A complete guide to the futures market technical analysis trading systems fundamental analysis options spreads and

List of IllustrationsChapter 1 Figure 1.1 Volume Shift in Gold Futures Chapter 3 Figure 3.1 July 1980 silver Figure 3.2 December 1994 Coffee Chapter 4 Figure 4.1 Daily Bar Chart: July 20

The Wiley Trading series features books by traders who have survived the market's ever changingtemperament and have prospered—some by reinventing systems, others by getting back to basics.Whether a novice trader, professional or somewhere in-between, these books will provide the adviceand strategies needed to prosper today and well into the future For more on this series, visit ourwebsite at www.WileyTrading.com.

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the UnitedStates With offices in North America, Europe, Australia and Asia, Wiley is globally committed todeveloping and marketing print and electronic products and services for our customers' professionaland personal knowledge and understanding

Technical Analysis and Trading Systems, Fundamental Analysis,

Options, Spreads, and Trading Principles

SECOND EDITION

Jack D Schwager Mark Etzkorn

Cover images: Stock Chart © Adam Kazmierski/iStockphoto; Abstract Background © Olga Altunina/ iStockphoto

Cover design: Wiley

Copyright © 2017 by Jack D Schwager All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

The first edition of A Complete Guide to the Futures Market was published by John Wiley & Sons in 1984.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley

& Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales

representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other

commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993, or fax (317) 572-4002.

Wiley publishes in a variety of print and electronic formats and by print-on-demand Some material included with standard print versions

of this book may not be included in e-books or in print-on-demand If this book refers to media such as a CD or DVD that is not included

in the version you purchased, you may download this material at http://booksupport.wiley.com For more information about Wiley

products, visit www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Names: Schwager, Jack D., 1948- author.

Title: A complete guide to the futures market : fundamental analysis, technical analysis, trading, spreads and options / Jack D Schwager Description: Second edition | Hoboken, New Jersey : John Wiley & Sons, Inc., [2017] | Series: Wiley trading series | Includes index Identifiers: LCCN 2016034802 (print) | LCCN 2016047999 (ebook) | ISBN 9781118853757 (pbk.) | ISBN 9781118859599 (pdf) | ISBN

9781118859544 (epub)

Subjects: LCSH: Futures market | Commodity exchanges | Hedging (Finance)

Classification: LCC HG6046 S39 2017 (print) | LCC HG6046 (ebook) | DDC 332.64/52-dc23

LC record available at https://lccn.loc.gov/2016034802

In memory of Stephen Chronowitz, my mentor and friend.

About the Authors

Part I: Preliminaries

Chapter 1: For Beginners Only

Purpose of This ChapterThe Nature of Futures MarketsDelivery

Contract SpecificationsVolume and Open InterestHedging

TradingTypes of OrdersCommissions and MarginsTax Considerations

NotesChapter 2: The Great Fundamental versus Technical Analysis Debate

NotesPart II: Chart Analysis and Technical Indicators

Chapter 3: Charts: Forecasting Tool or Folklore?

NotesChapter 4: Types of Charts

Bar ChartsLinked Contract Series: Nearest Futures versus Continuous FuturesClose-Only (“Line”) Charts

Point-and-Figure ChartsCandlestick ChartsChapter 5: Linking Contracts for Long-Term Chart Analysis: Nearest versus ContinuousFutures

The Necessity of Linked-Contract ChartsMethods of Creating Linked-Contract ChartsNearest versus Continuous Futures in Chart AnalysisConclusion

NotesChapter 6: Trends

Defining Trends by Highs and Lows

TD Lines

Internal Trend Lines

Moving Averages

Notes

Chapter 7: Trading Ranges

Trading Ranges: Trading Considerations

Trading Range Breakouts

Chapter 8: Support and Resistance

Nearest Futures or Continuous Futures?

Trading Ranges

Prior Major Highs and Lows

Concentrations of Relative Highs and Relative LowsTrend Lines, Channels, and Internal Trend Lines

Price Envelope Bands

Chapter 9: Chart Patterns

One-Day Patterns

Continuation Patterns

Top and Bottom Formations

Notes

Chapter 10: Is Chart Analysis Still Valid?

Chapter 11: Technical Indicators

What Is an Indicator?

The Basic Indicator Calculations

Comparing Indicators

Moving Average Types

Oscillators and Trading Signals

Indicator Myths

Indicator “Types”

Conclusion

Notes

Part III: Applying Chart Analysis to Trading

Chapter 12: Midtrend Entry and Pyramiding

Chapter 13: Choosing Stop-Loss Points

Note

Chapter 14: Setting Objectives and Other Position Exit CriteriaChart-Based Objectives

Measured Move

Bull and Bear Traps

False Trend Line Breakouts

Return to Spike Extremes

Return to Wide-Ranging Day Extremes

Counter-to-Anticipated Breakout of Flag or Pennant

Opposite Direction Breakout of Flag or Pennant Following a Normal BreakoutPenetration of Top and Bottom Formations

Breaking of Curvature

The Future Reliability of Failed Signals

Conclusion

Part IV: Trading Systems and Performance Measurement

Chapter 16: Technical Trading Systems: Structure and Design:

The Benefits of a Mechanical Trading System

Three Basic Types of Systems

Trend-Following Systems

Ten Common Problems with Standard Trend-Following Systems

Possible Modifications for Basic Trend-Following Systems

Run-Day Breakout System

Run-Day Consecutive Count System

Conclusion

Chapter 18: Selecting the Best Futures Price Series for System TestingActual Contract Series

