A complete guide to the futures market technical analysis trading systems fundamental analysis options spreads and

The Wiley Trading series features books by traders who have survived the market's ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future For more on this series, visit our website at www.WileyTrading.com Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding      A COMPLETE GUIDE TO THE FUTURES MARKET Technical Analysis and Trading Systems, Fundamental Analysis, Options, Spreads, and Trading Principles SECOND EDITION Jack D Schwager Mark Etzkorn Cover images: Stock Chart © Adam Kazmierski/iStockphoto; Abstract Background © Olga Altunina/ iStockphoto Cover design: Wiley Copyright © 2017 by Jack D Schwager All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey The first edition of A Complete Guide to the Futures Market was published by John Wiley & Sons in 1984 Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993, or fax (317) 572-4002 Wiley publishes in a variety of print and electronic formats and by print-on-demand Some material included with standard print versions of this book may not be included in e-books or in print-on-demand If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com For more information about Wiley products, visit www.wiley.com Library of Congress Cataloging-in-Publication Data: Names: Schwager, Jack D., 1948- author Title: A complete guide to the futures market : fundamental analysis, technical analysis, trading, spreads and options / Jack D Schwager Description: Second edition | Hoboken, New Jersey : John Wiley & Sons, Inc., [2017] | Series: Wiley trading series | Includes index Identifiers: LCCN 2016034802 (print) | LCCN 2016047999 (ebook) | ISBN 9781118853757 (pbk.) | ISBN 9781118859599 (pdf) | ISBN 9781118859544 (epub) Subjects: LCSH: Futures market | Commodity exchanges | Hedging (Finance) Classification: LCC HG6046 S39 2017 (print) | LCC HG6046 (ebook) | DDC 332.64/52-dc23 LC record available at https://lccn.loc.gov/2016034802 In memory of Stephen Chronowitz, my mentor and friend CONTENTS About the Authors Part I: Preliminaries Chapter 1: For Beginners Only Purpose of This Chapter The Nature of Futures Markets Delivery Contract Specifications Volume and Open Interest Hedging Trading Types of Orders Commissions and Margins Tax Considerations Notes Chapter 2: The Great Fundamental versus Technical Analysis Debate Notes Part II: Chart Analysis and Technical Indicators Chapter 3: Charts: Forecasting Tool or Folklore? Notes Chapter 4: Types of Charts Bar Charts Linked Contract Series: Nearest Futures versus Continuous Futures Close-Only (“Line”) Charts Point-and-Figure Charts Candlestick Charts Chapter 5: Linking Contracts for Long-Term Chart Analysis: Nearest versus Continuous Futures The Necessity of Linked-Contract Charts Methods of Creating Linked-Contract Charts Nearest versus Continuous Futures in Chart Analysis Conclusion Notes Chapter 6: Trends Defining Trends by Highs and Lows TD Lines Internal Trend Lines Moving Averages Notes Chapter 7: Trading Ranges Trading Ranges: Trading Considerations Trading Range Breakouts Chapter 8: Support and Resistance Nearest Futures or Continuous Futures? Trading Ranges Prior Major Highs and Lows Concentrations of Relative Highs and Relative Lows Trend Lines, Channels, and Internal Trend Lines Price Envelope Bands Chapter 9: Chart Patterns One-Day Patterns Continuation Patterns Top and Bottom Formations Notes Chapter 10: Is Chart Analysis Still Valid? Chapter 11: Technical Indicators What Is an Indicator? The Basic Indicator Calculations Comparing Indicators Moving Average Types Oscillators and Trading Signals Indicator Myths Indicator “Types” Conclusion Notes Part III: Applying Chart Analysis to Trading Chapter 12: Midtrend Entry and Pyramiding Chapter 13: Choosing Stop-Loss Points Note Chapter 14: Setting Objectives and Other Position Exit Criteria Chart-Based Objectives Measured Move Rule of Seven Support and Resistance Levels Overbought/Oversold Indicators DeMark Sequential Contrary Opinion Trailing Stops Change of Market Opinion Note Chapter 15: The Most Important Rule in Chart Analysis Failed Signals Bull and Bear Traps False Trend Line Breakouts Return to Spike Extremes Return to Wide-Ranging Day Extremes Counter-to-Anticipated Breakout of Flag or Pennant Opposite Direction Breakout of Flag or Pennant Following a Normal Breakout Penetration of Top and Bottom Formations Breaking of Curvature The Future