A Complete Guide to the Futures Market E-Book

Jack D. Schwager

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Trading Series
• Sprache: Englisch
• Veröffentlichungsjahr: 2017

Seitenzahl: 1065

Beschreibung

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.

Leseprobe

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A COMPLETE GUIDE TO THE FUTURES MARKET

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

SECOND EDITION

Jack D. Schwager

Mark Etzkorn

Cover images: Stock Chart © Adam Kazmierski/iStockphoto; Abstract Background © Olga Altunina/ iStockphoto

Cover design: Wiley

Copyright © 2017 by Jack D. Schwager. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

The first edition of A Complete Guide to the Futures Market was published by John Wiley & Sons in 1984.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data:

Names: Schwager, Jack D., 1948- author.

Title: A complete guide to the futures market : fundamental analysis, technical analysis, trading, spreads and options / Jack D. Schwager.

Description: Second edition. | Hoboken, New Jersey : John Wiley & Sons, Inc., [2017] | Series: Wiley trading series | Includes index.

Identifiers: LCCN 2016034802 (print) | LCCN 2016047999 (ebook) | ISBN 9781118853757 (pbk.) | ISBN 9781118859599 (pdf) | ISBN 9781118859544 (epub)

Subjects: LCSH: Futures market. | Commodity exchanges. | Hedging (Finance)

Classification: LCC HG6046 .S39 2017 (print) | LCC HG6046 (ebook) | DDC 332.64/52-dc23

LC record available at https://lccn.loc.gov/2016034802

In memory of Stephen Chronowitz, my mentor and friend.

CONTENTS

About the Authors

Part I: Preliminaries

Chapter 1: For Beginners Only

Purpose of This Chapter

The Nature of Futures Markets

Delivery

Contract Specifications

Volume and Open Interest

Hedging

Trading

Types of Orders

Commissions and Margins

Tax Considerations

Notes

Chapter 2: The Great Fundamental versus Technical Analysis Debate

Notes

Part II: Chart Analysis and Technical Indicators

Chapter 3: Charts: Forecasting Tool or Folklore?

Notes

Chapter 4: Types of Charts

Bar Charts

Linked Contract Series: Nearest Futures versus Continuous Futures

Close-Only (“Line”) Charts

Point-and-Figure Charts

Candlestick Charts

Chapter 5: Linking Contracts for Long-Term Chart Analysis: Nearest versus Continuous Futures

The Necessity of Linked-Contract Charts

Methods of Creating Linked-Contract Charts

Nearest versus Continuous Futures in Chart Analysis

Conclusion

Notes

Chapter 6: Trends

Defining Trends by Highs and Lows

TD Lines

Internal Trend Lines

Moving Averages

Notes

Chapter 7: Trading Ranges

Trading Ranges: Trading Considerations

Trading Range Breakouts

Chapter 8: Support and Resistance

Nearest Futures or Continuous Futures?

Trading Ranges

Prior Major Highs and Lows

Concentrations of Relative Highs and Relative Lows

Trend Lines, Channels, and Internal Trend Lines

Price Envelope Bands

Chapter 9: Chart Patterns

One-Day Patterns

Continuation Patterns

Top and Bottom Formations

Notes

Chapter 10: Is Chart Analysis Still Valid?

Chapter 11: Technical Indicators

What Is an Indicator?

The Basic Indicator Calculations

Comparing Indicators

Moving Average Types

Oscillators and Trading Signals

Indicator Myths

Indicator “Types”

Conclusion

Notes

Part III: Applying Chart Analysis to Trading

Chapter 12: Midtrend Entry and Pyramiding

Chapter 13: Choosing Stop-Loss Points

Note

Chapter 14: Setting Objectives and Other Position Exit Criteria

Chart-Based Objectives

Measured Move

Rule of Seven

Support and Resistance Levels

Overbought/Oversold Indicators

DeMark Sequential

Contrary Opinion

Trailing Stops

Change of Market Opinion

Note

Chapter 15: The Most Important Rule in Chart Analysis

Failed Signals

Bull and Bear Traps

False Trend Line Breakouts

Return to Spike Extremes

Return to Wide-Ranging Day Extremes

Counter-to-Anticipated Breakout of Flag or Pennant

Opposite Direction Breakout of Flag or Pennant Following a Normal Breakout

Penetration of Top and Bottom Formations

Breaking of Curvature

The Future Reliability of Failed Signals

Conclusion

Part IV: Trading Systems and Performance Measurement

Chapter 16: Technical Trading Systems: Structure and Design:

The Benefits of a Mechanical Trading System

Three Basic Types of Systems

Trend-Following Systems

Ten Common Problems with Standard Trend-Following Systems

Possible Modifications for Basic Trend-Following Systems

Countertrend Systems

Diversification

Ten Common Problems with Trend-Following Systems Revisited

Notes

Chapter 17: Examples of Original Trading Systems

Wide-Ranging-Day System

Run-Day Breakout System

Run-Day Consecutive Count System

Conclusion

Notes

Chapter 18: Selecting the Best Futures Price Series for System Testing

Actual Contract Series

Nearest Futures

Constant-Forward (“Perpetual”) Series

Continuous (Spread-Adjusted) Price Series

Comparing the Series

Conclusion

Notes

Chapter 19: Testing and Optimizing Trading Systems

The Well-Chosen Example

Basic Concepts and Definitions

Choosing the Price Series

Choosing the Time Period

Realistic Assumptions

Optimizing Systems

The Optimization Myth

Testing versus Fitting

The Truth about Simulated Results

Multimarket System Testing

Negative Results

Ten Steps in Constructing and Testing a Trading System

Observations about Trading Systems

Notes

Chapter 20: How to Evaluate Past Performance

Why Return Alone Is Meaningless

Risk-Adjusted Return Measures

Visual Performance Evaluation

Investment Insights

Notes

Part V: Fundamental Analysis

Chapter 21: Fourteen Popular Fallacies, or What Not to Do Wrong

Five Short Scenes

The Fourteen Fallacies

Chapter 22: Supply-Demand Analysis: Basic Economic Theory:

Supply and Demand Defined

The Problem of Quantifying Demand

Understanding the Difference between Consumption and Demand

The Need to Incorporate Demand

Possible Methods for Incorporating Demand

Why Traditional Fundamental Analysis Doesn’t Work in the Gold Market

Notes

Chapter 23: Types of Fundamental Analysis

The “Old Hand” Approach

The Balance Table

The Analogous Season Method

Regression Analysis

Index Models

Chapter 24: The Role of Expectations

Using Prior-Year Estimates Rather Than Revised Statistics

Adding Expectations as a Variable in the Price-Forecasting Model

The Influence of Expectations on Actual Statistics

Defining New-Crop Expectations

Chapter 25: Incorporating Inflation

Notes

Chapter 26: Seasonal Analysis

The Concept of Seasonal Trading

Cash versus Futures Price Seasonality

The Role of Expectations

Is It Real or Is It Probability?

Calculating a Seasonal Index

Chapter 27: Analyzing Market Response

Evaluating Market Response for Repetitive Events

Chapter 28: Building a Forecasting Model: A Step-by-Step Approach:

Chapter 29: Fundamental Analysis and Trading

Fundamental versus Technical Analysis: A Greater Need for Caution

Three Major Pitfalls in Fundamental Analysis

Combining Fundamental Analysis with Technical Analysis and Money Management

Why Bother with Fundamentals?

Are Fundamentals Instantaneously Discounted?

Fitting the News to Price Moves

Fundamental Developments: Long-Term Implications versus Short-Term Response

Summary

Part VI: Futures Spreads and Options

Chapter 30: The Concepts and Mechanics of Spread Trading

Introduction

Spreads—Definition and Basic Concepts

Why Trade Spreads?

Types of Spreads

The General Rule

The General Rule—Applicability and Nonapplicability

Spread Rather Than Outright—An Example

The Limited-Risk Spread

The Spread Trade—Analysis and Approach

Pitfalls and Points of Caution

Notes

Chapter 31: Intercommodity Spreads: Determining Contract Ratios

Notes

Chapter 32: Spread Trading in Stock Index Futures

Intramarket Stock Index Spreads

Intermarket Stock Index Spreads

Chapter 33: Spread Trading in Currency Futures

Intercurrency Spreads

Intracurrency Spreads

Notes

Chapter 34: An Introduction to Options on Futures

Preliminaries

Factors That Determine Option Premiums

Theoretical versus Actual Option Premiums

Delta (the Neutral Hedge Ratio)

Notes

Chapter 35: Option Trading Strategies

Comparing Trading Strategies

Profit/Loss Profiles for Key Trading Strategies

Notes

Part VII: Practical Trading Guidelines

Chapter 36: The Planned Trading Approach

Step 1: Define a Trading Philosophy

Step 2: Choose Markets to Be Traded

Step 3: Specify Risk Control Plan

Step 4: Establish a Planning Time Routine

Step 5: Maintain a Trader’s Spreadsheet

Step 6: Maintain a Trader’s Diary

Step 7: Analyze Personal Trading

Notes

Chapter 37: Seventy-Five Trading Rules and Market Observations

Entering Trades

Exiting Trades and Risk Control (Money Management)

Other Risk-Control (Money Management) Rules

Holding and Exiting Winning Trades

Miscellaneous Principles and Rules

Market Patterns

Analysis and Review

Chapter 38: 50 Market Wizard Lessons

Notes

Appendix A: Introduction to Regression Analysis

Basics

Meaning of

Best Fit

A Practical Example

Reliability of the Regression Forecast

Notes

Appendix B: A Review of Elementary Statistics

Measures of Dispersion

Probability Distributions

Reading the Normal Curve (

Z

) Table

Populations and Samples

Estimating the Population Mean and Standard Deviation from the Sample Statistics

Sampling Distribution

Central Limit Theorem

Standard Error of the Mean

Confidence Intervals

The

t

-Test

Notes

Appendix C: Checking the Significance of the Regression Equation

The Population Regression Line

Basic Assumptions of Regression Analysis

Testing the Significance of the Regression Coefficients

Standard Error of the Regression

Confidence Interval for an Individual Forecast

Extrapolation

Coefficient of Determination (

r

2

)

Spurious (“Nonsense”) Correlations

Notes

Appendix D: The Multiple Regression Model

Basics of Multiple Regression

Applying the

t

-Test in the Multiple Regression Model

Standard Error of the Regression

Confidence Intervals for an Individual Forecast

R

2

and Corrected

R

2

F

-Test

Analyzing a Regression Run

Notes

Appendix E: Analyzing the Regression Equation

Outliers

The Residual Plot

Autocorrelation Defined

The Durbin-Watson Statistic as a Measure of Autocorrelation

The Implications of Autocorrelation

Missing Variables and Time Trend

Dummy Variables

Multicollinearity

Addendum: Advanced Topics

Heteroscedasticity

Notes

Appendix F: Practical Considerations in Applying Regression Analysis

Determining the Dependent Variable

Selecting the Independent Variables

Should the Preforecast Period Price Be Included?

