A Complete Guide to the Futures Market

JACK D. SCHWAGER is a co-founder of FundSeeder, a web-based technology and investment business designed to connect undiscovered trading talent with sources of investment capital. He is the author of numerous acclaimed financial books, including the Market Wizards series and Market Sense and Nonsense. MARK ETZKORN is founder of FinCom Media. He was formerly Editor-in-Chief of Active Trader magazine, editor at Futures magazine, and a member of the Chicago Mercantile Exchange. He has authored, edited, and contributed to more than 10 books on the financial markets.

About the Authors xv Part I Preliminaries Chapter 1 For Beginners Only 3 Purpose of This Chapter 3 The Nature of Futures Markets 3 Delivery 4 Contract Specifications 5 Volume and Open Interest 9 Hedging 11 Trading 15 Types of Orders 16 Commissions and Margins 19 Tax Considerations 19 Chapter 2 The Great Fundamental versus Technical Analysis Debate 21 Part II Chart Analysis and Technical Indicators Chapter 3 Charts: Forecasting Tool or Folklore? 27 Chapter 4 Types of Charts 35 Bar Charts 35 Linked Contract Series: Nearest Futures versus Continuous Futures 39 Close-Only (Line) Charts 40 Point-and-Figure Charts 42 Candlestick Charts 43 Chapter 5 Linking Contracts for Long-Term Chart Analysis: Nearest versus Continuous Futures 45 The Necessity of Linked-Contract Charts 45 Methods of Creating Linked-Contract Charts 46 Nearest versus Continuous Futures in Chart Analysis 48 Conclusion 51 Chapter 6 Trends 57 Defining Trends by Highs and Lows 57 TD Lines 66 Internal Trend Lines 73 Moving Averages 78 Chapter 7 Trading Ranges 83 Trading Ranges: Trading Considerations 83 Trading Range Breakouts 86 Chapter 8 Support and Resistance 91 Nearest Futures or Continuous Futures? 91 Trading Ranges 92 Prior Major Highs and Lows 94 Concentrations of Relative Highs and Relative Lows 101 Trend Lines, Channels, and Internal Trend Lines 106 Price Envelope Bands 107 Chapter 9 Chart Patterns 109 One-Day Patterns 109 Continuation Patterns 122 Top and Bottom Formations 134 Chapter 10 Is Chart Analysis Still Valid? 149 Chapter 11 Technical Indicators 155 What Is an Indicator? 155 The Basic Indicator Calculations 157 Comparing Indicators 157 Moving Average Types 165 Oscillators and Trading Signals 167 Indicator Myths 170 Indicator Types 172 Conclusion 173 Part III Applying Chart Analysis to Trading Chapter 12 Midtrend Entry and Pyramiding 177 Chapter 13 Choosing Stop-Loss Points 183 Chapter 14 Setting Objectives and Other Position Exit Criteria 189 Chart-Based Objectives 189 Measured Move 190 Rule of Seven 194 Support and Resistance Levels 196 Overbought/Oversold Indicators 198 DeMark Sequential 199 Contrary Opinion 203 Trailing Stops 204 Change of Market Opinion 204 Chapter 15 The Most Important Rule in Chart Analysis 205 Failed Signals 205 Bull and Bear Traps 205 False Trend Line Breakouts 211 Return to Spike Extremes 213 Return to Wide-Ranging Day Extremes 216 Counter-to-Anticipated Breakout of Flag or Pennant 219 Opposite Direction Breakout of Flag or Pennant Following a Normal Breakout 222 Penetration of Top and Bottom Formations 225 Breaking of Curvature 229 The Future Reliability of Failed Signals 229 Conclusion 231 Part IV Trading Systems and Performance Measurement Chapter 16 Technical Trading Systems: Structure and Design 235 The Benefits of a Mechanical Trading System 236 Three Basic Types of Systems 236 Trend-Following Systems 237 Ten Common Problems with Standard Trend-Following Systems 244 Possible Modifications for Basic Trend-Following Systems 247 Countertrend Systems 254 Diversification 256 Ten Common Problems with Trend-Following Systems Revisited 259 Chapter 17 Examples of Original Trading Systems 261 Wide-Ranging-Day System 261 Run-Day Breakout System 268 Run-Day Consecutive Count System 273 Conclusion 278 Chapter 18 Selecting the Best Futures Price Series for System Testing 279 Actual Contract Series 279 Nearest Futures 280 Constant-Forward (Perpetual) Series 281 Continuous (Spread-Adjusted) Price Series 282 Comparing the Series 285 Conclusion 287 Chapter 19 Testing and Optimizing Trading Systems 289 The Well-Chosen Example 289 Basic Concepts and Definitions 291 Choosing the Price Series 293 Choosing the Time Period 293 Realistic Assumptions 295 Optimizing Systems 297 The Optimization Myth 298 Testing v