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com

Contents

1 2 3 G technical analysis 101 4

i the importance of method trading 7

technical versus fundamental analysis 9

tips and resources for electronic traders 10

types of stop orders: a tutorial 13

1 2 3 G moving averages explained 16

i
pivot-point techniques 19

the value of fair value 21

building your cme e-mini ® Futures trading strategy 22

the brilliance of gann in today’s markets 24

when trends aren’t your friend: How to approach drawdowns 26

the commitments of traders report: a clue to who’s moving markets 28

1 2 3 G introduction to futures spreads 31

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trade by the book: a guide to reading order flow 35

technical analysis and options strategies for 38

long-term position traders

understanding options spreads 40

a moving average that can motivate your trading: tilLson’s T3 41

1 2 3 G glossary of technical analysis terms 44

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glossary of trading strategies terms 48

glossary of basic futures terminology 53

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 800-445-2000 Lind-waldock.com

The Lind-Waldock
Futures Technical Trading Guide

Professional traders know it takes an edge to successfully While technical analysis methods may be the same for all traders,
navigate the markets—and for many, technical analysis provides your own interpretation and analysis can offer you an edge
that edge. Technical analysis can be defined as an approach that’s uniquely yours. For that reason, technical analysis has been
to forecasting commodity prices that examines the patterns of called an art as much as a science. The authors of the articles
price change, rates of change, and change in volume of in this Guide are simply offering their interpretation of the concepts.
trading and open interest, without regard to underlying funda- Advice is to be taken as educational in nature only, and not to be
mental market factors. construed as specific trading advice. Articles from outside authors
unaffiliated with Lind-Waldock have been reprinted with per-
Whether it’s moving averages, pivot points, or Gann theory, the mission. Lind-Waldock is not responsible for any advice or content
study of technical analysis can provide valuable insight into price from such outside authors reproduced herein, nor from their
action for virtually any market. This Guide contains a collection respective Web sites.
of informative articles that can help you learn more. The contents
are organized by level; if you’ve never explored technical anal-
ysis or futures in general, the articles in Level One are the place to
start. This section also offers a refresher on concepts you may
be a bit rusty on. Level Two articles expand on the basics and offer
some additional factors you might consider. Level Three articles
are a bit more advanced, containing more sophisticated concepts
and strategies for those already familiar with technical analysis
and those who have already been trading futures.

Futures trading involves substantial risk of loss and is not suitable for all investors.
Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical service and
other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such.
There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.
©Copyright 2007 MF Global Ltd. All Rights Reserved.

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1 2 3 G
i

technical analysis 101 4

the importance of method trading 7

Technical versus fundamental analysis 9

tips and resources for electronic traders 10

types of stop orders: a tutorial 13


Technical Analysis 101
By Jeffrey Friedman
The world of technical analysis is huge and can be applied to virtually any
market. There are literally hundreds of different patterns and indicators that
traders claim to have success with.
There are two major types of analysis typically used to predict
the performance of commodity futures—fundamental and tech-
nical. Fundamental analysis examines the supply and demand
factors that influence price, while technical analysis is the study of
price and price behavior. The world of technical analysis is huge
and can be applied to virtually any market. There are literally hun-
dreds of different patterns and indicators that traders claim to
have success with. In this article, I’ll introduce you to a few very
basic types of price charts and technical analysis tools.
What is Technical Analysis?
Using charts as a primary tool, commodity traders who employ
technical analysis look for peaks, bottoms, trends, patterns
and other factors that affect price movement, which they then use
to make buy or sell decisions. Technical analysis today includes
such principles as the trending nature of prices, prices discounting
all known information, moving averages, volume mirroring changes
in price, and the identification of support and resistance levels.
The price of a commodity represents a consensus between buy-
ers and sellers of all the information about that commodity at
any given point in time. It is the price at which one person agrees
to buy and another agrees to sell. The price at which a trader is
willing to buy or sell depends primarily on expectations.
Technical analysis reflects on historical prices in an effort to de-
ermine probable future prices. This is done by comparing
current price action (i.e., current expectations) with comparable
historical price action in order to predict a reasonable out-
come. The technician might observe that history repeats itself
in price behavior because human behavior repeats itself.
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Technical analysis is a method of evaluating commodities by
analyzing statistics generated by market activity, past prices, indi-
cators and volume. Technical analysts do not attempt to measure
a commodity’s intrinsic value; instead they look for patterns and
indicators on the charts that will determine a future performance.
Two Basic Chart Types
Bar charts are some of the most popular charts used in technical
analysis. They display the open, close, high and low for a specified
time period. Bar charts can be used for any time frame.
The daily chart, which is the most popular time period, is often
used to study price trends for the most recent six months. For
longer-range trend analysis going back five or 10 years, weekly and
monthly charts are more useful. Intraday charts can be used
by day traders to plot prices for periods as brief as one minute.
Each time period is a vertical line, with the top of the vertical line
indicating the highest price the commodity traded at during
the time period, and the bottom representing the lowest price.
(See Chart 1) The closing price is displayed on the right side
of the bar and the opening price is shown on the left side of the
bar. A single bar represents one time period of trading.
Candlestick charts, which have been around for hundreds of
years, are similar to bar charts in that they also display the open,
close, high and low. The primary difference is that if the closing
price is above the opening price, the body is usually clear, white or
green. If the closing price is below the opening price, the body is
usually solid, black or red. (See Chart 2)
4

Chart 1: Bar Chart
Technical Indicators You Can Use
A moving average is one of the easiest indicators to understand.
For example, to calculate the 50-day moving average, you
would add up the closing prices from the past 50 days and divide
them by 50. Because prices are constantly changing, the
moving average will move as well. Moving averages are most
often compared or used in conjunction with other indicators
such as Moving Average Convergence Divergence (MACD) or the
Relative Strength Index (RSI) discussed below.
While you can choose any time period you wish, the most com-
monly used moving averages are of 10, 20, 40, and 50 days.
Each moving average provides a different interpretation of what
the commodity price will do. There is no one right time frame
to use. The longer the time spans, the less sensitive the moving
average will be to daily price changes. Moving averages are
used to emphasize the direction of a trend and smooth out price
and volume fluctuations (or “noise”) that can confuse interpre-
tation. Typically, when the price moves below its moving average
it is a bad sign because the commodity is moving on a
negative trend.
The Moving Average Convergence Divergence is one of the
simplest and most reliable indicators available. MACD uses moving
averages, which are lagging indicators, to include some trend-
following characteristics. These lagging indicators are turned
into a momentum oscillator (a measure of how much prices have
changed over a given time period) by subtracting the longer
moving average from the shorter moving average. The resulting
plot forms a line that oscillates above and below zero, without
any upper or lower limits. MACD is a centered oscillator, which
fluctuates above or below a center point, and the guidelines
for using centered oscillators apply.
When we talk about the strength of a commodity futures contract,
there are a few different interpretations, one of which is the Relative
Strength Index. The RSI compares the number of days that the
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Chart 2: Candlestick Chart
contract finishes up with the number of days it finishes down. This
indicator is a big tool in momentum trading.
The RSI ranges from 0 to 100. A market is considered over-
bought around the 70 level and you should consider selling. This
number is not written in stone. In a bull market, some believe
80 is a better level to indicate an overbought price, since prices
often trade at higher valuations during bull markets. Likewise,
if the RSI approaches 30, price is considered oversold, and you
should consider buying. Again, make the adjustment to 20 in
a bear market.
The shorter the number of days used, the more volatile the RSI
is and the more often it will hit extremes. A longer-term RSI
is more rolling, fluctuating a lot less. Different commodities and
futures contracts have varying threshold levels when it comes
to the RSI. Prices in some futures contracts will go as high as 75-
80 before dropping back, and others have a tough time breaking
past 70.
Using Support and Resistance
Support and resistance are price levels at which movement should
stop and reverse direction. Think of support and resistance
as levels that act as a floor or a ceiling to future price movements.
Support is a price level below the current market price, where
buying interest should be able to overcome selling pressure—and
thus keep the price from going any lower. Resistance is a price
level above the current market price, where selling pressure should
be strong enough to overcome buying pressure—and thus
keep the price from going any higher. (See Chart 3) One of two
things can happen when a futures contract price approaches
a support or resistance level. It can act as a reversal point, or in
other words, when the futures price drops to a support level, it
will go back up. Or, support and resistance levels can reverse roles
once they are penetrated. For example, when the market price falls
below a support level, that former support level then becomes a
resistance level when the market later trades back up to that level.
5

Chart 3: Resistance and Support
Popular Charting Patterns
Many of us believe that history repeats itself. Using successful
and proven price patterns from price charts is a method technical
analysts widely use.
There are entire volumes of textbooks written on technical analysis.
It’s one of those fields where everyone has a different theory on
what works and what doesn’t. I suggest you do some homework
and back test your desired strategy. Back testing means look-
ing back at several years’ worth of charts to see how a particular
futures contract reacts. Different markets do different things.
Here are just a few examples:
Cup and Handle. This is a pattern on a bar chart that can be as
short as seven days or as long as 65 days. The cup is in the shape
of a U. The handle has a slight downward drift. The right hand side
of the pattern has low trading volume. As the price comes up to
test the old highs, the price will incur selling pressure by the people
who bought at or near the old high. This selling pressure will make
the price trade sideways with a tendency towards a downtrend
for four to 30 days, and then it may take off. It looks like a pot with
handle.
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Head and Shoulders. This chart formation resembles an “M” in
which a price rises to a peak and then declines, then rises above
the former peak and again declines, and then rises again, but not
to the second peak and again declines. The first and third peaks
are shoulders, and the second peak forms the head. This pattern is
considered a very bearish indicator.
Double Bottom. A double bottom occurs when a price drops to
a similar price level twice within a few weeks or months produc-
ing a pattern that resembles a “W.” You should buy when the price
passes the highest point in the handle. In a perfect double bottom,
the second decline should normally go slightly lower than the first
decline to create a shakeout of jittery traders. The middle point of
the “W” should not go into new high ground. This can be a very
bullish indicator.
Jeffrey Friedman is a Senior Market Strategist with Lind Plus. He can be
reached at 866-231-7811 or via email at jfriedman@lind-waldock.com for
more information about this topic or others.
6

The Importance of Method Trading
By Lind-waldock
It’s very important that you develop a method of trading that matches your
trading goals and personality, so you can protect yourself from your
own weaknesses. Without a method, you run the risk of succumbing to the
temptations and stresses that are constantly present in the market.
In futures speculation, there are winners and losers. Some specu-
lators put themselves in positions (either because of their emotional
makeup or because of a lack of knowledge) from which they can-
not hope to emerge successfully. While their motivations may be
primarily psychological, part of their failure can be attributed to a
lack of knowledge of trading techniques.
There are many successful trading methods or plans. But, what
works for you won’t necessarily work for someone else. It’s very
important that you develop a method of trading that matches your
trading goals and personality, so you can protect yourself from your
own weaknesses. Without a method, you run the risk of succumb-
ing to the temptations and stresses that are constantly present in
the market.
Here are several practical rules that can be applied to any trading
system. These are rules we believe should be integrated into your
trading system, so that you have your best chance of success.
1. Adopt a definite trading plan.
Because of the emotional stress inherent in any speculative situ-
ation, you must have a predetermined method of operation that
includes a set of rules by which you operate and to which you
rigidly adhere, in order to protect you from yourself. Very often your
emotions will tell you to do something totally foreign or negative to
your market-trading plan. If you’re following a plan, there’s a better
chance you’ll avoid knee-jerk decisions.
2. If you’re not sure, don’t trade.
If you’re in a trade and feel unsure of yourself, take your loss or
protect your profits with a stop. If you are unsure of a position, you
risk being influenced by any number of extraneous and unimport-
ant details.
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3. You should be able to be right 40 percent of the
time and still show a profit.
In speculating, it is unrealistic to expect to be right every time. If
you follow proper trading techniques, you should be able to cut
losses short and let profits run so that even being right less than
half the time will yield profits.
4. Cut your losses and let your profits ride.
One basic failing of speculators is that they put a limit on profits
and no limit on losses. They hate to admit being wrong, and will
often let losses ride in hopes that the market will turn around. After
a while, they begin hoping for a small loss and give up hoping for
a profit. There is an old saying, “you never go broke taking a small
profit”...but you’ll certainly never get rich that way.
Small profits are the direct opposite of the best way of making
money in speculation. If you are correct when entering a specula-
tive situation, you will know it almost immediately and will show
a profit. However, if you are wrong, you will show a loss and you
should remove yourself from the situation as quickly as possible.
Taking a small loss does not necessarily mean your thinking was
wrong. It simply means that your timing was perhaps incorrect and
that you should wait for the correct timing and situation to allow
you to reenter the market.
Remember, in any speculative situation, the market is the final
judge. You must let the market tell you when you are wrong and
when you are right. If you show a profit, ride it until the market turns
around and tells you that you are no longer right. Then get out, but
not before! On the other hand, the market will also tell you if you are
wrong, and it is a serious mistake to argue with the market.
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5. If you cannot afford to lose, you
cannot afford to win.
Losing is a natural part of trading. If you are not in a position to ac-
cept losses, either psychologically or financially, you have no busi-
ness trading. In addition, trading should be done only with surplus
funds that are not vital to daily expenses.
6. Don’t trade too many markets.
It’s difficult enough to successfully trade and understand a specific
market. It’s next to impossible for an individual, especially a begin-
ner, to be successful in several markets at the same time. The
fundamental, technical and psychological information necessary
to trade successfully in more than a few markets is more than you
probably have the time or ability to manage.
7. Don’t trade in a market that is too thin.
A lack of public participation in a market will make it difficult, if
not impossible, to liquidate a position at anywhere near the price
you want.
8. Be aware of the trend.
It is vitally important that you are aware of a strong force in the mar-
ket, either bullish or bearish. When this force is at its height it would
be folly to attempt to buck it; however, you must learn to recognize
when a trend is about to run its course, or is near exhaustion. This
will help you protect yourself from staying in the market too long,
and you’ll be able to change direction when the trend changes.
11. You can always sell the first rally or
buy the first break.
Generally, a market that has just established a trend (either up or
down) will have a reaction. Good interim profits can be made
by recognizing this reaction and taking advantage of it. For ex-
ample, in a bull market, the first reaction will generally be met
by investors waiting to buy the break. This support generally
causes the market to rally. The reverse is true of a bear market.
12. Never, ever straddle a loss.
A loss by itself is difficult enough to accept; however, to lock in this
loss, making it necessary for you to be right twice rather than once,
which you previously found impossible, is sheer absurdity.
All of these rules are part of a common sense approach to making
trading decisions that will help you manage your performance. In
fact, you’ll find that if you don’t follow a trading method, you’ll never
know what to credit your results to. If you follow a set of rules, you’ll
be able to diagnose your setbacks and successes, evaluate the
quality of your rules and determine whether you have actually been
following them with discipline.
Whatever method you apply, just be sure it fits your comfort levels
for style, performance and risk tolerance.

9. Don’t attempt to buy the bottom or sell the top.

It simply can’t be done unless you have the aid of a crystal ball. Be
content to wait for the trend to develop and then take advantage of
it once it has been established.

10. Never answer a margin call.

This rule serves as a stop loss when your position has weakened
considerably. If you follow this rule, you will be forced to get out
of the market before total disaster sets in. It is often difficult to
admit you’re wrong and get out of the market (which you probably
should have done well before you received a margin call).
However, the presence of a margin call should act as a clear and
final warning that you have let your position go as far as you
conceivably can (unless the initial margin is out of line with the
volatility of the contract).

