For example, this book has information that is transferable to any type of investing.

The Science of Getting Rich

This timeless classic from 1910 is still changing lives today with its practical program of prosperity! After reading this book, you will have the mindset to achieve all of your financial goals. Learn how to put yourself in a state in which you can manifest anything you dream of!

Futures and Options inherently carry more leveraged risk than do other investment vehicles, however there are many strategies that have limited risk and virtually unlimited reward potential. One such example would be the purchase of a put or a call option.

The risk is limited to that of the cost of the option. The profit potential is the strike price of the option, plus or minus the current market price.

For example, an E-Mini S&P 500 Put with a strike price of 900, with the underlying futures market trading at 850, will have an intrinsic value of 50 points (which equals $2500) plus time value and any additional value associated with increased volatility.

Hedging with Futures against a physical portfolio of stock is also possible. For example, consider the contract specification for the S&P 500 Futures product. It is valued at $250 times the Standard & Poor’s 500 Stock Price Index, where 1 point = .01 index points = $2.50. The minimum fluctuation is 0.10=$25.00.

If the S&P index is trading at 900, this means that one futures contract will hedge $225,000 worth of stock in the S&P 500 Index (900 * 250) = $225,000.

Note that many of the larger indices offer “mini” contracts, such as the E-Mini S&P Futures contract. This contract is only 1/5 the size of the Big S&P contract. One E-Mini S&P contract will hedge $50 * Index value (i.e. 50 * 900 = $45,000). This helps individuals with smaller equity portfolios to hedge, as the contract size is smaller.

The Dow Jones Futures and Russell Futures contracts also offer both E-Mini Russell and Mini Dow contract sizes. If you are interested in viewing the way a contract specification is presented, I recommend you visit the exchanges’ website for the products in which you are interested. The link to the Chicago Mercantile Exchange’s (CME) contract specification page for equity products is located here.

The same principle can be applied to any market, whether it’s foreign currencies, energy products, metals or grains.

Important note: this article focuses on futures and options on futures as they can be used for hedging purposes. It is not intended to encourage speculation. To the hedger, if properly hedged, declines in a physical asset are offset by gains in the hedge instrument.

In the near future, we will offer an online, interactive pivot calculator that you can use for any market to compute pivot points.

If you are interested in additional support and resistance levels for a particular market, using pivot analysis and other techniques, contact us and we will supply you with the information you require.

** Support and resistance numbers are rounded to the nearest point.

Pivot Support and Resistance Levels for the week of October 20, 2008

December E-Mini S&P 500 Futures

Resistance 3: 1268.75
Resistance 2: 1157.00
Resistance 1: 1045.25
Pivot: 955.25
Support 1: 843.50
Support 2: 753.50
Support 3: 641.75

From time to time, markets experience extreme price movement, such as price movement in Gold and Crude Oil Futures. In these extreme cases, we significantly surpass pivot levels that are calculated using standard Pivot Point formula.

In such cases, traders sometimes double “logical” components of price values indicated for a given support or resistance level.

For example, base on last week’s Crude Oil Futures price, the second resistance level was computed as 114.84. We dramatically traded through this level; however, pivot analysis can still be useful.

For example, if resistance level II was at 114.84, we can produce a correlated level by doubling part of the dollar portion of the price - this would give us a value of 128.84.

However, a certain level of judgment is required when using adjusted pivot levels - we would not want to double the entire price and derive a value of 229.68 (114.84 * 2), as that level would be unrealistic for the market under review (in this case, Crude Oil Futures).

We would double the “tens” portion of the trading price, as it more realistically reflects price action for the market under review.

One can use the concept of average and extreme trading ranges in order to help determine how much more a move has to offer, in terms of finding a topping or bottoming area and applying the average or extreme range to the market and time frame being observed.

For example, suppose you were wondering how much further we can expect equities to fall this week (you can apply this principle to any time frame). Well, it is absolutely impossible to predict this. No one knows the answer to this question. However, it makes sense to go back and look at weekly charts to measure the largest ranges.

Doing so for Dow Jones Futures, you will see the two largest trading ranges going back to August of 2007 were 770 and 780 points, on a weekly basis. If we were to assume that a) we will come close to that level (let’s round up to 800 points), then if the swoon were to continue, one would expect support in the area of Dow 10,450. This is based on observing the past and applying market behavior to current trading.

