Table Of ContentT
rading in futures can
provide considerable
financial rewards.
Donald Munson/SIS
i
T
rading in futures can provide considerable financial
rewards. Futures speculation, however, also
involves substantial risks. The key to avoiding the pitfalls
and reaping the rewards is to develop your trading skills
and knowledge of the markets.
The Chicago Board of Trade (CBOT®) created this
booklet to help you take the first step. It provides a
thorough introduction to speculating for those who
have had only minimal exposure to the futures markets.
If you want to learn more, see our web site at
www.cbot.com, contact your broker, or refer to the
numerous resources listed in the appendix of this booklet.
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Contents
Introducing the Speculator............................................1
Market Mechanics and Terminology............................4
Using Fundamental Analysis to Forecast Prices.......10
Using Technical Analysis to Forecast Prices..............18
Trading Guidelines.......................................................26
The Next Steps..............................................................33
Appendix.......................................................................35
Selected Bibliography
Internet Sites
Industry Contacts
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Introducing the Speculator
Speculators play a vital role in Types of Traders . . .
the futures markets. While futures Futures traders can be categorized
are designed primarily to assist in any number of ways. Some are
hedgers in managing their full-time professional speculators
exposure to price risk, this would while others only dabble in the
not be possible without the markets. Some of the major
participation of speculators. classifications follow:
Speculators, or traders, assume
Professional Traders
the price risk that hedgers attempt
Perhaps the most visible and
to lay off in the markets. In other
colorful speculator is the
words, hedgers often depend on
professional floor trader, or local,
speculators to take the other side
trading for himself or herself on
of their trades, and to add depth
the floor of an exchange. Locals
and liquidity to the markets.
come from all walks of life and
Many people are attracted to frequently begin their careers
futures market speculation after as runners, clerks, or assistants
hearing stories about the amount to other traders and brokers.
of money that can be made trading Very few locals, however, reach
futures. While there are success a high level of success. Trading
stories, the number of big-time on the floor requires a unique
traders is not unlike the number set of skills, and the cost of
of superstars in professional participation is typically high.
sports. Many people strive for
the top, but few ever reach it. In addition to floor traders, many Visit www.cbot.com and click on the a/c/e button
for further information on electronic trading.
professional traders can be found
At the same time, many people at a computer participating in
have achieved a more modest the market through the a/c/eSM
level of success in futures trading. platform. a/c/e (alliance/cbot/eurex)
The keys to their success are provides trading members
typically hard work, a disciplined electronic access to the exchange.
approach, and a dedication to
CBOT trading privileges are
master their trade. If you intend to Further information on acquiring CBOT trading
privileges can be obtained by contacting the
generally tiered by product group.
follow this path, this book can CBOT Member Services Department at
Full trading privileges allow 312-435-3499 or online at www.cbot.com.
help you get started.
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traders to trade all CBOT A scalper trades in and out of the
contracts, while other trading market many times during the day,
privileges are limited to index, hoping to take a small profit on a
debt, and energy contracts, heavy volume of trades. Because
for example. a scalper is willing to buy at the
asking price and sell at the
Proprietary Traders
bid price, he or she plays a vital
Another major speculator is the
role in providing liquidity to the
proprietary trader who works off
market. A scalper rarely holds a
the floor on a professional trading
position overnight. Most floor
desk. These “upstairs” traders are
traders are scalpers.
employees of large investment
and commercial banks and trading A day trader is similar to a
houses typically located in major scalper in that he or she also
financial centers. Their job is typically trades on the floor and
to earn money for their employer doesn’t hold overnight positions.
by engaging in speculative A day trader makes fewer trades,
trading activity. They are then however, and hopes to profit
compensated according to the from intraday trends. Many
profits they generate. proprietary traders and some
public speculators are day traders.