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Technical Versus
Fundamental Analysis
by Stuart kaufman

The debate between fundamental and technical analysis has raged for
decades. It is important to clarify the difference.
I am often asked what are the differences between fundamental
Fundamental Technical
and technical analysis, and how do I decide which to use when Considerations Considerations
I trade.
n Economic factors n Price action
n Supply and demand n Chart patterns
The debate between fundamental and technical analysis has raged
n Market-specific data n Volume and open interest
for decades. It is important to clarify the difference. By definition,

fundamentals consist of the economic factors behind a commod-
ity, namely the influences on supply and demand. For example,
fundamentals of cotton would include the size of last year’s crop,
I think that may be true to a certain extent. Most of the known
the amount of cotton left from that harvest that is still available for
fundamentals could be reflected in the current price, because
export and domestic use, the pace of exports this year, the prog-
fundamental knowledge often lags technical indications of a price
ress of the upcoming crop, and projected weather that could affect
move. What the pure technicians overlook is that studying funda-
its growth. These are all fundamentals, and if it looks like a lot of
mentals is not done to determine how they are impacting the price
information, it is.
today, but rather to project how these factors could impact prices
in the future.
Assuming that one is able to monitor all these factors, the next task
is to form a “big picture” of the market and then try to determine
My opinion is that it’s important to be cognizant of both kinds of
how these factors could affect price over the next three to six
analysis, but that technical analysis tends to get you in the market
months. Doing this is a key task in selecting markets that provide
quicker and at better price levels.
the greatest opportunities for profit.
Stuart Kaufman is a Senior Market Strategist at Lind Plus. If you would
Technical analysis, on the other hand, is the study of charts, chart like more information about this topic or others, you can contact him at
800-924-1060 or via email at skaufman@lind-waldock.com.
formations, and an array of technical indicators that affect volume,
price momentum, strength of buying or selling, and so on. Because
technical trading tends to be more concrete and tangible (e.g., buy
when prices hit this line), it attracts both the mathematical and the
statistical-oriented crowds. Pure technicians believe all the cur-
rent fundamentals are always priced into a futures contract at any
given time. Therefore, there is no use in studying the fundamentals
because they are all reflected in the price patterns.

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Tips and Resources
for Electronic Traders
By dave howe
What you need and where you will get it depends to a great extent on the
type of trader you want to be, the trading style you believe will be most suited
to your personality, and the amount of money and time you have to devote
to trading.
Whether you are learning to trade online for the first time or are
looking to improve your current online trading skills, finding the right
resources and the right support can be critical to your success. As
the old saying goes, “no man is an island.” As a self-directed trader
making your own decisions, you may at times feel like you are on
an island all alone. But there are plenty of resources to help you
gain confidence. What you need and where you will get it depends
to a great extent on the type of trader you want to be, the trading
style you believe will be most suited to your personality, and the
amount of money and time you have to devote to trading.
The type of trader you choose to be will have some bearing on the
resources you need—whether you plan to trade via technical or
fundamental factors, what markets you plan to trade, and whether
you plan to day-trade or hold longer-term positions. Years ago all
you might have needed to trade was a phone and an idea, but in
today’s technological era, a personal computer and an Internet
connection to link you to the marketplace are essential—along with
telephone service as a backup.
Trading Platform
Selecting a trading platform is an important first step as you learn
to trade online because you may want to not only enter your or-
ders, but also do your own analysis. There are several aspects of a
platform to consider.
Type of Platform. Do you want a downloadable version that high-
lights speed and accuracy? Do you want a browser-based plat-
form? What about wireless trading? The Internet can be a rather
fragile network and may not always be the most reliable means of
conveying your orders, especially during critical periods when tim-
ing is most important.
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If there is some disruption in your online connection, you need
access to a means of live technical support to assist you with any
questions.
Ease of Use. The platform should be simple to understand and
operate to facilitate transmission of orders quickly. If you are an
active trader or plan to be, you want to see market depth, which is
the listing of a market’s most recent bids and offers. Check to see
if you can place an order from the market-depth screen. Custom-
ization is another important feature. What data do you want to see
when you’re trading?
If you are looking at a chart or price quote, a platform may formu-
late the order for you so all you have to do is click “buy” or “sell.”
Procedures to enter an order should be clear and easy, yet should
have enough safeguards to reduce your chances of making mis-
takes as you make your trades.
Market Access. You will likely want a trading platform that has
the most flexibility to trade a wide variety of markets. At a later
date, you may want to add a new market you aren’t interested in
trading right now, so look at the big picture. Find out which global
exchanges your firm is connected to. New, attractive contracts are
being established all the time all over the world. If you see a trading
opportunity on an overseas exchange, your broker should be able
to facilitate trading in those markets.
Simulated Trading. One of the most useful training tools to learn
to trade online, get comfortable with a trading platform, or to test
a trading system is simulated trading. Everything about the trading
is real except that you use “virtual” money instead of real money.
Although it cannot match the emotional involvement real trading
does, simulated trading helps you learn the mechanics of trading
10

and become familiar with the trading platform before you have to
deal with the pressure of trading real money. Depending on your
knowledge of trading and skill level, it is like using a simulator to
learn how to fly an airplane or drive a car before being placed in
real—and possibly dangerous—situations. You enter trades, get
fills, receive account statements, etc. just as a real trader does and
can learn from your mistakes without having to pay real money to
gain the experience.
Trading Support Tools
If you are going to take your trading seriously, you will need more
than just a way to enter orders and track your account. There are
other resources you will likely need.
Price Quotes. To keep up with the current market status, you will
probably need some type of price quotes updated on a regular
basis. How much data you need and how often you get it will
depend on the type of trader you are and the amount of money
you are willing to spend. Real-time streaming quotes are up-to-the-
second prices updated continuously by the exchanges. They may
be reported tick-by-tick or only when there is a change in prices,
depending on the quote service. Based on your level of trading
activity, these quotes usually involve monthly exchange fees. If
you want to be an active intraday trader, you will probably need
real-time quotes. In some cases, exchanges offer real-time quotes
at no charge to encourage trading in a market, typically for a new
contract or for an area that the exchange is promoting.
Real-time delayed quotes provide the same information as real-
time quotes, but are delayed by 10 to 30 minutes. If you are a
highly active day-trader, this time lag probably won’t be acceptable.
However, if your approach is longer-term in nature and doesn’t
require trading decisions be made down to the second, delayed
quotes may be sufficient. Delayed quotes will also save you some
money as well, as they currently do not have exchange fees.
Snapshot quotes are live quotes but are available on a refresh
basis only every 10 minutes or so. Like delayed quotes, snapshot
quotes may be all you need if your trades are not highly time sensi-
tive. End-of-day quotes provide the open, high, low, and closing
prices for each day. This is a basic quote service used for some
trading systems that provide only one signal based on a day’s trad-
ing activity.
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Charts. Many traders use charts to show them the price history
of a market during different time horizons. Charts allow traders to
study what the market has done in the past in similar situations, so
they can attempt to discover trading signals and projected targets
based on what their analysis suggests for the future. The study
of technical analysis is based on interpretation of various chart
patterns, and can be very complex. It is often considered an art as
much as a science.
Analytical Software. Analytical software provides a wide array of
charts as well as a number of studies and technical indicators, and
perhaps even some means to test the performance of a trading
method you develop. The studies generally range from simple mov-
ing averages to a series of momentum indicators such as stochas-
tics or relative strength. Many are based on the same input—price
—so there is a danger of putting too much weight on signals that
are similar. System-testing capability gives you an opportunity to
try out ideas in market situations without having to use real money
to test a theory.
News, Reports, Statistics. Although market technicians would
say prices respond to signals on charts, the underlying force for
any significant market movement comes from fundamentals such
as supply and demand. Often, these are revealed in government
reports and statistics that have scheduled release dates. You need
to be aware of these key dates and the numbers other traders and
market analysts are forecasting to help you determine how the
market might react to them.
An unexpected event can also cause extreme price fluctuations,
especially in the short-term. You need to have a news source that
can keep you apprised of these events in a timely manner so you
can analyze how you might want to position yourself—or perhaps
more important, not position yourself—in a volatile market environ-
ment. By the time you read about a market-moving event in the
newspaper, it may be too late, and television news reports may be
too brief and shallow to help you as a trader, assuming the event
has caught the news department’s attention to even be mentioned.
News services that can provide key market-moving information are
available online and may be provided by your broker or as an add-
on service for a fee. Like price quotes, the cost usually depends
on whether you receive the news reports real-time or delayed, and
whether you need a specialized service that covers a particular
market in depth.
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Lind-Waldock Web Site and Lind eWire. The Lind-Waldock Web site is rich in educational resources.

Other Educational Resources
As a self-directed trader, you want to take advantage of all the
resources you can. Here at Lind-Waldock, we offer many means of
educational support, including online courses and articles via
our Web site, timely trading ideas from Lind Plus brokers in our free
weekly “Markets on the Move” webinars, as well as our monthly
Lind eWire newsletter.
An essential resource for one trader may be impractical for you.
The key point is not to accumulate resources, but to find those that
can help you most as a trader. And that is for you to decide!
Dave Howe is Director of Sales with Lind-Waldock. He can be reached at
800-445-2000 or via email at dhowe@lind-waldock.com for more information
about this topic or others.

As a self-directed trader, you may not need anyone else’s advice

on what or how to trade. Even if you don’t plan to use anyone
else’s recommendations, it can be helpful to listen to what a broker
or analyst is suggesting for several reasons. It can help you under-
stand what other traders are thinking and how they might be react-
ing to the same type of market developments you are watching.
You can compare someone else’s trading decisions with your own.
You may even take a recommended trade because the analyst who
presented it has probably done more research, considered more
inputs than you have, and has formed a good case for making the
recommendation.

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Types of Stop Orders: A Tutorial
By kristina zurla landgraf
Stops can be a valuable tool in your risk-control strategy and allow you to
execute your trading plan without the stress of constant market-monitoring.
Here we take a look at what stops are, and how to use them.
There is no surefire way to eliminate risk in any investment, but
finding ways to alleviate as much of it as you can is vital. Stops
can be a valuable tool in your risk-control strategy and allow you to
execute your trading plan without the stress of constant market-
monitoring. Here we take a look at what stops are, and how to
use them.
Stop Orders as Loss-Limiting Orders
Commonly referred to as a stop loss, stops are often used as loss-
limiting orders. You indicate that you want to get out of the market
at a specified target price level if the market trades at or through
that price. Buy stops are placed above the market and become
market orders if the market trades or is bid at or above your stop
price. Sell stops are stops placed below the market and become
market orders if the market trades or is offered at or below your
stop price. It’s important to note that there is no guarantee that
losses will be limited to the desired amount. There can be market
“gaps,” or dramatic price movements that result in losses substan-
tially higher than the amount targeted with the stop-loss order. The
market has traded through your price—but perhaps much farther
and faster than you had planned.
Stop Orders as Profit-Protection Vehicles
Although stops are most commonly used to exit a losing position,
they can also be used to protect profits or to enter positions as
markets move into territory considered a favorable entry point. This
can help you execute trades at desired levels automatically. Keep
in mind, although stops become market orders when elected, they
can be subject to what’s known as “slippage.” Slippage occurs in
fast-moving markets when stops are filled at prices worse than the
stop price. In addition, in markets with price limits in effect during
highly explosive periods, stops may be unable to be filled. A stop
placed as an open order, known as “GTC,” short for “Good Until
Cancelled,” may be unable to be filled for several consecutive ses-
sions if the market is in a limit-up or limit-down situation, but will be
filled at the first available opportunity.
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An open order is good until cancelled or filled, or until the prod-
uct goes off the board; that is, the contract has expired and is no
longer available for trading. A day order is good only for the regular
trading session during which it is placed, or for the next session
if placed in between sessions. All orders are assumed to be day
orders unless otherwise specified.
Different Types of Stop Orders
Stop Limit (STL). A buy-stop limit becomes a limit order at the
stop price when the market trades or is bid at or above the stop
price. A sell-stop limit becomes a limit order at the stop price when
the market trades or is offered at or below the stop price. The
stop and limit are the same price. These orders are designed to
eliminate slippage on stops. However, they may come back “un-
able,” which simply means they are not able to be filled, and cannot
be considered as protection in fast-moving markets. This is not a
common order type in open-outcry markets, but may be almost a
necessity on some electronic markets that are not very liquid.
Stop With Limit (STWL). This order type is similar to a stop limit in
that a limit price is established. However, the limit on a “stop with
limit” is different from the stop price, and provides some allowance
of slippage. Once the stop is elected, the order works as a limit
order, and as is the case with the stop-limit order, may come back
“unable.” Therefore, it cannot be considered as protection in fast-
moving markets. Although created for use in open-outcry trading,
these orders are most functional on electronic platforms that ac-
cept them. This order is useful when you want to place limit orders
slightly above the market on buys and slightly below the market
on sells. The additional room to fill the order may eliminate missed
market opportunities. However, it’s recommended you check with
your broker before using this order type actively.
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Stop Close-Only (SCO). This is a stop order that will be execut-

able if the day’s closing range is at or through your stop price.
There is no reference point to determine if this is a “good” order
and, as such, it can be placed at any price within the day’s
allowable range. If the market has no limit, there are no such
restrictions within reason. You would use an SCO when you
do not want a stop order to be activated during the session but
do want it to be activated if the market trades at your stop-
order level during the closing price range. This order helps you
avoid being taken out of a position on a stop that might be
hit during intraday price fluctuations.

Of course, there are many other types of orders you can place
and strategies you can use to help you manage your trading risk
while executing your plan. We encourage you to work with a
Lind Plus market strategist to find out more. The Education Tab on
our Web site also contains more information on order types.

Kristina Zurla Landgraf is Content Manager at Lind-Waldock.

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1 2 3 G
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moving averages explained 16

pivot-point techniques 19

the value of fair value 21

building your cme e-mini ® futures trading strategy 22

the brilliance of gann in today’s markets 24

when trends aren’t your friend: How to approach drawdowns 26

the commitments of traders report: a clue to who’s moving markets 28


Moving Averages Explained
By dave howe
A moving average smooths out “temporary “price fluctuations and can help
give you a clearer interpretation of which direction the market is moving.
I expect you’ve heard the term “moving average.” And, I expect
you may have wondered what it is, or how to use it. This article is
intended to answer both of these questions, and add to your
trading knowledge.
Simply put, a moving average is the average value of a commodity
or futures contract’s price over a specific period of time. Moving
averages come in different forms. Two of the more common are:
The Simple Moving Average (SMA) and the Exponential Moving
Average (EMA).
Now that you have the definition of a moving average, let’s consider
the question, “Why would you want to use a moving average?”
It’s very simple. A moving average smooths out temporary price
fluctuations and can help give you a clearer interpretation of
which direction the market is moving.
The use of short-term and long-term moving averages is really
a matter of personal preference. Short-term moving averages tend
to be very sensitive to price movements, whereas the long-term
moving averages are less sensitive to these same movements.
Take a closer look at the two we are discussing.
Simple Moving Averages
We’ll begin with the simple moving average. We said that a moving
average is figured by “averaging” the price over a selected time
period. Let’s say you have selected a 10-period, sometimes called
a 10-bar moving average for the June S&P 500. To find this moving
average, you add together closing prices of the June S&P 500 for
each of the last 10 periods and then divide the total by the number
of periods—in this case 10. With each new period, you drop the
oldest closing price and replace it with the new one. The result is
the moving average for the last 10 periods.
Notice that in the example, we did not say 10-minute or 10-day
moving average, we said 10-period moving average. This is im-
portant because the type of moving average you choose will work
differently across different time frames. A 10-bar moving average
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is the same calculation whether you are working from 5-minute bar
charts or end-of-day charts. The periods of time are different. With
the 5-minute bar chart, you are calculating the moving average
based on the average closing prices of 10 5-minute periods. With
the end-of-day charts, you are calculating the moving average
based on the average closing prices of 10 daily periods.
As we mentioned before, you can choose to use these moving
averages on different types of charts. You are not limited to 5-min-
ute or daily. Traders use many different types of charts. Examples
might be 1-minute, 5-minute, 30-minute, 60-minute, daily, weekly
and even monthly.
It’s worth noting one more time that moving averages can be cal-
culated for any given period of time. Day traders and other short-
term traders may wish to use a moving average based on minutes
rather than days. For instance, if you are planning to trade the
market, trying for small intraday profits, you might use 5-minute bar
charts. In this case instead of using the closing price for the day,
you are using the closing price for the last 5-minute period of time.
Typically, the most common or standard moving averages for trad-
ers are the 4-, 9- and 18-period moving averages, but again, any
time period could be selected.
When reading a chart, moving averages show up as an unbroken
line making it easier to see the “trend” of the market. The chart
on the following page illustrates a daily bar chart. In this case, we
chose a less conventional 10-bar and a 30-bar moving average of
the June 2004 S&P 500 futures contract.
When the 30-bar moving average makes a significant turn or bend,
it has more credibility as an indicator of change in the direction
of the overall trend than does the 10-bar. You see fewer false
changes in direction using a longer period moving average than the
shorter period. Conversely, the shorter period moving average,
being more sensitive, will at times give you an earlier indication of
change indirection.
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Daily Bar Chart: June 2004 S&P 500

Exponential Moving Averages
One of the drawbacks of the moving average is that it is a “lagging
indicator.” You can only see what happened in the past. To help
compensate for that, traders constructed the “Exponential Moving
Average.” The exponential moving average gives more weight to
the most recent data, hopefully giving an even more timely indica-
tion of market direction.
Once you have the smoothing constant (K), you can calculate the
rest of the moving average. First, you subtract the previous period’s
EMA (P) from the current price (C) and multiply the difference by
the smoothing constant (K). Finally, you add back the previous
period’s EMA (P) to get the new EMA.
Exponential Moving Average Formula

In the exponential moving average, or exponentially weighted mov- Step 1. Step 2.

ing average, the amount of weight given to the earlier data is de- K = 2 / (1+N) X = (K x (C - P) + P

pendent upon the length of the moving average used. For example,
the shorter length moving average (i.e., a 3-, 4-, or 9-period) gives
a higher weight to the more recent data than the longer length
moving average (i.e., the 10-, 18-, or 30-period). It is important to note, that when calculating the moving average for
the very first time, you will not have an exponential moving aver-
This makes the shorter-period moving averages react more quickly age, so you’ll need to use the simple moving average for the first
to recent data than the longer-period moving averages. calculation and the EMA thereafter.

