options on futures contractsare bought and sold. It is customary for Chicago markets to refer to the individualcommodity trading areas as pits, whereas in New York, they are referred to as“rings.”Pivot points The mathematical calculation formula used to determine the support or resistance ranges in a given time period. These formulas can be used to calculate intraday, daily, weekly, monthly, or quarterly ranges.Point-and-figure A charting style that tracks the market’s price action by representing increases with plotting Xs on a chart and downside corrections with Os. Timeis not an issue with this method; rather, it is concerned with pure price movement.Position The netted total commitments in a given currency; can be flat or square(no exposure), long (more currency bought than sold), or short ( more currencysold than bought).PremiumPrime ratetomers.
The dollar value amount placed on an option.Interest rate charged by major banks to their most creditworthy cus-
Producer Price Index An index that shows the cost of goods and services to producers and wholesalers.Profit taking The unwinding of a position to realize profits.
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GLOSSARY
Put option An option that gives the option buyer the right but not the obligationto sell an underlying futures contract at the strike price on or before the expirationdate.Quotedeal.
An indicative price; the price quoted for information purposes but not to
Rally A recovery in price after a period of decline.Range The difference between the highest and the lowest prices of a futurerecorded during a given trading session.Rate (1) The price of one currency in terms of another, normally against the U.S.dollar (USD); (2) assessment of the creditworthiness of an institution.Reaction
A decline in prices following an advance.
Real body The section of a candlestick defined as the area established betweenthe opening and the closing of a particular time period.Reciprocal currency A currency that is normally quoted as dollars per unit of currency rather than as the normal quote of units of currency per dollar. Sterling is themost common example.Relative Strength Index A technical indicator used to determine a market in anoverbought or oversold condition; was developed by Welles Wilder Jr. to help determine market reversals.Resistance point or level A price recognized by technical analysts as a price thatis likely to result in a rebound but if broken through is likely to result in a significantprice movement.Revaluationaction.
Increase in the exchange rate of a currency as a result of official
Revaluation ratesition or book.Rickshaw doji
The rate for any period or currency that is used to revalue a po-
A doji that has an unusually large trading range.
Risk management The identification and acceptance or offsetting of the risksthreatening the profitability or existence of an organization; with respect to foreignexchange, involves consideration of market, sovereign, country, transfer, delivery,credit, and counterparty risk, among other things.Risk position An asset or liability that is exposed to fluctuations in value throughchanges in exchange rates or interest rates.Rollover An overnight swap; specifically, the next business day against the following business day; also called “tomorrow next” (Tom-next).Round trip
Buying and selling of a specified amount of currency.
Same-day transactiontakes place.
A transaction that matures on the day the transaction
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Glossary
Scalper
A trader who trades for small, short-term profits.
Selling rate
Rate at which a bank is willing to sell foreign currency.
Settlement date
The date on which foreign exchange contracts settle.
Settlement price The last price paid for a commodity on any trading day. The exchange clearinghouse determines a firm’s net gains or losses, margin requirements,and the next day’s price limits, based on each futures and options contract settlement price; also referred to as “daily settlement price” or “daily closing price.”Shadow The area on a candlestick between the high or the low in relation to theopen or the close.Shooting star The candle that forms at tops of markets where the shadow is atleast twice the length of the real body and the real body forms near the low for thesession with little or no shadow at the bottom. This candle resembles an invertedhammer.Short The position in a futures market where a trader sells a contract with the intention of buying it back at a lower price for a profit or if at a higher price for a loss.An option trader would be considered “short the option” if he or she were a writerof that option.Short sale The sale of a specified amount of currency not owned by the seller atthe time of the trade; usually made in expectation of a decline in the price.Slippage Refers to the negative (or depreciating) price value between where astop-loss order becomes a market order and where that market order may be filled.Speculator An investor who is looking to profit from buying or selling derivativeproducts with the anticipation of profiting from price moves by trading in and outof their positions.Spinning tops A candle where the real body is small in nature with a large rangeand with shadows at both ends.Spot price
The price at which a currency is currently trading in the spot market.
Spread (l)The difference between the bid and the ask prices of a currency; (2) thedifference between the price of two related futures contracts.Spreading The simultaneous buying and selling of two related markets with theexpectation that a profit will be made when the position is offset.Sterling
British pound; otherwise known as cable.
