoulders, wedge, double-top, etc.) be sure you compare it to past patterns of the same formation. You must see if the pattern conforms to other such formations in the charts of the commodity you are trading. If it does, see how often the price responded predictably to that formation. If you are right, you can come up with a VERY relative calculation of the percentage of chance the pattern will work this time.
By the time you hear the news, it's too late! You've decided to be a "fundamental" trader, and begin your research. Make sure it is true research and not just tips and hear-say. You have to count on the many reports, informational sheets and articles you gather from every source that has anything to do with your chosen commodities, but you must not be influenced by tips, rumors and "word-on-the-street". This information is usually old news, and is already "in" the market. Through your sources you are trying to be the one who gleans that "new" data before anyone else. That is what will make you successful as a fundamental trader. Remember, all good luck starts with hard work.
There's more to a chart than lines and patterns. Now you've gotten to the point of recognizing certain chart patterns. You can identify trend lines, gaps and head-and-shoulders. These are patterns that are not too difficult to trade, but what about an ascending or descending triangle, or declining or rising wedge? These formations require a great deal more analysis than just seeing the formation. These and other more advanced formations require a study of other factors such as the volume of trading, the volatility of the market and the time period it took the pattern to form. there are other factors to consider also, so don't get into the more advanced patterns until you have experience and have reviewed past occurrences of these formations.
Try trading opening gaps. If you have the heart for excitement and the capital to back it up, try this VERY RISKY strategy. Some of the more volatile commodities will either gap higher or lower on the open. Combine this with the old adage that "gaps will fill", and you have a shot at some quick profits (or losses). Check your history first to be sure that the futures you've chosen does this on a fairly regular basis (T Bonds used to be good for this). Then if the price gaps higher on the open, give it a while to settle in. Now if the price hasn't continued running up, you may want to short the market in hopes it will come back down and fill the gap it left. Don't short it until it is coming off its high for the second or third time, then you must have a tremendous amount of discipline. You MUST place your stop a few ticks above the high, in an attempt to limit your loss if the price does decide to move higher. You must also determine that if the price does fill the gap, the reward you reap will be at a good ratio to the risk you were willing to take. When the gap is filled... GET OUT! You have accomplished your goal. This is, as I said, a dangerous strategy, but it works particularly well if the gap was created by a rumor before the market opened.
Lock your profits or lose nothing with free (almost) options. Follow me closely now... Using the Treasury Bonds as an example: Assume you enter a long position in the March '99 TBond futures @ 123-00. Now if you sell (write) the 124-00 call option for 25/64 ($390.62), and buy the 123-00 put option for 35/64 ($546.70), you have set yourself up with a defined profit and loss situation. If the price goes up, you have limited your profit to a total of $843.92 (the difference between the $1,000 for the move from 123-00 to 124-00 on the futures, less the $156.08 you had to pay for the higher priced put option). You will, of course, have to subtract out your commissions too. Remember... you cannot make more than $843.92, but the good part is you cannot lose more than the $156.08 difference you paid for the option (plus your commissions of course). Not a bad trade if you are interested in generating income. This can also be done on the short side of the market, by buying the call at-the-money, and selling the put 1-00 lower. If you want to take a bit more risk, you can try to "leg" into the position, and if done right, you can get into a position where you can make a profit or lose nothing. It does take practice so be careful. (The above example was done using the actual prices of the March TBond futures and option prices on 2-12-99).
If you're trading multiple contracts, be sure to scale off profits. If you are trading more than one contract and your position moves into profits, begin to liquidate to ensure some profits. It would be a shame to stay with all your contracts if the market moves against you. It never hurts to take profits with some of your winning contracts, then use a trailing stop to maximize the profits on the remaining positions.
Never say "Or Better" when you are placing a limit order... it's an insult!. When some representatives and customers place a limit order they have a tendency to say "Or Better". Think about it, it is an insult. If the broker on the floor is working for you, he or she will try their best to get you a good price. If you tell them to "buy at 5.25 Or Better", it sounds like you don't trust them. If you don't like your fills, then change brokers, but if you constantly use "OB" on tickets, there is no doubt you will get the worst possible fills from the person you just told you do not trust.
Find a couple of trading "buddies". Sure misery loves company, but so does victory. Even though you may have the "killer" system, find a couple of friends that have their own systems. When your system gives you a signal, ask your buddies what they think. Don't let it completely influence your trade, but it can give you some perspective that may be important. This may seem to fly-in-the-face of an earlier tip about not listening to what others say, but not really. If you have a system that works, and you don't listen to the whims and fancies of all other people (and especially the financial news papers), you can gain some support from others that are as committed as you to this job of futures trading.
If you are a believer in the Y2K problem.. better take action now. I don't think anyone can say for sure whether the 2,000 computer bug will cause no problems, or a major catastrophe. If you are one who believes the worst, you had better start your plan and begin taking action now. I am aware of at least four people who have invested tens of thousands of dollars in gold options, and some who plan massive options on the stock indices. I don't advocate such drastic measures, but then, I've been wrong more times than I care to admit, so make up your own mind (after doing EXTENSIVE research), and be prepared to position your portfolio for whatever it is you believe will happen.
Don't get complacent. Excellent trends can last for a long time, but NOT forever. When the trend breaks, don't give back all your profits on the hope that "this is just a temporary pull-back, and the trend will surely resume". Have your trailing stops in place and never move them further away. If it is a pull back and you get stopped out, you will have another opportunity to re-enter at a better price later.