Public Speculators
While locals and proprietary A position trader maintains a
traders grab the most attention in position for days, weeks, or even
the markets, the vast majority of months. Position traders focus
speculators are individuals trading on major long-term price trends
with private funds. As a group, and are less concerned with
they are called the retail business, minor fluctuations. Most public
or public speculators, and are speculators are position traders.
serviced by account executives in
the United States and throughout
How to Access the
the world. Market
Once you’ve decided that you
. . . and How They Trade
want to trade in futures, you’ll
Several other terms are also used
also need to determine how
to describe traders and their
your trades will be executed.
approaches to the market.
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If you’re new to the markets, If you choose this route, your
it’s particularly important to money will be pooled with that
get professional assistance from of many other investors and all
a full-service broker or trading trading decisions will be made
advisor. The broker or advisor by the fund manager. You’ll want
can walk you through everything to research the fund’s historical
you need to know and provide performance and the manager’s
Further information on finding a broker can be
professional trading advice. trading style before deciding if
found on www.cbot.com.
you want to invest.
Once you’ve become fully
experienced and want to make Regardless of your approach, it
your own trading decisions, you will be helpful to become familiar
may consider using a broker for with the most important terms and
execution purposes only. procedures in the futures markets.
Numerous discount brokerage The next section will introduce
companies specialize in this you to these basics.
kind of business. Further, if
your trading volume becomes
substantial, you may want to
consider obtaining trading
privileges, which would give you
the lowest possible trading fees.
In recent years it has become
increasingly popular to gain
exposure to the futures markets
by investing in managed futures
funds. Most major brokerage
houses offer managed accounts,
as do numerous independent fund
operators.
3
Market Mechanics and Terminology
In order to understand the must be specified. For example,
workings of the futures markets, knowing that the exchange floor
it’s essential to become familiar ticker symbol for Treasury bond
with some basic terminology and futures is US,noting on the table
MONTH CODES
operations. These terms may that the code for March is H,and
(for the current year)
sound confusing at first. In time, knowing that it is 2001,you can
however, they’ll become quite see that the March T-bond contract
Janruary F
familiar. While the trading rules identifier is USH1.
February G
and procedures of each futures
March H
exchange vary slightly, these
April J Volume and Open Interest
terms tend to be used consistently
May K Volume is the most frequently
by all U.S. exchanges.
June M cited statistic in reference to a
July N futures contract’s trading activity.
August Q Identifying the Contract Each unit of volume represents a
and Trading Month
September U contract traded and includes both
All futures contracts have been
October V the long and the short side of the
assigned a unique one- or two-
November X trade. Volume is typically quoted
letter code. This abbreviation, or
December Z on a daily basis.
ticker symbol, is used to identify
the contract on quotation vendor Open interest, on the other hand,
machines, on the price boards refers to the number of futures
located on the exchange floor, and positions that remain open, or
on the a/c/e platform. The codes unliquidated, at the close of each
are also used by trading floor trading session.
personnel to process all
To illustrate, assume that a trader
transactions through their member
buys 15 contracts and then sells
firms and the clearing house.
10 of them back to the market
For example, the ticker symbol before the end of the trading day.
for CBOT Treasury bond futures His trades add 25 contracts to that
is US on the floor and ZB on the day’s total volume figure. Since 5
a/c/e platform. A full list of of the contracts remain unliquidated,
contract ticker symbols can be open interest would increase by
found online at www.cbot.com. 5 contracts.
To identify the precise futures Volume and open interest figures
contract you want to trade,the are often used to gauge the level
contract, month code, and year of commercial participation in a
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market. For example, if a contract Each morning, information is
experiences relatively low volume displayed on the prior day’s
levels but high open interest, it is trading session. This quote,
generally assumed that commercial which appeared in a Wednesday
participation is high. This is issue, shows prices, volume,
because commercial hedgers tend and open interest based on
to use the markets for longer-term Tuesday’s market.
hedging purposes, putting their
Current prices and the previous
trades on and keeping them until
day’s settlement prices can be
they’re no longer needed to
found online at www.cbot.com.
manage a given risk. Conversely,
high volume with low open
interest tends to indicate more
speculative activity. This is
because the majority of traders
prefer to get in and out of the
market on a daily basis.
