Tip Number One: Always, always use stops to help define risk!
As the well-known economist, John Maynard Keyes once cautioned, “The markets can remain irrational longer than you can remain solvent.”
Remember, even the best traders can go on a losing streak before getting hot again; but if you lose most of your risk capital by taking oversized losses, it doesn’t matter how hot you were going to get because your money is gone.
In other words, heed the trader’s First Commandment, ‘Shoot not thy whole wad.”
Tip Number Two: “Get into the market as close to the danger point as possible.”
The preceding quote is attributed to the legendary trader Jesse Livermore. I interpret him to mean, as follows. Let’s say, for example, you’re looking at a Futures chart and determine that the market is in an uptrend and you want to participate on the long side. In my opinion, before you pull the trigger, look at where solid support comes in because your sell-stop will need to be placed somewhere beneath there because you cannot negotiate with support and resistance! Now if the dollar risk is too great, either pass on it or be patient and enter a limit order to buy just above support and place your stop below support. Let the market come to you. If you miss it, you miss it. There will be plenty of other opportunities. Whatever you do, don’t get in the habit of placing “money” or arbitrary stops by thinking “I want in but don’t want to place a stop that far away and lose that much money.” Arbitrary stops are the ones that get triggered, stop you out, then the market hits the support area below there, that you should have waited for, then takes off and you start thinking conspiratorial thoughts!
Tip Number Three: Watch the spreads.
Whether inter or intra, spreads can sometimes tell you something about the Futures trading that the “outrights” don’t. Certain inter-commodity spreads are directional in nature. Before the Euro FX came to the Chicago Mercantile Exchange, the Swiss/Deutsche Mark spread or cross was heavily traded on the CME floor. When the spread chart favored the Swiss gaining on the D-Mark, you should be bearish to the U.S. dollar vs the Europeans’. I remember times, when I was a floor trader, the Swiss and the D-Mark would both open sharply lower, but the “bull spread” was working because the Swiss was down less than the D-Mark. As a spread, it was telling us to buy the opening, so we would count to ten and either buy the spread or the Swiss or D-Mark independent of each other, and they would come back and rally. Without knowing that little tip, I question if I would have had the guts to jump in. In that respect, I was sad to see the D-Mark go. I will have to research the Swiss/Euro to see if there is any correlation there. Now there is another directional that is still in play, affectionately known as the “NOB” spread. I believe the phrase might have been coined by Mr.Hume in his “Super Investor Files.” It is the Ten Year Notes over the 30 Bonds or vice versa. When the spread chart looks like the Bonds are going to gain on the notes, you want to be long the interest rate complex. When the opposite is true, you want to be short. You can do this but using the signal for an outright position or trade it as a spread.
Now staying with interest rate futures, and switching from inter-commodity spreads which are using two different futures contracts, is doing an intra-commodity spread using the EURODOLLAR complex. This is an ultra-liquid high-volume contract. Once again, when contemplating whether to go long or short look at a spread chart along with whatever other tools you are using. Let’s look at the March 2016 Eurodollar vs. the Dec 2016 spread. When analyzing the spread chart if you determine that the chart pattern you are looking at favors the Dec ‘16(deferred) gaining on the nearby March ‘16, you want to be long the spread, of course, or the Eurodollar outrights. If the opposite is true, then you want to be short. In general, if the deferreds are gaining on the nearby it is a bullish set-up.
Tip Number Four: Close only or line chart vs. Bar Chart.
In my opinion, where a market closes on a chart, at the end of a period (5 min/Hourly/Daily/Weekly) is far more important to the trend or break-out than where it trades during that period. During any of these periods, it can appear as if a trend is breaking down or if the futures contact is taking out support or resistance only come back into the trend or pattern by the end of the period, so no harm no foul. False break-outs happen often, especially in “spikey” markets. What I have observed, over many years charting the markets, is when a futures contract penetrates and closes through a trend-line or above resistance or below support it is likelier to follow through. This is why the “stop-close-only” was a popular contingency order at the Chicago Mercantile Exchange in Chicago before Futures closed and re-opened. You could use it to stop yourself out of a position or into a position with more conviction that you are making doing the right thing. Now you can just see where the market close and make your move on the re-opening. To truly visualize how different a Bar Chart looks than the above mentioned close-only or line chart (which only plots the close of the certain period you are using) pick a market and compare the two charts; see where the Bar-Chart looked like it was breaking down but the Line-Chart is none the worse for wear!
Disclaimer – Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.