| Throughout our course on futures trading, we have | | | | required research. But that doesn't mean they cannot |
| tried to point out to you that there is a great difference | | | | use this information should the happen to stumble |
| between having an investor attitude and being a trader. | | | | across it. Technicals in the purest sense are fine, but |
| There are also many similarities. In one sense, a trader | | | | the way they have been bastardized into virtually |
| is someone who invests in his own trading ability. | | | | meaningless indicators makes no sense. The ultimate |
| Therefore, in that sense trading is investing. Trading | | | | foolishness of technical indicators is that of rendering |
| and investing are interrelated. You come to realize this | | | | them as mechanical trading systems. Employing |
| through experience. | | | | mechanical systems represents the height of the |
| For the most part, the trading approach comes from a | | | | undisciplined mind. It is tantamount to conceding that |
| much shorter- term mindset than the mindset of an | | | | because you do not have the discipline to exercise |
| investor. It can also be much more based on technical | | | | self-control, you will undergo the harsh discipline |
| information than on fundamental information. But here | | | | enforced on you by an uncaring, unfeeling machine. |
| again we find a dilemma. What exactly is technical | | | | While you try to escape from self-disciplined trading, |
| information? What exactly is fundamental information? | | | | mechanical systems force an even more horrible |
| Where do the two overlap, or do they? Are they | | | | discipline upon you in that you now have to sit and grit |
| interrelated? Sure they are. But again, it is through | | | | your teeth due to the pain brought on yourself |
| experience that you learn about and develop an | | | | because of the mechanical aspect of the system. |
| appreciation for these concepts. | | | | Mechanical trading is not without discipline, rather it |
| TECHNICAL VS FUNDAMENTAL?? | | | | places the discipline onto the wrong part of the trade. |
| As futures traders, we get to hear some pretty weird | | | | Instead of placing the emphasis on planning, organizing, |
| things, and also as writers, and teachers in the | | | | directing, and controlling the trade, it gets the trader in |
| business of educating people about futures trading . | | | | via a mechanical signal and then forces him to suffer |
| One of the strangest things we get to hear is when | | | | through the trade in order to exercise discipline -- quite |
| people try to separate trading into either technical or | | | | often a discipline he does not understand based upon |
| fundamental. Why, oh why, does everything have to | | | | a system he does not understand, and that may have |
| be put into a box? Would someone please explain | | | | been derived entirely outside the realm of reality. |
| how to separate one from the other? Is it possible, or | | | | The realities of the market are many. Markets are |
| is there some middle ground that cannot be classified | | | | affected by a lot of things that are not measurable by |
| as either technical or fundamental? | | | | either fundamental or technical analysis. In addition to |
| For example, how do you classify trading from news | | | | seasonality, news, rumor, weather, and common sense |
| stories? Surely you would not call news stories | | | | observation, one has to take into account the market |
| fundamental information, would you? A friend of ours | | | | conditions at the time at which a trade is to be |
| tells about a time in January when he heard a | | | | entered. Is the market fast? Is the market thin? Is the |
| commentator on CNBC explain that the price of | | | | tick size abnormal? Are market makers moving the |
| coffee had gone up because of a freeze in Brazil. The | | | | market? Is it options expiration day? Is it the day |
| only thing wrong with the story was that January is | | | | before a holiday? Is an important dignitary going to |
| the middle of summer in that country. Was the news | | | | make a speech? Has the market gone into a state of |
| worthy of the name fundamentals? | | | | hysteria, or even euphoria? Are you going to buy or |
| What about seasonal trades? Are they technical or | | | | are you going to sell? It is the summation, organization, |
| fundamental? Certainly they are not based upon hard | | | | and perception of these and even other criteria that |
| facts. Who knows if tomorrow will bring a season like | | | | constitute the realities of trading. |
| the last? Who knows that the weather will be the | | | | REALITY TRADING |
| same this summer as it was the last? | | | | We are convinced that the best way to trade should |
| They say enter on rumor, exit on fact. Is that technical | | | | be termed "Reality Trading(TM)." In fact, we are so |
| or fundamental? Or is it just plain good old common | | | | convinced that we have trade marked the name for |
| sense? | | | | future use. Reality Trading views the market as an |
| This chapter is about experience, but here's the catch: | | | | entire entity, a living, throbbing reality that includes |
| You must survive as a trader long enough to gain | | | | fundamentals, technicals, and realities such as news, |
| experience. Experience will show you that trading | | | | rumors, seasonal tendencies, common sense |
| cannot be placed into a box. Experience will bring you | | | | observations, and market conditions. |
| to the realization that some of the best trades you will | | | | Let's look at a possible trade that is based upon |
| ever make come from experience, gut feelings, and | | | | realities. Let's say that this is a trade that has been |