To calculate the exponential moving average, you apply a smooth-

ing constant to the equation. The smoothing constant (K) is derived
by dividing the number 2 by 1 plus the number of periods in the
moving average (N).

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How To Use Them

There are a number of different ways to use moving averages.
Many traders choose to combine a short-term moving average
with a longer-term moving average. Generally when the short-term
moving average crosses over the longer-term, this is considered
contrary to the longer-term trend. This indicator is called
a “Crossover.”

Others choose to create a band or “Envelope” around the moving

average by drawing parallel lines both above and below the moving
average line. These parallel lines are set at a percentage away from
the line, which indicates the normal distance the price will move
above or below the average before gravitating back towards the
moving average line. The general feeling is that if a market trades
through one of these outside bands it is a very strong indicator of
future direction of the market.

These are just a few examples. What you’ve learned here is just
the tip of the iceberg as it relates to moving averages, and for that
matter all technical analysis. Most traders begin by learning the
basics, combining and adding additional indicators, filters and rules
into the mix resulting in a complete trading methodology. Your next
step should be the discovery of these additional tools. A great way
to get started on your education is to visit our education site at
www.lind-waldock.com/edu.

If you’d like help, Lind-Waldock has a team of market strategists

who are happy to help you get a jump-start on your education. Feel
free to call us at 800-445-2000, and we’ll pair you up with a
mentor to help guide you.

Dave Howe is Director of Sales with Lind-Waldock. He can be reached at

800-445-2000 or via email at dhowe@lind-waldock.com for more information
about this topic or others.

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Pivot-Point Techniques
By Jeffrey Friedman

Pivot points sound like they could be critical junctures in the market, and for
some active traders looking at intraday charts, they are. In fact, just because
these traders look at pivot points and respect them may be exactly the reason
they often work.
Predicting Prices Using Support And
Resistance Points
Support and resistance (SAR) are first and foremost the most
important points to watch in price chart patterns. Finding first and
second support points (S#1 & S#2) and first and second resistance
points (R#1 & R#2) can help you predict how far prices might climb
and how far they might fall before you trade. Let’s find out how
support and resistance works and how to use pivot points.

Defining Support And Resistance Chart 2: Candles Support Trend

Support occurs when increased demand for a particular futures
market builds a floor under that market’s price. A support level or
zone appears when buyers miss purchasing a futures contract and
vow to buy it later should prices decline to the same, or nearly the
same, level.
Playing The Pivot
Pivot points sound like they could be critical junctures in the mar-
ket, and for some active traders looking at intraday charts, they are.
In fact, just because these traders look at pivot points and respect
them may be exactly the reason they often work. That is, they may
be a self-fulfilling prophecy because so many traders know about
them and trade or fade the same numbers.

A price bar represents all the prices traded in a specific time frame
for a particular market, and a pivot point is a computed number
based on a price bar’s high, low and close. From it, support and
resistance levels are calculated that act as sort of a bracket for the
next price bar’s action.

Chart 1: Suupport and Up Trend
Resistance occurs when selling pressure stops a market’s price
rise. A resistance level is similar in that traders buy the futures con-
tract just before it tumbles and they vow to sell if its price reaches
their purchase price. A common mantra among novice traders is,
“as soon as I get my money back, I’m selling.” SAR comes in many
flavors, and we’ll discuss the most important one to us: pivots.
Using Pivots For Support And Resistance
Pivot levels show support and resistance points that can be used
for day trading or swing trading. Day trades are those that last
for less than one day, while swing trades last between one and
five days.
A special mathematical formula calculates three numbers using
the high, low and closing price data with volatility, which shows
momentum. These numbers come from a proprietary formula.

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Pivot Table: April 3-7, 2006

Commodity High Low Close R1 R2 Pivot S1 S2

SPM6 1319.00 1300.50 1303.30 1314.70 1326.10 1307.60 1296.20 1289.10
US$M6 90.08 88.96 89.39 89.99 90.60 89.48 88.87 8836
DJM6 11365 11162 11195 11319 11444 11241 11116 11038
NQM6 1737.50 1683.00 1720.00 1744.00 1768.00 1713.50 1689.50 1659.00

The basic pivot technique involves trading with support and resis-
tance levels derived from the previous day’s or week’s (what ever
time period you want to use) high, low and closing prices. The idea
is to sell when price violates these levels on a break and buy when
price pushes through them on the upside.
Because former resistance becomes future support and vice
versa, these levels provide key stop-loss levels. For example, if you
sold when the market broke through support level one, you would
immediately place your stop at or just above the support level one
price. If the price continues to drop, you can follow the market with
a trailing stop. Although these levels sometimes will provide valid
support and resistance levels throughout the time period you use,
their significance diminishes as they are repeatedly violated. The
first time is the most important.
So, what do you have when you apply pivot-point lines to your
chart? Active traders treat them like support and resistance levels,
acting as potential boundaries for the next bar’s price range. Or, if
prices do break through S#1 or R#1, a stop might catch a move to
the next target, the S#2 or R#2 line. The support and resistance
lines may turn back prices because that’s as far as market strength
or weakness can take them or because so many traders expect
that to happen, but these lines aren’t walls. What may be more
important is how prices react as they approach or break through
these lines. When prices are attacking the R#1 and R#2 resistance
lines consistently, the bullish trend is entrenched; when prices back
away from the R#1 and R#2 lines, the bullish trend is weaken-
ing. Like many things about price charts, pivot-point analysis isn’t
perfect. It helps if the pivot-point lines coincide with prior highs or
lows, chart patterns, candlestick analysis or other corroborating
evidence. However, pivot points can be another effective trading
tool for your arsenal.

Jeffrey Friedman is a Senior Market Strategist with Lind Plus. He can be

reached at 866-231-7811 or via email at jfriedman@lind-waldock.com.

Chart 3: Silver Pivot Point

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The Value of Fair Value
By kristina zurla Landgraf
Simply put, fair value shows the relationship between a stock index futures
contract and the underlying cash stock index. It’s a tool that can help traders
determine whether the futures market may be over- or under-priced in
relation to the cash market.
Savvy traders use every piece of market information to their advan-
tage. Fair value may be one piece of information you’ve overlooked,
but it can enhance your stock index futures trading strategy if you
do a little homework.
You’ve probably heard about fair value, but what is it, and how
can it enhance your trading? Simply put, fair value shows the
relationship between a stock index futures contract and the under-
lying cash stock index. It’s a tool that can help traders determine
whether the futures market may be over- or under-priced in relation
to the cash market.
Lind-Waldock calculates fair value daily for clients on our Web site
(using three different interest rates) for the front three months of
the Standard & Poor’s 500 Index and the Dow Jones Industrial
Average. Go to the Trading Tools tab at www.lind-waldock.com for
detailed calculations.
Fair value, or fair basis, shows how far the futures contract should
be trading above or below the cash index given expected dividend
income for the stocks in the cash index, the days to expiration for
the futures contract and the short-term interest rate. If the futures’
price moves far above or below the fair value premium band, index
arbitragers typically will execute trades which will bring the cash
and the futures prices back into line.
Fair value refers to the spread between the index futures and cash
index price, or where futures should be “fairly” priced. To most of
the large institutional traders, when the spread is at fair value, own-
ing stock index futures or individual equities that make up the cash
index doesn’t make much difference. However, when the spread
between the index futures and cash index falls below fair value
or moves above it by a large enough margin, then one alternative
(stocks or futures) will become more attractive than the other, and
they will sell one and buy the other. If futures are sharply above fair
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value, market participants are expecting the cash index to move
higher, and if they are below, lower.
That’s information you can use.
“In general, fair value works as a filter,” said Dave Lerman, associ-
ate director, index products at the Chicago Mercantile Exchange.
“If the S&P futures are supposed to be trading at a 0.6-point
discount (to the cash), and you are buying at one-point premium, it
will negatively impact your execution and take away your profit po-
tential,” he said. Lerman noted one pitfall traders should avoid—
putting in orders too soon when they see the futures well above
or below fair value. If you see this happening, chances are, so will
others. The big arbitrage players will move at lightening speed to
help cause the markets to move back in line. “If you see futures
are rich, wait a few seconds until fair value reasserts itself, then go
ahead and buy,” he said.
The concept of fair value isn’t just valid for the market’s opening;
once you make your basis calculation of what fair value should
be, it’s good all day, barring any extreme interest rate or dividend
fluctuations.
Even if you don’t plan to use fair value in your trading strategy,
traders should be aware of fair value for another important reason.
All domestic stock index futures products at the CME are settled to
fair value at the end of every month. This is to alleviate any “track-
ing error” associated with the fact futures markets are open 15
minutes later than the cash stock markets. So if you have a posi-
tion on at month-end in these markets, you’ll want to know where
you stand.
Kristina Zurla Landgraf is Content Manager at Lind-Waldock.
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Building Your CME E-Mini

Futures Trading Strategy
by lind-waldock

CME’s popular E-mini index futures trade more than a million contracts per
®

day. Why is this important? And why are E-minis attractive products?
Dan Gramza, president of Gramza Capital Management, discusses
the basics of CME E-mini futures trading and how to develop your
own trading strategy for any market using popular technical analy-
sis methods. View a full online presentation, by Dan, co-sponsored
by CME, in our Events area archives at www.lind-waldock.com.
It’s free to view and illustrates the concepts presented here and
others in more detail. Following is a summarized excerpt from his
presentation, edited by Lind-Waldock.
Other Advantages. There are tax advantages to trading futures
contracts. There is no margin interest. There is no inventory
required for short positions, and there is no payment of short posi-
tion interest.
Types of Trading
Determining your trading time frame is an important element in de-
termining your trading strategy. We have four possible time frames.

CME’s popular E-mini index futures trade more than a million Scalping. Looking at a tick or two in terms of a trade.
contracts per day. Why is this important? And why are E-minis at-
Day Trading. Exiting positions before the end of a session.
tractive products?
Swing Trading. Holding a position from one to 10 days.
Liquidity. The marketplace in general has accepted this market.
Position Trading. Holding a position longer than 10 days.
Traders like you and me, private traders, institutional traders and
investors, are now participating in this market worldwide. It means
These elements, these time frames, are important. They create de-
you and I can enter and exit our trades easily (liquidity). It means a
mands. If you are a scalper or day trader, your technology require-
tight bid/ask spread, which is going to reduce our cost of trading.
ments are going to be very high. You have to make sure you have
accurate, up-to-date, up-to-the-second information. Where you get
Capital Efficiency. Don’t let the name E-mini fool you, each con-
in and where you get out of a trade as a scalper and day-trader is
tract controls thousands of dollars of stock. In fact, the only thing
essential in terms of your success. And, do you want to sit behind
that is mini about these markets, is the capital required to trade
a screen during the day? If you have the time to do that, day trad-
them. Compared to stocks or ETFs (exchange traded funds), you
ing might be appropriate for you. But if you work another position
only have to put up a fraction of the amount of margin.
(job), it might not be appropriate.

Virtually 24-Hour Trading. Virtually 24-hour trading is one of the

Selecting a Trading Technique:
things I find attractive about this product. It means you can express
Japanese Candlestick
your opinion about our stock market even when the stock market is
A Japanese candlestick chart uses four prices: the open, the high,
not open. We also see those opinions expressed around the world,
the low and the close. A box is drawn between the open and the
from Asia to Europe.
close. If that box is white, it means the closing price is higher than
the opening price. If the box is dark, it means the closing price
Central Marketplace. Also, I think an advantage of this market-
is lower than the opening price. Instead of calling it a box, the tradi-
place is that it’s one—one central marketplace—the CME. If I trade
tional term is the body of the candle. If it’s a white body, that
stocks, they can trade on the American Stock Exchange, the New
means it’s a buying body; it represents buying behavior coming
York Stock Exchange, or regional exchanges.
into the market. It it’s a dark body, it represents selling behavior
coming into the market. Also, you and I know the open and the