Nearest Futures

Constant-Forward (“Perpetual”) Series

Continuous (Spread-Adjusted) Price Series

Comparing the Series

Conclusion

Notes

Chapter 19: Testing and Optimizing Trading Systems

The Well-Chosen Example

Basic Concepts and Definitions

Choosing the Price Series

Choosing the Time Period

Realistic Assumptions

Optimizing Systems

The Optimization Myth

Testing versus Fitting

The Truth about Simulated Results

Multimarket System Testing

Negative Results

Ten Steps in Constructing and Testing a Trading System

Observations about Trading Systems

Notes

Chapter 20: How to Evaluate Past Performance

Why Return Alone Is Meaningless

Risk-Adjusted Return Measures

Visual Performance Evaluation

Investment Insights

Notes

Part V: Fundamental Analysis

Chapter 21: Fourteen Popular Fallacies, or What Not to Do WrongFive Short Scenes

The Fourteen Fallacies

Chapter 22: Supply-Demand Analysis: Basic Economic Theory:

Supply and Demand Defined

The Problem of Quantifying Demand

Understanding the Difference between Consumption and Demand

The Need to Incorporate Demand

Possible Methods for Incorporating Demand

Why Traditional Fundamental Analysis Doesn’t Work in the Gold Market

Notes

Chapter 23: Types of Fundamental Analysis

The “Old Hand” Approach

The Balance Table

The Analogous Season Method

Regression Analysis

Index Models

Chapter 24: The Role of Expectations

Using Prior-Year Estimates Rather Than Revised Statistics

Adding Expectations as a Variable in the Price-Forecasting Model

The Influence of Expectations on Actual Statistics

Defining New-Crop Expectations

Chapter 25: Incorporating Inflation

Notes

Chapter 26: Seasonal Analysis

The Concept of Seasonal Trading

Cash versus Futures Price Seasonality

The Role of Expectations

Is It Real or Is It Probability?

Calculating a Seasonal Index

Chapter 27: Analyzing Market Response

Evaluating Market Response for Repetitive Events

Chapter 28: Building a Forecasting Model: A Step-by-Step Approach:

Chapter 29: Fundamental Analysis and Trading

Fundamental versus Technical Analysis: A Greater Need for Caution

Three Major Pitfalls in Fundamental Analysis

Combining Fundamental Analysis with Technical Analysis and Money ManagementWhy Bother with Fundamentals?

Are Fundamentals Instantaneously Discounted?

Fitting the News to Price Moves

Fundamental Developments: Long-Term Implications versus Short-Term Response

Part VI: Futures Spreads and Options

Chapter 30: The Concepts and Mechanics of Spread Trading

Introduction

Spreads—Definition and Basic Concepts

Why Trade Spreads?

Types of Spreads

The General Rule

The General Rule—Applicability and Nonapplicability

Spread Rather Than Outright—An Example

The Limited-Risk Spread

The Spread Trade—Analysis and Approach

Pitfalls and Points of Caution

Notes

Chapter 31: Intercommodity Spreads: Determining Contract RatiosNotes

Chapter 32: Spread Trading in Stock Index Futures

Intramarket Stock Index Spreads

Intermarket Stock Index Spreads

Chapter 33: Spread Trading in Currency Futures

Factors That Determine Option Premiums

Theoretical versus Actual Option Premiums

Delta (the Neutral Hedge Ratio)

Notes

Chapter 35: Option Trading Strategies

Comparing Trading Strategies

Profit/Loss Profiles for Key Trading Strategies

Notes

Part VII: Practical Trading Guidelines

Chapter 36: The Planned Trading Approach

Step 1: Define a Trading Philosophy

Step 2: Choose Markets to Be Traded

Step 3: Specify Risk Control Plan

Step 4: Establish a Planning Time Routine

Step 5: Maintain a Trader’s Spreadsheet

Step 6: Maintain a Trader’s Diary

Step 7: Analyze Personal Trading

Notes

Chapter 37: Seventy-Five Trading Rules and Market Observations

Entering Trades

Exiting Trades and Risk Control (Money Management)

Other Risk-Control (Money Management) Rules

Holding and Exiting Winning Trades

Miscellaneous Principles and Rules

Market Patterns

Analysis and Review

Chapter 38: 50 Market Wizard Lessons

Reading the Normal Curve (Z) Table

Populations and Samples

Estimating the Population Mean and Standard Deviation from the Sample StatisticsSampling Distribution

Central Limit Theorem

Standard Error of the Mean

The Population Regression Line

Basic Assumptions of Regression Analysis

Testing the Significance of the Regression Coefficients

Standard Error of the Regression

Confidence Interval for an Individual Forecast

Extrapolation

Coefficient of Determination (r2)

Spurious (“Nonsense”) Correlations

Notes

Appendix D: The Multiple Regression Model

Basics of Multiple Regression

Applying the t-Test in the Multiple Regression Model

Standard Error of the Regression

Confidence Intervals for an Individual Forecast

Selecting the Independent Variables

Should the Preforecast Period Price Be Included?

Choosing the Length of the Survey Period

Sources of Forecast Error

List of Tables

Chapter 1

Table 1.1Table 1.2Table 1.3Table 1.4Chapter 11

Table 11.1Table 11.2Table 11.3Table 11.4Table 11.5Chapter 16

Table 16.1Table 16.2Chapter 17

Table 17.1Table 17.2Table 17.3Chapter 18

Table 18.1Chapter 19

Table 19.1Table 19.2Table 19.3Table 19.4Table 19.5Table 19.6Table 19.7Table 19.8Table 19.9

Table 19.10Table 19.11Table 19.12Table 19.13Table 19.14Table 19.15Table 19.16Table 19.17Table 19.18Table 19.19Table 19.20Table 19.21Table 19.22Table 19.23Chapter 20

Table 20.1Table 20.2Table 20.3Table 20.4Table 20.5Chapter 21

Table 21.1Table 21.2Chapter 23

Table 23.1Chapter 25

Table 25.1Table 25.2Chapter 26

Table 26.1Table 26.2

Table 26.3Table 26.4Table 26.5Table 26.6Chapter 27

Table 27.1Table 27.2Chapter 29

Table 29.1Table 29.2Chapter 34

Table 34.1Table 34.2Table 34.3Chapter 35

Table 35.1Table 35.2Table 35.3aTable 35.3bTable 35.3cTable 35.3dTable 35.4aTable 35.4bTable 35.4cTable 35.4dTable 35.5aTable 35.5bTable 35.5cTable 35.5dTable 35.6aTable 35.6b

