A Complete Guide to the Futures Market, 2e – Technical Analysis, Trading Systems, Fundamental Analysis, Options, Spreads, and Trading Principles

<p>About the Authors xv</p>
<p>Part I Preliminaries</p>
<p>Chapter 1 For Beginners Only 3</p>
<p>Purpose of This Chapter 3</p>
<p>The Nature of Futures Markets 3</p>
<p>Delivery 4</p>
<p>Contract Specifications 5</p>
<p>Volume and Open Interest 9</p>
<p>Hedging 11</p>
<p>Trading 15</p>
<p>Types of Orders 16</p>
<p>Commissions and Margins 19</p>
<p>Tax Considerations 19</p>
<p>Chapter 2 The Great Fundamental versus Technical Analysis Debate 21</p>
<p>Part II Chart Analysis and Technical Indicators</p>
<p>Chapter 3 Charts: Forecasting Tool or Folklore? 27</p>
<p>Chapter 4 Types of Charts 35</p>
<p>Bar Charts 35</p>
<p>Linked Contract Series: Nearest Futures versus Continuous Futures 39</p>
<p>Close–Only ( Line ) Charts 40</p>
<p>Point–and–Figure Charts 42</p>
<p>Candlestick Charts 43</p>
<p>Chapter 5 Linking Contracts for Long–Term Chart Analysis: Nearest versus Continuous Futures 45</p>
<p>The Necessity of Linked–Contract Charts 45</p>
<p>Methods of Creating Linked–Contract Charts 46</p>
<p>Nearest versus Continuous Futures in Chart Analysis 48</p>
<p>Conclusion 51</p>
<p>Chapter 6 Trends 57</p>
<p>Defining Trends by Highs and Lows 57</p>
<p>TD Lines 66</p>
<p>Internal Trend Lines 73</p>
<p>Moving Averages 78</p>
<p>Chapter 7 Trading Ranges 83</p>
<p>Trading Ranges: Trading Considerations 83</p>
<p>Trading Range Breakouts 86</p>
<p>Chapter 8 Support and Resistance 91</p>
<p>Nearest Futures or Continuous Futures? 91</p>
<p>Trading Ranges 92</p>
<p>Prior Major Highs and Lows 94</p>
<p>Concentrations of Relative Highs and Relative Lows 101</p>
<p>Trend Lines, Channels, and Internal Trend Lines 106</p>
<p>Price Envelope Bands 107</p>
<p>Chapter 9 Chart Patterns 109</p>
<p>One–Day Patterns 109</p>
<p>Continuation Patterns 122</p>
<p>Top and Bottom Formations 134</p>
<p>Chapter 10 Is Chart Analysis Still Valid? 149</p>
<p>Chapter 11 Technical Indicators 155</p>
<p>What Is an Indicator? 155</p>
<p>The Basic Indicator Calculations 157</p>
<p>Comparing Indicators 157</p>
<p>Moving Average Types 165</p>
<p>Oscillators and Trading Signals 167</p>
<p>Indicator Myths 170</p>
<p>Indicator Types 172</p>
<p>Conclusion 173</p>
<p>Part III Applying Chart Analysis to Trading</p>
<p>Chapter 12 Midtrend Entry and Pyramiding 177</p>
<p>Chapter 13 Choosing Stop–Loss Points 183</p>
<p>Chapter 14 Setting Objectives and Other Position Exit Criteria 189</p>
<p>Chart–Based Objectives 189</p>
<p>Measured Move 190</p>
<p>Rule of Seven 194</p>
<p>Support and Resistance Levels 196</p>
<p>Overbought/Oversold Indicators 198</p>
<p>DeMark Sequential 199</p>
<p>Contrary Opinion 203</p>
<p>Trailing Stops 204</p>
<p>Change of Market Opinion 204</p>
<p>Chapter 15 The Most Important Rule in Chart Analysis 205</p>
<p>Failed Signals 205</p>
<p>Bull and Bear Traps 205</p>
<p>False Trend Line Breakouts 211</p>
<p>Return to Spike Extremes 213</p>
<p>Return to Wide–Ranging Day Extremes 216</p>
<p>Counter–to–Anticipated Breakout of Flag or Pennant 219</p>
<p>Opposite Direction Breakout of Flag or Pennant Following a Normal Breakout 222</p>
<p>Penetration of Top and Bottom Formations 225</p>
<p>Breaking of Curvature 229</p>
<p>The Future Reliability of Failed Signals 229</p>
<p>Conclusion 231</p>
<p>Part IV Trading Systems and Performance Measurement</p>
<p>Chapter 16 Technical Trading Systems: Structure and Design 235</p>
<p>The Benefits of a Mechanical Trading System 236</p>
<p>Three Basic Types of Systems 236</p>
<p>Trend–Following Systems 237</p>
<p>Ten Common Problems with Standard Trend–Following Systems 244</p>
<p>Possible Modifications for Basic Trend–Following Systems 247</p>
<p>Countertrend Systems 254</p>
<p>Diversification 256</p>
<p>Ten Common Problems with Trend–Following Systems Revisited 259</p>