1 2 3 G building your cme e-mini futures trading strategy 22

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close, and the high and the low, don’t always match up…that
difference between the open and the close, the high and the low,
will be represented by a vertical line. That vertical line is called
a shadow.
Pay attention to the size, pay attention to the body color, pay at-
tention to the body size, pay attention to the shadows. Do you see
shadows on the top or bottom? And how big are they? They all
give us a measure of the degree of the buying or selling coming
into the market. When you look at a candle chart, you want to take
it apart.
Selecting a Trading Technique: Stochastics
Stochastics is a study, a measure of market momentum. It indi-
cates when prices have gotten high enough to attract sellers, and
it also indicates when prices have gotten low enough to attract
buyers. The underlying theme, the concept behind this, is that
it’s based on the premise that as prices trend higher, the closing
prices have the tendency to close near the highs. And when prices
trend lower, the closing prices have the tendency to close near the
lows. Normally displayed below a price chart, you’ll see a sto-
chastics scale that goes from 0 to 100. It is supposed to measure
“stretchiness” in the market. We use 70 and 30 as guidelines. If
this indicator trades above 70, that means it’s getting potentially
stretched to the upside. The term used is “overbought.” If it’s trad-
ing below 30, instead of saying “stretched to the downside” we’d
say “oversold.” These indicators make up two signal lines. A sell
signal occurs when the two signal lines move above 70 and cross
over, or if the two lines move below 30 and cross over, that would
be a buy signal.
Combining Techniques to Create a Trading Strategy
Let’s take these two techniques and create a trading strategy. We
are going to enter a trade if two conditions are met. First, we are
going to buy a higher high of a Japanese candle rejection pattern.
What I mean by a rejection pattern is a small body, with a large
shadow in the body. The second condition that needs to be met
is that the stochastics signal is below 30 and crossing over. If we
have that crossover below 30, and we have a Japanese candle
rejection pattern, we are going to buy a new high of that particular
candle. Our exit for this trade is that we are also going to trail our
stop below the lows of the following candles. And in this case, we
are going to stay in the trade until we trade the lower low for more
than three ticks.
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There are some critical questions you need to ask when develop-
ing your trading strategy. One is your profit objective. How do I
determine my profit expectations for this trade? We are going to do
some research, that’s how we get answers. Find out, if I did this
trade every time in the past, what the range of my profits might be.
What was the minimum to the maximum? I put my profit expecta-
tions in line with what the market can give me.
And, how much do I have to risk? How much heat should I take
in this trade? Take a look at profitable trades, and break them into
categories. Calculate a “heat index.” Heat is based on volatility
and trading characteristics of the market. So, if you have an idea
of how much heat you are going to take, and how much profit you
can (potentially) make, you have to decide if these balance out. Is
the risk/reward appropriate? What are the chances of this trade not
working? What is the probability this trade will be profitable?
It’s also important to think about other factors, such as trade dura-
tion, and trade frequency. How patient should I be? How often can
I expect to see this trade? Is it stable in different trading environ-
ments, a trending market or a sideways market? Can we consis-
tently take something away from this market, or do we see some
weaknesses? In a downtrending market, maybe it doesn’t work
so well. We want to identify that. We want to know, is this trading
strategy robust? We don’t want to ask something from a trading
strategy it can’t give us.
Evaluate Your Strengths and Weaknesses
A part of our trading strategy process is the trading decision pro-
cess we go through. Let’s think about what we do when it comes
to putting on a trade. The first thing we have to do is identify the
trade, the second thing we have to do is evaluate the trade, the
third thing we have to do is execute the trade, and the fourth thing
we have to do is manage the trade. We have to manage it from a
profit and loss perspective, and we also have to manage our-
selves. One of the things I like to do is to ask myself: Where am I
the strongest? Where am I the weakest? Look at that closer. What
am I going to do about it? If I have a tendency to hesitate when it
comes to executing a trade, what does that tell me? Why do you
and I hesitate to do anything in life we feel we should be doing? We
aren’t that confident, we aren’t that sure what we are going to do
next. But if I know that by following some of the elements we talked
about, if I know how much patience, then I have a way of increas-
ing my confidence and comfort when it comes to making a trade.
Dan Gramza is President of Gramza Capital Management.
23

The Brilliance of Gann
in Today’s Markets
By david burton
The Gann system is the one I prefer to use in my own trading for predicting
cycles, markets and trends. It can give you a roadmap of the markets—if you
take the time to unlock its secrets.
Born in 1878, W.D. Gann was one of the pioneers of technical
analysis and one of the most successful traders of his time. His
concepts and techniques still apply to trading today. Gann was
foremost a financial astrologer and spent countless hours studying
cycles, numbers and Gematria to predict not only movements in
stock and commodity markets with great success, but also horse
racing and the Cuban lottery. The Gann system is the one I prefer
to use in my own trading for predicting cycles, markets and trends.
It can give you a roadmap of the markets—if you take the time to
unlock its secrets.
Gann had become somewhat of a legend even before his death in
1955 for his predictive abilities. He forecast the exact top and price
in the cotton market on September 8, 1927, (in his book Tunnel
Thru the Air) and it’s even said he predicted World War I in 1914 as
well as the resulting panic in stocks. He was often correct about
commodity market trends back in the 1920s and 1930s, and his
track record of winning trades was extraordinary indeed. He had
accumulated more than $50 million until his death, an impressive
sum for that era.
Gann believed to successfully trade the commodities markets,
you must follow a defined set of rules, never to be violated. His
“28 Valuable Rules” are still valid for traders today, and I read them
every day. Usually when I’ve been unsuccessful trading, I’ve found
it’s because I’ve broken one of the rules. I’ll outline a few of Gann’s
28 rules in this article, but I encourage you to seek out and study
all of them further.
History Always Repeats
Gann wrote: “Time cycles repeat because human nature does
not change.” That is really the backbone of much of his predictive
market analysis. “The trend is your friend” is truly Gann philosophy
at its most basic. Gann always looked at the big picture first and
felt if you study the past, the future will become an open book. The
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big cycles, the great cycles, are where the most money has been
made, so follow the main trend.
He studied the CRB Index (a commodity index), the Dow Jones
Industrial Average and the bond market, which he felt were
the three main indicators for boom-and-bust cycles in the econo-
my. He pored over data back to 1259 A.D. in the wheat market
and back 400 years in the cotton market. He used wheat to predict
war periods—he found when wheat was booming, there was
usually war.
Health, Knowledge, Money Management,
Capital and Patience
Gann’s 28 rules are based on these five things. Gann believed that
you are what you eat, and because he studied long and hard, he
wanted to have a very alert and astute mind. He was very health-
conscious and did not smoke or drink. Gann felt one should never
trade when sick or stressed, because your judgment becomes
impaired and you make the wrong choices. When that is the case,
it’s time to take care of yourself and go on holiday to rejuvenate
your body and mind.
Gann also believed you can take away all a person’s money,
but not his knowledge. So, you must gain understanding of the
markets before you trade. If you are starting out, it will be advanta-
geous to paper trade for a time to see if your system works. You’ll
then be a step ahead of everyone else. Study the history of stocks,
commodities and interest rates, wars, elections and weather. Gann
studied these all of the time. Understand the tools of the trade, and
understand the main market cycle you are in.
Gann never believed in debt. He felt you should work on being
debt-free before you are 45 years old, to save and prepare for re-
tirement. You should also have at least a year’s wages in the bank
in case you lose your job. This was recommended 100 years ago,
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and is still good advice today. Gann said you should never have
more than 5 percent of your net worth in the market, and when
trading futures, he recommended you have three times the initial
margin per contract. For example, if the initial margin is $1,200 for
one contract for soybeans, you would have available per contract a
total of $3,600.
n Monthly high and low charts, angles that form from
tops and bottoms
n Natural time cycles based on the 360-degree master chart
n Time and price using the square of 9 and 12 charts
n Seasonal tendencies

n Market patterns
It is also important to always keep your trading capital separate
from your living capital and assets, and never borrow against as-
For an example of Gann cycle analysis, the wheat market showed
sets to trade. Save up money for your trading capital. As mentioned
bearish patterns in 2005. I subtract these large cycles from 2005.
previously, trading capital should be no more than 5 percent of
your net worth. If you can’t make money out of your trading ac-
These cycles proved low years in 1645, 1915, 1945 and 1975.
count, there is no point in throwing good money after bad.
Patience is a virtue. Gann suggested that you trade three to four n 360-year cycle from 1645 points to a low in 2005 (4x90)
times per year, per commodity. For this, you will obviously need
n 90-year cycle from 1915 points to a low in 2005
patience and discipline! If you follow Gann’s 28 rules, this will also
help you to be patient. Wait for major setups as more money is n 60-year cycle from 1945 points to a low in 2005
made in long bull or bear campaigns. n 30-year cycle from 1975 points to a low in 2005

A few more Gann-based rules I live by:

n Always have a maximum 3 percent stop loss
n Divide your capital into 10 equal parts
n Only trade trending markets—always leave dead markets
alone; trade markets with at least 30 years of data, so you
can track long-term cycles
n Read Gann’s 28 rules at least once every day, and make sure
you don’t break any. They are found on page 43 of Gann’s
book, How to Make Profits in Commodities.
Gann’s Tools
Gann never revealed his secrets to anyone unless they did the
work, including his own son. His philosophy was basically, work
hard and the secrets will come to you. Gann coded his books so
his followers would work hard to gain the knowledge contained
in them. You can download an eight-page partial decoding of his
book, Tunnel Thru the Air at www.schoolofgann.com. Here you’ll
also find more information about Gann for further study. As Gann
once said, “Knock on the door and it will be opened unto you, seek
and you shall find.”
David Burton is Managing Director of Commodity Hedging Company and
offers workshops and home study courses on Gann’s methods through his
Web site, www.schoolofgann.com.

Gann’s system is highly complex and a lot of his writings were

veiled in secrecy. He used a combination of methods to determine
future trends of the markets.

These methods include:

n Resistance levels made by market fluctuations

n Geometrical angles

n Time cycles and time periods (Gann’s cycles were 90, 84,
60, 30, 20, 13, 10, nine, seven, five, three and one-year)

n Squaring out price with time from tops and bottoms

n Odd and even squares and the halfway points between both
odd and even squares

n Weekly high and low charts, angles that form from tops
and bottoms

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When Trends Aren’t Your Friend:

How to Approach Drawdowns
By john tolan

With any investment you are going to experience losing periods, and trend-
following strategies are no exception. How you choose to deal with these
drawdowns can be the difference between sleepless nights and confidence in
your investment approach.
I’m sure you’ve heard the popular adage that guides many suc- It’s important to remember these four points.
cessful traders: “The trend is your friend.” It’s based on the simple
philosophy that if you stick to trading the prevailing trend in any 1. Stick to your trend-trading system. Don’t let a series of losing
market, you’ll have more success than trying to go against it. There trades, in the short run, cause you to lose confidence and deviate
are many popular trading systems based on this methodology, with from your long-term trading plan.
unique variations in their approach. But what if the trend isn’t your
friend, and you experience a losing period? What if tradable trends 2. Even the best systems—all systems—generate periods of
fail to materialize, and/or your trading system is having trouble losing trades and account equity drawdowns. That’s reality.
coping with a volatile period? With any investment you are going Just as market prices move in trends, so will your trading equity.
to experience losing periods, and trend-following strategies are no That is how the markets work and how trend-trading systems
exception. How you choose to deal with these drawdowns can be work. Up trends tend to be followed by sideways and down trends.
the difference between sleepless nights and confidence in your Profitable periods tend to be followed by losing periods, which
investment approach. tend to be followed by profitable periods, etc. It’s what to expect.

Every time traders or investors go through a difficult period, they
tend to ask the same questions: “Have the markets changed? Has
trend-following stopped working? Does something need to be
fixed? Should I close my account? Should I trade another system?”
Before you jump ship, please take a moment to consider your deci-
sion from a long-term, trend-following perspective.
Drawdowns Are Normal Events
Of course drawdowns are unpleasant. But, they do not signal that
something is wrong with markets, trend following, or the future.
History has shown that change is constant, change is random, and
trends will appear again if we go through a period of non-trend-
ing markets. Choppy, sideways markets are a precursor to future
trends, whether they are up or down. Therefore, when you experi-
ence this type of action, you can look at it as a waiting period for
some possibly dynamic trends in the near future.
3. These equity swings will test your trend-trading discipline.
Don’t get optimistic when you’re making money and add to your
position size. This may result in doubling the magnitude of your
next drawdown.
4. Don’t let your emotions, whether up or down, affect your
long-term trading plan. Have realistic expectations and stick to
your plan. If you can’t accept losses as part of the process, then
trend-trading will not work for you. You must be prepared to evalu-
ate your trading performance based on many trades over a long
period of time. This discipline is “the key to trading success;” your
trading edge.

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Trend-Following Isn’t Perfect, but Has

Historically Been Viable
Like democracy, trend-following has its critics. Trend-following isn’t
perfect, but over the long run, many investors have found it to be a
viable strategy.

You must evaluate your own financial situation and risk tolerance
to determine what is suitable for you. If trend-following were a
perfect strategy with high returns and no risk, everyone would do
it successfully. But trend-following, like all strategies, has its flaws.
Volatility. Losing trades. Drawdowns. The reality is that the masses
tend not to learn from history, human behavior does not change,
and so history repeats itself.

John Tolan is a Commodity Trading Advisor.

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The Commitments of Traders Report:
A Clue to Who’s Moving Markets
By kristina Zurla landgraf
The Commodity Futures Trading Commission’s (CFTC) Commitments of
Traders (COT) Report offers a weekly glance into positions various groups of
market participants are taking in the futures markets.
Ever wish you could get some insight into what other traders are
doing? How the biggest players, such as large funds and institu-
tions, may be positioning themselves in the markets? The Com-
modity Futures Trading Commission’s (CFTC) Commitments of
Traders (COT) Report offers a weekly glance into positions various
groups of market participants are taking in the futures markets.
Many analysts use the report to help determine what trends could
come next, and it’s a tool you might find useful in your trading
as well.
The CFTC puts out its COT reports each Friday at 2:30 p.m. Cen-
tral Time—one for futures and one combining futures and options.
The reports contain a breakdown of open interest for markets in
which 20 or more traders hold positions equal to or above levels
the CFTC has established, as of three days prior (Tuesday) that
same week. The categories of participants are grouped into “re-
portable” and “non-reportable” positions. For reportable positions,
data are provided for commercial and non-commercial holdings,
spreading, changes from the prior report, percentage of open
interest by category and number of traders. A long version of the
report also contains information on data by crop year, where ap-
propriate for agricultural markets, and shows the concentration of
positions held by the largest four and eight traders. You can go
to the CFTC’s Web site at www.cftc.gov to obtain current and
historical data.
It’s important to know what the CFTC is reporting, so below are
brief definitions of some of the terms in the COT. We’ll explore later
how some analysts use this data to help determine market trends,
and what you might look for.
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CFTC COT Definitions
Open Interest. Open interest is the total of all futures and/or op-
tion contracts entered into and not yet offset by a transaction, by
delivery, by exercise, etc. The aggregate of all long open interest is
equal to the aggregate of all short open interest. Open interest held
or controlled by a trader is referred to as that trader’s position.
Reportable Positions. Clearing members, futures commission
merchants, and foreign brokers (collectively called “reporting
firms”) file daily reports with the Commission. Those reports show
the futures and option positions of traders that hold positions
above specific reporting levels set by CFTC regulations. The aggre-
gate of all traders’ positions reported to the Commission
usually represents 70 to 90 percent of the total open interest in
any given market.
Commercial and Non-Commercial Traders. When an individual
reportable trader is identified to the Commission, the trader is
classified as either “commercial” or “non-commercial.” All of the
trader’s reported futures positions in a commodity are classified
as commercial if the trader uses futures contracts in that particular
commodity for hedging, as defined in the Commission’s regula-
tions. The non-commercials, therefore, represent mainly specula-
tors, the large funds. A trader may be classified as commercial in
some commodities and non-commercial in other commodities. A
single trading entity cannot be classified as both a commercial and
non-commercial entity in the same commodity. Nonetheless, a
multi-functional organization that has more than one trading entity
may have each trading entity classified separately in a commod-
ity. For example, a financial organization trading in financial futures
may have a banking entity whose positions are classified as com-
mercial, and have a separate money-management entity whose
positions are classified as non-commercial.
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Non-reportable Positions. The long and short open interest
known as “non-reportable positions” are derived by subtracting
total long and short “reportable positions” from the total open
interest. Accordingly, for “non-reportable” positions, the number of
traders involved and the commercial/non-commercial classification
of each trader are unknown.
Spreading. For the futures-only report, spreading measures the
extent to which each non-commercial trader holds equal long and
short futures positions. These figures do not include inter-market
spreading (e.g., spreading Eurodollar futures against Treasury note
futures).
Changes in Commitments from Prior Reports. Changes
represent the differences between the data for the current report
date and the data published in the previous report.
Some traders use COT data to help determine an overbought or
oversold condition. If the COT report would show, for example, a
heavy long position in a market that has spiked unusually and is
high-priced, with high relative strength readings for an extended
period, a trader may look to sell. In this sense, the report can be
used as a contrarian indicator—a sign the longs may be looking to
take profits, and price action could take a turn.
You can use the COT reports to track historical tendencies and
past extremes in net long or short posture for each group to gain
some insight into their thinking, and perhaps even their next move.
Of course, what’s happened in the past may not happen again,
and no one really knows what each group will do. But, the COT
data has its place as another tool many traders find valuable.
Kristina Zurla Landgraf is Content Manager at Lind-Waldock.