Table 35.6cTable 35.6dTable 35.7Table 35.8Table 35.9Table 35.10Table 35.11aTable 35.11bTable 35.12aTable 35.12bTable 35.13Table 35.14Table 35.15Table 35.16Table 35.17Table 35.18Table 35.19bTable 35.20aTable 35.20bTable 35.21Table 35.22Table 35.23Table 35.24Table 35.25Table 35.26Table 35.27Table 35.28Appendix A

Table A.1Appendix B

Table B.1

Table B.2Table B.3Table B.4Appendix CTable C.1Appendix DTable D.1Table D.2Appendix ETable E.1Table E.2Table E.3

List of Illustrations

Chapter 1

Figure 1.1 Volume Shift in Gold Futures

Chapter 3

Figure 3.1 July 1980 silver

Figure 3.2 December 1994 Coffee

Chapter 4

Figure 4.1 Daily Bar Chart: July 2015 Soybeans

Figure 4.2 Weekly Bar Chart: Soybeans (Continuous Futures)

Figure 4.3 Monthly Bar Chart: Soybeans (Continuous Futures)

Figure 4.4 30-Minute Bar Chart: July 2015 Soybeans

Figure 4.5 Daily Bar Chart Perspective: December 2013 Coffee

Figure 4.6 Weekly Bar Chart Perspective: Coffee Nearest Futures

Figure 4.7 Distortion in Nearest Futures Chart: Cattle Weekly Nearest Futures (top) andCattle Weekly Continuous Futures (bottom)

Figure 4.8 Cash Price Chart: Crude Oil

Figure 4.9 Spread Chart: July–November 2015 Soybeans

Figure 4.10 Point-and-Figure Chart: December 2014 Gold

Figure 4.11 Bar Chart Corresponding to Point-and-Figure Chart in Figure 4.10: December

2014 Gold

Figure 4.12 Candlestick Chart: White Real Body

Figure 4.13 Candlestick Chart: Black Real Body

Figure 4.14 Candlestick Chart Corresponding to Figures 4.10 and 4.11: December 2014Gold

Chapter 5

Figure 5.1 March 2016 Russell 2000 Mini Futures

Figure 5.2 Corn Nearest Futures

Figure 5.3 Corn Continuous Futures

Figure 5.4 RBOB Gasoline Continuous Futures

Figure 5.5 Lean Hog Nearest Futures

Figure 5.6 Lean Hog Continuous Futures

Figure 5.7 10-Year T-Note Nearest Futures

Figure 5.8 10-Year T-Note Continuous Futures

Figure 5.9 Soybean Nearest Futures

Figure 5.10 Soybean Continuous Futures

Figure 5.11 Soybean Meal Nearest Futures

Figure 5.12 Soybean Meal Continuous Futures

Figure 5.13 VIX Nearest

Figure 5.14 VIX Continuous Futures

Figure 5.15 Live Cattle Nearest Futures

Figure 5.16 Live Cattle Continuous Futures

Figure 6.4 Uptrend Line: E-Mini Nasdaq 100 Continuous Futures

Figure 6.5 Uptrend Line: Copper Continuous Futures

Figure 6.9 Uptrend Line: 10-Year U.S T-Note Continuous Futures

Figure 6.10 Uptrend Channel: Soymeal Continuous Futures

Figure 6.11 Downtrend Channel: Soybean Oil Continuous Futures

Figure 6.12 Uptrend Line: Russell 2000 Mini Continuous Futures

Figure 6.13 Uptrend Line Redefined: Russell 2000 Mini Continuous Futures

Figure 6.14 Uptrend Line Redefined: Russell 2000 Mini Continuous Futures

Figure 6.15 Downtrend Line Redefined: Oat Continuous Futures

Figure 6.16 TD Downtrend Line (N = 5): E-Mini Nasdaq 100 Continuous Futures

Figure 6.17 TD Uptrend Line (N = 8): Copper Continuous Futures

Figure 6.18 Succession of TD Uptrend Lines (N = 10): U.S Dollar Index Continuous

Futures

Figure 6.19 Succession of TD Downtrend Lines (N = 10): June 2015 Euro Futures

Figure 6.20 Succession of TD Uptrend Lines (N = 10): August 2015 Gasoline

Figure 6.22 Succession of TD Uptrend Lines (N = 2): August 2015 Gasoline

Figure 6.23 Succession of TD Downtrend Lines (N = 10): Gold Continuous Futures

Figure 6.25 Succession of TD Downtrend Lines (N = 2): Gold Continuous Futures

Figure 6.26 Nominal Low versus True Low: Lean Hog Continuous Futures

Figure 6.27 Internal Trend Line versus Conventional Trend Line: Euro Continuous FuturesFigure 6.34 Internal Trend Line versus Conventional Trend Lines: Soybean Oil ContinuousFutures

Figure 6.35 Moving Average (40-Day) in Trending Market: Canadian Dollar ContinuousFutures

Figure 6.36 Moving Average (40-Day) in Sideways Market: Oat Continuous Futures

Figure 6.37 Moving-Average-Based Signals in Trending Market: Canadian Dollar

Continuous Futures

Figure 6.38 Moving-Average-Based Signals in Sideways Market: Oat Continuous FuturesChapter 7

