A Complete Guide to the Futures Market

Technical Analysis, Trading Systems, Fundamental Analysis, Options, Spreads, and Trading Principles

Jack D. Schwager, Mark Etzkorn

• Éditeur: Wiley
• Année: 2017
• ISBN:
  9781118859544
• Édition: 2
• Sujet: Business
• Sous-sujet: Investments & Securities

The essential futures market reference guide

A Complete Guide to the Futures Market is the comprehensive resource for futures traders and analysts. Spanning everything from technical analysis, trading systems, and fundamental analysis to options, spreads, and practical trading principles, A Complete Guide is required reading for any trader or investor who wants to successfully navigate the futures market.

Clear, concise, and to the point, this fully revised and updated second edition provides a solid foundation in futures market basics, details key analysis and forecasting techniques, explores advanced trading concepts, and illustrates the practical application of these ideas with hundreds of market examples. A Complete Guide to the Futures Market:

• Details different trading and analytical approaches, including chart analysis, technical indicators and trading systems, regression analysis, and fundamental market models.
• Separates misleading market myths from reality.
• Gives step-by-step instruction for developing and testing original trading ideas and systems.
• Illustrates a wide range of option strategies, and explains the trading implications of each.
• Details a wealth of practical trading guidelines and market insights from a recognized trading authority.

Trading futures without a firm grasp of this market's realities and nuances is a recipe for losing money. A Complete Guide to the Futures Market offers serious traders and investors the tools to keep themselves on the right side of the ledger.

PART I

Preliminaries

CHAPTER 1

For Beginners Only

If a little knowledge is dangerous, where is the man who has so much as to be out of danger?

—Thomas Henry Huxley

■ Purpose of This Chapter

The focus of this book is on analysis and trading. Although these subjects are explored in far greater depth than in most general commodity texts, the presentation in the following chapters does not assume any prior knowledge except for a familiarity with the basic concepts of futures markets. This chapter is intended to provide a sketch of the background information necessary to make this book accessible to the novice reader. The title of this chapter should be taken literally. Traders who are already familiar with futures markets should proceed directly to Chapter 2.

The introductory discussion provided by this chapter is deliberately brief and does not purport to cover all background subjects. Topics such as the history of exchanges, choosing a broker, and operation of the clearinghouse are not covered because a familiarity with these subjects is unnecessary for the analysis and trading of futures markets. Readers who desire a more detailed discussion of commodity market basics can refer to a wide range of introductory commodity texts.

■ The Nature of Futures Markets

A futures contract is a commitment to deliver or receive a standardized quantity and quality of a commodity or financial instrument at a specified future date. The price associated with this commitment is the trade entry level.

The essence of a futures market is in its name: Trading involves a commodity or financial instrument for a future delivery date, as opposed to the present time. Thus, if a cotton farmer wished to make a current sale, he would sell his crop in the local cash market. However, if the same farmer wanted to lock in a price for an anticipated future sale (e.g., the marketing of a still unharvested crop), he would have two options: He could locate an interested buyer and negotiate a contract specifying the price and other details (quantity, quality, delivery time, location, etc.). Alternatively, he could sell futures. Some of the major advantages of the latter approach are the following:

1. The futures contract is standardized; hence, the farmer does not have to find a specific buyer.
2. The transaction can be executed virtually instantaneously online.
3. The cost of the trade (commissions) is minimal compared with the cost of an individualized forward contract.
4. The farmer can offset his sale at any time between the original transaction date and the final trading day of the contract. The reasons this may be desirable are discussed later in this chapter.
5. The futures contract is guaranteed by the exchange.

Until the early 1970s, futures markets were restricted to commodities (e.g., wheat, sugar, copper, cattle). Since that time, the futures area has expanded to incorporate additional market sectors, most significantly stock indexes, interest rates, and currencies (foreign exchange). The same basic principles apply to these financial futures markets. Trading quotes represent prices for a future expiration date rather than current market prices. For example, the quote for December 10-year T-note futures implies a specific price for a $100,000, 10-year U.S. Treasury note to be delivered in December. Financial markets have experienced spectacular growth since their introduction, and today trading volume in these contracts dwarfs that in commodities. Nevertheless, futures markets are still commonly, albeit erroneously, referred to as commodity markets, and these terms are synonymous.

■ Delivery

Shorts who maintain their positions in deliverable futures contracts after the last trading day are obligated to deliver the given commodity or financial instrument against the contract. Similarly, longs who maintain their positions after the last trading day must accept delivery. In the commodity markets, the number of open long contracts is always equal to the number of open short contracts (see section Volume and Open Interest). Most traders have no intention of making or accepting delivery, and hence will offset their positions before the last trading day. (The long offsets his position by entering a sell order, the short by entering a buy order.) It has been estimated that fewer than 3 percent of open contracts actually result in delivery. Some futures contracts (e.g., stock indexes, eurodollar) use a cash settlement process whereby outstanding long and short positions are offset at the prevailing price level at expiration instead of being physically delivered.

■ Contract Specifications

Futures contracts are traded for a wide variety of markets on a number of exchanges both in the United States and abroad. The specifications for these contracts, especially details such as daily price limits, trading hours, and ticker symbols, can change over time; exchange web sites should be consulted for up-to-date information. Table 1.1 provides the following representative trading details for six futures markets (E-mini S&P 500, 10-year T-note, euro, Brent crude oil, corn, and gold):

1. Exchange. Note that some markets are traded on more than one exchange. In some cases, different contracts for the same commodity (or financial instrument) may even be traded on the same exchange.
2. Ticker symbol. The quote symbol is the letter code that identifies each market (e.g., ES for the E-mini S&...