A Complete Guide to Technical Trading Tactics
eBook - ePub

A Complete Guide to Technical Trading Tactics

How to Profit Using Pivot Points, Candlesticks & Other Indicators

John L. Person

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eBook - ePub

A Complete Guide to Technical Trading Tactics

How to Profit Using Pivot Points, Candlesticks & Other Indicators

John L. Person

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About This Book

A thorough trading guide from a professional trader
The Complete Guide to Technical Trading Tactics can help the new individual investor understand the mechanics of the markets. Filled with in-depth insights and practical advice, this book details what it takes to trade and shows readers how they can broaden their horizons by investing in the futures and options markets. The Complete Guide to Technical Trading Tactics outlines a variety of proven methodologies-pivot points, candlesticks, and other top indicators-so readers may use those that work best for them as well as make their own trading decisions without a second thought. Author John Person also shares his insights on a variety of trading technologies that will allow readers to gain a competitive edge in the market.
John L. Person (Palm Beach, FL) publishes The Bottom-Line Financial and Futures Newsletter, a weekly commodity publication that incorporates fundamental new developments as well as technical analysis using his trading system.

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Information

Publisher
Wiley
Year
2012
ISBN
9781118429013
Subtopic
Finance
Edition
1

CHAPTER 1

Introduction to Futures and Options

Understanding the Mechanics

Success is turning knowledge into positive action.
Thinking is easy, acting is difficult, and to put one’s thoughts into action is the most difficult thing in the world.
—Johann Wolfgang von Goethe
Goethe could have been referring to paper trading versus the act of actually trading when he wrote the phrase above. Trading is exactly that: putting your thoughts or convictions about a price move into action by entering an order and placing money at risk.
Investing is a totally different ball game. This book is about trading. The purpose of trading is to turn over or buy and sell (sell and buy) to build cash in an account by capitalizing on changes in price. It is not about acquiring and holding assets or property.
Futures trading is becoming more attractive than ever before as investors transfer their knowledge and trading skills from the stock market boom of the late 1990s to more active markets where the idea of creating wealth is still alive. As the equity markets became consumed by the bear market mentality liquidation phase, investors with knowledge of technical analysis and computer skills flocked to open futures accounts to trade e-mini S&P 500 and e-mini Nasdaq 100 index futures.
Stock market firms and brokers have developed futures divisions, and day-trading education experts have crawled out of the woodwork to teach investors the art of day trading those products. Some of the numerous quality instructors come with a very high tuition cost; others are not so expensive.
Most likely, learning about trading at a reasonable price is why you are reading this book. However, reading this book alone will not guarantee that you will succeed in trading. You need to read this book, practice its principles, and continue your trading education, realizing that the biggest obstacle in trading is what is between your left and right ears. I believe the techniques in this book are excellent strategies, and I hope you will apply and benefit from them. Teaching someone to become a successful trader and letting them experience the power of financial rewards is a satisfying and rewarding pursuit.
As investors look for markets beyond stocks or mutual funds in which to put their money, they will find a whole new world out there with different products to trade, among them futures. You may be among those investors who are afraid of and concerned about trading futures because of what you heard about them in the past. There are good reasons for being nervous about treading into any new market. But consider the scandals that have plagued Wall Street in the post-bubble era and may continue for some time. As history shows, there have been countless scandals on Wall Street in the past, and there almost certainly will be more in the future. So-called traditional investing in stocks is not immune to risk and has its own set of problems.
The question is: Will confidence in America’s corporate leadership return sooner rather than later? Stock ownership is at the highest level per capita in America’s history. More investors and private traders participate in the markets than ever before. In addition to stocks and mutual funds, there are a host of stock-related derivative products—exchange-traded funds such as QQQs, options such as the OEX, and many, many others including a relatively new and spectacular market development called single stock futures. The price direction of equities and all of these derivative instruments boils down to what will happen to the underlying forces of earnings and growth.
Here is a brief story that may shed light on Americans’ changing viewpoint about investing. I was giving a seminar on the futures markets to an investment club. One older gentleman said his money was safe in the bank, and he wouldn’t give his money to the stock market again.
I asked, “Why do you feel that way?”
He responded, “They are all crooks!”
“Well, if you think like that, why are you at a futures seminar?” I asked.
“I always thought they were risky, but now I want to learn for myself,” he replied.
“Futures trading is risky,” I agreed, “but what gave you the impression not to open a futures account before?”
“My stock broker told me not to trade commodities, that I would lose my shirt,” he said. “So I kept buying the stocks he recommended, and, instead, I lost my shirt with him.”
Not a happy story, but the amazing development is that the gentleman is getting back on the horse after falling off, this time getting his own education and finding out for himself whether futures are for him.
This book is designed for people like him and for the more experienced technical trader as well. If you had a similar experience, then keep reading and studying and you will continue to increase your knowledge and competence. With that, you will gain confidence. The more knowledge and information you have about a subject, the better you will become in dealing with it. As we all know, knowledge is power.
Every investor should know that trading is like riding an elevator. You get on if you want to go up and then get out once you are where you want to be. If you want to go up but then realize that you are going down instead, bail out. Get off the elevator and get back on another ride going up. Risk management and turnover are the keys to successful trading.

TRADING MENTALITY

Most new investors are not familiar with trading the short side of the market. I have listened to many novices say that they have a hard time comprehending how to sell something they do not even own. I always tell them that even if they buy a futures contract to go long, they are not going to own anything (except in rare instances where they may take actual delivery of some physical commodities).
All futures traders are doing is speculating on the direction of prices on a given product during a given time period. If they are right, they get rewarded; if they are wrong, of course, they get penalized. Remember the elevator analogy. If a building has 100 floors and you are on the 50th floor, you can play a guessing game to see if the elevator goes up or down and by how many floors. You can take the ride, but you don’t have to own the elevator to do so.
The principle of trading is a very simple concept although we, as humans, tend to make it quite complicated, especially those who have a hard time comprehending selling short. Trading is just a matter of interested parties coming together and speculating whether the price of a specific commodity is going to go up or down. It is that simple.
Let’s say Bill believes the price of commodity XYZ is going up, so he buys. A second trader, Pete, believes the price is going down, so he sells short. One could win, one could lose. Or, believe it or not, both Bill and Pete can be right and make money during the same day with their opposite positions. Similarly, both could also lose within the same trading day doing the exact opposite trade at the same time. It happens all the time. Volatility is the reason. Get to know that term as well as whipsaw, choppy, erratic market behavior, and other terms used in connection with volatility.
The market’s behavior reflects the emotional condition of those who are doing the trading. The market is the by-product of those who use it. Sometimes it seems like a jungle. It can be financially rewarding and exciting like discovering a wealth of mineral deposits in a hidden cavern behind thick brush. It can also be like enjoying the beauty and splendor of a sunset off the coast of Florida with the sun’s light descending on the low clouds as palm trees sway in the breeze. But it can also provide some of the scariest and most financially dangerous adventures you will ever experience.
Trading will probably test your emotional strength and psyche. It will be the ultimate financial, emotional, and intellectual challenge you will ever encounter. Fear, doubt, complacency, greed, anxiety, excitement, false pride—all can interfere with rational and intellectual thoughts. It is those feelings that create the jungle, and you may need help to overcome that jungle of emotion. Conquer those feelings and you may find the holy grail of trading: a confident winning attitude.
Reading this book will give you the knowledge necessary to improve your life as a trader. You will be taught to take the emotion out of trading and to develop a method or trading plan. Remember, “Those who fail to plan, plan to fail.” I have devoted a chapter to the mental aspect of trading (Chapter 11) because I believe about 80 percent of successful trading is based on emotional makeup. The way to increase your confidence and competence levels is through knowledge, and that comes from learning solutions to problems and then applying or executing what you learn.

