Last week I wrote briefly about the benefits of futures compared with the popular trading vehicle of options. I have to say upfront that as a directional trader, futures would always be my trading vehicle of choice. Directional trader implies confidence in picking whether the next move is likely to be up or down and trading it. Regardless of how much confidence there may be, the stop loss is the safety net on the occasions the position is wrong.

One of the things that confuses a new trader is knowing exactly what it is they should be trading and charting. When you open up the Software and look in the Symbol Tree under the futures folders, some contracts can have about 20+ listings. You might look at that with new eyes to futures and say, “where do I start?”

As an example, this week I’ll use the Dow Jones futures contract which is traded on the Chicago Board of Trade (CBOT). There have been some very nice profits on the short side over the past couple of weeks, which have been very tradeable. Take it from me. I will visit some of the technical analysis underlying that statement shortly. Let’s just say for now, the chart suggests the Dow is headed for more downward action before an uptrend resumes.

Futures contracts, like any contract, are an agreement and have a set date by which the agreement must be finalised. So therefore contracts come into being, exist for a period of time and then once they expire they cease to exist. So the first point is that we need to keep a chart that is continuous, allowing us to gather some history for a market. We can’t just keep drawing up a new chart for each contract. We need to link them together, building one continuous chart, made up of many linked contracts. In the screenshot below you can see the list for the day-traded contract charts for the Dow.

The Dow contract has expiry months of March, June, September and December. So on the surface of it, we would be rolling over contracts on our continuous chart 4 times per year. This is not always the case for all futures contracts, but for the Dow, it’s straightforward.

In the list you can see specific contracts (e.g. Dec 2004), ‘Gann’ charts (e.g. Mar Gann), ‘Cash’, ‘Spot1’ and ‘SpotV’. This is where the question, where do I start begins to arise.

The first thing is that the ‘Cash’ chart is the actual Dow Jones Industrial Average Index, the underlying physical. In terms of continuous charts, the ‘Gann’, Spot1’ and ‘SpotV’ charts are the choices. The Gann charts link the same contract each year, for example the December 2002 contract, to the December 2003 contract, currently linked to the December 2004 contract. This chart would have long periods of inactivity and then a three-month flurry of activity starting early September each year.

The ‘Spot1’ chart links consecutive contracts as they expire. So currently the Spot 1 chart will contain the data for the December 2004 contract, until the day it expires. Then from that point forward it will use the March 2005 contract, until it expires and so on.

The ‘SpotV’ chart, links consecutive contracts on the basis of which contract has the highest trading volume. This is the chart I tend to start my analysis on. Often the SpotV and the Spot1 only vary slightly around the time to rollover. So at the moment my analysis is done with the SpotV chart and when it is time to take a trade, I use the December contract, it’s that straightforward. I’ll only need to be concerned with rolling over contracts getting closer to the middle of December, for now the choice is simple. Pick the direction well and buy or sell the December contract accordingly to make profits.

The Dow Jones contract has a point value of US$10 per point. So when the Dow is trading at 10,000 one contract is worth about US$100,000. It only takes a margin (deposit) of US$5,000 to control one contract. The delta is basically 1 to 1 and there is no time decay!

Until next week......

Noel Campbell

Many times in trading tutors there has been a focus on domestic markets, and when branching out to international markets the tendency is to look at the United States. In many cases this is a natural and logical progression.

With index trading, a benefit can be derived from watching the overseas indices for a lead as to where the major global markets are heading as a whole. It’s interesting that in Australia we look to the US as the lead to our morning push, however, in the US they take their lead for the day’s trade with a somewhat casual glance at the European performance. The main indicator for US traders is how the US based companies have traded in the local European exchanges.

In light of this some analysis on the main UK Index futures contract, the FTSE 100 (LFT-SPOTV in HUBB software), suggests an upward break in that market is likely. This futures contract follows the top 100 shares listed in the London Stock Exchange and similar to our local SPI contract. The chart below shows the reality of this market since the start of 2004, where it has been in a sideways or distribution pattern.

In the most recent price action we have seen the market breakout of this sideways channel and what is also encouraging, is that it has made higher bottoms above the channel. This lends some support to the idea that it is not just a false break.

Getting a lead into this move was possible with some basic price and time analysis. The chart below shows the retracement levels of the last major bear move from 2002 to the final low in 2003. Once again, using Gann’s 50% rule, the market has held just below that area, made a minor double bottom and run out very strongly. The two blue horizontal lines represent the price channel from the previous chart.