Stochastics A technical indicator created by George C. Lane that gives an indication of when a market is overbought or oversold.Stock index An indicator used to measure and report value changes in a selectedgroup of stocks.Stocky Market slang for Swedish krona.Stop-limit order
A variation of a stop order in which a trade must be executed at
332
GLOSSARY
the exact price or no worse than a specific price. The limit side of the order limitsthe slippage. It also does not ensure execution if the next best price is beyond thelimit side of the stop order until the limit or stop price is reached again.Stop order An order to buy or to sell when the market reaches a specified point.A stop order to buy becomes a market order when the futures contract trades at orabove the stop price. A stop order to sell becomes a market order when the futurescontract trades at or below the stop price.Strike Price The price at which the futures contract underlying a call or put option can be purchased or sold.Support
A price level that attracts buyers.
Swap The simultaneous purchase and sale of the same amount of a given currencyfor two different dates against the sale and the purchase of another. A swap can bea swap against a forward. In essence, swapping is somewhat similar to borrowingone currency and lending another for the same period. However, any rate of returnor cost of funds is expressed in the price differential between the two sides of thetransaction.Swissy
Market slang for Swiss franc.
Technical analysis The study of price and/or volume to anticipate future pricemoves. Studies can include price patterns, mathematical calculations, and data regarding the open, the high, the low, and the close of a market.Thin market A market in which trading volume is low and in which bid and askquotes are wide and the liquidity of the instrument traded is low.Three crows A candlestick pattern consisting of three dark candles that close onor at their lows. After an extended advance, this formation can be a strong reversalpattern.Three white soldiers A candlestick pattern consisting of three candles that closeat their highs and can indicate a continued advance. This pattern is a reliable indication that prices are moving higher, especially if they develop after a longer periodof consolidation at a bottom; opposite of three crow’s formation.Tick
A minimum change in price, up or down.
Tomorrow next (Tom-next) Simultaneous buying of a currency for delivery thefollowing day and selling for the spot day, or vice versa.Transactionan order.
The buying or selling of currencies resulting from the execution of
Transaction date
The date on which a trade occurs.
Uncovered Another term for an open position.Undervaluation The condition of an exchange rate when it is below its purchasing power parity.
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Glossary
Uptick A transaction executed at a price greater than that of the previous transaction.Volatility A measure of the amount by which an asset price is expected to fluctuate over a given period.Volume The number of purchases or sales of a commodity futures contract madeduring a specified period of time; often the total transactions for one trading day.Wash tradeWindows
A matched deal that produces neither a gain nor a loss.
A Japanese candlestick term referred to as the Western gap.
Working day A day on which the banks in a currency’s principal financial centerare open for business. For forex transactions, a working day occurs only if thebanks in both financial centers are open for business (all relevant currency centersin the case of a cross are open).Yield A measure of the annual return on an investment; also referred to as theamount of interest on a debt instrument.
About the CD-ROM
INTRODUCTIONThis appendix provides you with information on the contents of the CD thataccompanies this book. For the latest and greatest information, pleaserefer to the ReadMe file located at the root of the CD.
SYSTEM REQUIREMENTS• A computer with a processor running at 120 Mhz or faster.• At least 32 MB of total RAM installed on your computer. For best performance, at least 64 MB is recommended.• A CD-ROM drive.• Internet access.• Windows Media Player.
USING THE CD WITH WINDOWSTo install the items from the CD to your hard drive, follow these steps:1. Insert the CD into your computer’s CD-ROM drive.2. Use the CD-ROM interface that appears to explore the contents of the
CD in a simple point-and-click way.If the opening screen of the CD-ROM does not appear automatically,follow these steps to access the CD:
335
336
ABOUT THE CD-ROM
1. Click the Start button on the left end of the taskbar, and then choose
Run from the menu that pops up.2. In the dialog box that appears, type d:\setup.exe. (If your CD-ROM
drive is not drive d, fill in the appropriate letter in place of d.) Thisbrings up the CD interface described in the preceding set of steps.
WHAT’S ON THE CD?The following sections provide a summary of the software and other materials you’ll find on the CD.
