<s> StartingOut in
FuturesTradingUpdated and ExpandedSIXTH EDITION
MARK J. POWERS
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StartingOut in
FuturesTradingUpdated and ExpandedSIXTH EDITION
MARK J. POWERSMcGraw-HillNew York Chicago San FranciscoLisbon London Madrid Mexico CityMilan New Delhi San Juan SeoulSingapore Sydney Toronto
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McGraw-Hill
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Contents
List of Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xviiList of Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxiIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxiiiChapter 1 Trading Stocks versus TradingCommodity Futures. . . . . . . . . . . . . . . . . . . . . . . . . . . 1Margin and Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Relative Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4The Time Factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Daily Price Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Market Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Selling Short. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
viiCopyright 2001 The McGraw-Hill Companies. Click Here for Terms of Use.
Contents
Method of Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Size of Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Who Trades Commodities and Why? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Social and Economic Benefits of Futures Trading. . . . . . . . . . . . . . . . . . . . 8Stocks, Bonds, Currencies, and Commodities—It’s All One Market Now . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Chapter 2
The Electronic Exchange . . . . . . . . . . . . . . . . . . . . . 15
The Advent of Electronic Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15The Crash of ’87, The Chicago Sting, and The Growthof Electronic Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16The Ownership and Control of Electronic Exchanges. . . . . . . . . . . . . . . . 17What Does Electronic Trading Mean to the Trader? . . . . . . . . . . . . . . . . . 18
Chapter 3 Speculation Is Not a Four-Letter Word . . . . . . . . . . 21Why Do Speculators Speculate? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Speculation or Gambling? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Do Most Speculators Lose? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23No Winning Formula . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Practice Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Chapter 4 Managed Futures—A Good Alternative . . . . . . . . . 27Growth of Managed Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Selecting a CTA to Manage Your Money. . . . . . . . . . . . . . . . . . . . . . . . . . 34The Value of Adding Commodity Futures to Your Investment Portfolio . 38Getting Help—Use a Trading Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . 40A Long-Term Perspective Needed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Chapter 5 Commodity Index Futures—The Basket Approach to Investing . . . . . . . . . . . . . . 43Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Chapter 6
The Trading Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Your Attitude toward Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48The Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48Part I—Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
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Part II—Initiating Positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55Part III—Exiting a Trade—Liquidation Strategy. . . . . . . . . . . . . . . . . . . . 60Part IV—Review of Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61A Word about Diversification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61Seasonality and Trading Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63A Final Warning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Chapter 7
Choosing a Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Where to Begin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72What to Look For. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72Consider the Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73What Not to Look For . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74Problems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75Opening the Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76Types of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Chapter 8
The Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Time Element . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80Stop Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81Combination Orders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82Placing the Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83Electronic Trading Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Chapter 9 Forecasting Prices—Supply and Demand . . . . . . . . 85Fundamental Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86Consumer is King. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89Where to Get Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90Government Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91What to Look For and Where to Find It. . . . . . . . . . . . . . . . . . . . . . . . . . . 91Government Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Chapter 10 Basic Price Patterns—Forecasting Tools . . . . . . . . . 95Seasonal Movements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
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Cyclical Movements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97Trends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99Statistical Techniques. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99Analyzing the Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Chapter 11
Technical Analysis . . . . . . . . . . . . . . . . . . . . . . . . . 105
The Bar Chart. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106The Point-and-Figure Chart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107Interpreting Bar Charts—Basic Chart Patterns . . . . . . . . . . . . . . . . . . . . 111Defining a Trend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112Cycles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114Chart Formations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114Technical Analysis, Chart Services, and Software. . . . . . . . . . . . . . . . . . 117
Chapter 12 Technical Analysis—The Tools and How They Work . . . . . . . . . . . . . . . . . . . . . . . . . . 121Moving Averages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122Moving Average Oscillators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122A Survey of Technical Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123Warning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130Mimicking the Mind—Neural Networks. . . . . . . . . . . . . . . . . . . . . . . . . 133Additional References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136Futures Periodicals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
Chapter 13
Volume and Open Interest . . . . . . . . . . . . . . . . . . 139
Finding the Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141Interpreting Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141Seasonal Patterns in Volume and Open Interest. . . . . . . . . . . . . . . . . . . . 142Fundamentalists versus Technicians . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143Randon Walks versus Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
Chapter 14 Commodity Hedging—A Primer . . . . . . . . . . . . . 147Who Hedges and Why? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150Several Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151Commodity Characteristics and Hedging . . . . . . . . . . . . . . . . . . . . . . . . 152
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The CFTC and Hedging. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152Hedging is Not an Automatic Reflex . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Chapter 15
Hedging—The Basis . . . . . . . . . . . . . . . . . . . . . . . 157
The Important Difference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158Calculating the Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
Chapter 16
Your Banker and Hedging . . . . . . . . . . . . . . . . . . 163
The Loan Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
Chapter 17 Commodity Hedging in Action . . . . . . . . . . . . . . . 167The Short Hedge—Cattle. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168Hedging Hogs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170The Storage Hedge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173Trying Other Examples Yourself . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175Selecting a Hedge Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175What about Delivery? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176Decision-Making on Hedging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176How Much to Hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
Chapter 18 Energy Hedging—Some Examples . . . . . . . . . . . 179Hedge #1: Refiner—Hedging the Sale of Excess Inventory . . . . . . . . . . 180Hedge #2: Forward Sale to Hedge the Purchase of Inventory Needs . . . 181Hedge #3: Selling Inventory in Transit . . . . . . . . . . . . . . . . . . . . . . . . . . 182
Chapter 19 Fact and Fiction About Spreads . . . . . . . . . . . . . . 185Semantics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186“Time” Spreads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187How Profitable? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188Perishable Spreads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189Inter-Season Spreads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190Spreading Location Basis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190Spreading Quality Basis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191Inter-Commodity Spreads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191Spotting Spread Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
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Suggested Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192Options Spreads and Trend Changers . . . . . . . . . . . . . . . . . . . . . . . . . . . 193More on Spreads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193Spreading and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195Carryback and Carryforward of Losses . . . . . . . . . . . . . . . . . . . . . . . . . . 196Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
Chapter 20 Financial Futures—An Introduction . . . . . . . . . . 199Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200Money in the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201Money, The Machine, and The Banking System . . . . . . . . . . . . . . . . . . . 202Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
Chapter 21 Money—Trading the Ultimate Commodity . . . . 207The Price of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208Recent History of the International Monetary System. . . . . . . . . . . . . . . 208The Spot Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210Evaluating Foreign Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211Interest Rate Arbitrage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213Capital Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
Chapter 22 Understanding the “Yield Curve” . . . . . . . . . . . . 217Why Study Yield Curves? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218The Changing Shape of the Yield Curve . . . . . . . . . . . . . . . . . . . . . . . . . 219The Futures Yield Curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221The Strip Curve . . . . . . . . . . . . . . . . . . .