Percent of Open Interest. Percentages are calculated against the

total open interest for the futures-only report.

Analyzing the Data

So, now you know what’s in the report. But the $64,000 question
is—how do you use this information? Most analysts tend to focus
on the net position changes from report to report for the various
groups. Are the large funds net long this week, or net short? Where
were they positioned last week? Many watch where the largest
traders with the most assets, or what some call the “smart money,”
are entering and exiting trades, because they generally have the
most power in terms of moving the market. These typically are
the large commercials and/or large speculators, although in some
markets, the small speculators may be the ones making the best
trading decisions, even if they aren’t the biggest players. It helps
to track this data each week, see what each group is doing, and
compare the price action to find out who has been on the winning
side of the market.

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introduction to futures spreads 31

trade by the book: a guide to reading order flow 35

technical analysis and options strategies for 38

long-term position traders

Understanding Options spreads 40

a moving average that can motivate your trading: tillson’s T3 41

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Introduction to Futures Spreads

By keITH schap

Today, traders on proprietary trading desks and at hedge funds that use
futures are almost always in spread positions. Observers call them “relative
value traders.”
Since nearly the beginning of the futures markets, traders have
used spreads. Today, traders on proprietary trading desks and at
hedge funds that use futures are almost always in spread posi-
tions. Observers call them “relative value traders.” Any trader
serious about the business of trading should consider following the
lead of these professionals.
Spreads Defined
At its simplest, a spread involves buying one contract and
simultaneously selling another related contract.
Calculating Conventions
To make the abstract more concrete, consider an old crop/new
crop corn spread—the July/December spread. The July contract
marks the end of one crop marketing year while the December
contract marks the beginning of the next marketing year. Corn
futures quote in cents per bushel (e.g., 253 cents per bushel), but
some quote sources convert into dollars per bushel (e.g., $2.53 per
bushel).
This spread is most often calculated in terms of new crop
minus old crop equals spread.

Some of the more common spreads include: (New Crop) Dec corn $2.47
n Old crop-new crop corn spreads (or any other agricultural or (Old Crop) July corn -$2.53
tropical contract) Spread -$0.06

n Crude oil calendar spreads

n Intermarket spreads such as wheat/corn or platinum/gold
n Stock index spreads including the E-mini® S&P ®/E-mini®
NASDAQ ® spread
More complex spreads—such as yield curve spreads, the soybean
crush spread, or the crack spread—can also produce solid op-
portunities, but this discussion will focus on simpler two-contract
spreads to introduce the basic ideas.
So, on one day in 2004, the July/December corn spread was
at minus six cents. You can set up a spreadsheet to calculate this
spread over time and chart the futures prices and the spread,
or just the spread. Figure 1 shows this spread. The way Figure 1
focuses on just the spread makes it easier to locate the trading
opportunities that existed then.

The two parts of a spread—the bought and sold contracts—are

called “legs.” The legs of a spread might represent an old crop and
a new crop. They might represent inflation fears and estimates of
economic growth. Traders expect one leg to lose but the other leg
to gain enough to result in a net gain. The point is that one leg will
outperform the other in relative terms—hence the term “relative
value trade.” I’ll outline a couple of examples of spreads from mar-
ket activity in 2004 as examples of the concepts.

Figure 1: Corn Spread

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Why Trade Spreads?
Spreads attract professional traders for several reasons. For one,
spreads contain solid information about supply-demand econom-
ics. When supplies are plentiful, or when demand is slack, spreads
signal the market’s desire that the new crop, or new production,
go into storage. Conversely, when supplies are scant, or when
demand exceeds supply, spreads signal the market’s desire for
immediate delivery of the goods. These signals occur year-in and
year-out regardless of price levels. This makes spreads more pre-
dictable than outright prices.
Futures buyers gain only when prices rise; sellers gain only
when prices fall. Spread traders can gain whether prices rise, fall,
or move in opposite directions.
Consider that a spread will “narrow” when:
n both prices rise but the nearby rises more
n both prices fall but the nearby falls less
n the nearby rises and the deferred falls

Further, a spread will “widen” when:

For another, spreads tend to be mean reverting. They rise and
n both prices rise but the deferred rises more
fall around a mean level and are extremely unlikely to embark on
long trending moves. This tends to make spreads safer to trade n both prices fall but the deferred falls less
than outrights.
n the nearby falls and the deferred rises

Be careful with this. A common misconception is that spreads

Professional traders prefer these extra chances to be right. The
are safe. Spreads are speculative trades. Granted, the burden of
logic of trading spreads is straightforward. If you expect something
the speculation is on spread behavior rather than on price direc-
to increase in value, you typically want to buy. If you expect
tion, and spreads are typically easier to predict than price direction.
something to decrease in value, you typically want to sell. For out-
Spreads remain view-driven trades, and views can be wrong. In
right futures, increase in value means rise in price. Decrease
short, while spreads may be safer, they are not safe.
in value means fall in price. For spreads, increase in value means
spread widening. Decrease in value means spread narrowing.
A final reason to trade spreads involves margins. In early August
Expecting a widening spread, you typically want to buy. Expecting
2005, the speculative initial margin for Chicago Board of Trade corn
a narrowing spread, you typically want to sell.
was $675 per contract, in contrast to $135 for the old crop/new
crop corn spread. The exchanges list margins and margin breaks
So, to buy the old crop/new crop spread in any of the markets
on their Web sites but all handle them a bit differently. Your broker
where these are relevant terms, you buy the new crop contract
can help you make sense of this and also help you with current
and sell the old crop contract. In the case of the July/December
margin requirements, price quote conventions and the mechanics
spread, you buy December and sell July. To sell this spread, you
of spread order placement.
sell December and buy July.

Narrowing, Widening, and Spread Logic

Rather than worry about the relative safety of spreads, you will
do better to focus on the fact that spreads give you more ways to
be right.

Narrowing and Widening Table

Narrowing widening

Start End Change Start End Change

July Corn 2.71 2.77 0.06 2.71 2.77 0.06
December Corn 2.79 2.82 0.03 2.79 2.88 0.09
Spread 0.08 0.05 -0.03 0.08 0.11 0.03

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Table 1: One Possible Old Crop-New Crop Spread Outcome

Action Price ($) Action Price($) Result Amount ($)

July Corn Sell 2.71 Buy 2.77 Lose -0.06
December Corn Buy 2.79 Sell 2.88 Gain 0.09
Spread 0.08 Spread 0.11 Net 0.03

Table 2: Second Possible Old Crop-New Crop Spread Outcome

July Corn Sell 2.71 Buy 2.65 Gain 0.06

December Corn Buy 2.79 Sell 2.76 Lose -0.03
Spread 0.08 Spread 0.11 Net 0.03

Table 3: Selling the Spread in Anticipation of Narrowing

July Corn Buy 2.71 Sell 2.68 Lose -0.03

December Corn Sell 2.79 Buy 2.73 Gain 0.06
Spread 0.08 Spread 0.05 Net 0.03

Table 4: Buying the Platinum-Gold Spread in Anticipation of Good Economic News

Platinum Buy 50,469 Sell 56,522 Gain 6,053

Gold Sell 50,886 Buy 51,036 Lose -150
Spread -417 Spread 5,487 Net 5,903

Table 5: Selling the Platinum-Gold Spread on Rising Inflation Fears

Platinum Sell 52,760 Buy 48,823 Gain 3,937

Gold Buy 49,706 Sell 50,381 Gain 675
Spread 3,054 Spread -1,558 Net 4,612

An Old Crop/New Crop Corn Example
To illustrate the fact that spread widening or narrowing, not price
direction, is what matters in spread trading, suppose your market
study led you to believe that the July/December spread would
widen in the next few weeks. Given this, you might have bought
the spread—i.e., bought the December contract and sold the July
contract. Suppose the market behaved as shown in Table 1.
Both futures prices rose, but the July price rose six cents while
the December price rose nine cents. Since you initially sold the
July leg, the price increase results in a loss. Still, this widened the
spread three cents.
You may wonder why bother with the July leg when the December
contract on its own would have earned nine cents. Table 2, which
has the same starting prices as Table 1, shows the answer.
This time, both futures prices fell, but the July price fell more. Since
you initially sold the July, this falling price results in a gain. However,
the falling December price results in a loss, and the spread nets the
same three-cent gain. The point is that you don’t know which leg of
the spread will make money. In Table 1, it was the December leg. In
Table 2, it was the July leg.
When you trade spreads, you give yourself more ways to be right.
Spread traders are willing to accept modest gains given strategies
that allow these gains to happen more often.
Now consider a situation in which you anticipated a spread narrow-
ing. You would sell the spread—i.e., buy the July contract and sell
the December. Suppose both prices fell but the December price
fell more. This would narrow the spread and generate a gain, as
Table 3 shows.

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Always keep in mind that losses can happen if your outlook is
wrong. Switch the buys and sells in these examples and see what
results.
Market Knowledge Is Key
Market veterans insist that to trade spreads you must know your
markets. You must be aware of the supply-demand situation and
of how spreads typically react to factors affecting this balance.
Consider the 2004 corn market of Figure 1.
This spread narrowed sharply from minus 4.5 cents per bushel
on January 9 to minus 19.25 cents on January 28. Here’s why:
right after January 9, the USDA reported that corn stocks were far
smaller than anyone had thought. When supplies are scant, the
old crop price will rise relative to the new crop price to draw sup-
plies out of storage. This narrows the spread. So this might have
seemed a good time to sell the spread.
Further analysis led the market to fear the world could run out of
corn in a few years. This narrowed the spread even more. Note the
downward spike in late January. Spread sellers could have earned
as much as 14.75 cents per bushel, or $737.50 per one-lot spread,
depending of course on where they got in and out.
By May planting time, the outlook had changed. Farmers planted
more acres to corn than anticipated, planting weather was ideal,
and planting was completed early—all omens of a bumper crop.
Supply abundance typically creates a strong storage impulse—i.e.,
the promise of a huge crop will drive the spread wider.
So, mid-to late-May might have seemed a good time to buy the
July/December corn spread. Figure 1 shows that spread buyers
could have earned anywhere from a 15-cent to a 20-cent widening,
depending on entry and exit points. Of course a sudden rash of
bad weather could have altered the picture, and the spread could
have lost. In this case, it didn’t.
Trading Growth and Inflation Prospects
The platinum/gold spread is another good example of a spread,
and one which shouldn’t be overlooked because it serves as a
useful gauge of the U.S. economy. When inflation threatens or
when financial investments generate meager returns, gold be-
comes an inflation hedge or an alternative investment. Though also
precious, platinum is more of an industrial metal. Every automotive
catalytic converter contains platinum as do fuel cells, spark plugs,
computer hard drives, and pollution control devices.
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Thus when inflation threatens or economic growth slows, demand
for gold should increase, and gold should outperform platinum.
Conversely, when the U.S. economy seems to be thriving, demand
for platinum will strengthen enough that platinum should outper-
form gold.
To calculate this spread, multiply the prices by the contract sizes
and subtract the gold dollar value from the platinum dollar value.
This spread structure will widen when the economy is strengthen-
ing and platinum is outperforming and narrow when the economy
is weakening or inflation is threatening and gold is outperform-
ing. You buy or sell this spread in terms of what you do with the
platinum leg.
Figure 2 shows this spread for the first 10 months of 2004. Con-
sider two segments: from February 2 to March 1 and from May
26 to June 28. During much of that January, economic prospects
seemed rosy and auto makers were ramping up production. This
could have seemed a good time to buy this spread. Table 4 shows
the potential of such a trade. By May, inflation talk had become
more prominent, and selling the spread might have seemed wise.
Table 5 shows the potential of this trade. Notice especially that
both legs gained, not entirely rare with this spread.
Figure 2: Platinum/Gold Spread
A Final Word
This discussion touches on only two of the many spread trading
opportunities that are available in the futures markets. Although an
erroneous outlook can lead to losses, spreads are much easier to
predict than outright prices. As a result, spread trading strategies
can generate a steady stream of modest but gratifying returns to
your trading efforts.
Keith Schap is the author of The Complete Guide to Spread Trading.
For more information on this topic, go to our Events archives, where you can
view Keith’s webinar, “Futures Spreads: The What, the Where, the How and
the Logic,” presented August 23, 2005.
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Trade by the Book:

A Guide to Reading Order Flow
By Jack broz

If you use technical analysis to determine entry points for trades, you prob-
ably have found that many, many times, as soon as you get long—the market
breaks. Or, no sooner do you get short—and the market rallies.
The more time I spend working with new traders, the clearer it
becomes to me that what these traders are missing in their quest
to become profitable is the ability to read order flow. Oftentimes,
I find that these traders know more about technical analysis than
professional traders who have been making a living in the pits or on
the screen for 10, 15, or even 20 years. If you use technical analysis
to determine entry points for trades, you probably have found that
many, many times, as soon as you get long—the market breaks.
Or, no sooner do you get short—and the market rallies. Or, you en-
ter a trade, and just watch the market chop around your entry price
for several minutes. (There’s no reward in that trade either). How
about exiting trades? How many times have you just gotten out of
a position—and the market immediately races your way several
more ticks?
Now, rest assured that these same things also happen to profes-
sional traders; however, they happen to the novice trader so often
that the trader finds it difficult to become profitable. I propose that
what the novice trader is missing is a correct gauge of the order
flow, that is, what the buyers and sellers in the market are doing.
I’ve heard many traders refer to what I’m discussing as “timing” as
in, “I had the right idea, but my timing was off.” It’s the same thing;
a trader who can correctly read the flow of bids and offers into the
marketplace will be better able to time his trade entries and exits.
I’ll demonstrate an order book for the mini-sized Dow futures with
buy orders to the left side, and sell orders to the right. The top
price on the left side is the current bid; the top price on the right
side is the current offer. The numbers next to the prices in the book
show the actual quantity at each price. For example, 42 9736 on
the left side means there are 42 orders to buy at the price of 9736.
If we see 9737 38 in a row on the right side, we know that there are
38 orders to sell at the price of 9737. However, keep in mind that
what you are seeing (when you trade) is the live book and that the
prices—and especially the quantities—will continually change.
(Note: In an exchange-designated fast market, the changes in the
book will be even more pronounced. While there are strategies
for trading a fast market, the purpose of this article is to introduce
traders to the benefits of reading order flow; traders in the begin-
ning stages of learning to use the order book should not trade fast
markets.)
Now, what is critical is the volume of the best five bids versus the
volume of the best five offers. As you read that, perhaps you’re
thinking, “How in the world can I keep up with something that is
ever-changing?” Well, first of all, you only need to “guesstimate” the
total volume of the best five bids versus the best five offers. If the
book shows:
Bids Last Price Offers
— 9741 40
— 9740 40
— 9739 16
— 9738 18
— 9737 38
42 9736 —
16 9735 —
22 9734 —
87 9733 —
38 9732 —
Scan each “tens” columns of bids and offers; it suffices to say
that there are more bids than offers in the book. (We would expect
this to push the market higher).