ContentThere are more than one hour and three minutes of instructions on fourpresentations.Along with the Pivot Point Calculator, this CD covers:••••••
Introduction to pivot points (44:23).Tutorial on how to use the Pivot Point Calculator (9:38).Examples on how to use confluence of pivot points (11:13).How to use a pivot point trading system (7:46).Pivot Point Calculator.ReadMe.
In order to activate the Pivot Point Calculator, users need Internet access. Any Internet speed will work. Users do not need high-speed DSL.
ApplicationsThe following applications are on the CD:Adobe Reader—Adobe reader is a freeware application for viewing files inthe Adobe Portable Document format.
Customer CareIf you have trouble with the CD-ROM, please call the Wiley Product Technical Support phone number at (800) 762-2974. Outside the United States,call 1(317) 572-3994. You can also contact Wiley Product Techical Support
About the CD-ROM
337
at http://support.wiley.com. John Wiley & Sons will provide technicalsupport only for installation and other general quality-control items. Fortechnical support on the applications themselves, consult the program’svendor or author.To place additional orders or to request information about other Wileyproducts, please call (877) 762-2974.
Author’s DisclaimerStocks, futuress, forex, and options trading involves substantial risk. Thevaluation of futures, forex, and options may fluctuate; and as a result,clients may lose more than their original investment. In no event should thecontent of this presentation be construed as an expressed or an impliedpromise, guarantee, or implication by John Person or John Wiley & Sons,Inc., that you will profit or that losses can or will be limited in any mannerwhatsoever. Past results are no indication of future performance. Information provided in this presentation is intended solely for informative, educational purposes and is obtained from sources believed to be reliable.Information is in no way guaranteed. No guarantee of any kind is implied orpossible where projections of future conditions are attempted. There is arisk of loss in trading stock, futures, forex, and options. One’s financialsuitability should be considered carefully before placing any trades.
IndexAbandon baby formation, 197Acceptanceof price, 68of support and resistance level, 183Active day trading, 203Active management, 40Active systems trader, 281Active Trade Magazine, 155–156Adjustable rate mortgages (ARMs), 3Advanced Micro Devices (AMD),43–44, 46Advancing soldiers formation, 193Adverse markets, 36Airline stocks, 58Alcoa, 142, 227Alpha, 5Alternative energy sources, 55Aluminum, 52American Eagle Outfitters, 243American Jobs Creation Act, 61American Stock Exchange (AMEX), 42Appel, Gerald, 103, 283Apple Computer, Inc., 21–25, 28, 46,81–83, 113–114Applied Materials, 44Archer Daniels Midland, 50Ascending triangles, 81Asian markets, 74, 129. See alsoChina; JapanAsk, 64, 207Asset(s)allocation, 48classes, 16Auction analogy, 78Australian dollar, 72, 74Back-testing, 91, 98, 121, 204, 279, 290,294, 301, 306
Balance of positions, 274, 276Bank for International Settlements, 62,65Bank of England, 61Bank of Japan, 72Bankruptcy, 19Bank settlement close (NY), 130, 290Bar charts, 81, 187Basis, 145, 207Basket of diversified stocks, 34, 40Bayes, Thomas, 210Bayesian theory, 210–211Bayes rule, 211Bear flags, 232, 236Bearish conditions, see Bearishmarket; Bearish trendsdark cloud cover, 193divergence pattern, 100–102engulfing pattern, 199falling three methods, 200harami doji, 197harami doji crosses, 192, 230haramis, 184, 197top patterns, 197Bearish market, 9, 80, 82, 89–90, 95,118–119, 126, 133, 150, 155, 159,169, 190, 192, 227, 254, 266Bearish trends, 79, 88, 166, 173–174,177, 184Beating the street, 160–161Belt hold, 293Berkshire Hathaway, Inc., 61–62Bernstein, Peter L., 12Best Buy, 25–27, 46Bid, 64, 207Bid-and-ask spread, 18, 34Biofuel, 55Biotechnology sector, 36