Figure 7.1 Multiyear Trading Range: Silver Continuous Futures

Figure 7.2 Multiyear Trading Range: Crude Oil Continuous Futures

Figure 7.3 Multiyear Trading Range: Crude Oil Nearest Futures

Figure 7.4 Multiyear Trading Range: December 2014 Crude Oil Futures

Figure 7.5 Intraday Trading Range: December 2013 Euro Futures

Figure 7.6 Downside Breakout from Extended Trading Range: Weekly Heating Oil

Figure 8.7 Resistance at Prior High: Cotton Nearest Futures

Figure 8.8 Penetration of Previous High as Buy Signal: Russell 2000 Mini Nearest FuturesFigure 8.9 Penetration of Previous High as Buy Signal: Live Cattle Nearest Futures

Figure 8.10 Penetration of Previous Low as Sell Signal: Silver Nearest Futures

Figure 8.11 Penetration of Previous Low as Sell Signal: Mexican Peso Nearest FuturesFigure 8.12 Previous Resistance Becomes Support: Live Cattle Nearest Futures

Figure 8.13 Previous Support Becomes Resistance: Silver Nearest Futures

Figure 8.14 Previous Support Becomes Resistance: Silver Nearest Futures

Figure 8.15 Previous Support Becomes Resistance: Live Cattle Nearest Futures

Figure 8.16 Support Zone Defined by Concentration of Prior Relative Lows and Highs:Swiss Franc Nearest Futures

Figure 8.17 Support Zone Defined by Concentration of Prior Relative Lows and Highs:Gasoline Nearest Futures

Figure 8.18 Support Zone Defined by Concentration of Prior Relative Highs and Lows:Soybean Meal Nearest Futures

Figure 8.19 Support Zone Defined by Concentration of Prior Relative Highs and Lows:British Pound Nearest Futures

Figure 8.20 Support Zone Defined by Concentration of Prior Relative Lows: Copper

Figure 9.2 Spike High: Copper Continuous Futures

Figure 9.3 Spike High: Swiss Franc Continuous Futures

Figure 9.4 Spike Lows: British Pound Continuous Futures

Figure 9.5 Reversal Days: WTI Crude Oil Continuous Futures

Figure 9.6 Reversal Days: Copper Continuous Futures

Figure 9.7 Spike and Reversal Day: July 2008 Soybeans

Figure 9.8 Spike and Reversal Days: Mexican Peso Continuous Futures

Figure 9.9 Upthrust and Downthrust Days in Bull Market: E-Mini S&P 500 ContinuousFutures

Figure 9.10 Upthrust and Downthrust Days in Bear Market: December 2014 EuroFigure 9.11 Run Days in Bull Market: Euro Stoxx 50 Continuous Futures

Figure 9.12 Run Days in Bear Market: March 2015 Sugar

Figure 9.13 Wide-Ranging Up Days: Euro Continuous Futures

Figure 9.14 Wide-Ranging Down Days: Silver Continuous Futures

Figure 9.15 Wide-Ranging Up and Down Days: October 2012 WTI Crude Oil

Figure 9.16 Wide-Ranging Up and Down Days: September 2011 Coffee

Figure 9.17 Wide-Ranging Up Weeks: Japanese Yen Continuous Futures

Figure 9.18 Wide-Ranging Down Bar: September 2015 E-Mini Nasdaq 100 FuturesFigure 9.19 Symmetrical Triangle: Japanese Yen Continuous Futures

Figure 9.20 Symmetrical Triangle: March 2015 DAX

Figure 9.21 Symmetrical Triangle: Copper Continuous Futures

Figure 9.22 Ascending Triangle: Euro Stoxx 50 Continuous Futures

Figure 9.23 Ascending Triangle: Euro Continuous Futures

Figure 9.24 Descending Triangle: Euro Continuous Futures

Figure 9.25 Descending Triangle: September 2015 E-Mini Dow

Figure 9.26 Descending Triangles with Upside Breakouts: 10-Year T-Note ContinuousFutures

Figure 9.27 Flags and Pennants: Natural Gas Continuous Futures

Figure 9.28 Flags and Pennants: March 2015 Wheat

Figure 9.29 Flags and Pennants: Soymeal Continuous Futures

Figure 9.30 Flags and Pennants: September E-Mini Nasdaq 100

Figure 9.31 Flags and Pennants: Euro Schatz Continuous Futures

Figure 9.32 Flag Near Top of Trading Range as Bullish Signal: U.S Dollar Index

Figure 9.36 Flag Near Bottom of Trading Range as Bearish Signal: Japanese Yen

Continuous Futures

Figure 9.37 Flag Near Bottom of Trading Range as Bearish Signal: Copper ContinuousFutures

Figure 9.38 “V” Top: Wheat Continuous Futures

Figure 9.39 “V” Bottom: Euro Stoxx 50 Continuous Futures

Figure 9.40 Double Top: Euro Bobl Weekly Continuous Futures

Figure 9.41 Double Top: Canadian Dollar Continuous Futures

Figure 9.42 Double Bottom: E-Mini Nasdaq 100 Continuous Futures

Figure 9.43 Double Bottom: June 2015 Mini Russell 2000 Futures

Figure 9.44 Double Top: Platinum Continuous Futures

Figure 9.45 Triple Top: DAX Continuous Futures

Figure 9.46 Head-and-Shoulders Top: Sugar Continuous Futures

Figure 9.47 Head-and-Shoulders Bottom: Euro Stoxx 50 Continuous Futures

Figure 9.48 Head-and-Shoulders Bottom: November 2012 Soybeans

Figure 9.49 Head-and-Shoulders or Triple Top? Dollar Index Continuous Futures

Figure 9.50 Rounding Top: Nikkei 225 Continuous Futures

Figure 9.51 Rounding Top: Soybean Continuous Futures

Figure 9.52 Rounding Bottom: Lean Hog Continuous Futures

Figure 9.53 Rounding Bottom: Swiss Franc Continuous Futures

Figure 9.54 Triangle Top: Platinum Continuous Futures

Figure 9.55 Triangle Top: Orange Juice Continuous Futures

Figure 9.56 Triangle Bottom: DAX Continuous Futures

Figure 9.57 Triangle Bottom: Copper Continuous Futures

Figure 9.58 Rising Wedge: Euro Continuous Futures

Figure 9.59 Declining Wedge: Sugar Continuous Futures

Chapter 10

Figure 10.1 Trading Range Market: September 1992 Eurodollar

Figure 10.2 False Breakout Signals: September 1992 Eurodollar

Figure 10.3 Winning Breakout Signal after Two False Signals: September 1992 EurodollarFigure 10.4 Long-Term Chart as Part of Comprehensive Analysis: Eurodollar ContinuousFutures