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Suppose the book changed to this scenario:
Bids Last Price Offers ers at 9738 pulled their offers—they are less eager to sell than they
— 9741 40
— 9740 33
— 9739 20
— 9738 14
— 9737 28
39 9736 —
42 9735 —
93 9734 —
43 9733 —
40 9732 —
The first thing to look at is the Last Price – suppose 9737 appears
there. This change in the order book tells us that 9737 traded
perhaps as many as 10 times (the offer volume is 10 less and the
offer price traded). We can also deduce that the buyers are be-
coming more willing to buy; the quantity of 87 that was on the 9733
bid appears to have moved up to 9734; the quantity of 22 previ-
ously bid at 9734 appears to now be bid at 9735. Now the book
changes to:
Bids Last Price Offers to take profits. We also see huge size at 9755. That kind of size can
— 9742 16
— 9741 40
— 9740 35
— 9739 11
— 9738 9
66 9737 —
55 9736 —
40 9735 —
52 9734 —
38 9733 —
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What we see here is that the buyers have taken all the 9737 offers
and bid to buy more. That’s bullish. Furthermore, some of the sell-
were a few seconds ago. That’s bullish—some of the 9736 bids
went up to 9737—also bullish. A guesstimate shows the bid size is
still larger than the offer side, which is bullish. About the only thing
that is bearish is that the size at 9741 hasn’t budged. Two minutes
later, the book shows:
Bids Last Price Offers
— 9757 55
— 9756 87
— 9755 109
— 9754 50
— 9753 7
9 9752 —
17 9751 —
22 9750 —
44 9749 —
20 9748 —
The first thing that jumps out is that now the offer side of the order
book has the better size. This is the first hint that perhaps it’s time
be interpreted as longs looking to take profits, institutional sellers
anticipating resistance at 9755, or, institutions trying to push the
market back down so they can re-establish long positions.
Now, please understand that reading order flow is by no means an
exact science. However, by studying the order book every day, you
will begin to notice nuances – patterns – in the way market partici-
pants place orders, pull orders, etc. When you’re watching order
flow, you’re watching every market participant – the institutions,
hedgers, large speculators, and small traders.
On one end of that spectrum are the one-and two-lot traders plac-
ing orders in an attempt to establish a trade. On the other end of
the spectrum are the institutions and large traders who, besides
looking for trades, will use the book in an attempt to bluff other
traders. An example of how they might do this is by placing large
buy orders and hoping other traders bid in front of those orders.
The institution will then sell those bids. In many ways it’s a game of
cat-and-mouse that often goes unnoticed by new traders.
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As you learn what is happening in the market by watching the

book, combine that insight with information obtained from studying
a five-minute chart. Suppose the five-minute chart shows that the
market has rallied up to 9775 twice during the session – only to fail
and sag back to 9735-38. This tells us that the market is viewing
9775 and 9735 as important areas. The key is to use the order
book as trade nears those prices to determine if the market is still
viewing 9775 as resistance, and 9735 as support.

Continuing with our previous examples, let’s say the market falls
back after uncovering the 109 offered at 9755. A few minutes later
we see this in the book:

Bids Last Price Offers

— 9742 16
— 9741 40
— 9740 35
— 9739 11
— 9738 9
66 9737 —
55 9736 —
40 9735 —
52 9734 —
38 9733 —

This tells us that the market is still viewing the 9735 area as sup-
port, and we can therefore look to buy this area.

You can see the order flow on Lind Xpress®, which offers market
depth for both Globex and e-cbot markets, five deep on your
screen. You can view number of orders, quantity and price
displayed. Lind Xpress is always free to download and use.

Jack Broz is a Chicago Board of Trade member and an independent

analyst of U.S. equity and interest rate markets. He publishes daily analysis
at www.themarlinletter.com, where he can be reached.

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Technical Analysis and

Options Strategies for Long-Term
Position Traders
By ken shaleen

The age-old question all traders face is when to enter a new position. There
are three obvious choices for classical chartists: in anticipation of a breakout,
on the breakout (a close outside the formation), and after a price pullback to-
ward the breakout.
You might see a pattern unfolding and want to “lead off,” or get into
Minimum Measuring Objective
a trade before it actually develops. This can be a mistake—what if
the breakout you are anticipating doesn’t happen? But on the other
hand, you don’t want to miss out on the trade, or get in too late.
You can use an options strategy to help you in this situation.

2 4 Neckline
As you see the evolution of a price pattern, specific options strate-
gies may be far more suitable for establishing a position than an
outright long or short trade. This is especially true in the futures
markets, with their propensity to gap open beyond reasonably
placed protective stop-loss orders. 5
Right Shoulder

Let’s examine a classic head-and-shoulders bottom pattern as an 1

example of a chart that offers potential for an upside market break- Left Shoulder
3
out. A head-and-shoulders chart formation resembles a human
Head
head and shoulders and is generally considered to be predictive
of a price reversal. A head-and-shoulders top (which is considered
predictive of a price decline) consists of a high price, a decline to Head-and-Shoulders Bottom

the support level, a rally to a higher price than the previous high
price, a second decline to the support level, and a weaker rally to The problem is, when we think we have a low on the right shoulder,
about the level of the first high price. The reverse (upside down) we get excited about putting on a position, that is, getting long. But
formation is called a head-and-shoulders bottom (which is predic- if we put that position on too soon, that would be anticipating the
tive of a price rally). breakout, which might or might not occur. We need to wait for a
close, until the pattern is fully formed. What we can do in anticipa-
Any head-and-shoulders pattern needs five reversals of the minor tion of this pattern, however, is to use an options strategy.
price trend. In a head-and-shoulders bottom, the lows at points
one and five are the low of the shoulders. There must be a high-
volume close above the neckline to confirm a bullish pattern. Once
that pattern is activated, you can calculate your upside objective.

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the Vertical Bull Call Spread strategy lies in the fact that your maximum loss is equal to your
To anticipate an upside breakout with a limited loss potential (but net debit. That is, you are only risking the funds you need to initiate
also a limited reward potential) you can initiate a vertical bull call the position.
spread. You would buy the lower strike price and sell the higher
strike price of the same expiration month. Conversely, if you see a So, which call to sell and which to buy? I would recommend being
possible head-and-shoulders top forming and expect the market to long the at-the-money option and short the out-of-the-money. This
fall somewhat, you’d initiate the opposite lead-off options strat- is in anticipation of buying back one-half of the higher strike on the
egy—a vertical bear put spread where you’d buy the higher strike breakout.
price and sell the lower of the same expiration month.
If the market is trading at 100, you’d be long the 100 call and short
the 102, or for a more aggressive approach, short at 104. This is
risk reward profiles at expiration
more aggressive because the maximum reward is only realized
(assuming no lifting of legs) if the underlying instrument is trading
above the upper strike (at expiration). If you look at the diagram,
Short ATM Call “C”
+ the letter “C” on the chart would be the at-the-money option, say at
100, while the “A” strike would be out-of-the-money 96 and the “E”
– the in-the-money at 104.

Long ITM Call “A” You can go back to your head-and-shoulders chart pattern to find
Short OTM Call “D” out what strikes you might want to use, based on your projected
+ breakout target. This is shown on the diagram by moving the verti-
cal distance of the pattern over to the price at the neckline break.
– Keep in mind, objectives for head-and-shoulders patterns are
minimums; the breakout could exceed your expectations. A wise
Long ITM Call “B”
strategy is to take profits you might realize on one-half of your
position, then let the rest ride until the charts tell you the outlook
Short OTM Call “E”
has changed. Look at open interest for clues also; see where it’s
+
concentrated. And use a trailing “mental” stop on the price chart of
the underlying instrument to help you lock in any gains.
–
Long ATM Call “C” A benefit to this type of long-term approach to trading is that unlike
a short-term trader, you don’t have to be glued to your screen all
day, and you don’t need to pay for real-time quotes.

+ Reward and Increasing Price of

Underlying Instrument This is just one strategy you can consider when using technical
analysis. There are many more options strategies you can incor-
A
– B C D E
Risk=Amount Paid Current porate depending on your viewpoint, the type of chart pattern you
Price
see, and at what stage the pattern appears to be.

Note the maximum profit is realized if the price of the underlying is at or above If you are interested in this or other options strategies, please speak to one of
the higher strike expiration. The maximum loss is recorded if the underlying is our Lind Plus brokers, who would be happy to assist you.
at or below the lower strike at expiration.
Ken Shaleen is President of CHARTWATCH and a frequent instructor
at CME. To find out more about Ken’s weekly technical research, go to
The options strategy is a debit transaction, with your breakeven www.chartwatch.com
point the lower strike plus your net debit. Your maximum profit
equals the higher strike minus the lower strike minus the net debit.
If you are willing to consider a lower possible reward (versus an
outright long in the underlying instrument), the advantage of this

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Understanding Options Spreads

By Adam Klopfenstein

The premise behind them is that they have defined risk and limited profit
potential but can be used to get closer to the actual futures price of the
underlying commodity.
Option spreads are a great way to take part in an upward or This can be done by purchasing a put closer to the underlying
downward trending market. The premise behind them is that they commodity price, while selling a put further away from the current
have defined risk and limited profit potential but can be used to get commodity price. If you need any more information or explanation
closer to the actual futures price of the underlying commodity. An on the use of option spreads please feel free to contact me.
example of an option spread in the soybean market, where outright
Adam Klopfenstein is a Senior Market Strategist with Lind Plus.
options are very expensive due to the volatility, would be to buy the
You can reach him at 800-266-0551 or via email at
November soybean $7/ $7.60 bull call spread. Here you are buying aklopfenstein@lind-waldock.com.
the call option closer to the money ($7 call) and selling the option
that is further away ($7.60 call). Part of the cost of buying the $7
call is “financed” by the sale of the $7.60 call. If you wanted to buy
a $7 call option on the November soybeans outright, it would cost
you 34 cents (each cent in the beans is $50), or $1,700 per option.
The maximum risk is the $1,700 you pay (not including any com-
missions or fees) and the profit potential is infinite above $7 plus
the 34 cents you paid for the option (breakeven is $7.34). However,
if you initiated a $7/ $7.60 call spread, the cost would only be 15
cents, or $750. The advantage of a spread is that you can get
closer to the underlying commodity price for less cost. However,
the disadvantage is that your profits are capped at the difference
between the two strike prices (in this case 60 cents, or $3,000
exclusive of commissions or fees).

While the profits are not unlimited as they are with an outright op-
tion, it is rare that a market goes straight up or down. A spread can
offer a better chance of having your long option in the money as
you can get closer to the underlying commodity for less out-of-
pocket cost. While option spreads can be an effective way to play
a market move up or down, there is a tradeoff if the market were
to move past the further-out call. In this case you would miss out
on any potential profits above the strike price that was sold to
“finance” the closer-to-the-money call. This same example can be
used to position an account for a move lower in price through
a put spread.

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A Moving Average That Can Motivate

Your Trading: Tillson’s T3
By steve karnish

Many traders who have been exposed to Tillson’s T3 agree that it is

a moving average that is a better tool than most simple, weighted or
exponential averages.
Moving averages have always been a favorite tool among techni-
cians. I have used moving averages since 1975 and believe that
a good moving average can: a) define the trend b) act as support
and resistance and c) be used/configured as a momentum oscil-
lator. Over the years, I have seen many attempts at constructing a
“better moving average.” I’m sure you’ve heard of 20-day, 50-day
and 200-day moving averages. After testing and examining hun-
dreds of algorithms, I would like to share with you the one moving
average I use every day to guide my trading.
The Trend Is Truly Your Friend
If I had to pick a single tool to help traders, it would be an indica-
tor to define trend. The “trend is your friend” is an adage that is
overused in technical circles. In fact, the “trend is truly your friend.”
Years ago, I decided no matter what time frame that I was trading
in, I would only place trades in the direction of the existing trend.
Since that epiphany, my trading has improved. Let’s see how the
T3 acts as a trend identifier.

Three years ago, I met Tim Tillson. Tim wrote a great article in the
January 1998 issue of “Technical Analysis of Stocks and Com-
modities” titled: “Better Moving Averages.” Many traders who have
been exposed to Tim’s work agree that he has designed a moving
average that is a better tool than most simple, weighted or expo-
nential averages.

Tim’s goal in constructing the T3 was to remove random noise from

the underlying time series (your favorite stock or commodity). His
moving averages exhibit very desirable characteristics. The T3 is
an adaptive moving average that is smooth, but is not sensitive to
random noise in the issue you are monitoring. Also, the T3 modifies
the “lag and overshoot” properties of a simple moving average. In
other words, the T3 draws a very smooth moving average and has
a tendency to be rather sensitive to significant directional changes
in the market (mostly, eliminating the “whipsawing” that many trad-
ers are familiar with when using simple moving averages). I won’t
get into the mathematical complexities of the formula on which the
T3 is based here—more important is how it can be applied to your
trading.
Chart 1: March Soybeans
Chart 1 shows how well the T3 defines trend. March soybeans
have chopped back and forth between $4.98 and $5.65, changing
direction every two or three weeks for the last four months. When
the T3 has a positive posture (pointing up) we see an abundance
of white candles (days when the bulls are in control and the close
is higher than the opening). When the T3 has a negative slope, the
market has a tendency to produce a majority of black candles.
Many of us have heard the adage, “the trend is your friend” and in
life, “go with the flow.” These are truly words of wisdom. Trading
against the trend can be hazardous to your financial health. Chart
1 tells a simple story: the T3 can define the direction of the market
with very little lag. . . don’t trade against that direction.

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Chart 2 displays soybean price history in 2005. I use the T3 not

only as a directional indicator (trend identification), but also as an
indicator to define support and resistance. Notice how well price
was resisted at the down-trending T3 line and how well price was
supported at the up-trending T3 adaptive moving average. Many
approaches can be developed when one has a reliable indicator. I
witnessed traders who day-traded futures contracts and scalped
in the direction of the T3. In the morning, they buy the opening
(providing the T3 is positive), and in the afternoon they sell their
positions market-on-close. In Chart 2, a similar strategy would have
profited handsomely.

Chart 3: March Soybeans

Let’s review the concepts I have presented by looking at Chart 4. In

early November 2004, April gold futures turned up. The T3 sensed
the directional change and adapted quickly to the upside. For the
following four weeks of trading, purchasing gold at or near the T3
line would have been very rewarding. As the price of gold painted a
roller-coaster pattern on the charts, the T3 consistently pointed to
the direction of the trend and provided support and resistance as
gold bounced up-down-up-down-up-down.

Chart 2: March Soybeans

Moving averages can be the driving math behind some really inter-
esting momentum oscillators. In Chart 3, I have taken the T3 and
then subtracted the same indicator, but set to five days, instead of
three. To state it differently, I have subtracted two adaptive moving
averages from one another. In this case, I subtracted the five-pe-
riod moving average: T3(5) from the three-period moving average
T3(3). The results are a rather smooth oscillating momentum indi-
cator. I have attached dotted blue and red lines to help discern the Chart 4: April Gold
indicator directional turns. Of course, each directional turn in the
indicator is not known with certainty until the close of the following T3 Can Help You Find the Trend
bar, but it can be of great value. I use momentum oscillators every Markets draw pictures that we interpret through chart analysis. All
day. Every issue that I analyze, I examine the current status of the my chart analysis starts with the identification of the trend. I only
oscillator. Many of my best mechanical systems have moving aver- trade in the direction of the trend. The T3, an adaptive moving aver-
age oscillators as the featured trigger generator. age, can help you discern trend direction. Always trading with
the trend will improve most investors’ decisions. Using a moving
average as support and resistance is a way to help you improve
entry and exit strategies. I use these tools daily and I encourage
you to take the time to investigate how they might help you.

Steve Karnish is Principal of Cedar Creek Trading. Learn more about other
kinds of moving averages and how they differ, including the T3, and apply
the concepts to single-stock futures markets in our archived webinar given
February 1, 2005. Go to the Events archive area.

Coyyright 2005 CedarCreekTrading.com. All rights reserved.

Used with permission by Equis Intl.