HOLDING PENALTY

As you learn different trading styles, remember this key concept: Futures are a trading vehicle and not—I repeat, not—a buy-and-hold, long-term investment platform. Do not try to dictate or get married to an idea about the direction you think the market should go. This approach can lead to financial donations to other traders’ wealth, to an increase in your knowledge about your brokerage firm’s money wire transaction process, and, worse yet, to getting wiped out.
You need to work at this business. You need to manage and maintain your positions and monitor price action. Game plans need to be established, and you will need to be flexible and quick to act. Access and communication to stay in touch with the market is important when you are trading.
Futures trading should be used to make money on a price movement. It should not be a personal vendetta, trying to prove that you are right in your opinion of what the market should do. That outlook is why there are all kinds of clichĂ©s about taking profits. For instance, “A profit is a profit, no matter how small.” That is a great line, but let’s define “small profit.” Coming to this business to risk thousands of dollars to make a hundred dollars or so isn’t the way this trading environment should be used.
Another old saying describes someone who takes small profits and lets big losers ride: “Eating like a bird and crapping like an elephant.” That is the essence of a habit you don’t want. If this is a syndrome that you fall into, Chapter 11 offers exercises to help you work through it. If you catch yourself getting into that habit, stop trading. Try not to get used to taking small profits constantly and letting losses get large before taking them. You need to develop good discipline and strong emotional traits. Otherwise, fear of losing will hinder your performance.
Think about this: If trading were easy and such a sure thing, why would you have to sign all of those disclaimers about how dangerous it is when you fill out an account application at a brokerage firm?
So far I have mentioned buying, selling, winning, losing, and human emotions, and I have not yet covered a single aspect of technical analysis. This approach to the subject reflects my belief about what I consider the most important aspect of trading: your mental and emotional capacity.

GETTING TECHNICAL

Technical analysis is the study of a market’s price data, which is created by the emotions of the participants. Price reflects the current or anticipated value of a market from a supply and demand perspective. Price is the true and absolute reflection of value, as perceived by the various market participants at a particular point in time.
There are a number of different forms of analysis. This book will go into further detail on most aspects of technical analysis, but my focus is on market reversals incorporating pivot point analysis with other methods to nail down time and price predictions.
All traders have access to four common denominators: open, high, low, and closing price. How you analyze, interpret, and act on the information available is what gives you a trading style that differentiates you from other traders. Successful traders interpret correctly and act swiftly. There are five business days in every week and usually four weeks in every month. One day within a month will usually mark a price high, another day will generally mark a low, and the market will close somewhere between those points. Those facts define the monthly range. The successful trader does not consistently make a habit of buying the high of the range or selling the low of the range.
But before jumping ahead of ourselves into subjects covered later in the book, we need to review what the futures markets are all about. Seasoned traders may be able to skip over the next sections, but those new to futures should read them carefully because they contain important concepts and terminology that make futures different from most other markets.

GETTING INTO FUTURES

For futures traders, the choice of products varies from the traditional to the exciting new trading vehicles now available. Everyone can relate to many of these markets that you use every day, from energy products such as crude oil or natural gas to agricultural markets such as meats, grains, and the so-called softs (coffee, sugar, cocoa). Prices are dictated by supply and demand functions that often are affected by weather.
In addition to supply/demand influences, futures markets may provide a safe-haven security function. Precious metals such as gold may start to increase in price as investors on a global scale believe it is necessary to hold on to hard assets instead of paper assets in times of political tension or because they fear potential inflation resulting from the massive liquidity pumped into the global economy from 2001 through 2003. Financial instruments such as Treasury notes and bonds and currencies are also popular trading vehicles.
In short, diversified products in all of these areas are available to futures traders and provide advantages in liquidity and leverage. Many of these markets also offer direct electronic access to traders. As long as there are products subject to supply/demand and price fluctuations that carry an element of risk, there will be a role for futures in the business world.

THE FUTURES INSTRUMENT

Many people, including traders, refer to commodities and futures as one and the same thing. To clarify that point first, the term commodities means an actual physical product such as corn, wheat, soybeans, cattle, gold, coffee, crude oil, cotton, and the like. The term futures refers to the instrument or the contract that is actually traded on these underlying products. Futures contracts have set standards for quantity, quality, financial requirements, and delivery points, if any (many futures contracts ...

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