Figure 10.5 False and Winning Breakout Signals: June 2012 Natural Gas Futures

Figure 10.6 Long-Term Chart as Part of Comprehensive Analysis: June 2012 Weekly

Natural Gas Futures

Chapter 11

Figure 11.1 Difference Indicators: Close – Close vs Close – MA

Figure 11.2 Ratio Versions of Difference Indicators

Figure 11.3 30-Day Versions of Close – Close and Close – MA Indicators

Figure 11.4 Price – MA vs MA – MA Indicators

Figure 11.5 Close/Close vs Closing Strength Indicators

Figure 11.6 Popular Indicator Comparison

Figure 11.7 Indicator Length vs Calculation Type

Figure 11.8 Moving Average Comparison

Figure 11.9 Oscillator Signals: Initial Penetration

Figure 11.10 Oscillator Dual-Condition Signals

Figure 11.11 Oscillator Signals in Trending Market

Figure 11.12 Price-Indicator Divergences

Figure 11.13 Length vs Indicator Type

Chapter 12

Figure 12.1 Missed Price Move? (May 2014 Coffee)

Figure 12.2 How It Turned Out (May 2014 Coffee)

Figure 12.3 Buy Signals on 50 Percent Retracements (E-Mini S&P MidCap 400 ContinuousFutures)

Figure 12.4 Reversal of Minor Reaction (Australian Dollar Continuous Futures)

Figure 12.5 Continuation Pattern Breakouts as Entry Signals (February WTI Crude Oil)Figure 12.6 Reaction to Long-Term Moving Average (E-Mini S&P 500 Futures)

Chapter 13

Figure 13.1 Stop Placement Following Trading Range Breakout: September 2015 Natural

Figure 13.1 Stop Placement Following Trading Range Breakout: September 2015 NaturalGas

Figure 13.2 Stop Placement Following Flag Pattern Breakout: December 2010 RBOB

Gasoline

Figure 13.3 Stop Placement Following Wide-Ranging Day Breakout: June 2012 10-Year Note

T-Figure 13.4 Stop Placement at Relative Lows: December 2012 Corn

Figure 13.5 Example of Market Where Money Stop Is Appropriate: December 2008 WTICrude Oil

Figure 13.6 Trailing Stop: E-Mini Nasdaq 100 Continuous Futures

Chapter 14

Figure 14.1 Measured Move: Soybean Continuous Futures

Figure 14.2 Measured Moves: Brazilian Real Continuous Futures

Figure 14.3 Measured Moves: Soymeal Continuous Futures

Figure 14.4 Measured Moves: Orange Juice Continuous Futures

Figure 14.5 Concentration of Measured Move Targets: Cocoa Continuous Futures

Figure 14.6 Concentration of Measured Move Targets: Canadian Dollar Continuous FuturesFigure 14.7 Rule of Seven: Soymeal Continuous Futures

Figure 14.8 Rule of Seven: Canadian Dollar Continuous Futures

Figure 14.9 Downside Objective at Support Zone: Australian Dollar Continuous FuturesFigure 14.10 Upside Objective at Resistance Level: Cocoa Nearest Futures

Figure 14.11 Upside Objective at Former Support Turned Resistance: British Pound

Nearest Futures

Figure 14.12 Relative Strength Index in Trend and Trading Range Conditions: U.S DollarIndex Continuous Futures

Figure 14.13 DeMark Sequential: June 2016 10-Year T-Note Continuous Futures

Figure 14.14 DeMark Sequential: June 2016 Gold

Figure 14.15 DeMark Sequential: May 2016 Soybeans

Figure 14.16 DeMark Sequential: Copper Continuous Futures

Figure 14.17 DeMark Sequential: June 2016 E-Mini Nasdaq 100

Chapter 15

Figure 15.1 Bull Trap: WTI Crude Oil Continuous Futures

Figure 15.2 Bull Trap: RBOB Gasoline Futures

Figure 15.3 Bear Trap: U.S Dollar Index Futures

Figure 15.4 Bear Trap: May 2014 Corn Futures

Figure 15.5 Bull Trap Confirmation Conditions: WTI Crude Oil Continuous Futures

Figure 15.6 Bull Trap Confirmation Conditions: RBOB Gasoline Continuous Futures

Figure 15.7 Bear Trap Confirmation Conditions: U.S Dollar Index Continuous FuturesFigure 15.8 Bear Trap Confirmation Conditions: May 2014 Corn Futures

Figure 15.9 False Breakout of Uptrend Line: 10-Year T-Note Continuous Futures

Figure 15.10 False Breakout of Uptrend Line: E-Mini Nasdaq Continuous Futures

Figure 15.11 Multiple False Breakouts of Downtrend Lines: Euro Continuous Futures

Figure 15.12 Penetration of Spike Highs: 30-Year T-Bond Continuous Futures

Figure 15.13 Penetration of Spike High: Cotton Continuous Futures

Figure 15.14 Penetration of Spike Highs: Soybean Oil Continuous Futures

Figure 15.15 Penetration of Spike Low: Australian Dollar Continuous Futures

Figure 15.16 Spike Penetration Signals Negated: 5-Year T-Note Continuous Futures

Figure 15.17 Penetration of Upside Wide-Ranging Day: Canadian Dollar Continuous

Futures

Figure 15.18 Penetration of Upside Wide-Ranging Day: U.S Dollar Index Continuous

Futures

Figure 15.19 Penetration of Upside Wide-Ranging Day: Copper Continuous Futures

Figure 15.20 Penetration of Downside Wide-Ranging Day: Bund Continuous Futures

Figure 15.21 Counter-to-Anticipated Breakout of Flag Pattern: Soybean Continuous FuturesFigure 15.22 Counter-to-Anticipated Breakout of Flag Pattern: Canadian Dollar ContinuousFutures

