<s> McCafferty_FM_IPROF_P
7/2/01
8:54 AM
Page i
UNDERSTANDINGHEDGED SCALETRADING
McCafferty_FM_IPROF_P
7/2/01
8:54 AM
Page ii
Other Books in The Irwin Trader’s Edge SeriesTHOMAS STRIDSMAN • Traders Systems That WorkJEFFREY OWEN KATZ AND DONNA L. MCCORMICK • The Encyclopedia of Trading StrategiesCONSTANCE BROWN • Technical Analysis for the Trading ProfessionalRICHARD DUNCAN • Agricultural Futures and OptionsWILLIAM GALLACHER • The Options EdgeR. E. MCMASTER • The Art of the Trade
McCafferty_FM_IPROF_P
7/2/01
8:54 AM
Page iii
UNDERSTANDINGHEDGED SCALETRADING
THOMAS MCCAFFERTY
McGraw-HillNew York Chicago San Francisco Lisbon London MadridMexico City Milan New Delhi San Juan SeoulSingapore Sydney Toronto
abc
McGraw-Hill
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Manufactured in theUnited States of America. Except as permitted under the United States Copyright Act of 1976, no partof this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.0-07-138260-7The material in this eBook also appears in the print version of this title: 0-07-134556-6.
All trademarks are trademarks of their respective owners. Rather than put a trademark symbol afterevery occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefitof the trademark owner, with no intention of infringement of the trademark. Where such designationsappear in this book, they have been printed with initial caps.McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs. For more information, please contact GeorgeHoare, Special Sales, at george_hoare@mcgraw-hill.com or (212) 904-4069.
TERMS OF USEThis is a copyrighted work and The McGraw-Hill Companies, Inc. (“McGraw-Hill”) and its licensorsreserve all rights in and to the work. Use of this work is subject to these terms. Except as permittedunder the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may notdecompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon,transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it withoutMcGraw-Hill’s prior consent. You may use the work for your own noncommercial and personal use;any other use of the work is strictly prohibited. Your right to use the work may be terminated if youfail to comply with these terms.THE WORK IS PROVIDED “AS IS”. McGRAW-HILL AND ITS LICENSORS MAKE NO GUARANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OFOR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMATION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE,AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUTNOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR APARTICULAR PURPOSE. McGraw-Hill and its licensors do not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted orerror free. Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom.McGraw-Hill has no responsibility for the content of any information accessed through the work.Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental,special, punitive, consequential or similar damages that result from the use of or inability to use thework, even if any of them has been advised of the possibility of such damages. This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tortor otherwise.DOI: 10.1036/0071382607
McCafferty_FM_IPROF_P
7/2/01
8:54 AM
Page v
This is dedicated to . . .The ones I love — Carol, Cynthia, Monica, Colleen,and Sadie
This page intentionally left blank.
McCafferty_FM_IPROF_P
7/2/01
8:54 AM
Page vii
CONTENTS
Acknowledgments ixIntroduction xi
Chapter 1
The Derivative Markets—
Futures 1
Chapter 2
The Derivative Markets—
Options-on-Futures 21
Chapter 3
Traditional Scale Trading 47Chapter 4
Understanding Hedged Scale Trading 61Chapter 5
The Criterion for the Selection of Scalable Commodities 73Chapter 6
Selecting the Perfect Commodities to Scale Trade 89Chapter 7
Mechanics of Scale Trading 119Chapter 8
Roll Me Over 129Chapter 9
Starting a Scale Trading Business 141Chapter 10
A Little Technical Analysis Can Go a Long Way When Scale Trading 165
Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use.
McCafferty_FM_IPROF_P
7/2/01
8:54 AM
Page viii
viii
Chapter 11
Getting Ready to Scale Trade 179Chapter 12
Summing Up the Rules for Successful Scale Trading 191Appendix 1
Commodity Futures Contract Specifications 203Appendix 2
Sources for More Information 209Glossary 217Index 235
Contents
McCafferty_FM_IPROF_P
7/2/01
8:54 AM
Page ix
ACKNOWLEDGMENTS
F
irst, my thanks go to Stephen Isaacs, my editor at McGraw-Hill,for his patience. This project took much longer than anticipated.Several other valuable projects intervened, yet Stephen’s supportwas unwavering.There are two people who taught me much about scale trading to whom I owe a good deal of the content of this book. I amreferring to the two commodity brokers I worked with atSecurities Corporation of Iowa in Waterloo, Iowa — Paul Lovegren(scipaul@cfu.net or 800-262-4643) and Monty Wambold. It waswith these commodity traders that I saw the most positive andnegative aspects of scale trading. If it were not for their service toour customers and their dedication to learning as much as possible about this valuable trading technique, many of our clients newto scale trading would not have succeeded. You guys did a greatjob and deserve all the success you have had. Thanks again.I would also like to thank David S. Nassar, President and CEOof Market Wise Securities, Inc., for teaching me a lot about trading.We have worked together for the past few years and it has beena joy.Thanks also to Stan Yan, who is a superior security broker,artist, and cartoonist. He created most of the illustrations includedin this text. I am grateful for his assistance.
Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use.
This page intentionally left blank.
McCafferty_FM_IPROF_P
7/2/01
8:54 AM
Page xi
INTRODUCTION
Who makes money trading commodity futures?The most definitive answer to this question can be found intwo books by Jack Schwager—Market Wizards and New MarketWizards. Mr. Schwager, a world-class commodity trader in his ownright, interviewed the most successful futures traders he couldfind. The common denominator is that each of these traders hadfound an edge on the market. Each had developed a trading system that put the odds, ever so minutely, in his or her favor.Profitable futures trading depends on getting an edge on themarket, taking advantage of the edge whenever possible, anddoing nothing when the edge is not evident.This book is all about teaching you where there is an edge inthe futures market and showing you how to take advantage of it. Ialso attempt to instill a sense of paranoia in you. If you get lazy orcocky or disregard the rules outlined within, you will have yourhead handed to you.Futures trading is a lot like war. The winner is the one standing when the loser is forced to sign a treaty. The person standing isthe one with an edge, the one who trades defensively. A goodexample of this is the technician. Most of us know the basic technical signals traders track. Some are so common they work becausethey are self-fulfilling prophecies. If major price support or resistance is violated, one exits or reverses one’s position. The professional trader does this and immediately takes a small profit, whereas the amateur follows suit but holds the position, hoping for amajor profit and all too often taking a bath in the process.Scale trading can give traders an edge. By taking it one stepfurther and hedging their positions, they can more than doublethat edge.Hedging means being on both sides of the market at the sametime. A farmer-hedger, for example, produces corn. Therefore, heautomatically becomes long corn on the cash side of the marketwhen he plants a crop. When the futures price is high enough tomake a decent profit (adjusted for local basis), he sells his corn on
Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use.
McCafferty_FM_IPROF_P
xii
7/2/01
8:54 AM
Page xii
Introduction
the futures side of the market. At this point in time (and price), heis hedged, which means his gross profit margin is fixed no matterhow high or how low the price of corn goes as long as he can deliverthe commodity. If corn prices plummet, his short futures contractsgain in value. If corn prices skyrocket, his cash crop becomes morevaluable. Any gain or loss on one side is offset on the other side.When the futures contract expires or he decides to close out thefutures side of the market, say, at harvest, he delivers his long cashcorn against his short futures position. True hedging is all aboutrisk management and locking in profit opportunities, as is hedgedscale trading.This book teaches you how to reap the rewards of scale tradingin the futures markets without the fear associated with traditionalscale trading. As you’ll learn, scale traders buy into descending markets. The concept is “What goes down must come up,” and all positions eventually become winners. Theoretically, this is true. But timeand again, I’ve seen good, experienced traders panic when the priceof the commodity they are long limits down for 1, 2, 3, or more daysin a row. Limit-down days are trading sessions when a futures contract immediately plunges to its daily trading limit without actuallytrading. The reason these seasoned traders lost was that they did notput any downside protection on their positions.If you are holding only a few contracts on the long (buy) side,not to mention having a multiple contract position, it is a mostunpleasant sensation to watch prices dive without being able to doanything. It recalls the feeling you get when you are driving a caron an icy road and realize you are skidding out of control. Nothingresponds. Trying to brake or steer makes the situation worse. Getthe feeling?There are ways of managing this risk in the futures market. I’lleven teach you how to make money from these rare and frightening market moves. Until now, all the books and all the scale tradinggurus, to the best of my knowledge, have not recommended thetechniques described in this book. But the brokers I worked withused them, and they made a substantial difference!The trading strategies I teach are not macho, and they are notclassical scale trading. They reduce the profit potential and interfere with the true essence of scale trading—or at least that is howthe purist’s argument goes.
