The Complete Guide to Futures Trading

1 The Complete Guide to Futures TradingWhat You Need to Know about the Risks and RewardsREFCO PRIVATECLIENT GROUPJohn Wiley & Sons, Complete Guide to Futures TradingThe Complete Guide to Futures TradingWhat You Need to Know about the Risks and RewardsREFCO PRIVATECLIENT GROUPJohn Wiley & Sons, 2005 by Refco Private Client Group. All rights by John Wiley & Sons, Inc., Hoboken, New simultaneously in part of this publication may be reproduced, stored in a retrieval system, or transmitted in any formor by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except aspermitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the priorwritten permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the web at Requests to the Publisher for permissionshould be addressed to the Permissions Department, John Wiley & Sons, Inc.

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4 1. Financial Refco Private Client '52 dc222005003024 Printed in the United States of the ContributorsxiiiCHAPTER 1 Futures : The Investment for the Twenty-First Century1 Mark SachsHistorical Roots2 What Futures Are2 What Futures Are Not4 Who Trades Futures ?9 Making Your Choice11 CHAPTER 2 Becoming a Futures Trader13 Dan McMullinTrading Decision Issues14 Fundamental Analysis Highlights18 Technical Analysis Highlights25 Putting It All Together56 CHAPTER 3 Trading with a Broker as a Partner59 Jim GombasWhat a Broker Can Offer59 Options versus Futures65 Market Should Fit Strategy66 Paper Trading , Back-Testing67 CHAPTER 4 Letting the Pros Trade Your Account69 Carol DannenhauerWhy Managed Futures ?70 Where Do You Start?74 Evaluating Trading Programs76 Investing in Managed Futures80 CHAPTER 5 Using an Auto-Executing Trading System83 Herb KralWhy an Auto-Executing Trading System?

5 83 Look at Yourself First85 What to Look for in a Trading System86 Why Successful Systems May Fail88 Summing up Systems89 CHAPTER 6 Resources for the Self-Directed Trader91 David HoweBrokerage Firm Choice91 Trading Platform93 Trading Support Tools95 Match Resources to Your Needs98 CHAPTER 7 Knowing Your Margins and Marching Orders99 Greg GulottaTrading on Margin99 Order Types101 Placing Orders108 Tips about Trading Mechanics110 Connectivity Issues and Questions113 CHAPTER 8 Futures : Diverse Markets You Can Trade115 Susan Abbott GidelEquity-Based Futures117 Financial Instruments122 Commodities127 CHAPTER 9 Options on Futures : A Flexible Trading Tool139 Dan McMullinIssues to Consider When Investing in Futures Options140 Mechanics of Futures Options144 Basic Futures Options Strategies151viCONTENTSCHAPTER 10 Forex: Another Opportunity for Traders167 Phillip FondrenWhat Is the Forex Market?

6 167 exchange Rates and Central Banks171 The Trading Instrument172 Spot Market versus Futures Market176 Electronic Trading177 Costs of Trading178 CHAPTER 11 Deciding to Trade181 Mark SachsThe Money Factor181 Time for Trading183 Knowing the Market183 Who Are You?183 Your Trading Plan184 Picking a Brokerage Firm186 CHAPTER 12 Opening an Account189 Nancy WestwickOpening Account Information190 Risk Disclosures190 Type of Account192 Power of Attorney193 Customer Identification (Patriot Act Requirements)193 Single-Stock Futures193 Account Funding Requirements194 Margin Calls194 Resolving Disputes195 CHAPTER 13 The Tax Factor for Traders197 Philip SilvermanSection 1256 Contracts197 How to Report Gains or Losses199 Special Considerations201 ContentsviiCHAPTER 14 The Business of Futures : Who Does What203 Laura OatneyRegulatory Structure203 Futures Exchanges205 Clearinghouses205 Futures Industry Professionals207 APPENDIX A Domestic and International Futures Contract Volume211 APPENDIX B Futures Contract Specifications251 APPENDIX C Speculative Margins269 Glossary273 Index289viiiCONTENTSixForewordAs its title suggests, this landmark book makes Futures Trading accessible to main-stream individual investors.

7 The determination of whether Futures are right foryour portfolio remains with each individual, but The Complete Guide to FuturesTradingcan serve as an expert advisor to help you make informed decisionsabout how to participate in the exciting derivatives by experienced practitioners from Refco, a diversified global financialservices organization, and Refco Private Client Group, previously known as Lind-Waldock, a leading broker for individual Futures traders, the book answers thequestions a newcomer to Futures and commodities Trading might have about whatit takes to establish an account and make a commitment to is not a book about tradingfutures, however. It does not offer tips abouta particular technical or fundamental approach to the markets. Instead, it servesas a bridge between having an interest in Futures yet knowing little about how togo about acting on that interest and placing a Trading order in your Futures ac-count.

8 After reading it, you will know what questions to ask yourself and your bro-kers and other industry professionals when getting ready to establish a futurestrading account. Readers who are new to Futures Trading will be interested in the range of top-ics covered, because it will answer questions about how to get started tradingcommodity Futures : Which type of account is best for me? What should I know about risk, leverage, and margin? Is my comfort level with risk in line with what Futures Trading provides? What questions should I ask when looking for a brokerage relationship? How are Futures taxed? What resources do I need as a Futures trader? What are the different ways to approach making a Trading decision? What are the various types of orders I can use? What markets can I trade?Clearly written by contributors with a depth of practical understanding thatcomes from years in the Futures industry, The Complete Guide to Futures Tradingaddresses these issues and others in a well-organized, easy-to-follow style.

9 Aschief executive officer of the largest financial exchange in the world for Trading fu-tures and options, I can wholeheartedly recommend this volume for the readerwho wants to learn the fundamentals of investing in DONOHUEC hief Executive OfficerChicago mercantile ExchangeMay 2005 CME is the largest financial exchange in the world for Trading Futures and op-tions on Futures serving risk-management needs globally through a diverserange of derivatives products on its CME Globex electronic Trading platformas well as on its Trading floors. Today the company is in 27 countries, withmore than 740 direct customer connections, annual sales in excess of $735 mil-lion, and 1,300 employees. In 2004, CME handled nearly 800 million contractswith an underlying value of $463 trillion. The first financial exchange in theUnited States to go public, CME is traded on the New York Stock exchange andNasdaq under the symbol CME and has a market value of nearly $7 are the investment of the twenty-first the beginning of the twentieth century, investing in stocks was consid-ered a risky proposition for individuals, who were advised to stick to buyingbonds.

10 Now, over 50 percent of households invest in the stock market directlyor indirectly through mutual fund holdings even in retirement accounts. At RefcoPrivate Client Group, we believe writers of the twenty-second century lookingback on the twenty-first will say the same about investment in Futures markets began in the mid-1800s, they didn t haveglobal significance until the 1980s, when companies and governments worldwideembraced the instruments as financial management tools. Futures markets havealways been about price discovery and transfer of risk, so are ideally suited toenvironments of uncertainty and high volatility an apt description of the past30 collapse of the gold standard in 1972 led to free-floating currency ex-change rates and the first financial Futures contracts, foreign exchange , at theChicago mercantile exchange .