It is critical to note that we have no idea how low (or high, for that matter) a market will go. But, we can look at history and know times of extreme volatility produced ranges close to 800 Dow points.

There are trading systems that are built around the concept of average range or extreme range. For example, if the 21 day average range in E-Mini S&P Futures is 24 points, then traders make seek buy or sell opportunity based on that information.

Spotting recurring price patterns (price pattern detection) in futures markets is critical to achieving long term success. Volumes of material about technical analysis and futures trading are available, however there as less material available that describes components of automated futures trading (also known as algorithmic trading or black-box trading).

Some automated trading systems can be designed to detect classic chart patterns such as Head and Shoulders, Ascending Triangles and Candlestick patterns, to name a few. These systems can alert short-term futures traders, futures brokers who notify their clients trading opportunities, day-traders or futures traders operating in any time frame.

Automated trading systems can also be designed to apply any of the standard technical indicators such as Stochastics, Relative Strength Index, Bollinger Bands, Elliot Wave Patterns, Fibonacci Retracements and trend lines to futures prices.

Standard charting programs are more than sufficient for spotting opportunities using “classic” concepts mentioned above. However, one of the major benefits of using automated futures trading systems, or “black box” trading system, is that the futures traders can detect price patterns that do not necessarily relate to a futures chart or technical indicator found in a basic futures charting program.

A futures trader can conceive their own ideas, primarily through price pattern detection, make critical observations about prices, etc … and with the help of software development, ideas can be programmed. Once programmed, a futures trading plan can be tested objectively to determine performance results. Testing involves loading historical data into a software program that will apply the trading rules required to detect the recurring pattern. From there, one can analyze performance results.

This post describes a simple idea related to trading the opening range in E-Mini S&P futures, but before describing the details of the idea, I will describe the criteria for constituting a pattern: the pattern must adhere to clearly defined rules (with no exceptions) and must occur with a frequency of at least 60%. Ideally, this pattern should manifest across all futures markets with similar rates of frequency. Pattern detection is a critical part of designing certain automated trading systems. Recall that, as stated several times on this site, we believe that technical analysis techniques and automated trading systems should work across all futures markets.

Back to our pattern detection example. Let’s look at trading the opening range in E-Mini S&P Futures. The rules are as follows: 1) At 9:30 AM (CST), plot the trading range between 8:30 AM (CST) and 9:30 AM (CST); 2) determine the number of points within that range. For example, the low of the 60 minute bar beginning at 8:30 AM (CST) is 1263.25 and the high of that bar is 1271.25. We have an 8 point range;3) wait for price to trade above 1271.25 (the bar’s high) or below 1263.25 (the bar’s low);4) after 9:30, we wait for a breakout of the range established in the previous hour - go long above the bar’s high or go short below the bar’s low. Our profit objective is 8 points.

Okay, so the rules are simple, the concept is simple. The next step is to use a software program, which would need to be designed either by the futures trader or by a third-party resource. Some futures brokers or futures brokerage firms offer value-added services that may include assistance with develop software programs to create automated trading systems.

Once the idea is incorporated into a software program, the process of back testing and system optimization can begin. In summary, we have three goals: 1) pattern detection; 2) software development; 3) optimization of the system based on the pattern being studied.

Click here for information about futures trading software services and where you may find resources to provide assistance designing a system that implements your ideas.

You may also want to check out this section of our site for more information about
automated futures trading systems.

Trader Y stood quietly, for hours on end, in the 30-Yr T-Bond pit, cramped in with 500 locals. Then, seemingly out of nowhere, sometimes even in quiet periods, Trader Y would jump up and scream frantically, something like “I WANT TO BUY 500″. Other traders would look at him like he was crazy.

He did not seem to be crazy when, almost immediately after his purchase of 500 T-Bonds, the market would start to rise considerably. He developed quite a reputation this way - stand quietly, apparently ignoring the action in the pit, as he gazed up at the ticker wallboard. Then suddenly and quite frantically, he would put on a massive position that would usually be an instant winner.

I felt compelled to find out his formula for success. He was an approachable sort of individual - I asked him, “okay, what’s your secret?”.