How about hedging your mutual fund with a put option? Many of us are in mutual funds with the hope that some day we may "chuck" it all and retire. Well, if you are like us, you may have a stake in a mutual fund based on the S&P 500 index. If that is the case, and you suspect that when the DOW closes over 10,000, (or wherever), that a much needed correction is on the way, why not buy a put option on the S&P500 index. If the correction does come as you suspect, then your fund may lose some value, but you will have profited with your put option to offset some of that loss. It is a "hedge", which is like insurance. You pay the premium, and it's there if you need it, but you hope you never have to use it.
When you are up to your butt in alligators, it's difficult to remember your initial objective was to drain the swamp! This is another "stick to your plan" kinda' thing. Some of the markets have suffered some real insane volatility recently. Remember, when you and your system (or method) decide on a trade, be sure that you have your stop-loss orders in and stay with your plan. Don't let rumors or the screams of doom from others alter your resolve to stay with the program that has been successful for you. If things do "explode", you have your stops in and that's what they're for!
Remain objective and don't get subjective. This is even another "stick to your plan" kinda' thing. Lately, from some traders I have heard things like; "well my numbers say I should... but I really believe that the market will....! When asked about their recent performance, they have to admit that things haven't been going too well. You must stay with your system. When you start to "out-guess" the market and your system, you are guilty of the same thing as the tip above, only it is you, yourself that is creating the problem. You have employed a system because it works... don't try to second guess it.
Know your competition. Whether you are a fundamental or technical trader, now days you must know the finer points of both. Even if you don't believe in trading fundamentally or perhaps technically, in order for you to have an idea what your fellow traders might do in a given situation, you have to understand the way they trade. This education may even help you hone your own trading program by encouraging you to use a combination of the two main methods.
The fear to make a trade is worse than making a losing trade. I have spoken with three professional traders lately that have had recent problems with their trading systems. Two of the three have gotten to the point of refusing to even make a trade because of fear of making a bad trade. This understandable yet damaging fear can end a trading career. If you suffer this problem, take a little time off to clear your mind, refine your system and follow it for a few days, then get back in the game and make your trades.
Green is also the color of envy. Your system has been working fine, and you are generating a nice income from the profits, but you are only generating 4 to 8 percent a month. You notice that a friend or another trader is talking about making 20 to 70 percent a month on their trades. You decide to "push" you system to keep up and make all that money you have been missing.... BIG MISTAKE!! Watch you own system. As a famous man once said... "watch your pennies and the dollars will take care of themselves".
Then red must be the color of anger. So you've lost... move on. Like any other thing in life, if you concentrate on being upset or angry with something, you have no time to focus on the main objective. In this case it is the preparation of your next trade. You have no time to waste being elated with a win and you also have no time to waste being angry with a loss. You are in a very intense business here, and you must keep your mind on preparing for each trade with a clear mind.
Learn from each trade. Don't just analyze the trade before entering it, analyze it after it is completed too. Whether you profit or lose on a trade, there is something there to learn. You must objectively analyze it and see, if a win, is there a way you could have made more, and if a loss, is there some information you overlooked that would have prevented you from making the trade in the first place. Keep notes of your analysis and refer to them when doing your next-trade research.
If it ain't broke... build another one. If you are a system trader, you have no doubt experienced a time when your system quit working. You were then "down" until you had revised the system to once again operate properly in the current market conditions. In anticipation of such a thing happening again, (and they always do), begin working on you system to "tweak" it to the current conditions and see if you can even make it better. Don't mess with the profitable system, just make another copy and work on it. If you stay ahead of the game, you won't be as far behind when the markets change.
Pay attention to the indicators. Even if you trade technically, you must pay attention to the common and recurring fundamental indicators. Years ago it was the money supply numbers, then unemployment, then (and now) the Fed and G-7 meetings. These things will always cause some kind of market reaction. Make sure you are aware of the times these recurring events take place, and consider them when planning your trade.
You can make money in flat markets. Don't be afraid of writing options. If you are convinced that a market will not be moving up or down dramatically in the next month or two, and if you have the ability to understand option writing and the implications of being "assigned", then don't overlook the premium income that can be generated by shorting the calls and puts. Remember that writing options carries unlimited risk, and there are margin requirements, but also remember that writing options is where the majority of the money is made in option trading. Be sure you understand them before trying the strategy.
Align yourself with the winners. Instead of getting angry at the people that seem to make all the money, try to understand what they do right, and emulate their process. Never close your mind to new opportunity, and whether it's the trader down the street or a local on one of the exchanges, if you can learn their secrets, you may improve your system, or even design a new one for testing and later use.
Relax. Stress is a major contributor to losing. Recently many of these markets have been so choppy that even the best systems have "crashed". If your system has had this problem, don't be overly concerned. If it is starting to hurt your equity, take that much needed break from trading and just relax for awhile. This may be a good time to start working on your system to see if you can get it more in tune to these market conditions.
Don't ignore what the public expects. When trading fundamentally it is often possible to draw the wrong conclusions from some information. For example, if crop estimates for soybeans appears very large, you, as a fundamental trader may decide that this is very bearish for the price of soybeans. It may be, but you had better check to see what the demand will be for the beans as well as for the beanoil and beanmeal. Even though you are facing an abundant harvest, if the demand is very high, the scenario may actually be bullish... Check ALL the information pertinent to your contracts when trading fundamentally.
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