Figure 15.23 Counter-to-Anticipated Breakout of Flag Pattern: Orange Juice ContinuousFutures

Figure 15.24 Counter-to-Anticipated Breakout of Flag Pattern: Copper Continuous FuturesFigure 15.25 Counter-to-Anticipated Breakout of Flag Pattern: Heating Oil ContinuousFutures

Figure 15.26 Counter-to-Anticipated Flag Breakout and Opposite Direction Flag BreakoutFollowing Normal Breakout: Cocoa Continuous Futures

Figure 15.27 Opposite Direction Breakout of Flag Following Normal Breakout: PlatinumContinuous Futures

Figure 15.28 Opposite Direction Breakout of Flag Following Normal Breakout: April 2016Natural Gas

Figure 15.29 Opposite Direction Breakout of Flag Following Normal Breakout: Sugar

Continuous Futures

Figure 15.30 Opposite Direction Breakout of Flag Following Normal Breakout: Euro

Continuous Futures

Figure 15.31 Penetration of Double Top: 30-Year U.S T-Bond Continuous Futures

Figure 15.32 Penetration of Double Bottom: Australian Dollar Continuous Futures

Figure 15.33 Failed Head-and-Shoulders Top Pattern: Soymeal Continuous Futures

Figure 15.34 Failed Head-and-Shoulders Top Pattern: E-Mini S&P 500 Continuous FuturesFigure 15.35 Failed Head-and-Shoulders Top Pattern: Nikkei 225 Continuous Futures

Figure 15.36 Failed Head-and-Shoulders Bottom Pattern: Sugar Continuous Futures

Figure 15.37 Breaking of Curvature: E-Mini Nasdaq 100 Continuous Futures

Figure 15.38 Breaking of Curvature: Corn Continuous Futures

Chapter 16

Figure 16.1 June 2015 WTI Crude Oil and 35-Day Moving Average

Figure 16.2 E-Mini Nasdaq 100 Continuous Futures with 12-Day Moving Average

Figure 16.3 E-Mini Nasdaq 100 Continuous Futures with 48-Day Moving Average

Figure 16.4 E-Mini Nasdaq 100 Continuous Futures with Moving Average Crossover

Figure 16.5 Breakout System Signals, Fast versus Slow Systems: Silver Continuous FuturesFigure 16.6 Breakout Signals in Trading Range Market: October 2015 Natural Gas FuturesFigure 16.7 Failure of System to Exploit Major Price Move: Russell 2000 Mini FuturesFigure 16.8 Surrender of Profits by Nonsensitive System: Silver Continuous Futures

Figure 16.9 Penetration as Confirmation Condition: Coffee Continuous Futures

Figure 16.10 Time Delay as a Confirmation Condition: Coffee Continuous Futures

Figure 16.11 Example of a Pattern Confirmation Condition: Coffee Continuous FuturesFigure 16.12 Pyramid Signals: Gold Continuous Futures

Figure 16.13 Countertrend Signals: October 2015 Natural Gas Futures

Figure 16.14 System Trading: A Game of Inches (December 1981 Coffee)

Chapter 17

Figure 17.1 Wide-Ranging Day System, Chart 1: Copper Continuous Futures

Figure 17.2 Wide-Ranging Day System, Chart 2: Copper Continuous Futures

Figure 17.3 Wide-Ranging Day System, Chart 3: Copper Continuous Futures

Figure 17.4 Wide-Ranging Day System, Chart 4: Copper Continuous Futures

Figure 17.5 Wide-Ranging Day System, Chart 5: Copper Continuous Futures

Figure 17.6 Run-Day Breakout System (N1 = 5; N2 = 4), Chart 1: WTI Crude Oil

Figure 18.1 “Negative” Prices in a Continuous Futures Chart: Soybean Continuous FuturesChapter 19

Figure 19.1 Major Trending Phase as Unrepresentative Price Sample: Canadian DollarContinuous Futures

Figure 19.2 Wide Gap between Signal Price and Actual Entry: Impact of Limit Days

(September 2011 Corn)

Figure 19.3 Trading Results Reflect Market, Not System: Short Swiss Franc ContinuousFutures

Chapter 20

Figure 20.1 Two Paths to Return

Figure 20.2 Doubling the Exposure of the Lower-Risk Manager

Figure 20.3 Which Manager Is Riskier?

Figure 20.4 How Has Performance Changed over Time?

Figure 20.5 Log Scale: Equal Percentage Price Moves Appear Equal

Figure 20.6 Small Difference in Return; Wide Difference in Stability of Return

Figure 20.7 12-Month Rolling Return: Manager E

Figure 20.8 12-Month Rolling Return: Manager F

Figure 20.9 24-Month Rolling Return: Manager E

Figure 20.10 24-Month Rolling Return: Manager F

Figure 20.11 Underwater Curve: Manager E vs Manager F

Figure 20.12 2DUC: Manager E vs Manager F

Chapter 22

Figure 22.1 Supply Curve

Figure 22.2 Fixed Supply

Figure 22.3 Demand Curve

Figure 22.4 Elasticity of Demand

Figure 22.5 Equilibrium

Figure 22.6 Increase in Demand

Figure 22.7 Supply-Demand Interaction

Figure 22.8 Consumption Reflects Supply (in Fixed Supply Case)

Figure 22.9 Higher Demand, Lower Consumption: Variable Supply (a) and Fixed Supply(b)