<p>Chapter 17 Examples of Original Trading Systems 261</p>
<p>Wide–Ranging–Day System 261</p>
<p>Run–Day Breakout System 268</p>
<p>Run–Day Consecutive Count System 273</p>
<p>Conclusion 278</p>
<p>Chapter 18 Selecting the Best Futures Price Series for System Testing 279</p>
<p>Actual Contract Series 279</p>
<p>Nearest Futures 280</p>
<p>Constant–Forward ( Perpetual ) Series 281</p>
<p>Continuous (Spread–Adjusted) Price Series 282</p>
<p>Comparing the Series 285</p>
<p>Conclusion 287</p>
<p>Chapter 19 Testing and Optimizing Trading Systems 289</p>
<p>The Well–Chosen Example 289</p>
<p>Basic Concepts and Definitions 291</p>
<p>Choosing the Price Series 293</p>
<p>Choosing the Time Period 293</p>
<p>Realistic Assumptions 295</p>
<p>Optimizing Systems 297</p>
<p>The Optimization Myth 298</p>
<p>Testing versus Fitting 310</p>
<p>The Truth about Simulated Results 312</p>
<p>Multimarket System Testing 313</p>
<p>Negative Results 314</p>
<p>Ten Steps in Constructing and Testing a Trading System 315</p>
<p>Observations about Trading Systems 316</p>
<p>Chapter 20 How to Evaluate Past Performance 319</p>
<p>Why Return Alone Is Meaningless 319</p>
<p>Risk–Adjusted Return Measures 323</p>
<p>Visual Performance Evaluation 335</p>
<p>Investment Insights 343</p>
<p>Part V Fundamental Analysis</p>
<p>Chapter 21 Fourteen Popular Fallacies, or What Not to Do Wrong 347</p>
<p>Five Short Scenes 347</p>
<p>The Fourteen Fallacies 349</p>
<p>Chapter 22 Supply–Demand Analysis: Basic Economic Theory 359</p>
<p>Supply and Demand Defined 359</p>
<p>The Problem of Quantifying Demand 362</p>
<p>Understanding the Difference between Consumption and Demand 363</p>
<p>The Need to Incorporate Demand 366</p>
<p>Possible Methods for Incorporating Demand 368</p>
<p>Why Traditional Fundamental Analysis Doesn t Work in the Gold Market 371</p>
<p>Chapter 23 Types of Fundamental Analysis 373</p>
<p>The Old Hand Approach 373</p>
<p>The Balance Table 373</p>
<p>The Analogous Season Method 374</p>
<p>Regression Analysis 375</p>
<p>Index Models 376</p>
<p>Chapter 24 The Role of Expectations 379</p>
<p>Using Prior–Year Estimates Rather Than Revised Statistics 379</p>
<p>Adding Expectations as a Variable in the Price–Forecasting Model 380</p>
<p>The Influence of Expectations on Actual Statistics 380</p>
<p>Defining New–Crop Expectations 381</p>
<p>Chapter 25 Incorporating Inflation 383</p>
<p>Chapter 26 Seasonal Analysis 389</p>
<p>The Concept of Seasonal Trading 389</p>
<p>Cash versus Futures Price Seasonality 389</p>
<p>The Role of Expectations 390</p>
<p>Is It Real or Is It Probability? 390</p>
<p>Calculating a Seasonal Index 391</p>
<p>Chapter 27 Analyzing Market Response 403</p>
<p>Evaluating Market Response for Repetitive Events 403</p>
<p>Chapter 28 Building a Forecasting Model: A Step–by–Step Approach 413</p>
<p>Chapter 29 Fundamental Analysis and Trading 417</p>
<p>Fundamental versus Technical Analysis: A Greater Need for Caution 417</p>
<p>Three Major Pitfalls in Fundamental Analysis 418</p>
<p>Combining Fundamental Analysis with Technical Analysis and Money Management 426</p>
<p>Why Bother with Fundamentals? 427</p>
<p>Are Fundamentals Instantaneously Discounted? 428</p>
<p>Fitting the News to Price Moves 431</p>
<p>Fundamental Developments: Long–Term Implications versus Short–Term Response 432</p>
<p>Summary 435</p>
<p>Part VI Futures Spreads and Options</p>
<p>Chapter 30 The Concepts and Mechanics of Spread Trading 439</p>
<p>Introduction 439</p>
<p>Spreads Definition and Basic Concepts 440</p>
<p>Why Trade Spreads? 440</p>
<p>Types of Spreads 441</p>
<p>The General Rule 443</p>
<p>The General Rule Applicability and Nonapplicability 443</p>
<p>Spread Rather Than Outright An Example 445</p>
<p>The Limited–Risk Spread 446</p>
<p>The Spread Trade Analysis and Approach 448</p>
<p>Pitfalls and Points of Caution 449</p>