339
340Black box trading system, 7, 122Black candle, 196Blow-off top formations, 68, 190, 230Bond investments, 12, 152Bond market, 4, 73, 136, 205, 220Bond yields, 2, 51Bottom(s)exhaustion, 68, 190, 247false, 100, 106, 119hammer formations, 251implications of, 99, 100, 105, 136,138, 142, 146, 153, 187, 191, 193,196, 201, 205, 227, 241, 247, 254moving averages and, 171Breakdown, 86, 203Breakeven, 232, 273Breakouts, 81, 164, 166, 169, 202, 231British pound (GBP), 162, 175, 177,191, 209–210, 216, 264, 288Broadcom, 44Brokerage account, 17. See alsoTrading accountBroker/brokerage firmcommissions, 34, 66functions of, 24, 36relationship with, 18trading procedures, 8Buffett, Warren, 28–31, 61–62Bull call spread, 23Bullish conditionschart patterns, 81convergence, 100, 117–119, 185,250–251engulfing pattern, 185, 198–199harami doji, 198harami doji crosses, 192implications of 162piercing pattern, 185, 193, 198reversal candle pattern, 94, 185rising three methods, 200–201Bullish market, 9, 80, 82, 86, 89–90,126, 136, 143, 159, 169, 189, 192,223, 254, 263Bullish setup, 185Bullish trends, 81, 84, 88, 173Bull markets, 77, 95, 300Bunge Limited, 50–51
INDEX
Business cycles, 21Business models, 21Business plan, 7Buy-and-hold investments, 8, 18, 28Buy low, sell high, 217Buy signals, 46, 48, 88, 90–91, 103, 103,138, 142, 144, 178, 185, 216, 222,226, 230, 247, 250, 288Call options, 16, 42, 46Canadian dollar, 47, 64, 72, 209–211Candle formationsbearish engulfing pattern, 185, 199bearish falling three methods, 200bearish harami doji, 197bullish engulfing pattern, 199bullish harami doji, 198bullish piercing pattern, 198bullish rising three methods, 201dark cloud cover, 198doji, 185, 191–193, 215, 233evening star, 140, 192, 197, 243hammer pattern, 193–195harami, 197,implications of, 14, 55, 86morning star, 184, 192, 196–197, 215,233shooting star, 195tweezer bottoms, 201tweezer tops, 201Candlestick chartingadvantages of, 187characteristics of, 8, 13, 44, 46, 60,81, 97, 183, 188–190formations, see Candle formationstrading trigger strategy, 203–211Capital gains, 34Capital preservation, 32Capitulation, 246Carry-trade strategy, 73Cash flow, positive, 5, 28Cash market, 58Catch the falling knife, 229Caterpillar, 35–37Central banks, 2, 65, 72–73Chart formations, traditional, 14Charting software packages, 4, 8, 160
Index
Chart pattern analysis, 65Chart-reading skills, 5, 14Chase, Henry Wheeler, 123Chicago Board of Trade (CBOT), 10,29–31, 42, 47, 96, 130, 148–149,152, 164–165, 171, 177, 185, 205,219, 225, 220, 236, 239, 247, 288,291Chicago Mercantile Exchange (CME),3, 29–32, 66, 181, 290–291China, 58Chopstick pattern, 201Circuit City, 25–27, 46Classic indicators, 159Climaxing market condition, 69Close, candle formations, 189–190Close of business, 129–130Close of market, see Closing pricecandle formations, 189–190significance of, 14–15, 37, 78, 80, 82,84, 90, 103, 126Close-to-the-money options, 23, 46Closing price, 93, 159–161, 166,168–169, 174,1 76, 185, 194Closing time period, 90–91Cocoa, 52Coefficient of variation, 260Coffee, 52Collar strategy, 23“Combining Cycles and Pivot Points toPredict Market Values,”179–180Comcast Corporation, 252Commercial forex trades, 72Commissions, 18, 34, 38, 63, 65–66,292Commodities/commodity market, seespecific types of commoditiescharacteristics of, 1, 3–4, 12, 14, 16,47historical prices, 52–53influential factors, 53–54resources, 52Commodity channel index (CCI), 122,220Commodity ETFs, 38–39Commodity Exchange Act, 42