McCafferty_FM_IPROF_P
Introduction
7/2/01
8:54 AM
Page xiii
xiii
We, meaning I and the brokers I worked with, bought intothese arguments for a while. After we saw some of our good clientsgo belly up, financially and emotionally, when faced with margincalls they could not meet, we said enough is enough! Traders canmake above-average profits in scale trading without sufferingthe abuse the market is capable of delivering. Used judiciously, thestrategies taught in this book can often enhance the profit margin.Another purpose of this book is to show investors, especiallythose who have prospered in the stock market during the pastdecade, that there is an alternative investment opportunity worthyof consideration once the stock market retreats to its historicalreturn of 11 percent per year. The general argument against futurestrading is that it is extremely complicated, virtually esoteric. Otherssay it is no different from gambling.Scale trading the way it is taught in this book is more similarto trading securities than it is to trading futures. One of the mostreliable ways to make money in the stock market is to purchaseshares in well-run, well-financed companies whose earnings aregrowing, and holding them as the per-share price appreciates. Ifyou hold them long enough, you are almost guaranteed to win.Scale trading is similar, but it works in the opposite direction.Following the rules detailed in this book, you buy futures contractsof commodities that are declining. Eventually, the prices of thesecommodities turn around, and you exit your positions at a profit.Best of all, you’ll understand the rules and why they work: Theyare built on the sound foundation of the laws of supply anddemand. You will even learn how to incorporate methods to further manage your risk and enhance your profit potential.The book begins with an explanation of the two derivativemarkets you will be trading, including how and why they work. Bythe end of Chapter 2, you should be very comfortable with thesemarkets. From time to time, you may find the Glossary useful.Next, traditional and hedged scale trading are compared andcontrasted. Once you thoroughly understand the concept of scaletrading, the rules you need to know to succeed are presented. Thereare two key issues you need to pay particular attention to—whichcommodities to scale trade and when to begin a scale. After that,advanced techniques—such as when to make small adjustments intrading that can substantially increase your return—are introduced.
McCafferty_FM_IPROF_P
7/2/01
8:54 AM
Page xiv
xiv
Introduction
The backbone of scale trading is fundamental analysis of thefutures market. You’ll learn how to do this analysis and to identifythe critical factors impacting the commodities you will be trading.The source of good fundamental information is either your broker,the research department of the brokerage firm or clearing member,or the Internet. If your broker is not a scale trading expert, youcould have problems. I discuss how to deal with this situation.Scale traders hold long futures positions, waiting for them tomove into specific price ranges (referred to as the scales) before taking profits. Since no one can accurately predict when this mightoccur and since futures contracts expire on specific dates, the scaletrader must occasionally transfer positions from the current contract month to a more distant one—from the May corn contract tothe September contract, for example. This is called rolling positionsover. You’ll learn the most efficient ways of doing this.There are some substantial differences between the protectionyou have as an individual investor in the futures market comparedwith what you have in the stock market. By the time you finish thissection, you’ll be well informed, and I think you’ll be pleasantlysurprised at the quality of the protection afforded futures traders.Last of all, you’ll get some good ideas and suggestions on howbest to get started. These are solid ideas and approaches I havelearned over years of working with scale traders and brokers. Youwill find they can save you time and money.
A WORD TO THE WISE . . .Investing in anything is risky, because you are attempting to predictwhat may or may not happen at some time in the future. Only hindsight is 20-20. What makes futures trading riskier than stock tradingis the amount of leveraging available. If you trade stocks in a margin account, you can leverage 50 percent of the value of the stock.With futures, you may be required to put down only5 percent or less of the value of the contract being traded as the initial margin. It is this high leveraging factor (20:1) that accounts forthe high profits that commodity brokers brag about. But it is alsothis high leveraging that can create the major losses some tradersexperience. You can lose money in scale trading just as you can withany investment. And you can lose more than you invest as a resultof leveraging.
McCafferty_FM_IPROF_P
Introduction
7/2/01
8:54 AM
Page xv
xv
The hedged scale trading system attempts to manage the riskas much as possible. Unfortunately, there is no completely foolproof system. In my opinion, this system comes as close as any I’veseen. Again, no one can foretell the future or what totally unexpected events (war, weather, politics, etc.) will impact the marketsyou trade. For this reason, I maintain that not everyone is suited tothe futures market or scale trading.You do not have to trade; it is totally your decision. I dorecommend you read this book, discuss the opportunities with trusted advisors, interview a few scale trading brokers, talk with someactual scale traders, and visit some of the Web sites devoted to thesubject. Then decide whether scale trading fits your temperamentand investment objectives.If you do decide that it is something worth pursuing, goodhunting!
This page intentionally left blank.
IPRO-F_11/13_ch01_McCafferty
7/2/01
CHAPTER
8:55 AM
Page 1
1
The DerivativeMarkets—Futures
The purpose of this chapter is to give you insights into the mindsof a large percentage of the derivative traders who will be drivingthe market you will be trading. Once you know where they arecoming from and what they are trying to accomplish, you will bebetter armed to take advantage of their weaknesses. Understanding these markets will also give you the discipline needed tobe a successful scale trader.The term derivative is generic and refers to a wide variety offinancial instruments whose prices are derived from the value of anunderlying entity. That entity could be a security, as in an option ona stock. Or it could be a debt instrument (bond futures contract),equity index (S&P futures contract), or a physical commodity (cornfutures contract).The prices of derivatives rise and fall as the supply-demandequation of their underlying entity reacts to new information entering the marketplace. It can be either current or future projectionsthat impact pricing of the underlying entity or even rumors or falseor misleading information deliberately placed to disrupt the markets. The most important aspect traders new to futures marketsneed to grasp is that most derivative markets attempt to anticipatethe future price of the underlying entity. Derivative traders use avariety of analytic tools, such as fundamental and technical analysis or a combination of the two, to predict where prices of theunderlying entities will be a minute, an hour, days, weeks, months,or years into the future.1
Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use.
IPRO-F_11/13_ch01_McCafferty
2
7/2/01
8:55 AM
Page 2
CHAPTER 1
Another key element is that derivatives involve either rights orobligations on the part of the owner of the derivative. This meansthe owner or trader has a right to the underlying entity at some timeand price in the future or an obligation to deliver the derivative atsome time or price in the future. The difference depends on whetherthe trader is the buyer or seller of the derivative.In the final analysis, a derivative is only a contract mutuallyagreed upon between market participants. To be a legal contract,all terms must be acceptable to both parties and money must beexchanged. Once this is complete, the buying party has rights thatmay be exercised against the seller. Conversely, the seller must liveup to the obligations of the contract, which usually means promptdelivery of the underlying entity to the buyer.One of the socially redeeming values of derivatives is thatthey can be used to manage risk. For example, an individualowner of an underlying entity, such as a stock position or even anentire portfolio, who fears it will lose value over the comingmonths but does not wish to sell it, can buy a derivative. A putoption on that security or an index matching the portfolio willgain value as the underlying entity loses value. As the securityloses value, the put gains value. Properly done, the investor ishedged or neutral. The price or value of the underlying entity isfrozen for a period of time.Hedgers can also be major consumers of the underlying entities. Typical examples are grain merchants who have contracts tosupply corn, soybeans, and wheat to corporations that processthese commodities into feed and food for human and/or animalconsumption. Or it could be producers of gasoline and heating oilthat use the futures markets in crude oil to lock up prices at advantageous times. Users of silver, gold, and copper do the same thingin the electrical, photographic, and jewelry industries. So do banks,pension funds, mutual funds, and other financial institutions thatrely on financial futures to meet obligations they must prepare forin the near- to long-term future. Currency futures can take some ofthe sting out of importing or exporting.Second, derivative markets provide an insight into the futuresupply-demand situation of the underlying entities. By trackingcontracts that expire in 3, 6, 9, or 12 months into the future, interested parties (users, hedgers, traders, government officials, the