Figure 22.10 Average Monthly Copper Nearest Futures Price vs Copper

Figure 25.1 Lumber: Nearest Futures, Nominal vs Deflated by PPI*

Figure 25.2 Soybeans: Nearest Futures, Nominal vs Deflated by PPI*

Figure 25.3 Copper: Nearest Futures, Nominal vs Deflated by PPI*

Figure 25.4 Live Cattle: Monthly Nearest Futures, Nominal Versus Deflated by PPI*

Figure 26.5 December E-Mini S&P 500 Seasonal Index: Comparison of Average

Percentage Method and Link Relative Method

Figure 26.6 December Gold Seasonal Index: Comparison of Average Percentage Method

and Link Relative Method

Figure 26.7 September Coffee Seasonal Index: Comparison of Average Percentage Methodand Link Relative Method

Figure 26.8 November Frozen Concentrated Orange Juice Seasonal Index: Comparison ofAverage Percentage Method and Link Relative Method

Figure 26.9 December Corn Seasonal Index: Comparison of Average Percentage Methodand Link Relative Method

Chapter 27

Figure 27.1 10-Year T-Note after Bullish Initial Response to Jobs Report (Cumulative)Figure 27.2 10-Year T-Note after Bearish Initial Response to Jobs Report (Cumulative)Figure 27.3 10-Year T-Note after Bullish Initial Response to Jobs Report (Daily)

Figure 27.4 10-Year T-Note after Bearish Initial Response to Jobs Report (Daily)

Figure 27.5 E-Mini S&P Change 500 after Bullish Initial Response to Jobs Report

Figure 29.1 March 1990 FCOJ

Figure 29.2 September 2012 Corn

Figure 29.3 Nikkei 225 Continuous Futures

Figure 29.4 December 1990 WTI Crude Oil

Figure 29.5 Swiss Franc Continuous Futures

Figure 29.6 May 2013 Corn

Figure 29.7 Case-Shiller National Home Price Index, Inflation Adjusted

Figure 29.8 The S&P/Case-Shiller Home Price Index (20-City Composite, SeasonallyAdjusted) vs S&P 500 Index Median Monthly Price

Figure 29.9 Subprime Arm Total Delinquencies vs S&P 500 Median Monthly Price

Source: OTS (delinquency data)

Figure 29.10 March 1986 WTI Crude Oil Futures

Figure 29.11 LME Copper Inventories vs LME Copper Prices

Figure 29.12 March 1986 Corn

Figure 29.13 July 1981 Cotton

Figure 29.14 November 1993 FCOJ

Chapter 30

Figure 30.1 July and December 2015 Coffee Futures vs July/December 2015 Coffee

Spread

Chapter 31

Figure 31.1 September 2013 Wheat Minus September 2013 Corn

Figure 31.2 Price Ratio of September 2013 Wheat to September 2013 Corn

Figure 31.3 3 September 2013 Wheat Minus 4 September 2013 Corn

Figure 31.4 September 2013 Wheat and September 2013 Corn

Chapter 32

Figure 32.1 Contract Value Ratio: S&P 500/Dow E-Mini Futures

Figure 32.2 Contract Value Ratio: S&P 500/Nasdaq 100 E-Mini Futures

Figure 32.3 Contract Value Ratio: S&P 500/Russell 2000 Mini Futures

Figure 32.4 Contract Value Ratio: Nasdaq 100/Dow E-Mini Futures

Figure 32.5 Contract Value Ratio: Nasdaq 100/Russell 2000 Mini Futures

Figure 32.6 Contract Value Ratio: Dow/Russell 2000 Mini Futures

Figure 32.7 S&P 500/Dow E-Mini Futures Ratio vs S&P

Figure 32.8 S&P 500/Nasdaq 100 E-Mini Futures Ratio vs S&P

Figure 32.9 S&P 500/Russell 2000 Mini Futures Ratio vs S&P

Figure 32.10 Nasdaq 100/Dow E-Mini Futures Ratio vs Dow

Figure 32.11 Nasdaq 100/Russell 2000 Mini Futures Ratio vs Russell 2000

Figure 32.12 Dow/Russell 2000 Mini Futures Ratio vs Russell 2000

Chapter 34

Figure 34.1 Theoretical Option Premium Curve

Figure 34.2 Time Value Decay

Chapter 35

Figure 35.1 Profit/Loss Profile: Long Futures

Figure 35.2 Profit/Loss Profile: Short Futures

Figure 35.3a Profit/Loss Profile: Long Call (At-the-Money)

Figure 35.3b Profit/Loss Profile: Long Call (Out-of-the-Money)

Figure 35.3c Profit/Loss Profile: Long Call (In-the-Money)

Figure 35.3d Profit/Loss Profile: Long Futures and Long Call Comparisons (In-the-Money,At-the-Money, and Out-of-the-Money)

Figure 35.4a Profit/Loss Profile: Short Call (At-the-Money)

Figure 35.4b Profit/Loss Profile: Short Call (Out-of-the-Money)

Figure 35.4c Profit/Loss Profile: Short Call (In-the-Money)

Figure 35.4d Profit/Loss Profile: Short Futures and Short Call Comparisons (In-the-Money,At-the-Money, and Out-of-the-Money)

Figure 35.5a Profit/Loss Profile: Long Put (At-the-Money)

Figure 35.5b Profit/Loss Profile: Long Put (Out-of-the-Money)

Figure 35.5c Profit/Loss Profile: Long Put (In-the-Money)

Figure 35.5d Profit/Loss Profile: Short Futures and Long Put Comparisons (In-the-Money,At-the-Money, and Out-of-the-Money)

Figure 35.6a Profit/Loss Profile: Short Put (At-the-Money)

Figure 35.6b Profi t/loss Profi le: Short Put (Out-of-the-Money)

Figure 35.6c Profit/Loss Profile: Short Put (In-the-Money)

Figure 35.6d Profit/Loss Profile: Long Futures and Short Put Comparisons (In-the-Money,At-the-Money, and Out-of-the-Money)