Interestingly, there was some Technical Analysis involved in his response. He would look at two things: first, he would study the markets that were most strongly inversely correlated with the T-Bond market. Doing this is somewhat art and somewhat science, as markets correlate with other markets and then shift correlations over time.

Secondly, Trader Y would identify critical levels on price charts of the correlated market. For example, if the T-Bonds were trading inversely with the CRB Index, Trader Y would spot critical levels in the CRB Index - levels that if broken, would spark a reaction on the T-Bond market. This trader used weekly pivot points in the CRB. He would simply gaze at the wallboard and watch the CRB Index, looking for something pivotal to happen in that market. When it did happen, he would jump up and put on a large T-Bond trade. That was his secret - combine technical analysis with correlating two markets. In summary, after he confidently identified the inversely correlated market, he would wait for a technical evident in that market, and then put on his position in the T-Bond market.

This approach is different than that of a post I wrote about Trader X - this approach can be used in today’s markets, which are traded almost exclusively electronically (with a few exceptions).

Both Trader X and Trader Y used a technical analysis idea and capitalized on it by combining it with one other component in order to devise a successful trading plan.

What about the “good old days” where trading was conducted via open out-cry in the hectic trading pits? How did traders succeed with no fancy computers in front of them, no technical analysis tools and no access to real-time breaking news?

Discussions with several traders reveal some interesting approaches to making money while trading in the pit. One extremely successful pit trader (I’ll refer to him as Trader X) would gaze into the Treasury Bond futures pit from a different location, set slighter above the pit. He had a very good view of the executing brokers and the market making locals.

Trader X was generally quiet in nature - he did not scream and yell constantly; instead, every now and then, he would simply lean forward and gesture to a broker to sell 100 30-Year Bond futures at the market. Almost immediately after selling, the market would start to deteriorate slightly. Soon after going short, the market would be eight tics lower. The trader would then lean forward and gesture to buy 100 30-Year Bond futures at the market. Typically, his trades would earn him 8 ticks on 100 contracts, which equals $25,000 per trade.

I personally asked Trader X what his secret was. Why do you do nothing for hours and then suddenly go short 100 contracts? What are you looking at? Did you see a special pivot point, moving average level, trend-line approaching? Why does the market usually go in your favor almost immediately after executing your trade?

His answer was simple, yet complex. Trader X believed that the T-Bond market tended to move in 8 tick increments and would “correct” or at least pause at those increments. That’s the easy part of his explanation. I asked why he didn’t sell or buy at every single 8 tick increment (he would only trade at certain 8 tick levels).

The more complicated part of Trader X’s secret was that he combined his observation of 8 tick movements with his assessment of the overall position of the local traders in the pit at each of these 8 tick increments. I asked how he knew what the overall position of the local traders is?

This particular trader would observe volume traded at a particular level and the reaction of the local traders at those levels. For example, the low price of the session for T-Bond futures is 110-08 and the market trades up to 110-16. Bonds begin trading considerably at the offer price. It is common practice for local traders to trade the “turn”, which is when the market turns from “bid at 16, offered at 16″ to “bid at 16, offered at 17″. Local traders will try to buy the “16’s” in hopes that the market turns “16 bid”, thereby gaining the “edge” in the pit.

Trader X went on to explain that sometimes, the locals simply get it wrong. Trader X had a natural ability to spot situations where the local traders got twisted up on the wrong side of the market.

It would usually play out like this: the market is offered heavily on “paper” (non-local offers) at 110-16. Brokers in the pit would begin to buy the offer, sufficiently enough to entice locals to enter long at 110-16, in hopes of trading the turn and becoming long at 110-16 while the market turns soundly bid at 110-16. Sometimes it simply did not work out that way for the local traders. Trader X had a natural ability to spot these situations and he would capitalize on them. In this example, Trader X was able to see locals buying and accumulating long positions up to on 8 tick increment. When the market traded at 110-16 it would briefly turn “16 bid” and then pop back “16 offered”. Well, now we have a bunch of locals long the market while it is once again offered heavily at 110-16. That’s when Trader X would strike and go short.

This is one example of how a simple “technical” idea for Trader X - the T-Bond market tends to move in 8-tick increments - was combined with another factor in order to determine a way to trade profitably. I have to wonder how Trader X applies an “8-tick increment” principle while trading in front of a screen. Perhaps Trader X needs some new tricks in his bag.