IPRO-F_11/13_ch01_McCafferty
7/2/01
The Derivative Markets—Futures
8:55 AM
Page 3
3
press, etc.) know what the market participants project regardingexcesses or shortages in underlying entities.Another one of the most useful contributions of the derivativeexchanges is price discovery. Thousands of traders, hedgers, speculators, and scalpers, representing every corner of the world andmost major corporations, bid and offer contracts on hundreds ofunderlying entities. The consensus of this activity provides insightsinto the future pricing for all these entities—not just on the spotmarkets, but as far out as a year or more. Without these markets, theusers of the commodities represented by futures contracts wouldnot have a remote idea as to where price trends were headed, norwould they be alerted to future shortages or oversupply conditions.The derivative markets can be excellent planning guides for a widevariety of industries, even sovereign nations.Yet another function of the derivative markets is generatingincome via speculation, something near and dear to all our hearts.Many of these markets are extremely popular with speculators.Their objective is simply to generate short-term profits, betting onthe near-term price fluctuations. Their value to the hedger andscale trader is that they add much needed liquidity to many derivative markets, making it easier to buy and sell derivative contracts.There is nothing new about the derivative markets. Market historians are proud to trace their use back to the Old Testament. TheBook of Genesis, Chapter 29, tells the story of Jacob, who bought anoption costing seven years’ labor. It gave him the right to marryLaban’s daughter Rachel. Unfortunately, Laban reneged on the contract, perhaps the first default on an over-the-counter option, andJacob married Leah, Rachel’s older sister. Like any good optionstrader, Jacob jumped right back in the market and bought a secondoption on Rachel. (Multiple wives were permitted in 1700 B.C.)Again, the option cost him another seven years of labor. This timethere was a happy ending, presupposing the sisters got alongtogether, for Jacob. It could not have been too bad, since Jacobended up with 12 sons, who became the patriarchs of the 12 tribesof Israel.In merry old England of the Middle Ages, records indicate aflourishing futures market. As early as the thirteenth century,active forward contract markets existed in wheat and wool inLondon. Forward contracting is the practice of producers agreeing
IPRO-F_11/13_ch01_McCafferty
4
7/2/01
8:55 AM
Page 4
CHAPTER 1
to deliver a certain amount of a commodity of a predeterminedquality to a dealer at a specific time in the future at a set price.These types of markets were the forerunners of our modern-dayfutures and options contracts.The Royal Exchange in London is usually credited as the firstexchange to allow the trading of forward contracts in the seventeenth century, and it was forward contracts that helped fuel theDutch tulip mania of 1637. As a matter of fact, 15 to 25 percent oftrades executed on the New York Stock Exchange in its early yearswere classified as “time bargains” or forward contracts, rather thantransactions for cash or next-day settlement. But credit for the firstfungible contract is usually given to the Yodoya Rice Market inOsaka, Japan, around 1650.In the United States, the Chicago Board of Trade was the firstfutures market, opening in 1848. Necessity is the mother of invention, and at the time, the grain market was in chaos. The abundantcrops produced in the Midwest poured into Chicago at harvest.More came in than could be handled and stored. There needed tobe a way of bringing the crops to market in an orderly fashion. Thegrain storage facilities in Chicago and other key collection locationswere overwhelmed at harvest and underutilized most of the rest ofthe year. Chicago, because of its location on Lake Michigan and thesurrounding farm states of Illinois, Iowa, and Michigan, was a natural center for farm commerce.When Chicago was flooded with corn and wheat at harvest,prices plummeted. Storage facilities were bursting at their seams.Neither the farmers nor the grain merchants could make the moneythey deserved under those circumstances. A similar situation existedwith the marketing of the livestock. A plan was devised to allowfarmers to store the grain on their farms and bring it to market in anorderly fashion, while receiving an advance payment based onfuture delivery and locking in a decent price. This was known as the“to-arrive” contract.The grain merchants of Chicago also had the right to tradethese contracts among themselves. If demand rose, these merchants would bid the price up of the to-arrive contracts. The priceto the farmer did not change, but the farmer had transferred therisk of ownership, meaning lower prices, to the grain merchant. By1865, the contract terms were standardized and a fungible contractwas in place.