Reading the Prices
In addition to www.cbot.com,
numerous national and local
newspapers publish futures and
options prices, and volume and
open interest figures, on a daily
basis. In order to understand a
price, you must first know how
it is quoted. CBOT® DJIASM
futures contracts, for example,
are quoted in whole index points.
The table on the following page
shows how to read CBOT® DJIASM
futures prices in The Wall Street
Journal.
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1. The first column indicates the Tick Size
delivery month.
The smallest unit of exchange in
U.S. currency is a penny. Similarly,
2. Following are the opening
price,the high and low price for each futures contract has a minimum
2
thatday,and the final settlement price increment called its tick
1 price. In this case,the June size. The term tick size, or simply
3 4
contract settled at 8908.
tick, dates back to the old ticker
5 3. This column tape machines, which were the
indicates how original means of conveying price
much today’s
information from the trading floor.
settlement price
is higher or
The tick size varies for different
lower than the
futures contracts. CBOT T-bond
previous
settlement futures, for example, have a tick
price. In this of 1/32nd of one percent. Since a
case,the price
single contract represents a $100,000
of the June
face value bond, the tick size
contract
declined by 44 equals $31.25.
index points.
Traders frequently talk in terms of
6 7 4. These two columns display the ticks to express profits or losses on
highest and lowest prices ever
a trade. For example, the value of a
reached for eachdeliverymonth
tick in CBOT muni bond futures is
since the contract began
trading. $31.25. Hence, if a trader says he’s
made 10 ticks in muni bonds, he’s
5. Finally,the total open interest,
earned $312.50 per contract.
or outstanding positions,for
each contract month is shown.
The Route of an Order
As a public speculator, your futures
6. Across the bottom is the total
estimated volume for CBOT® trades must go through a registered
DJIASMfutures traded on that broker at a Futures Commission
day,the actual volume from the
Merchant (FCM).
previous day,the total open
interest in all delivery months,
FCMs are brokerage firms licensed
and how much open interest
has increased or decreased to handle customer business in the
from the prior trading day. futures markets. When you instruct
your broker to execute a trade for
7. Preliminary numbers of the
you, the broker transmits the order
Reprinted by permission of The Wall Street Journal, underlying cash market.
©1998 Dow Jones & Company,Inc. (either verbally or electronically) to
All Rights Reserved Worldwide.
6
the appropriate trading arena. since your objective is to have the
Trade confirmations are then order executed as soon as possible
relayed back to the customer. at the best possible price.
THE ROUTE OF AN ORDER
Depending on the type of
When the order is filled, it’s
order and the current market
usually close to the price that was
conditions, this whole process
Individual Speculator
trading at the time it was placed.
can sometimes be completed
In a fast market, however, the
in a matter of seconds.
price could be considerably
Types of Orders different. Gives broker Trade
There are many different ways an order confirmation
to enter orders into the futures Limit Order
markets. Your decision about A limit order specifies a price
which type of order to use will limit at which the order must be
Retail Broker
depend on your trading objectives executed. In other words, it must
and your broker’s recommendation. be filled at that price or better. The
Further, each brokerage firm and advantage of a limit order is that
Transmits Trade
futures exchange has discretion in you know the worst price you’ll
order confirmation
determining which kinds of orders get if the order is executed. The
are accepted. disadvantage is that you can’t be
certain that the order will be filled.
It is vital, however, for you and Trading Desk
your broker to fully understand Stop Order
and agree on the type of order Stop orders are not executed until
you are entering. Mistakes can be the market reaches a given price,
Sends Trade
costly but can almost always be at which time they become market
order confirmation
avoided with clear communication. orders. They are normally used to
liquidate earlier positions.
Following are the most regularly
used orders: Stop orders can also be used to
enter the market. Suppose you
expect a bull market only if the Broker Executes
Market Order Trade on Exchange
price passes through a specified
Floor or a/c/e
The most common type of order level. In this case, you could enter
Platform
is the market order. If you enter a a buy-stop order to be executed if
market order, you simply state the the market reached this point.
number of contracts you want to
buy or sell in a given delivery One variation is a stop-limit order.
month. You do not specify price, With this type of order, the trade
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