341Commodity Futures TradingCommission (CFTC)Commitment of Traders (COT)Report, 58, 70–71, 127, 147–148,308functions of, 71insider trading, 70–72Modernization Act, 64Commodity Research Bureau, seeReuters/Jeffries CRB(Commodity Research Bureau)Common sense, 130Competition, 21, 63Complete Guide to Technical TradingTactics: How to Profit UsingPivot Points, Candlesticks, &Other Indicators, The (Person),1, 13, 47, 123, 185, 279Conditional change, 262–265, 277,275Conditional Optimized MovingAverage System™ (COMAS),168–171, 173–174, 216, 222, 231Conditional stop, 10Confluencecharacteristics of, 122, 226importance of, 141–145time and price, 141–143at tops, 145–157volatility, 143–145Congestion phase, 80, 164, 217Consolidation/consolidation phase, 80,82, 85–87, 94, 139, 162, 164–166,175, 217 223, 237, 239, 243, 266,272–273, 300Consumer Price Index, 52Consumer spending, 21Continuation patterns, 193Contract size, 250Contrarian approach, 77Conundrum, 2, 51Convergence, 100, 117–118, 141, 183,185, 247, 252, 308Copper, 52Corn, 52, 224Corporation, formation of, 7Cotton, 52
342Countertrend trades, 88, 122, 193Cross, 18. See also specific types ofcross formationsCrossover, see Pivot point analysisCrude oil, 2–3, 33, 40, 47–48, 52Cup formation, 166Currency ETFs, 37–38Currency traders, 73Current value, 183Cyclical businesses, 19Cyclical sector, 36%D, 95–99, 101–102, 218, 229, 252, 280,309Daily charts, 183, 188, 242Daily Dow Report, 312Daily pivot points, 141, 145, 150–151,153–156Daimler Chrysler, 61Dark candles, 137, 174, 190, 198–199,234Dark cloud cover, 184, 193, 198Day traders/day trading strategies,9–10, 12, 15–17, 29, 75, 77, 94,97, 121, 139, 150, 177–178,182–183, 185, 217, 220, 231, 240,248, 255, 272, 281, 288–290Dealer, forex markets, 64Decision-making process, 13, 15,50–51, 70, 75, 82, 270–271, 308Declining market, 60–61, 68, 97, 103,120, 234, 254, 266Declining trend, 163Deep-discount commission brokeragefirms, 18Defcon program/system, 291–292, 295,301, 311Dell Inc., 24–25, 28, 46, 84, 178–179Demark, Tom, 214Depreciation, 162Derivatives, 13, 38, 65Descending triangle, 273Deutsche mark, 182Deutscher Aktien Index (DAX), 177Diamonds, 149, 285Divergence patterns, 101–102, 183
INDEX
Diversification, 9, 11–13, 15, 32, 34, 48,286Doji pattern, see High close doji(HCD); Low close doji (LCD)characteristics of, 136, 150, 184–185,191–193, 197–198, 204–205,210–211, 285evening star, 140, 192, 243harami, 185harami crosses, 192, 230importance of, 214–215long-legged, 192morning star, 184, 192, 197, 215, 233moving averages, 171rickshaw, 142, 192top, 145Dot-com bubble, 19, 31Double bottoms, 203Dow futures, 149Dow Jones Industrial Average, 16, 34,137, 155, 171Downside correction, 95Downtrends/downtrending market, 34,69, 79, 84, 88, 90, 93, 95, 101,109, 141, 159, 162, 164, 167, 174,177, 190–191, 194, 236, 239, 255,262, 300Dragonfly formation, 191–192Drawdowns, 281–282, 293, 303Earnings forecasts, 24Earnings per share, 42e-CBOT, 291Economic conditions, influentialfactors, 73, 153Economic developments, 61Economic recovery, 3Economic reports, market impact of,75Efficient market theory, 5Electronic day session, close of, 103e-mini Standard & Poor’s (S&P)futures, 47, 86, 105, 108, 130,138, 165, 169, 171, 178, 205–206,237, 240, 248, 248, 258, 276, 288,292, 313
343
Index
Emotional control, 6–7, 10, 32, 63, 85,122, 175–176, 178, 183, 187, 282,294End-of-day chart, 224End-of-day trading, 262Energy futures contracts, 58Energy sector, 2, 36, 52, 57Enron, 19Entry point(s), see Buy signalsguidelines for, 270–273importance of, 6, 58, 127, 154, 175,177, 26