IPRO-F_11/13_ch01_McCafferty
7/2/01
The Derivative Markets—Futures
8:55 AM
Page 5
5
In 1874, the Chicago Produce Exchange was organized tocompete with the Chicago Board of Trade (the Board). It changedits name to the Chicago Mercantile Exchange in 1919. The “Merc,”as it is generally known, was followed by several other localexchanges, but the Board and the Merc remain the world leaders infutures trading to this day.Jacob’s option was an over-the-counter (OTC) option, somemight even call it a forward contract like the ones first used inChicago. Nevertheless, by this simple means the parties negotiatedand agreed on all the terms of the contract. OTC options are stillwidely used, but it is exchange-traded derivatives that are important to the hedged scale trader.With exchange-traded derivatives, all the terms and conditionsare set in advance by the exchanges, except price and the number ofcontracts to be bought or sold. Terms and conditions means the sizeof the contract (how many shares of a security or bushels, bales,pounds, tons, gallons, barrels, etc. of a physical commodity such ascotton, copper, or crude oil), the quality of the underlying entity, thelocation of delivery, and time of delivery. The term fungibility is usedin derivative markets to denote that each contract is completely interchangeable. All the specifications—quality, quantity, date of delivery,and delivery location—are standard. Since the trader decides howmany contracts to buy or sell, only price needs to be decided, and thatis done traditionally through open outcry auctions in the trading pits.The term commodities was used initially because the onlyunderlying entities being traded were physical commodities. In1972, the Chicago Mercantile Exchange began trading the currencyfutures contract. This contract was followed by the interest ratefutures contract on the Chicago Board of Trade (1975). The Merccountered with Treasury bill futures (1975) and the Board withT-bond futures (1977). The competition went on and on and stillgoes on. Now you can trade weather insurance and electricity contracts. Major exchanges developed in New York. By the mid-1970s,the term futures replaced commodity, for obvious reasons.These exchanges also developed options contracts, once theygot up and running. The Roaring Twenties was as wild and unregulated a period in the commodities and options-on-commoditiesmarkets as it was in securities. Bucket-shop trading commoditiesand options abounded. Options were so abused that they werebanned in 1936. Eventually they reappeared in 1973.
IPRO-F_11/13_ch01_McCafferty
6
7/2/01
8:55 AM
Page 6
CHAPTER 1
As a scale trader, you will need to master two derivativemarkets—the futures and the options-on-futures markets. Let’sbegin with an overview of the futures markets.I use the symbol of Janus, the ancient Roman god, to explainthe futures markets. Janus was the god with two faces, one lookingfore, the other aft. The god’s responsibility was to protectentrances. Janus’s main temple in the Roman Forum opened itsdoors during times of war and closed them in times of peace.The reason I use Janus is because there are so manydichotomies that must be dealt with when trading futures. First,you can buy or sell (go long or short) without any restrictions. Inthe securities market, an individual trader must have an uptick inprice (New York Stock Exchange) or an up bid (NASDAQ) beforebeing permitted to short a stock. Not so with futures.In addition to not having any restrictions, you can executetrades rapidly—you can get a fill on a market order while you arestill on the phone with your broker. Or you can trade electronically.You can reverse your position just as quickly. For example, you arelong one copper contract, you decide you want to be short, and yousell two. In an instant, you have reversed your position.But the most important dichotomy for the scale trader tounderstand is the one that