| good old common sense. Experience will demonstrate | | | | good most years in the last 15 years. Let's say that |
| to you that many great trades are derived by paying | | | | the trade is to buy March wheat between September |
| attention and learning to be an opportunist. Experience | | | | and December of the current year. |
| will bring you to the point where you will take a | | | | First we look to see if March wheat futures are |
| smattering of what others may call "fundamentals" | | | | behaving normally. What does the March wheat |
| along with a pinch of what some call "technical | | | | futures chart need to look like if this trade is going to |
| analysis," and combine them with a spoonful of | | | | work? |
| know-how to succeed in making your living in the | | | | We begin watching March wheat futures in the first |
| markets. | | | | week of September, for possible entry between that |
| FUNDAMENTALS | | | | time and the last week in November. We're not |
| Our understanding is that fundamentals deal with | | | | particularly interested in what the March wheat futures |
| known facts and published or unpublished information | | | | look like prior to September, but according to past |
| about the underlying commodity or instrument you wish | | | | seasonal patterns, they should not end September in a |
| to trade. Because statistics lie, governments knowingly | | | | down trend. The normal pattern for wheat futures at |
| lie with statistics, or at times do so unwittingly, those | | | | that time of year is that wheat prices begin to rise or |
| who can afford it and also have a need, spend tons of | | | | at the very least remain flat. Falling prices would |
| money doing their own research in order to come up | | | | indicate an over supply of wheat. The rising or flatness |
| with their own body of fundamental knowledge. This | | | | may have begun earlier, or it may begin later, but not |
| includes gathering information and statistics on anything | | | | by the end of September. The main thing we don't |
| imaginable that might affect the underlying. They | | | | want to see is wheat prices falling after September. If |
| research production, marketing, crop conditions, financial | | | | wheat prices are falling in the time period mentioned |
| conditions, etc.; everything they can find out about the | | | | above, then we do not have a normal year for these |
| underlying. They may even make in-person visits to | | | | futures and we want to avoid this trade. No one |
| farms, mines, or financial institutions for discussions | | | | knows for sure what weather conditions will be |
| about the underlying. They then combine this | | | | between the first week in September and the time the |
| knowledge with what they find believable as handed | | | | that wheat inventory figures are known. No one |
| down by various reporting agencies. | | | | knows if exports will be up, down, or flat compared |
| Even with live data, it is not economic to compete with | | | | with the previous year. It is the seasonal anticipation |
| these behemoths with regard to the amount of | | | | that should prop up the price of the wheat futures. |
| fundamental knowledge they can afford and are able | | | | Obviously, this same sort of technique could be applied |
| to gather. | | | | to any purchasable commodity that can be expected |
| TECHNICALS | | | | to experience increased activity seasonally. |
| Technical analysis in its purest form assumes that | | | | So, lets look at a wheat chart. We want to select the |
| everything known about the markets that affect the | | | | best the best possible time to enter. Experience has |
| markets can be seen on a price chart. We believe | | | | shown that the two best times are as follows:o An |
| that to be true. But that's where reality and the kind of | | | | announcement by the government between |
| technical analysis we see today part company. What | | | | September and October that it export sales of wheat |
| we mean is, in general what do technical indicators | | | | have increased materially - a buying situationo A report |
| show you that you can't normally see with your two | | | | showing a greater than expected inventory of wheat |
| eyes via pure chart reading and analysis? Admittedly | | | | in September through November - a selling short |
| there are a few things. We have never denied that an | | | | situation. |
| indicator like Bollinger Bands can show you the location | | | | At "A" we see announcements coming from |
| of 2 standard deviations. We cannot visually know | | | | government reports that demand for wheat for export |
| where that amount of deviation from price would be | | | | is great. It is the middle of September. People rush in to |
| without the bands. But most technical indicators wipe | | | | purchase wheat futures. However, from the look of |
| away the very things we do want to see. They take | | | | this chart, overall demand for wheat was not very |
| your focus away from what is truly happening to price. | | | | good. Actually, the year shown was poor for wheat |
| By smoothing, they purport to remove "noise." But it is | | | | most of the time. |
| the noise that we, as traders, and especially as day | | | | Later, beyond the time frame in which we are |
| traders, most want to see. The noise is what tells us | | | | interested, at "B" we see that the government crop |
| the reality of what is going on. | | | | report for January was really bad for wheat. There |
| REALITIES | | | | was simply too much of it. Wheat prices began to |
| Fundamentals, in the purest sense, are beyond what | | | | plunge. What stopped the plunge? Anticipation of |
| the individual trader can deal with. Most individual | | | | planting problems due to unusually cold weather. |
| traders simply don't have the time to conduct the | | | | |