Reliability of Failed Signals Conclusion Part IV: Trading Systems and Performance Measurement Chapter 16: Technical Trading Systems: Structure and Design: The Benefits of a Mechanical Trading System Three Basic Types of Systems Trend-Following Systems Ten Common Problems with Standard Trend-Following Systems Possible Modifications for Basic Trend-Following Systems Countertrend Systems Diversification Ten Common Problems with Trend-Following Systems Revisited Notes Chapter 17: Examples of Original Trading Systems Wide-Ranging-Day System Run-Day Breakout System Run-Day Consecutive Count System Conclusion Notes Chapter 18: Selecting the Best Futures Price Series for System Testing Actual Contract Series Nearest Futures Constant-Forward (“Perpetual”) Series Continuous (Spread-Adjusted) Price Series Comparing the Series Conclusion Notes Chapter 19: Testing and Optimizing Trading Systems The Well-Chosen Example Basic Concepts and Definitions Choosing the Price Series Choosing the Time Period Realistic Assumptions Optimizing Systems The Optimization Myth Testing versus Fitting The Truth about Simulated Results Multimarket System Testing Negative Results Ten Steps in Constructing and Testing a Trading System Observations about Trading Systems Notes Chapter 20: How to Evaluate Past Performance Why Return Alone Is Meaningless Risk-Adjusted Return Measures Visual Performance Evaluation Investment Insights Notes Part V: Fundamental Analysis Chapter 21: Fourteen Popular Fallacies, or What Not to Do Wrong Five Short Scenes The Fourteen Fallacies Chapter 22: Supply-Demand Analysis: Basic Economic Theory: Supply and Demand Defined Standard error of the estimate (SEE) Standard error of the mean Standard error of the regression (SER): about multiple regression model and simulation and Standardized residuals, regression run analysis and Statistic, definition of Statistics: elementary (see Elementary statistics) forecasting model, building influence of expectations on actual using prior-year estimates rather than revised Steidlmayer, Peter Stepwise regression Stochastic indicator Stock index futures: dividends and intermarket stock index spreads intramarket stock index spreads most actively traded contracts response to employment reports spread pairs spread trading in Stock market collapse Stop, trailing See Trailing stop Stop close only Stop-limit order Stop-loss points flags and pennants and money stop and relative highs and relative lows relative lows and selecting trading ranges and trailing stop and trend lines and wide-ranging days and Stop-loss strategy, planned trading approach and Stop order Strategies See Option trading strategies Stress Strike price Subprime mortgage lending Substitutes, availability of Sugar prices Supply: consumption and definition of elastic relative to demand (highly inelastic demand and) fixed price and Supply curve Supply-demand interaction Supply-demand reports Support and resistance levels nearest or continuous futures price envelope bands and prior major highs and lows resistance zone support zone trading ranges trend lines/channels and Swiss franc, unexpected developments and Symmetric downside-risk (SDR) Sharpe ratio Synthetic long futures Synthetic short futures System-testing platforms, price series and System variation Tail ratio Tautological relationship Tax considerations T-bill rates TD lines definitions and relative high relative low TD downtrend line TD uptrend line true high and true low Technical analysis: about fundamental analysis and money management and Technical indicators about calculations, basic comparing indicators (see Comparing indicators) moving average types myths about oscillators trading signals “types” Technical trading systems benefits of countertrend systems (see Countertrend systems) pattern recognition systems (see Pattern recognition systems) trend-following systems (see Trend-following systems) types of, overview Techniques of a Professional Commodity Chart Analyst Testing/optimizing trading systems assumptions, realistic concepts and definitions continuous futures and example, well-chosen multimarket system testing negative results optimizing myth optimizing systems price series and price series selection simulated results, truth about steps in constructing/testing system testing versus fitting time period selection trading systems, observations Texas option hedge: bearish bullish Thorp, Edward Thrust count Thrust days Ticker symbol “Tick” size and value Time