Figure 35.7 Profit/Loss Profile: Long Straddle (Long Call + Long Put)

Figure 35.8 Profit/Loss Profile: Short Straddle (Short Call + Short Put)

Figure 35.9 Profit/Loss Profile: Bullish “Texas Option Hedge” (Long Futures + Long Call)Figure 35.10 Profit/Loss Profile: Bearish “Texas Option Hedge” (Short Futures + LongPut)

Figure 35.11a Profit/Loss Profile: Option-Protected Long Futures—Long Futures + Longat-the-Money Put (Similar to Long At-the-Money Call)

Figure 35.11b Profit/Loss Profile: Option-Protected Long Futures—Long Futures + LongOut-of-the-Money Put (Similar to Long In-the-Money Call)

Figure 35.12a Profit/Loss Profile: Option-Protected Short Futures—Short Futures + LongAt-the-Money Call (Similar to Long At-the-Money Put)

Figure 35.12b Profit/Loss Profile: Option-Protected Short Futures—Short Futures + LongOut-of-the-Money Call (Similar to Long In-the-Money Put)

Figure 35.13 Profit/Loss Profile: Covered Call Write—Long Futures + Short Call (Similar

to Short Put)

Figure 35.14 Profit/Loss Profile: Covered Put Write—Short Futures + Short Put (Similar toShort Call)

Figure 35.15 Profit/Loss Profile: Synthetic Long Futures (Long Call + Short Put)

Figure 35.16 Profit/Loss Profile: Synthetic Short Futures (Long Put + Short Call)

Figure 35.17 Profit/Loss Profile: Ratio Call Write—Long Futures + Short 2 Calls (Similar

Figure 35.20a Profit/Loss Profile: Bull Put Money Spread (Long Put with Lower StrikePrice/Short Put with Higher Strike Price); Case 1—Both Puts In-the-Money

Figure 35.20b Profit/Loss Profile: Bull Put Money Spread (Long Put with Lower StrikePrice/Short Put with Higher Strike Price); Case 2—Long Out-of-the-Money Put/Short At-the-Money Put with Comparison to Short At-the-Money Put

Figure 35.21 Profit/Loss Profile; Bear Put Money Spread (Short Put with Lower StrikePrice/Long Put with Higher Strike Price)

Figure 35.22 Profit/Loss Profile: Two Long Calls vs Long Futures

Figure 35.23 Probability of Futures Price within Given Range of Option Expiration forVarious Expected Probability Distributions (Arrow Indicates Current Price of Futures)Figure 35.24 “Bullish/Nonvolatile” Expected Probability Distribution and Profit/LossProfiles for Three Alternative Bullish Strategies

Figure 35.25 “Bullish/Volatile” Expected Probability Distribution and Profit/Loss Profilesfor Three Alternative Bullish Strategies

Figure 35.26 “Bearish/Nonvolatile” Expected Probability Distribution and Profit/LossProfiles for Three Alternative Bearish Strategies

Figure 35.27 “Bearish/Volatile” Expected Probability Distribution and Profit/Loss Profilesfor Three Alternative Bearish Strategies

Figure 35.28 “Neutral/Nonvolatile” Expected Probability Distribution and Profit/LossProfiles for Two Alternative Neutral Strategies

Figure 35.29 “Neutral/Volatile” Expected Probability Distribution and Profit/Loss Profilesfor Two Alternative Neutral Strategies

Chapter 36

Figure 36.1 Sample Page from a Trader’s Spreadsheet

Appendix A

Figure A.1 June–November Hog Slaughter vs December–May Pig Crop (Thousands)

Figure A.2 Meaning of a and b for Straight Line

Figure A.3 Deviation for a Single Observation

Figure A.4 Best-Fit Line for June–November Hog Slaughter vs December–May Pig CropAppendix B

Figure B.1 Probability Distribution for Number of Winning Trades in 10 Trades If

Decision Based on Chance

Figure B.2 Continuous Probability Distribution

Figure B.3 Fixed Interval Probability Increases with Proximity to Mean

Figure B.4 Sampling Distribution of Mean

Figure B.5 Probability Distribution for Spinning Wheel

Figure B.6 Sampling Distribution of Mean for Spinning Wheel Trials

Appendix C

Figure C.1 Fitted vs True Regression Line

Figure C.2 Sampling Distribution of Regression Coefficient

Figure C.3 Effect of Range of X t on Reliability of the Regression Coefficient Source: T H Wonnacott and R J Wonnacott Econometrics, John Wiley & Sons, New York, 1980.

Copyright © 1980 by John Wiley & Sons; reprinted by permission

Figure C.4 Confidence Interval for an Individual Forecast

Figure C.5 Explained, Unexplained, and Total Deviation

Figure C.6 Number of Hedge Funds vs U.S Wine Consumption

Appendix D

Figure D.1 Scatter of Observed Points About the Regression Plane

Appendix E

Figure E.1 Standardized Residuals Plotted Against Time

Figure E.2 Standardized Residuals for Average Price of December Hog Futures (July–November) vs June–November Hog Slaughter

Figure E.3 Standardized Residuals for Average Price of December Hog Futures (July–November) vs June–November Hog Slaughter, and Trend

Figure E.4 Standardized Residuals for Average Price of December Hog Futures (July–November) vs June–November Hog Slaughter, Broiler Slaughter, and Trend

Figure E.5 Standardized Residuals for Hog Slaughter vs Previous Six-Month Pig CropFigure E.6 Standardized Residuals for Hog Slaughter vs Previous Six-Month Pig Cropafter Including Dummy Variables

Figure E.7 Bias in Regression Line Due to Omission of Dummy Variables

Figure E.9 Distortion in Applying Linear Regression to Nonlinear Function

Figure E.10 Y = ae bX

Figure E.11 Y = aX b

Figure E.12 Heteroscedasticity