Automated futures trading, also referred to as algorithmic trading or black box trading, has many benefits. Automated futures trading provides a futures trader buy and sell signals based on predetermined logic or “rules”.

An automated futures trading system is not required to transmit orders to a futures broker or commodities exchange; however many automated trading systems are capable of doing that. Minimally, an automated futures trading analyzes price data and notifies the futures trader when a buy or a sell signal has occurred. Automated futures trading systems should have one or more money management components built into them. Maximum risk for a trade should be known at the time the trade signal is generated.

Building an automated trading system requires some degree of software development. Depending on the nature of the trading system, software development can be extremely complex, or it can be trivial. Some systems are simple enough in design such that Microsoft will suffice as a development tool for creating an automated trading system.

One of the most important benefits of using an automated trading system is the ability to optimize the system. Optimization is a critical concept and enables the futures trader to fine tune and hone the automated trading system so that it produces maximum profits with minimal draw-down. Note that optimization will vary, depending on the underlying rules of the system.

Consider a simple system that states that a market will test or trade at its daily pivot point within the first hour of trading. A futures trader using this system is likely to ask such questions as, how often does this theorem prove to be true? If it is true 64% of the time, it is only natural to probe ways of optimizing this system. For example, suppose we modified the automated trading systems to test that a market will test or trade to its daily pivot point within the first thirty minutes of trading.

In the above example, optimization is in the form of modifying a time frame for an event that we believe will occur with some degree of probability; however, we are trying to determine the most optimal time frame in which the event will occur.

It is obvious that the inputs that are changed through the process of optimization will vary, based on the underlying theory being traded. The trader must be provided with the ability to optimize their automated trading systems by having access to change one or more input parameters that are relevant to the theorem being tested and traded.

Let’s consider an automated trading system that attempts to predict how far a market will trade as a result of a correlated event. For example, suppose a futures market trades higher than its previous day’s high and we feel that, as a result of doing so, the futures market will trade the same distance above yesterday’s high as it had traded below it during the current session.

In this trading system, the most obvious input parameter require to optimized the automated system would be the price parameter; specifically, how much momentum will the market provide, as it trades above the previous day’s high. We chose, as a starting point, that the market may trade the same distance above yesterday’s high as it had traded below it during the current session.

Suppose we find this phenomenon to hold true 40% of the time. We might be inclined to optimized our automated trading system by accessing an input parameter that decreases the amount of follow through - for example, suppose we wanted to optimize our system and test the frequency or probability that the futures market will trade above yesterday’s high by an amount equal to %50 that it had traded below it, during the current session. For example, if yesterday’s high was 100, and in the current session we traded at 80, then %50 of this difference would be 10 points. By including an input parameter the futures trade can use to optimized the automated trading system, we can test the probability of the market trading 10 points higher than its previous high (versus a full %100, or 20 points, above yesterday’s high).

In contrast to the first example, this example uses price as an input parameter used to optimize the automated trading system. In the prior example, time frame was used to optimized the trading system.

Many automated trading systems used stop loss inputs to help optimize trading results. Being able to modify the stop loss level to optimize an automated trading system should be a pre-requisite for any trading program.

As you can see, each idea intended to become an automated trading system has specific characteristics that need to be considered when thinking about optimizing the system.

In summary, a futures trader conceives an idea; software programs are used to create an automated trading system based on the rules of the system; money management principles are built into the system; optimization criteria defined and tools are supplied to the futures trader that let them optimize the automated trading system through modifying input values relevant to the automated trading system being used.

“Well, I read a couple of cheap books on forex and thought I knew enough and started trading live, lost $1000 in 3 weeks. Thankfully I read a few things about money management and this loss is something I can absorb”

This supports a theme that is repeated throughout ABC Futures - Money Management is critical!

You can find this post and other good articles from this forum
here.

The image shown is this post is quite dramatic and shows how effective the reversal bar technique described at ABC Futures would have been, had the sell signal in Euro or Euro FX futures been taken.

Of course, automated futures trading systems must always apply risk management to ensure capital preservation. Combining sound risk management principles with our reversal bar technique can be extremely profitable.

The below image shows Euro or Euro FX Currency Futures and depicts a hugely profitable selling opportunity that would have been realized if the Reversal Bar technique described on our web site was used to enter this market.

Euro FX Futures Reversal Bar