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glossary of technical analysis terms 44

glossary of trading strategies terms 48

glossary of basic futures terminology 50


Technical Analysis Terms Glossary
Here you can review a short list of the jargon used in reference to
the technical analysis and futures.
Definitions are not intended to suggest the correct legal signifi-
cance or exact meaning. They were collected from several sources
to help in your understanding of the futures and options industry.
Bb
Bar Chart
A chart that graphs the high, low, and settlement prices for a spe-
cific trading session over a given period of time.
Bollinger Band
An indicator used to compare volatility and relative price levels over
a specified time period. Three bands are plotted: a simple moving
average, an upper band of the simple moving average plus two
standard deviations, and a lower band of the simple moving aver-
age minus two standard deviations. When the markets become
more volatile, the bands widen, or move farther away from the
average. When the markets are less volatile, the bands contract, or
move closer to the average.
Cc
Candlestick Chart
Candlestick charts provide a quick visual picture of the relationship
between opening and closing prices and their relative strengths
or weaknesses, especially for extended periods. The body, which
looks like a candle, represents the difference between opening and
closing prices. Shadows, which look like wicks, represent price
action above and below the body.
Channel
The range of prices between support and resistance levels that a
market has traded in for a specific time period.
Charting
The use of graphs and charts in the technical analysis of futures
markets to plot price movements, volume, open interest or other
statistical indicators or price movement.
1 2 3 G technical analysis glossary
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Chaos Theory/Trading
Also called non-linear dynamics, chaos theory involves complex
analysis but is essentially a tool to determine whether repetitive
patterns and cycles exist in the markets; that is, the presence of an
underlying order. It involves the study of historical price action and
use of mathematical and statistical tools.
Closing Out
Liquidating an existing long or short futures or options position
with an equal and opposite transaction. Also called offsetting.
Commitments of Traders Report (COT)
A weekly report from the Commodity Futures Trading Commission
providing a breakdown of each Tuesday’s open interest for markets
in which 20 or more traders hold positions equal to or above the
reporting levels established by the CFTC. Open interest is broken
down by aggregate commercial, non-commercial, and non-report-
able holdings.
Congestion
A period of time characterized by repetitious and limited price
fluctuations.
Correction
A temporary reversal in prices following a significant trending
period.
Counter-Trend Trading
The method by which a trader takes a position contrary to the cur-
rent market direction in anticipation of a change in that direction.
Dd
Directional Movement Index (DMI)
A trend-following indicator used to determine market trends. It
has three components—one for upward price movement, one for
downward price movement, and a third that measures the differ-
ence in these up-and-down market forces to arrive at an index
showing the strength of a trend.
44

Double Bottom
Chart pattern describing a drop in price, a rebound, and another
drop to the same or close to the level of the first drop, then another
rebound. The chart typically looks like a “W” in shape, and the two
bottom points of the W represent support areas.
Double Top
Chart pattern describing a rise in price, a fall, another rise to the
same or close to the level of the first rise, then another fall. The
chart typically looks like an “M” in shape, with the two top points of
the M representing resistance areas.
Ee
Elliott Wave Theory
A theory named after Ralph Elliott, who contended that stock
market trends move in discernable and predictable patterns reflect-
ing the basic harmony of nature. In technical analysis, it reflects a
charting method based on the belief that all prices act as waves,
rising and falling rhythmically in a pattern of five up and three
down. Waves essentially reflect psychology of the marketplace as it
makes its normal rallies and corrections.
Ff
Fibonacci
Leonardo Fibonacci was a thirteenth-century Italian mathematician
who discovered the significance and unique properties of a simple
number series, in which each numeral is added to the previous
to create the next one in the series: 0,1,2,3,5,8,13, etc. Fibonacci
numbers, and more significantly the ratio of those numbers to each
other, can be found throughout nature and cycles. Fibonacci ratios
are used in technical analysis to predict retracement areas during
pullbacks, as well as targets, called “extensions,” for projected
price moves.
Gg
Gann Theory
A method of predicting price movements through the relationship
of geometric angles in charts depicting time and price. The meth-
odology was created by W.D. Gann, a financial astrologer who was
born in 1878 and became one of the most successful traders of
his time. Gann techniques can be complex, but are based on price
study, time study and pattern study and operate under the premise
markets are cyclical in nature.
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Gap
Price areas on a chart where no trading takes place. Gaps happen
often in markets that trade only part of a day because price-moving
events and announcements take place during times when markets
are closed. Follow-up price action may cover them, or “fill the gap.”
Hh
Head-and-Shoulders
A chart formation that resembles a human head-and-shoulders
and is generally considered to be predictive of a price reversal. A
head-and-shoulders top (which is considered predictive of a price
decline) consists of a high price, a decline to the support level,
a rally to a higher price than the previous high price, a second
decline to the support level, and a weaker rally to about the level of
the first high price. The reverse (upside down) formation is called a
head-and-shoulders bottom (which is predictive of a price rally).
Ll
Liquid Market
A market in which selling and buying can be accomplished with
minimal effect on price.
Mm
Momentum
The relative change in price over a specific time interval. Often
equated with speed or velocity and considered in terms of relative
strength.
Moving Average
A statistical price analysis method of recognizing different trends.
A moving average is calculated by adding the prices for a predeter-
mined number of days and then dividing by the number of days.
Moving Average Convergence/Divergence (MACD)
MACD analysis uses three moving averages, often exponential.
Two of them are based on the number of price periods used and
the third an average of the difference between the two moving
averages. The difference between the readings of the two moving
averages is usually shown as a histogram, while the average of that
difference is shown as a moving average line plotted on top of the
histogram. An important part of MACD analysis is how its move-
ments compare with price movements to determine strength or
weakness in the market.
45

Oo
Open Interest
The sum of all long or short futures contracts in one delivery month
in one market that have been entered into and not yet liquidated by
an offsetting transaction or fulfilled by delivery.
Oscillator
A term for indicators used to determine overbought and oversold
conditions, often useful when a clear trend can’t easily be
determined. Oscillators include stochastics, moving average con-
vergence/divergence, relative strength index and momentum.
Overbought
A term used to describe a technical opinion on a market that
has risen too steeply and too fast in relation to underlying funda-
mental factors.
Oversold
A term used to describe a technical opinion of a market has
declined too steeply and too fast in relation to underlying funda-
mental factors.
Pp
Parabolic Indicator
A strategy that uses trailing stops and a reverse method called
stop-and-reversal (SAR) to pinpoint entry and exit points. Price
action above the SAR would signal a bullish posture, price action
below, a bearish posture.
Point-and-Figure Chart
A method of charting that uses prices to form patterns of move-
ment without regard to time. It defines a price trend as a continued
movement in one direction until a reversal or predetermined crite-
rion is met. Xs are used to represent upticks, while Os represent
downticks.
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Rr
Rally
An upward movement of prices.
Range
The difference between the high and low price of a commodity
during a given trading session, week, month, year, etc.
Relative Strength Index
The Relative Strength Index compares periods with up closes with
periods that have down closes to produce an index reading reflect-
ing the strength of price changes on a scale of 0 to 100. The index
provides overbought or oversold signals, and divergence/conver-
gence with prices is an important part of the analysis.
Resistance
A price area where new selling is expected to emerge to dampen a
continued rise. Areas of resistance are found above current prices.
Retracement
A move opposite the direction of the main market trend.
Reversal
A change in the direction of prices.
Ss
Squeeze
A market situation in which the lack of supplies tends to force
shorts to cover their positions by offsetting at higher prices.
Stochastics
Stochastics measures the closing price relative to the low of the
range for a selected period to indicate rising or falling momentum,
providing trading signals when its lines cross into overbought or
oversold territory. As an overbought/oversold indicator, the sto-
chastic indicator attempts to forecast turns in market action.
Support
The place on a price chart where it is expected buying of futures
contracts will be sufficient to halt a price decline. Areas of support
are found beneath current prices.
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Tt
Technical Analysis
An approach to forecasting commodity prices that examines the
patterns of price change, rates of change, and changes in volume
of trading and open interest, without regard to underlying funda-
mental market factors.

Trend
The general direction, either up or down, in which prices have
been moving.

Trend lines
Lines drawn across successively higher bottoms in uptrending
price action or progressively lower tops in downtrending price ac-
tion. Prices crossing a trend line may indicate a change in direction
has occurred.

Vv
Volatility
A measurement of the change in price over a given time.

Volume
The number of purchases and sales of futures contracts or options
on futures contracts made during a specified period of time.

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Trading Strategy Terms Glossary
Here you can review a short list of those items you’re most
likely to encounter when reading about futures trading strategies.
Definitions are not intended to suggest the correct legal signifi-
cance or exact meaning. They were collected from several sources
to help in your understanding of the futures and options industry.
Bb
Bear Spread
The simultaneous purchase and sale of two futures contracts in
the same or related commodities with the intention of profiting from
a decline in prices but at the same time limiting the potential loss
if this expectation does not materialize. In agricultural products, this
is accomplished by selling a nearby delivery and buying a de-
ferred delivery.
Black Box Trading
Black box trading, or automated trading, refers to the use of
computerized systems with buy and sell instructions generated by
a proprietary software program.
Bull Spread
The simultaneous purchase and sale of two futures contracts in
the same or related commodities with the intention of profiting from
a rise in prices but at the same time limiting the potential loss if
this expectation is wrong. In agricultural commodities, this is ac-
complished by buying the nearby delivery and selling the deferred.
Cc
Counter-Trend Trading
The method of trading by which a trader takes a position con-
trary to the current market direction in anticipation of a change in
that direction.
Cabinet Trade
A trade that allows options traders to liquidate deep out-of-the-
money options equal to less than one tick.
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Call Option
An option that gives the buyer the right, but not the obligation, to
purchase (go long) the underlying futures contract at the strike
price on or before the expiration date.
Convergence
The tendency for cash and futures prices to come together (i.e., the
basis approaches zero) as the futures contract nears expiration.
Contrarian
Contrarian traders take positions against the prevailing market
trend, that is, buy, or go long, when prices are falling and sell, or
go short, when prices are rising. A contrarian trader may aim to
profit from a series of small trades based on fluctuations within the
prevailing trend, or may be anticipating a change in direction based
on momentum indicators or other analysis tools.
Counter-Trend
Against the prevailing trend. The market may make a short-term
counter-trend move within a prevailing long-term trend. Counter-
trend traders aim to take advantage of this tendency by buying
when prices are low and selling when prices are high, or they may
be anticipating a change in direction based on momentum indica-
tors or other analysis tools.
Covered Call
An option spread position where calls are sold against a long
position in the underlying instrument. In essence, the trader is
limiting his profit on the long position in exchange for receiving the
option premium. On option expiration day, the breakeven on the
long futures is lower by the amount of option premium received,
less commissions.
Covered Option
A short call or put option position which is covered by the sale or
purchase of the underlying futures contract or physical commodity.
For example, in the case of options on futures contracts, a covered
call is a short call position combined with a long futures position. A
covered put is a short put position combined with a short futures
position. Also called a Covered Write. (See also Covered Call and
Covered Put).
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Covered Put
An option spread position where Puts are sold against a short po- Ee
sition in the underlying instrument. In essence, the trader is limiting
his profit on the short position in exchange for receiving the option Exercise

premium. On option expiration day, the breakeven on the short The action taken by the holder of a call option if he or she wishes to

futures is raised by the amount of option premium received, less purchase the underlying futures contract or by the holder of a put

commissions. option if he or she wishes to sell the underlying futures contract.

Exercise Price

Dd The price at which the futures contract underlying a call or put op-
tion can be purchased (if a call) or sold (if a put). Also referred to as

Day Trade strike price.

The purchase and sale of a futures or an options contract in the

same day, thus ending the day with no established position in the
market or being flat. Ff
Day Traders Fill or Kill

Speculators who take positions in futures or options contracts and A customer order that is a price limit order that must be filled im-

liquidate them prior to the close of the same trading day. mediately or cancelled.

Day Trading
(See Day Trade) Gg
Day Order Gamma

An order that is placed for execution during only one trading A measurement of how fast delta changes, given a unit change in

session. If the order cannot be executed during that session, it is the underlying futures price.

automatically cancelled.
Global Macro

Day Trade A strategy in which trading decisions are based on global econom-

The purchase and sale of a futures or options contract during only ic and political factors, that is, macroeconomic principles.

one trading session. If the order cannot be executed during that

session, it is automatically cancelled. A day trader places and liqui- Good ‘til Canceled (GTC)

dates trades during one trading session. An order worked by a broker until it can be filled or until canceled
(see Open Order).

Delta
A measure of how much an option premium changes, given a unit
change in the underlying futures price. Delta is often interpreted as
the probability the option will be in-the-money by expiration.
Differentials
Price differences between classes, grades, and delivery locations
of various supplies of the same commodity.
Discretionary Account
An arrangement by which the holder of the account gives written
power of attorney to another person to make trading decisions.
Also known as a controlled or managed account.
Hh
Hedge
The purchase or sale of a futures contract as a temporary substi-
tute for a cash market transaction to be made at a later date.
Usually it involves opposite positions in the cash market and fu-
tures market at the same time.
Horizontal Spread
The purchase of either a call or a put option and the simultaneous
sale of the same type of option with typically the same strike
price but with a different expiration month. Also referred to as a
calendar spread.

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Ii
In-the-Money Option
An option with intrinsic value. A call option is in-the-money if its
strike price is below the current price of the underlying futures
contract. A put option is in-the-money if its strike price is above the
current price of the underlying futures contract.
Intrinsic Value
The amount by which an option is in-the-money.
Inverted Market
A futures market in which contracts nearer to expiration are
priced higher than those in more distant months. Also called back-
wardation, an inverted market typically reflects a market facing
a supply shortage.
Ll
Limit Order (LMT)
An order type that specifies a certain maximum (or minimum) price,
beyond which the order (buy or sell) is not to be executed.
Liquid
A characteristic of a security or commodity market with enough
units outstanding to allow large transactions without a substantial
change in price.
Liquidate
Selling (or purchasing) futures contracts of the same delivery
month purchased (or sold) during an earlier transaction. Or, making
(or taking) delivery of the cash commodity represented by
the futures contract.
Mm
Market Depth
A dimension of market liquidity that refers to the ability of the
market to handle large trading volumes without a significant impact
on prices. Traders may study market depth to determine how and
when particular orders may impact price action, and to help time
the entry and exit of trades.
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Market Neutral
A trading strategy that aims to profit from both rising and falling
prices, often by taking a combination of long and short positions in
one or more markets. True market neutrality means the expected
beta, or market risk, is equal to zero. Traders who employ a market
neutral strategy are attempting to exploit market momentum.
Momentum
The relative change in price over a specific time interval. Often
equated with speed or velocity and considered in terms of relative
strength.
Nn
Naked Option
The sale of a call or put option without holding an equal and op-
posite position in the underlying instrument. Also referred to as an
uncovered option, naked call, or naked put.
NOB Spread (Notes over Bonds)
A futures spread trade involving the buying (selling) of a 10-year
U.S. Treasury note futures contract and the selling (buying) of a
U.S. Treasury bond futures contract.
Oo
One Cancels Other (OCO) Order
A pair of orders, typically limit orders, whereby if one order is filled,
the other order will automatically be cancelled.
Open Order (or Orders)
An order that remains in force until it is canceled or until the futures
contracts expire.
Out-of-the-Money
A term used to describe an option that has no intrinsic value.
For example, a call with a strike price of $400 on gold trading at
$390 is out-of-the-money $10.
Out-Trades
A situation that results when there is some confusion or error on a
trade, e.g., over difference in the understanding of a price at which
a trade is done, or the number of contracts traded.
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Pp
Position Trader
An approach to trading in which the trader either buys or sells
contracts and holds them for an extended period of time.
Pyramiding
The use of profits on existing positions as margin to increase the
size of the position, normally in successively smaller increments.
Rr
Risk/Reward Ratio
The relationship between the probability of loss and profit. This
ratio is often used as a basis for trade selection or comparison.
Ss
Scale Down (or Up)
To purchase or sell a scale down means to buy or sell at regu-
lar price intervals in a declining market. To buy or sell on scale
up means to buy or sell at regular price intervals as the market
advances.
Scalp
To trade for small gains. Scalping normally involves establishing
and liquidating a position quickly, usually within the same day, hour
or even just a few minutes.
Small Traders
Traders who hold or control positions in futures or options that are
below the reporting level specified by the exchange or the CFTC.
Spreading
The simultaneous buying and selling of two related markets in the
expectation that a profit will be made when the position is offset.
Examples include: buying one futures contract and selling another
futures contract of the same commodity but different delivery
month; buying and selling the same delivery month of the same
commodity on different futures exchanges; buying a given delivery
month of one futures market and selling the same delivery month
of a different, but related, futures market.
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Speculative Bubble
A rapid, but usually short-lived, run-up in prices caused by exces-
sive buying which is unrelated to any of the basic, underlying
factors affecting the supply or demand for the commodity. Specu-
lative bubbles are usually associated with a “bandwagon” effect
in which speculators rush to buy the commodity (in the case of
futures, “to take positions”) before the price trend ends, and an
even greater rush to sell the commodity (unwind positions) when
prices reverse.
Straddle
An option position consisting of the purchase or sale of put and call
options with the same expiration date and the same strike prices.
Strangle
An option position consisting of the purchase or sale of put and call
options having the same expiration date but different strike prices.
Strong Hands
When used in connection with delivery of commodities on futures
contracts, the term usually means that the party receiving the
delivery notice probably will take delivery and retain ownership of
the commodity; when used in connection with futures positions,
the term usually means positions held by trade interests or well-
financed speculators.
Tt
Trading Arcade
A trading facility where independent traders can gather for comput-
erized trading, often operated by a clearing member.
Trailing Stop
A technique often used in attempt to protect profits without limiting
potential gains by moving a stop up or down with the market. A
stop order would be raised on a long position in a bullish market,
and lowered on a short position in a bear market. For example, a
trader initiates a long futures position when the market is at $4, and
places a protective stop at $3. The market then rallies to $10. He or
she then moves the stop up to $9, exiting the position if the market
falls to $9.
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Time Value
The amount option buyers are willing to pay, above the intrinsic
value, for an option in the anticipation that, over time, a change
in the underlying futures price will cause the option to increase in
value. In general, an option premium is the sum of time value and
intrinsic value. Any amount by which an option premium exceeds
the option’s intrinsic value can be considered time and volatility
value. Also referred to as extrinsic value.