considerations, ignoring relative Time-outs Time spread Time stability: automatic trading systems and optimizing systems and Time value, of options Time value decay Timing: poor using fundamentals for T-Note: futures response to monthly U.S employment report market response analysis and Top and bottom formations: double tops and bottoms penetration of V tops and bottoms Total variation Trade(s): entering exiting, risk control and new, planning reason for scaling in and out of segmented, analysis of winning (see Winning trades) Trade entry: poor timing and timing of Trade exit comments Trade opportunity, forecasting model and Trader's diary, maintaining Trader's spreadsheet, maintaining Trading: about around a position fundamental analysis and seasonal Trading hours Trading method, personality and Trading philosophy Trading plan Trading range(s) breakouts from definition of intraday multi-year stop-loss points and trading considerations trend-following systems and Trading rules Trading signals Trading system(s): definition of price series and updating Trailing stop profitable trades and stop-loss points and trade exit point and Transaction costs Trend(s) downtrend lines internal trend lines (see Internal trend lines) middle portion of moving averages (see Moving averages) news coverage and participation in major TD lines (see TD lines) uptrend lines “whipsawing” signals Trend channels: definition of rules applied to support and resistance and Trend-following systems breakout systems common problems with countertrend systems definition of diversification modifications for (see Modifications, trend-following systems) moving average systems Trending phase, price sample and Trend lines See also Internal trend lines breakouts, false rules applied to stop-loss points and Triangles ascending descending nonsymmetrical symmetrical triangle bottom triangle top Triple top True range: definitions wide-ranging day and t-test: about multiple regression model and 2DUC charts Two-tailed test Type error Type error Underwater curve Unexpected developments Unexplained variation Up run day Upthrust day Uptrend: definition of examples of Uptrend channel Uptrend lines examples of false breakout signals U.S Department of Agriculture (USDA): balance table consumption, demand and forecasting model, building unexpected developments and U.S dollar (USD) See Dollar U.S employment report, T-Note futures response to monthly U.S Treasury, fundamentals and Variable(s): dependent, determining discrete dummy independent lagged missing random Variance Variation: degrees of freedom and R2 and total Visual performance evaluation 2DUC charts net asset value (NAV) charts rolling window return charts underwater curve Volatility: implied market adjustments option premiums and planned trading approach and Sharpe ratio and spread trades and Volatility ratio (VR): trend-following systems and wide-ranging days and Volume, open interest and V tops and bottoms Wallet Street Week Wedge Weighted least squares (WLS) Weighted moving average (WMA) Weinstein, Mark Wheat market: balance table crop expectations intercommodity spreads and Whipsaws: trend-following systems and trend signals Wide-ranging days: definition stop-loss points and Wide-ranging days (WRDs) down bar down days extremes, return to stop-loss points and up and down days up days up weeks Wide-ranging-day system basic concept daily checklist illustrated example parameter set list system parameters trading signals Winning trades: gains and gains and holding/exiting losing and, concepts of needing to win Wizard lessons, market WLS See Weighted least squares (WLS) World trade agreements WRDs See Wide-ranging days (WRDs) WTI crude oil See also Crude oil market poor timing and unexpected developments and Zero return Ziemba, William T Z-test WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA ... FUTURES MARKET Technical Analysis and Trading Systems, Fundamental Analysis, Options, Spreads, and Trading Principles SECOND EDITION Jack D Schwager Mark Etzkorn Cover images: Stock Chart © Adam Kazmierski/iStockphoto;... Incorporating Demand Why Traditional Fundamental Analysis Doesn’t Work in the Gold Market Notes Chapter 23: Types of Fundamental Analysis The “Old Hand” Approach The Balance Table The Analogous Season... a Forecasting Model: A Step-by-Step Approach: Chapter 29: Fundamental Analysis and Trading Fundamental versus Technical Analysis: A Greater Need for Caution Three Major Pitfalls in Fundamental