A Complete Guide to the Futures Market: Technical Analysis, Trading Systems, Fundamental Analysis, Options, Spreads, and Trading Principles

"Jack Schwager strikes again with yet another bullseye. A Complete Guide to the Futures Market will quickly become, and remain for many years, the definitive textbook for information on the futures market. The book covers the gamut of futures markets from technical and fundamental analysis to systematic trading to spreads and options. This book is a must–read for any trader in the futures markets."
Peter Brandt, Trader & publisher of the Factor Report

THE ESSENTIAL FUTURES REFERENCE GUIDE

A Complete Guide to the Futures Market is an indispensable reference for futures traders and analysts of all skill levels. Spanning every topic from technical analysis, trading systems, and fundamental analysis to options, spreads, and practical trading principles, this definitive guide is required reading for any trader or investor who wants to understand and successfully navigate the futures market.

This fully revised and updated second edition provides a solid foundation in futures market basics, details key analysis and forecasting techniques, explores advanced trading concepts, and illustrates the practical application of these ideas with hundreds of market examples. A Complete Guide to the Futures Market:

Details different trading and analytical approaches, including chart analysis, technical indicators and trading systems, regression analysis, and fundamental market models Separates misleading market myths from trading realities Gives step–by–step instruction for developing and testing original trading ideas and systems Illustrates a wide range of option and spread strategies, and explains the trading implications of each Details a wealth of practical trading guidelines and market insights from a recognized trading authority

Trading the futures market without a firm grasp of its realities and nuances is a recipe for losing money. A Complete Guide to the Futures Market provides serious traders and investors with the tools to keep themselves on the right side of the ledger.

Part One: Preliminaries

Chapter 1: For Beginners Only

Purpose of This Chapter

The Nature of Futures Markets

Delivery

Contract Specifications

Volume and Open Interest

Hedging

Trading

Types of Orders

Commissions and Margins

Tax Considerations

Chapter 2: The Great Fundamental versus Technical Analysis Debate

Part Two: Chart Analysis and Technical Indicators

Chapter 3: Charts: Forecasting Tool or Folklore?

Chapter 4: Types of Charts

Bar Charts

Linked Contract Series: Nearest Futures Versus Continuous Futures

Close–Only Charts

Point and Figure Charts

Candlestick Charts

Chapter 5: Linking Contracts for Long–Term Chart Analysis: Nearest versus Continuous Futures

The Necessity of Linked–Contract Charts

Methods of Creating Linked–Contract Charts

Nearest Versus Continuous Futures in Chart Analysis

Conclusion

Chapter 6: Trends

Defining Trends by Highs and Lows

TD Lines

Internal Trend Lines

Moving Averages

Chapter 7: Trading Ranges

Trading Ranges: Trading Considerations

Trading Range Breakouts

Chapter 8: Support and Resistance

Trading Ranges

Prior Major Highs and Lows

Concentrations of Relative Highs and Relative Lows

Trend Lines, Channels, and Internal Trend Lines

Price Envelope Bands

Chapter 9: Chart Patterns

One–Day Patterns

Continuation Patterns

Top and Bottom Formations

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

Part III: Applying Chart Analysis to Trading

Chapter 12: Midtrend Entry and Pyramiding

Chapter 13: Choosing Stop–Loss Points

Chapter 14: Setting Objectives and Other Position Exit Criteria

Chart–Based Objectives

Measured Move

Rule of Seven

Support and Resistance Levels

Overbought/Oversold Indicators

Demark Sequential

Contrary Opinion

Trailing Stops

Change of Market Opinion

Chapter 15: The Most Important Rule in Chart Analysis

Failed Signals

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 Breakout

Penetration 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

Countertrend Systems

Diversification

Ten Common Problems with Trend–Following Systems Revisited

Chapter 17: Examples of Original Trading Systems

The Wide–Ranging Day System

Run Day Breakout System

Run Day Consecutive Count System

Conclusion

Chapter 18: Selecting the Best Futures Price Series for System Testing

Actual Contract Series

Nearest Futures

Constant–Forward ( Perpetual ) Series

Continuous (Spread–Adjusted) Price Series

Comparing the Series

Conclusion

Chapter 19: Testing and Optimizing Trading Systems

The Well–Chosen Example1

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

Steps in Constructing and Testing a Trading System

Observations about Trading Systems

Chapter 20: How to Evaluate Past Performance

Why Return Alone Is Meaningless

Risk–Adjusted Return Measures

Visual Performance Evaluation

Investment Insights

Part V: Fundamental Analysis

Chapter 21: Fourteen Popular Fallacies, or What Not to Do Wrong

Five 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

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

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 Management

Why Bother with Fundamentals?

Are Fundamentals Instantaneously Discounted?

Fitting rhe News to Price Moves

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

Summary

Part IV: 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 Non Applicability

Spread Rather than Outright An Example

The Limited–Risk Spread

The Spread Trade Analysis and Approach

Pitfalls and Points of Caution

Chapter 31: Intercommodity Spreads: Determining Contract Ratios

Chapter 32: Spread Trading in Stock Index Futures

Intramarket Stock Index  Spreads

Intermarket Stock Index Spreads

Chapter 33: Spread Trading in Currency Futures

Intercurrency Spreads

Intracurrency Spreads

Chapter 34: An Introduction to Options on Futures

Preliminaries

Factors That Determine Option Premiums

Theoretical Versus Actual Option Premiums

Delta (The Neutral Hedge Ratio)

Chapter 35: Option Trading Strategies

Comparing Trading Strategies

Profit/Loss Profiles for Key Trading Strategies

Choosing an Optimal Strategy

Hedging Applications

Part VII: Practical Trading Guidelines

Chapter 36: The Planned Trading Approach

Step One: Define a Trading Philosophy

Step Two: Choose Markets to Be Traded

Step Three: Specify Risk Control Plan1

Step Four: Establish a Planning Time Routine

Step Five: Maintain a Trader s Spreadsheet

Step Six: Maintain a Trader s Diary

Step Seven: Analyze Personal Trading

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 a

Analysis and Review

Chapter 38: Market Wiz(ar)dom

Appendix A: Introduction to Regression Analysis

Basics

Meaning of Best Fit

A Practical Example

Reliability of the Regression Forecast

Appendix B: A Review of Elementary Statistics

Measures of Dispersion

Probability Distributions

Reading the Normal Curve (Z) Table

Populations and Samples

Estimating The Population Mean and Standard Deviation from the Sample Statistics

Sampling Distribution

Central Limit Theorem

Standard Error of the Mean

Confidence Intervals

The t–Test

Appendix C: Checking the Significance of the Regression Equation

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

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

R2 And Corrected R2

F–Test

Analzying a Regression Run

Appendix E: Analyzing the Regression Equation

Outliers

The Residual Plot

Autocorrelation Defined

The Durbin–Watson Statistic as a Measure of Autocorrelation

The Implications of Autocorrelation

Missing Variables and Time Trend

Dummy Variables

Multicollinearity

Addendum: Advanced Topics

Heteroscedasticity

Appendix F: Practical Considerations in Applying Regression Analysis

Determining the Dependent Variable

Selecting the Independent Variables

Should the Preforecast Period Price Be Included?

Choosing the Length of the Survey Period

Sources of Forecast Error

Simulation

Stepwise Regression

Sample Step–By–Step Regression Procedure

Summary

References and Recommended Readings

Index

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.