Trend-Following
Trend following is a strategy that follows the market’s prevailing
direction, buying when prices are rising and selling when prices are
falling. This presumes the prevailing trend will continue.

Vv
Vertical Spread
Buying and selling puts or calls of the same expiration month but
different strike prices.

Volatility Trading
Strategies designed to take advantage of the changes in volatility of
the market rather than the direction of the market.

Ww
Weak Hands
When used in connection with delivery of commodities on futures
contracts, the term usually means that the party probably
does not intend to retain ownership of the commodity; when used
in connection with futures positions, the term usually means
positions held by small speculators.

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Introductory Futures Terms Glossary
Here you can review a list of the jargon we use in the futures in-
dustry. These terms will help you gain a basic understanding of the
“language of the futures industry.”
Definitions are not intended to suggest the correct legal signifi-
cance or exact meaning. They were collected from several sources
to help in your understanding of the futures and options industry.
Aa
Arbitrage
The simultaneous purchase and sale of identical or equivalent
financial instruments or commodity futures in order to benefit from
a discrepancy in their price relationship.
Ask
A motion to sell. The same as offer. Indicates a willingness to sell a
futures contract at a given price. (See Bid.)
Bb
Back Month
Futures delivery months other than the spot or front month.
(Also called deferred months.)
Basis
The difference between the current cash price and the futures
price of the same commodity. The basis is determined by the costs
of actually holding the commodity versus contracting to buy it
for a later delivery (i.e. a futures contract). The basis is affected by
other influences as well, such as unusual situations in supply
or demand. Unless otherwise specified, the price of the nearby
futures contract month is generally used to calculate the basis.
(See Carrying Charge.)
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Broker
A person paid a fee or commission for executing buy or sell orders
for a customer. In commodity futures trading, the term may refer
to: (1) Floor Broker - a person who actually executes orders on the
trading floor of an exchange; (2) Account Executive or Associated
Person - the person who deals with customers in the offices of
Futures Commission Merchants; or (3) the Futures Commission
Merchant.
Bid
The price that the market participants are willing to pay. A motion
to buy a futures or options contract at a specified price. Opposite
of offer.
Bear
One who expects a decline in prices. The opposite of a “Bull.”
Remember that a bear attacks by striking his paw downward.
Bear Market
A market in which prices are dropping.
Bull
One who expects prices to rise. The opposite of “Bear.” Remember
that a bull attacks by thrusting his horns upward.
Bull Market
A market in which prices are rising.
Cc
Carrying Charge (Cost of Carry)
For physical commodities such as grains and metals, the cost of
storage space, insurance, and finance charges incurred by holding
a physical commodity. In interest rate futures markets, it refers to
the differential between the yield on a cash instrument and the cost
necessary to buy the instrument. (See Basis.)
Cash Commodity
An actual physical commodity someone is buying or selling, e.g.,
soybeans, corn, gold, silver, Treasury bonds, etc. Also referred to
as Actuals.
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Cash Market
A place where people buy and sell the actual commodities, i.e.,
grain elevator, bank, etc. (See Spot and Forward Contract.)
Cash Price
The price of the actual physical commodity that a futures contract
is based upon.
Commodity
An article of commerce or a product that can be used for com-
merce. In a narrow sense, products traded on an authorized
commodity exchange. The types of commodities include agricul-
tural products, metals, petroleum, foreign currencies, and
financial instruments and indexes, to name a few.
Contract
Unit of trading for a financial or commodity future. Also, actual bilat-
eral agreement between the parties (buyer and seller) of a futures
or options on futures transaction as defined by a futures exchange.
Dd
Daily Trading Limit
The maximum price range set by the exchange each day for a
contract. A trading limit does not halt trading, but rather, limits how
far the price can move in a given day.
Day Order
An order that is placed for execution during only one trading ses-
sion. If the order cannot be executed (filled) that day, it automati-
cally expires at the close of the trading session.
Day Trade
The purchase and sale of a futures or an options contract in the
same day, thus ending the day with no established position in the
market or being flat.
Day Traders
Speculators who take positions in futures or options contracts and
liquidate them prior to the close of the same trading day.
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Day Trading
(See Day Trade.)
Deferred Month (AKA: Back Months)
The more distant month(s) in which futures trading is taking place,
as distinguished from the nearby (delivery) month.
Deliverable Grades (AKA: Contract Grades)
The standard grades of commodities or instruments listed in the
rules of the exchanges that must be met when delivering cash
commodities against futures contracts. Grades are often accom-
panied by a schedule of discounts and premiums allowable for de-
livery of commodities of lesser or greater quality than the standard
called for by the exchange.
Delivery
The transfer of the cash commodity from the seller of a futures
contract to the buyer of a futures contract. Each futures exchange
has specific procedures for delivery of a cash commodity. Some
futures contracts, such as stock index contracts, are cash settled.
Delivery Month
A specific month in which delivery may take place under the
terms of a futures contract. Also referred to as contract month or
front month.
Delivery Points
The locations and facilities designated by a futures exchange
where stocks of a commodity may be delivered in fulfillment of a
futures contract, under procedures established by the exchange.
Ee
Exchange
(See Futures Exchange.)
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Ff
First Notice Day
The first day on which a notice of intent to deliver a commodity in
fulfillment of a given month’s futures contract can be made by
the clearinghouse to a buyer. The clearinghouse also informs the
seller who they have been matched up with.
Forward (Cash) Contract
A cash contract in which a seller agrees to deliver a specific cash
commodity to a buyer sometime in the future. Forward contracts,
in contrast to futures contracts, are privately negotiated and are not
standardized.
Front Month
(See Delivery Month.)
Futures
A term used to designate all contracts covering the purchase
and sale of financial instruments or physical commodities for future
delivery on a commodity futures exchange.
Futures Commission Merchant
A firm or person engaged in soliciting or accepting and handling
orders for the purchase or sale of futures contracts, subject
to the rules of a futures exchange and, who, in connection with
solicitation or acceptance of orders, accepts any money or
securities to margin any resulting trades or contracts. The FCM
must be licensed by the CFTC.
Futures Contract
A legally binding agreement, made on a futures exchange, to buy
or sell a commodity or financial instrument sometime in the
future. Futures contracts are standardized according to the quality,
quantity, and delivery time and location.
Futures Exchange
A central marketplace with established rules and regulations
where buyers and sellers meet to trade futures and options on
futures contracts.
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Gg
Good till Canceled (GTC)
An order worked by a broker until it can be filled or until canceled.
(See Open Order.)
Hh
Hedge
The purchase or sale of a futures contract as a temporary sub-
stitute for a cash market transaction to be made at a later
date. Usually it involves opposite positions in the cash market
and futures market at the same time.
Hedger
An individual or company owning or planning to own a cash com-
modity corn, soybeans, wheat, U.S. Treasury bonds, notes, bills,
etc. and concerned that the cost of the commodity may change
before either buying or selling it in the cash market. A hedger
achieves protection against changing cash prices by purchasing
(selling) futures contracts of the same or similar commodity and
later offsetting that position by selling (purchasing) futures con-
tracts of the same quantity and type as the initial transaction.
Hedging
The practice of offsetting the price risk inherent in any cash
market position by taking an equal but opposite position in the
futures market. Hedgers use the futures markets to protect
their busnesses from adverse price changes.
Ii
Initial Margin
The minimum value on deposit in your account to establish a new
futures or options position, or to add to an existing position. Initial
margin amount levels differ by contract. Lind-Waldock sets the
level of Initial Margin required, and it may change at any time at
Lind-Waldock’s discretion. Increases or decreases in Initial Margin
levels reflect anticipated or actual changes in market volatility. Also
called “Initial Performance Bond.”
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Ll Mm
Last Trading Day Maintenance Margin
The final day when trading may occur in a given futures or options The minimum value that you must keep in your account in order
contract month. Futures contracts outstanding at the end of to continue to hold a position. The maintenance margin is typically
the last trading day must be settled by delivery of the underlying less than the initial margin, and also differs by contract. If your
commodity or securities or by agreement for monetary settle- account falls below the maintenance margin requirement, you will
ment (in some cases by EFPs). receive a margin call. If you wish to continue to hold the position,
you will be required to restore your account to the full initial margin
Limit Move level (not to the maintenance margin level). Also known as the
(See Daily Trading Limit.) Maintenance Performance Bond.

Limit Order Managed Futures

An order given for an options or futures trade specifying a certain
maximum (or minimum) price, beyond which the order (buy or sell)
is not to be executed.
Leverage
The ability to control large dollar amounts of a commodity with a
comparatively small amount of capital.
Represents an asset class comprised of professional money man-
agers known as commodity trading advisors (CTAs) who manage
client assets on a discretionary basis, using global futures markets
as an investment medium.
Margin
(See Performance Bond.)

Limit Order Margin Call

(See Price Limit Order.)
Liquid
A characteristic of a security or commodity market with enough
units outstanding to allow large transactions without a substan-
tial change in price. Institutional investors are inclined to seek out
liquid investments so that their trading activity will not influence the
market price.
Liquidation
Any transaction that offsets or closes out a long or short
futures position.
Long
(1) One who has bought a futures contract to establish a market
position; (2) a market position that obligates the holder to take de-
livery; (3) one who owns an inventory of commodities. See Short.
Long Hedge
The purchase of a futures contract in anticipation of an actual
purchase in the cash market. Used by processors or exporters as
protection against an advance in the cash price.
A demand from a clearinghouse to a clearing member, or from
a brokerage firm to a customer, to bring margin deposits up to a
minimum level required to support the positions held. This can be
done by either depositing more funds or offsetting some or all of
the positions held.
Mark-To-Market (Marked-To-Market)
A daily accounting entry that is the bedrock of regulated futures
bookkeeping. It’s the end-of-day adjustment made to trading ac-
counts to reflect profits and losses on existing positions. In other
words, winnings are credited and immediately available to the
account and losses are debited and immediately owed. This brings
integrity to the marketplace because participants are not allowed to
trade unless funds are available to cover the positions.
Market Order (MKT)
An order to buy or sell a specified commodity, including quantity
and delivery month at the best possible prices available, as soon
as possible.
Market-If-Touched (MIT) Order
A price order that automatically becomes a market order if the
price is reached.

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Market on Close (MOC) Pit

An order to buy or sell at the end of the trading session at a price A specially constructed arena on the trading floor of some ex-
within the closing range of prices. changes where trading in a futures contract is conducted.
On some exchanges the term “ring” designates the trading area
for a commodity.
Oo
Position
Offer A market commitment. A buyer of an initial futures contract is said
Indicates a willingness to sell a futures contract at a given price. to have a long position and, conversely, a seller of an initial futures
Also called “Ask” (See Bid). contract is said to have a short position.

Offset Price Discovery

Taking a second futures or options position opposite to the initial
or opening position. This means selling, if one has bought, or
buying, if one has sold, a futures or option on a futures contract.
Open Order
An order to a broker that is good until it is canceled or executed.
(See GTC.)
Open Outcry
Method of public auction for making verbal bids and offers in the
trading pits or rings of futures exchanges.
Or Better Order (OB)
A type of a limit order in which the market is at or better than the
limit specified. The term is often used to help clarify that the order
was not mistakenly given as a Limit when it looks like it should be a
Stop Order.
Pp
Performance Bond (Margin)
Funds that must be deposited as a performance bond by a cus-
tomer with his or her broker, by a broker with a clearing member,
or by a clearing member, with the clearinghouse. The performance
bond helps to ensure the financial integrity of brokers, clearing
members and the exchange as a whole.
The generation of information about “future’’ cash market prices
through the futures markets. It has been said that futures markets
are often the place of “original price discovery” because that’s
where the buyers and sellers are brought together to determine the
price. As in any auction, the last price is considered to reflect the
sum total of opinions about what price an item should be valued.
Price Limit Order
An order that specifies the highest price at which a bidder will pay
for a contract, or the lowest price a seller will sell a contract.
This type of order is used to “limit” how much the trader is willing to
“give in” on price to get the order filled.
Ss
Settlement Price
The last price paid for a commodity on any trading day. The ex-
change clearinghouse determines a firm’s net gains or losses, mar-
gin requirements, and the next day’s price limits, based on each
futures and options contract settlement price. If there is a closing
range of prices, the settlement price is determined by averaging
those prices. Also referred to as Settle or Closing Price. Thinly
traded options may be traded at a theoretical value.
Scalp
To trade for small gains. Scalping normally involves establishing
and liquidating a position quickly, usually within the same day, hour
or even just a few minutes.

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Short Stop Limit

(1) The selling side of an open futures contract; (2) a trader whose
net position in the futures market shows an excess of open sales
over open purchases. (See Long).
Short Hedge
The sale of a futures contract in anticipation of a later cash market
sale. Used to eliminate or lessen the possible decline in value of
ownership of an approximately equal amount of the cash financial
instrument or physical commodity.
A variation of a stop order. A stop limit order to buy becomes a limit
order at the stop price when the futures contract trades (or is bid)
at or above the stop price. A stop order to sell becomes a limit or-
der at the stop price when the futures contract trades (or is offered)
at or below the stop price.
Tick
Smallest increment of price movement possible in trading a
given contract.

Speculator
One who attempts to anticipate price changes and, through buying
and selling futures contracts, aims to make profits. A speculator
does not use the futures market in connection with the production,
processing, marketing or handling of a product.

Spot
Market of immediate delivery of and payment for the product.

Spread
The price difference between two related markets or commodities.

Spreading
The simultaneous buying and selling of two related markets in the
expectation that a profit will be made when the position is offset.
Examples include: buying one futures contract and selling another
futures contract of the same commodity but different delivery
month; buying and selling the same delivery month of the same
commodity on different futures exchanges; buying a given
delivery month of one futures market and selling the same delivery
month of a different, but related, futures market.

Stop Order
Sometimes called a Stop Loss Order, although it can be used to
initiate a new position as well as offset an existing position. It’s an
order to buy or sell when the market reaches a specified point. A
stop order to buy becomes a market order when the futures con-
tract trades (or is bid) at or above the stop price. A stop order to
sell becomes a market order when the futures contract trades (or
is offered) at or below the stop price. An order to buy or sell at the
market when and if a specified price is reached.

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