inverted markets, 138and price premiums, 133–135and seasonal price patterns,136short, 130soybean scale example of,136–138table for, 132–135traditional scale trading vs.,130–131and worse-case scenarios, 132Royal Exchange, London, 4Russia, 50–51, 79
SSantayana, George, 163Scale spreadsheets, 157–160Scale trade manager software,124Scale trader’s journal, 160–163,194–195Scale trading, 119–128broker selection for, 122–124and competition, 81–82contract months in, 126–127creating scales for, 124–125diversification in, 125–126
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Scale trading (Cont.):and electronic brokerageservices, 128exchanges for, 127–128expected returns from, 180hedged (See Hedged scaletrading)month for beginning a scale,127and natural disasters, 80planning scales for, 121positions on the scale, 122and premium, 126–127price charts for, 119–121selection of commodities for(See Scalable commodities)from short side, 199starting a business in (SeeScale trading business,starting a)success in (See Success inscale trading)theory of, 56and time factors, 82–83traditional (See Traditionalscale trading)and volatility, 121Scale trading business, startinga, 141–163budget creation, 146–147building scales for, 147–150,152–156business plan for, 141commodities charts for, 141,144, 160and margins, 147–151and periodic assessments,162–163
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Scale trading business,starting a (Cont.):profit-loss projections for,146–147research resources for,142–143, 145scale spreadsheets for,157–160scale trader’s journal for,160–163and trading zones, 156Scalable commodities, 73–92.(See also specific commodities)and accuracy of reporteddata, 79–80and competition, 81–82and elasticity, 90–91fundamental analysis of,83–84and global production/use,90and inflation, 85and information supply, 90inventory management perspective on, 75–76and liquidity, 85, 92and perfect competition, 89and political decisions,78–79, 91and supply and demand,73–77technical analysis of, 84–88time factors affecting, 82–83uncontrollable factors in,80–81, 91–92Scales:abandoning, 126adjusting, 125, 167–168bear trap, 124
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Scales (Cont.):building, 147–150, 152–156creation of, 62–66, 124–125ideal, 125month for beginning, 127planning, 121rational, 125time spent in, 121Scales within scales, 167Scalpers, 9Schwager, Jack, 9, 144Seasonal patterns, 77, 82–83,122, 136, 138, 176Seasonal volatility, 35SEC (See Securities andExchange Commission)Second scales (for red zones),167–168Securities:futures vs., 182organizations regulating,213–214Securities and ExchangeCommission (SEC), 184,187, 214Self-regulating organizations(SROs), 187Sell prices, calculating, 131–132Sellers, 24, 27–28Selling:futures contracts, 8as intellectual, 30right/obligation to, 21Semielasticity, 90–91Semiprofessional traders, 39–40Short side:scale trading from, 199scaling from, 199Shorts, 7, 21, 27
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Silver, 114contract specifications for,155, 206–207Hunt family’s attempt tocorner, 191–192rollover example for, 132–135sample scale for, 154–155Software:for price charts, 119–121for scales, 124, 147Soybean(s), 92–94, 97–100contract specifications for,204–205meal/oil, 101–102Sparks Companies, Inc., 97Speculation, 11Speculators, 6, 166amateur, 10in futures markets, 9–10professional, 9use of deltas by, 43Spreading commodities, 40–42Spreadsheets:electronic, 147, 160working/enhanced, 157–160SROs (self-regulating organizations), 187Stair-stepping price movement,57, 59Standard deviation (SeeVolatility)Stop orders, 19, 44Stops, mental, 44Straddles, 41–42Strangles, 41–42Strategies (systems):of amateurs, 37–39of conservative traders, 70–71defensive, 66
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Strategies (systems) (Cont.):of “just-in-case” traders,67–70and natural disasters, 80of professionals, 40–42of semiprofessionals, 39–40for technical analysis, 52–53for trading in futures markets,12–18for traditional scale trading,54–55of ultraconservative traders,71–72Strike price, 23–25, 31Strong hands, 10, 175–176Success in scale trading,191–201and business plan, 194–195and certainty/uncertainty,199, 200and clarity, 196discretionary trading,197–198and greed, 192–194maximization of oscillatingprofits, 195–196and patience, 200and personality, 195,198–200and scaling from short side,199and supply/demandequation, 196systematic trading, 197–198and trader’s journal,194–195underfinanced trading,199–200Sugar, 105–106, 204–205
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Supply and demand, 73–84(See also specific commodities)and accuracy of reports,79–80basic laws of, 73–75and competition, 81–82corrections in, 51and elasticity/inelasticity,77–78and farm programs/subsidies, 78and fashion, 83and inventory management,75–76and national culture, 78and natural disasters, 80and news, 80–81and political intervention,78–79and scalable commodities,73–77and scale trading theory, 56seasonal patterns in, 77success and knowledge of, 196and success in scale trading,196time factors in, 82–83and time in the scale, 121of underlying entities, 2–3unpredictable factors in, 80and USDA surveys, 79–80USDA table for grains, 94–96and weather, 80Support, price, 170–172Surveys, USDA, 79–80Swing traders, 179Synthetics, 42System (for futures trading), 10,12–18
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Systematic traders/trading,197–198
TTechnical analysis, 14–18,165–177broker’s familiarity with, 123and daily volume, 169–170of futures markets, 14–18and inflation, 85and liquidity, 85major problems with, 53open interest, 172–174price charts for, 84–85and price congestion,170–172reason for using, 166and red zones (See Redzones)research resources for,174–176of scalable commodities,84–88seasonal price trends, 176in traditional scale trading,49–50, 52–53and volatility, 168–169volume, 172–174why it works, 166Terms and conditions, 5Thin markets, 101Thinly traded markets, 168–169Thinly traded options, 44Time:on bar charts, 17, 18as concern in scale trading,73, 82–83Time discretion, 186Time in the scale, 121
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Time limit orders, 19Time spreads, 41Time value of options, 30–31Timing:for entering scales, 153technical analysis for, 14To-arrive contracts, 4Traders:categories of, 179–180conservative, 70–71discretionary, 197–198“just-in-case,” 67–70with strong hands, 10,175–176systematic, 197–198ultraconservative, 71–72Trades, possible outcomes to,14–15Trading:art of, 21in futures, 6–8online, 186–187underfinanced, 199–200Trading zones, 156Traditional scale trading, 47–59,130–131economic laws in, 56entering/exiting market in,56–58fundamental analysis in,49–52logic behind, 47–48margins in, 57oscillating prices/profits in,57and preservation of capital, 54rollovers vs., 130–131stair-stepping price movement in, 57, 59
249
Traditional scale trading (Cont.):systems for, 54technical analysis in, 49–50,52–53theory of, 56–58Trend lines, 87, 156Trends:market, 16–17price, 3, 16, 6420-day moving average, 64,86, 87
UUltraconservative (UC) traders,71–72Uncertainty:and hedged scale trading, 64,65and success in scale trading,199, 200Uncontrollable/unpredictablefactors, 80–81, 91–92, 98Underfinanced trading,199–200United States Department ofAgriculture (USDA), 13,49, 142, 144, 209and farm programs/subsidies, 78information supplied by, 94Supply-demand grain tables,95–96surveys, 79–80weather information from, 98United States Postal Service, 189Unleaded gasoline, 206–207USDA (See United StatesDepartment ofAgriculture)
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VValue:current market, 23–24fair, 36intrinsic, 24, 25of securities/indexes vs. putoptions, 2time, 30–31Vega, 43Volatility, 99. (See also Redzones)of coffee, 104in last week of deliverymonth, 26level of, 64, 65measurements of, 32–34, 62,99noise index for calculating,142, 143in options-on-futures trading, 32–35and price, 66and scale trading, 121and success in scale trading,193and technical analysis,168–169types of, 35and volume, 157Volatility curve, 169
Volatility spreads, 41Volume, 172–174 (See also Redzones)on bar charts, 18daily, 169–170, 172–174and technical analysis,172–174and volatility, 157
WW-9 form, 185WASDE (World Supply andDemand) Report, 94Weather, 80, 91and coffee, 104and FCOJ, 106and grain trading, 98and sugar, 106and supply and demand, 80Web sites, 181, 210–211for cost analysis, 134for price charts, 119, 120Wheat, 92–94, 97–100, 204–205Whipsawing, 11Wizards, 9World Supply and Demand(WASDE) Report, 94
ZZen trading, 54
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ABOUT THE AUTHORThomas McCafferty has been involved in the futures business for nearly three decades. Aregistered stockbroker and securities options principal, he is the former branch office manager at Securities Corporation of Iowa and is currently chief operations officer at MarketWise Securities, Inc., of Broomfield, Colorado. McCafferty is the author of several books,including All About Futures, All About Options, All About Commodities, and Winningwith Managed Futures.
Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use.
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