<p>Chapter 31 Intercommodity Spreads: Determining Contract Ratios 453</p>
<p>Chapter 32 Spread Trading in Stock Index Futures 461</p>
<p>Intramarket Stock Index Spreads 461</p>
<p>Intermarket Stock Index Spreads 462</p>
<p>Chapter 33 Spread Trading in Currency Futures 471</p>
<p>Intercurrency Spreads 471</p>
<p>Intracurrency Spreads 473</p>
<p>Chapter 34 An Introduction to Options on Futures 477</p>
<p>Preliminaries 477</p>
<p>Factors That Determine Option Premiums 480</p>
<p>Theoretical versus Actual Option Premiums 483</p>
<p>Delta (the Neutral Hedge Ratio) 484</p>
<p>Chapter 35 Option Trading Strategies 487</p>
<p>Comparing Trading Strategies 487</p>
<p>Profit/Loss Profiles for Key Trading Strategies 489</p>
<p>Part VII Practical Trading Guidelines</p>
<p>Chapter 36 The Planned Trading Approach 559</p>
<p>Step 1: Define a Trading Philosophy 559</p>
<p>Step 2: Choose Markets to Be Traded 560</p>
<p>Step 3: Specify Risk Control Plan 560</p>
<p>Step 4: Establish a Planning Time Routine 563</p>
<p>Step 5: Maintain a Trader s Spreadsheet 563</p>
<p>Step 6: Maintain a Trader s Diary 565</p>
<p>Step 7: Analyze Personal Trading 565</p>
<p>Chapter 37 Seventy–Five Trading Rules and Market Observations 567</p>
<p>Entering Trades 568</p>
<p>Exiting Trades and Risk Control (Money Management) 569</p>
<p>Other Risk–Control (Money Management) Rules 570</p>
<p>Holding and Exiting Winning Trades 570</p>
<p>Miscellaneous Principles and Rules 571</p>
<p>Market Patterns 572</p>
<p>Analysis and Review 573</p>
<p>Chapter 38 50 Market Wizard Lessons 575</p>
<p>Appendix A Introduction to Regression Analysis 589</p>
<p>Basics 589</p>
<p>Meaning of Best Fit 591</p>
<p>A Practical Example 593</p>
<p>Reliability of the Regression Forecast 593</p>
<p>Appendix B A Review of Elementary Statistics 597</p>
<p>Measures of Dispersion 597</p>
<p>Probability Distributions 599</p>
<p>Reading the Normal Curve (Z) Table 604</p>
<p>Populations and Samples 606</p>
<p>Estimating the Population Mean and Standard Deviation from the Sample Statistics 607</p>
<p>Sampling Distribution 608</p>
<p>Central Limit Theorem 609</p>
<p>Standard Error of the Mean 612</p>
<p>Confidence Intervals 612</p>
<p>The t–Test 614</p>
<p>Appendix C Checking the Significance of the Regression Equation 619</p>
<p>The Population Regression Line 619</p>
<p>Basic Assumptions of Regression Analysis 620</p>
<p>Testing the Significance of the Regression Coefficients 620</p>
<p>Standard Error of the Regression 627</p>
<p>Confidence Interval for an Individual Forecast 627</p>
<p>Extrapolation 630</p>
<p>Coefficient of Determination (r2) 630</p>
<p>Spurious ( Nonsense ) Correlations 634</p>
<p>Appendix D The Multiple Regression Model 637</p>
<p>Basics of Multiple Regression 637</p>
<p>Applying the t–Test in the Multiple Regression Model 640</p>
<p>Standard Error of the Regression 641</p>
<p>Confidence Intervals for an Individual Forecast 642</p>
<p>R2 and Corrected R2 642</p>
<p>F–Test 643</p>
<p>Analyzing a Regression Run 644</p>
<p>Appendix E&nbsp;Analyzing the Regression Equation 649</p>
<p>Outliers 649</p>
<p>The Residual Plot 650</p>
<p>Autocorrelation Defined 651</p>
<p>The Durbin–Watson Statistic as a Measure of Autocorrelation 651</p>
<p>The Implications of Autocorrelation 654</p>
<p>Missing Variables and Time Trend 655</p>
<p>Dummy Variables 658</p>
<p>Multicollinearity 663</p>
<p>Addendum: Advanced Topics 666</p>
<p>Appendix F Practical Considerations in Applying Regression Analysis 673</p>
<p>Determining the Dependent Variable 673</p>
<p>Selecting the Independent Variables 675</p>
<p>Should the Preforecast Period Price Be Included? 675</p>
<p>Choosing the Length of the Survey Period 676</p>
<p>Sources of Forecast Error 677</p>
<p>Simulation 678</p>
<p>Stepwise Regression 679</p>
<p>Sample Step–by–Step Regression Procedure 680</p>
<p>Summary 681</p>
<p>References and Recommended Readings 683</p>
<p>Index 685</p>