Choosing the Length of the Survey Period

Sources of Forecast Error

Simulation

Stepwise Regression

Sample Step-by-Step Regression Procedure

Summary

Notes

References and Recommended Readings

Index

EULA

List of Tables

Chapter 1

Table 1.1

Table 1.2

Table 1.3

Table 1.4

Chapter 11

Table 11.1

Table 11.2

Table 11.3

Table 11.4

Table 11.5

Chapter 16

Table 16.1

Table 16.2

Chapter 17

Table 17.1

Table 17.2

Table 17.3

Chapter 18

Table 18.1

Chapter 19

Table 19.1

Table 19.2

Table 19.3

Table 19.4

Table 19.5

Table 19.6

Table 19.7

Table 19.8

Table 19.9

Table 19.10

Table 19.11

Table 19.12

Table 19.13

Table 19.14

Table 19.15

Table 19.16

Table 19.17

Table 19.18

Table 19.19

Table 19.20

Table 19.21

Table 19.22

Table 19.23

Chapter 20

Table 20.1

Table 20.2

Table 20.3

Table 20.4

Table 20.5

Chapter 21

Table 21.1

Table 21.2

Chapter 23

Table 23.1

Chapter 25

Table 25.1

Table 25.2

Chapter 26

Table 26.1

Table 26.2

Table 26.3

Table 26.4

Table 26.5

Table 26.6

Chapter 27

Table 27.1

Table 27.2

Chapter 29

Table 29.1

Table 29.2

Chapter 34

Table 34.1

Table 34.2

Table 34.3

Chapter 35

Table 35.1

Table 35.2

Table 35.3a

Table 35.3b

Table 35.3c

Table 35.3d

Table 35.4a

Table 35.4b

Table 35.4c

Table 35.4d

Table 35.5a

Table 35.5b

Table 35.5c

Table 35.5d

Table 35.6a

Table 35.6b

Table 35.6c

Table 35.6d

Table 35.7

Table 35.8

Table 35.9

Table 35.10

Table 35.11a

Table 35.11b

Table 35.12a

Table 35.12b

Table 35.13

Table 35.14

Table 35.15

Table 35.16

Table 35.17

Table 35.18

Table 35.19b

Table 35.20a

Table 35.20b

Table 35.21

Table 35.22

Table 35.23

Table 35.24

Table 35.25

Table 35.26

Table 35.27

Table 35.28

Appendix A

Table A.1

Appendix B

Table B.1

Table B.2

Table B.3

Table B.4

Appendix C

Table C.1

Appendix D

Table D.1

Table D.2

Appendix E

Table E.1

Table E.2

Table E.3

Guide

Cover

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About the Authors

Jack Schwager is a co-founder and Chief Research Officer of FundSeeder, a firm that seeks to find undiscovered trading talent worldwide via its trader platform (FundSeeder.com), and a co-founder of FundSeeder Investments (FundSeederinvest.com), which seeks to connect properly regulated traders with sources of investment capital. Mr. Schwager is a recognized industry expert in futures and hedge funds and the author of a number of widely acclaimed financial books. Previously, Mr. Schwager was a partner in the Fortune Group (2001–2010), a London-based hedge fund advisory firm. His prior experience also includes 22 years as Director of Futures research for some of Wall Street’s leading firms, most recently Prudential Securities.

Mr. Schwager has written extensively on the futures industry and great traders in all financial markets. He is perhaps best known for his best-selling series of interviews with the greatest hedge fund managers of the last three decades: Market Wizards (1989), The New Market Wizards (1992), Stock Market Wizards (2001), Hedge Fund Market Wizards (2012), and The Little Book of Market Wizards (2014). His other books include Market Sense and Nonsense (2012), a compendium of investment misconceptions, and the three-volume series Schwager on Futures, consisting of Fundamental Analysis (1995), Technical Analysis (1996), and Managed Trading (1996). He is also the author of Getting Started in Technical Analysis (1999), part of Wiley’s popular Getting Started series.

Mr. Schwager is a frequent seminar speaker and has lectured on a range of analytical topics including the characteristics of great traders, investment fallacies, hedge fund portfolios, managed accounts, technical analysis, and trading system evaluation. He holds a BA in Economics from Brooklyn College (1970) and an MA in Economics from Brown University (1971).

Mark Etzkorn is founder of FinCom Media. He was formerly Editor-in-Chief of Active Trader magazine, editor at Futures magazine, and a member of the Chicago Mercantile Exchange. He has authored, edited, and contributed to more than 10 books on the financial markets.

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:

The futures contract is standardized; hence, the farmer does not have to find a specific buyer.

The transaction can be executed virtually instantaneously online.

The cost of the trade (commissions) is minimal compared with the cost of an individualized forward contract.

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.

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):

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.

Ticker symbol.

The quote symbol is the letter code that identifies each market (e.g., ES for the E-mini S&P 500, C for corn, EC for the euro), combined with an alphanumeric suffix to represent the month and year.

Contract size.

The specification of a uniform quantity per contract is one of the key ways in which a futures contract is standardized. By multiplying the contract size by the price, the trader can determine the dollar value of a contract. For example, if corn is trading at $4.00/bushel (bu), the contract value equals $20,000 ($4 × 5,000 bu per contract). If Brent crude oil is trading at $48.30, the contract value is $48,300 ($48.30 × 1,000 barrels). Although there are many important exceptions, very roughly speaking, higher per-contract dollar values will imply a greater potential/risk level. (The concept of contract value has no meaning for interest rate contracts.)

Price quoted in.

This row indicates the relevant unit of measure for the given market.

Minimum price fluctuation (“tick”) size and value.

This row indicates the minimum increment in which prices can trade, and the dollar value of that move. For example, the minimum fluctuation for the E-mini S&P 500 contract is 0.25 index points. Thus, you can enter an order to buy December E-mini S&P futures at 1,870.25 or 1,870.50, but not 1,870.30. The minimum fluctuation for corn is

, which means you can enter an order to buy December corn at $4.01