How will you trade? Fundamental traders base their trades on information external to the market. In other words, thing like; weather, strength of the dollar, cattle-on-feed reports, slaughter count, political events, etc. Technical traders base their trades on information internal to the market. Things like; chart patterns including trendlines, channels, waves, double tops and bottoms, etc. Also considered are stochastics, moving averages and the like. I'm not sure who makes the most money (that has been debated forever), but I think it is difficult to be 100% one or the other now days. There are others who do quite well using Astrology, Numerology, and just plain "gut feel". In any case... Choose your weapon, the battle is about to begin.
Fundamental trading means more than just reading the Investor's Business Daily. As a fundamental trader you must become familiar with all the factors involving your trades. If you are trading grains, you should be on the mailing list of the Department of Agriculture and several other sources. You should receive reports from all agencies and companies that will publish information such as visible supply, acreage planted, weather reports, cattle on feed and hog reports, etc. This is only an example, and you should carry it through with each "family" of commodities you trade. You must work to be informed, you can't expect to win if your not properly armed.
As a chartist, when you find a pattern, be sure it is what you think. When you have worked with charting, and believe you see an important formation (head-and-shoulders, wedge, double-top, etc.) be sure you compare it to past patterns of the same formation. You must see if the pattern conforms to other such formations in the charts of the commodity you are trading. If it does, see how often the price responded predictably to that formation. If you are right, you can come up with a VERY relative calculation of the percentage of chance the pattern will work this time.
By the time you hear the news, it's too late! You've decided to be a "fundamental" trader, and begin your research. Make sure it is true research and not just tips and hear-say. You have to count on the many reports, informational sheets and articles you gather from every source that has anything to do with your chosen commodities, but you must not be influenced by tips, rumors and "word-on-the-street". This information is usually old news, and is already "in" the market. Through your sources you are trying to be the one who gleans that "new" data before anyone else. That is what will make you successful as a fundamental trader. Remember, all good luck starts with hard work.
There's more to a chart than lines and patterns. Now you've gotten to the point of recognizing certain chart patterns. You can identify trend lines, gaps and head-and-shoulders. These are patterns that are not too difficult to trade, but what about an ascending or descending triangle, or declining or rising wedge? These formations require a great deal more analysis than just seeing the formation. These and other more advanced formations require a study of other factors such as the volume of trading, the volatility of the market and the time period it took the pattern to form. there are other factors to consider also, so don't get into the more advanced patterns until you have experience and have reviewed past occurrences of these formations.
Try trading opening gaps. If you have the heart for excitement and the capital to back it up, try this VERY RISKY strategy. Some of the more volatile commodities will either gap higher or lower on the open. Combine this with the old adage that "gaps will fill", and you have a shot at some quick profits (or losses). Check your history first to be sure that the futures you've chosen does this on a fairly regular basis (T Bonds used to be good for this). Then if the price gaps higher on the open, give it a while to settle in. Now if the price hasn't continued running up, you may want to short the market in hopes it will come back down and fill the gap it left. Don't short it until it is coming off its high for the second or third time, then you must have a tremendous amount of discipline. You MUST place your stop a few ticks above the high, in an attempt to limit your loss if the price does decide to move higher. You must also determine that if the price does fill the gap, the reward you reap will be at a good ratio to the risk you were willing to take. When the gap is filled... GET OUT! You have accomplished your goal. This is, as I said, a dangerous strategy, but it works particularly well if the gap was created by a rumor before the market opened.
Lock your profits or lose nothing with free (almost) options. Follow me closely now... Using the Treasury Bonds as an example: Assume you enter a long position in the March '99 TBond futures @ 123-00. Now if you sell (write) the 124-00 call option for 25/64 ($390.62), and buy the 123-00 put option for 35/64 ($546.70), you have set yourself up with a defined profit and loss situation. If the price goes up, you have limited your profit to a total of $843.92 (the difference between the $1,000 for the move from 123-00 to 124-00 on the futures, less the $156.08 you had to pay for the higher priced put option). You will, of course, have to subtract out your commissions too. Remember... you cannot make more than $843.92, but the good part is you cannot lose more than the $156.08 difference you paid for the option (plus your commissions of course). Not a bad trade if you are interested in generating income. This can also be done on the short side of the market, by buying the call at-the-money, and selling the put 1-00 lower. If you want to take a bit more risk, you can try to "leg" into the position, and if done right, you can get into a position where you can make a profit or lose nothing. It does take practice so be careful. (The above example was done using the actual prices of the March TBond futures and option prices on 2-12-99).
source: irfutures.com