The purple line running off the low in 2003 is a Gann angle and runs up at a set price per day. Using this angle it has offered support at the 50% level. Getting into this move early would have been made possible by having these projections in place and watching the market around this area.

One final tool I use to confirm the mood or strength of a move is to step back on time frames and look at the 3 day swing chart. The chart below shows the first time the market has made a consistent series of higher tops and bottoms in some time, circled in orange.

With the US markets in an interesting phase before the upcoming elections, a broader view is possible by looking at other markets. You may want to put indices like these from around the globe in a quote page to monitor their moves.

Good Trading

Aaron Lynch

From time to time it is interesting to look back on previous articles and topics covered, to review the events that have taken place since, especially when comments on future market movements have been made.

You may recall in Trading Tutors Issue #76: 24 Sept 2004, that we covered ceiling and ladder patterns in Bollinger Bands. The emphasis was placed on the angle of a Bollinger Band limits when breached, either upwards or downwards. The following example illustrated this point.

We finished on BHP and its current price action at that time. The upward angle of the upper limit indicated a continuation of the existing up trend ‘1’. As we can see, BHP confirmed the upward angle of the Bollinger limit and added another 7% to its share price before reversing.

It is interesting to note that when bars form completely outside the limits, like in the case of the current high, a reversal is also likely to follow. Again this was confirmed the following week with a move back down through the limits, which flattened the angle of the limit, shown at ‘2’. Aggressive traders may have used this to enter bearish positions on the stock, futures, options or CFDs, while more conservative traders, at the very least may have taken profit or refrained from entering bullish positions.

Where to from here? It is reasonably to expect a move back to the mid line, ‘3’, which by the same token is not far I know! Depending on the strength of the move through this line, we may see a target of the lower limit line being reached.

Happy trading…

Jordan Craw

You are outdoors on a sunny day. You are holding a piece of paper in your hands, pointing it towards the sun. You hold for five minutes and nothing happens. You then hold a magnifying glass above the paper at the right distance bringing sun’s rays together at one point. You hold it like that for a minute or two. The paper catches fire. What changed? Focus. The magnifying glass focused the sun’s rays concentrating its power at one point.

Your mind starts collecting information from the moment you are born. Stored in your brain, this information determines what you focus on, how you interpret and internalise the events of your life. Your relationships, your financial status, your trading, your work, your moods, your decisions are all affected by your focus.

In the Trading Tactics Workshop we say: “What you focus on grows”. Your mind has such creative power that whatever you focus on comes to be. Your brain - like iron filings being dragged along by a magnet - organises itself in whatever way necessary to get you whatever you focus on. If you are not getting what you want in life, internally or externally, the root cause is that you are focussing your mind on avoiding what you don't want, and your brain is creating for you what you are focussing on.

To create the results you want and to do so intentionally, you must re-arrange the information and change your focus so that your brain performs the way you want it to. It is as simple as the difference between:

Don’t forget to place the order with the broker. Remember to place the order with the broker.

The difference is subtle perhaps, but the effect on your brain is significantly different: Don’t forget, don’t forget, don’t forget versus, remember, remember, remember!

If you focus your mind on what you want instead - if you talk to yourself about what you want, make pictures inside of what you want, think about what you want, and so on and so on, your beliefs will reorganise themselves in such a way that you get what you want, your values will change to support what you want, and your brain will create the internal strategies you need, the tools to use and anything else you may need.

Take a piece of paper and write down what you want from your trading. This will refine your focus. Write these in positive sentences (what you want) rather than negative sentences (what you don’t want). Leave out sentences that contain the word “not” in them: I don’t want to lose money, I don’t want to quit, I don’t want to work for a boss anymore… Write down the trading skills you want, the time you want to allocate to your trading, the discipline that you think is necessary, the assets you want to build, the cash flow you are drawing from your trading account.

Next comes repetition. Next comes repetition. Look at your list three times a day or more as repetition helps the creation of new habits. Then bring in your feelings and your emotions. Picture yourself being this person, experiencing the benefits and enjoying the work you put into it. Let the feelings draw you to these goals. You are focussing with intensity now, taking control and sitting in the driver’s seat. You are directing your focus (like the magnifying glass) to one spot: successful trading. I leave you with some thought provoking quotes: