The Tycoon Report

Top 3 Rules to Trading Futures

Monday, June 8, 2009 | Barbara Cohen

This week's article examines 3 key rules you need to consider when trading the Futures Market. 

Remember, your first responsibility in trading is to ensure that your portfolio remains intact.  After that, think about profit.  Always maintain the adage in the back of your mind as you trade... "Live to Trade Another Day". 

With that in mind, here are some key rules you won't want to break.

Always trade within your comfort zone.  How does that apply?  Say you are used to trading with 5 contracts.  With margins, for most Futures, that would mean somewhere around $2500. 

You have been trading well lately, and today you wake up and decide to double your risk, trading 10 contracts instead of 5.  You haven't paper-traded or used a live simulator.  You just made the decision.  Now you are trading outside your comfort zone.  Chances are, you'll be more "careful" and "being careful" generally tends to result in needless losses.

Never trade with real money before you have fully tested your strategy and have contingencies.  Try losing trades on the simulator at the new risk level and see how it makes you feel.  Can you afford to lose that amount and still live to trade another day?  Perhaps you would feel more in your comfort zone if you increased your risk from 5 contracts to 6, instead of doubling your risk right away.  All too often traders make a quick killing, a couple of days at 5 contracts, and decide that they are now consistent and double or even triple their risk.

Never risk your entire trading account on just 1 trade.  If it goes against you, you won't be able to live to trade another day.  Look to minimize your losses.  If the trade is not going in your direction, exit the trade quickly and accept the small loss. 

Say you have a strategy that you are playing.  You see the setup on the chart and decide to enter long.  News suddenly comes out that immediately threatens the likelihood of your trade being successful.  The wrong approach is to remain in the trade with the "hope" that the Market will turn around.  "Going on Hoping" is never a good strategy to trade with.

Trade with a well-capitalized account.  Never trade with "scared money".  Scared money leads to poor trading habits, needless mistakes, and generally does not result in living to trade another day.  You have $5,000 to your name.  Putting all $5,000 in a trading account is probably not the best use of the funds.  Every trade you make, in the back of your mind you'll be thinking, if I have a loss on this trade, I'll be wiped out.  Wait until you have disposable capital that can be risked on trading.

Here's perhaps the most important key for living to trade another day:

Never enter a trade because you listened to pundits on television or received a "hot (verbal) tip" from your broker.  

Your broker calls you up and says "You gotta get in on this opportunity, very hot." 

The last thing you want to do is take that tip from your broker.  Why?  Because you have no idea why he is calling you.  Is he calling you because he has a hot tip, or is he calling you because his boss told him he had to find someone to buy this "hot tip", or he would have to buy the hot tip himself.  Brokers become very motivated (pushy) when they know they have to buy it themselves.

Same holds true for a pundit on television.  Why is he talking about that investment opportunity?  Is it really a hot investment?  Or is he stuck in a position and now trying to find others to buy to drive the price up so he can unload?

Whatever you choose to invest in, always ask yourself, if I make this investment, if I enter this trade, will I be able to "Live to Trade Another Day"?  

Before I take any trade, I generally try to talk myself out of the trade first.  If I can't find a reason to remain on the sidelines, then I make the trade.

Hope this helps.









Barbara Cohen
Contributing Editor
The Tycoon Report


Economic Calendar for the Week of June 8 - 12

TUESDAY, JUNE 9

10:00 a.m. - Wholesale Inventories

• Importance (A-F): This release merits a D-.
• Source: The Census Bureau of the Department of Commerce.
• Release Time: 10:00 ET around the fifth business day of the month (data for two months prior).
• Raw Data Available At: http://www.census.gov/svsd/www/mwts.html.

The wholesale trade report includes sales and inventory statistics from the second stage of the manufacturing process. The sales figures say close to nothing about personal consumption and therefore do not move the market.

Wholesale inventories sometimes swing enough to change the aggregate inventory profile (aggregate inventory is the sum of inventory at the manufacturing, wholesale, and retail levels), which may affect the GDP outlook. In that event they can elicit a small market reaction. More often than not, however, this release goes unnoticed except by market economists.

Wholesale inventories are just one component of total business inventories.  Manufacturing and retail inventories make up the rest of total business inventories.  The market ignores this release and doesn't pay much attention to the full business inventory release that comes a few days later.  Improved inventory management in recent years has reduced the economic swings associated with inventories and has helped produce a long-term downtrend in the inventory-to-sales ratio.


WEDNESDAY, JUNE 10

8:30 a.m. - Trade Balance

• Importance (A-F): This release merits a C .
• Source: The Census Bureau and the Bureau of Economic Analysis of the Department of Commerce.
• Release Time: 8:30 ET around the 20th of the month (data for two months prior).
• Raw Data Available At: http://www.census.gov/foreign-trade/www/press.html.

The trade report is most widely watched for trends in the overall trade balance. But trends in both exports and imports of goods and services bear watching as well. The export data in particular are important to watch for indications that a strengthening competitive position at home and/or strengthening economies overseas are boosting U.S. growth. Imports provide an indication of domestic demand, but given the severe lag of this report relative to other consumption indicators, it is not particularly valuable for this purpose.

The volatility in the monthly trade balance can play an important role in GDP forecasts. Net exports are a relatively volatile component of GDP, and the trade report provides the only early clues to the net export performance each quarter.

Highlights

2:00 p.m. - Treasury Budget

• Importance (A-F): This release merits a D.
• Source: U.S. Treasury Department.
• Release Time: 14:00 ET, about the third week of the month for the prior month.
• Raw Data Available At: http://www.fms.treas.gov/mts/index.html.

The monthly Treasury budget data follow strong seasonal patterns which produce huge month-to-month fluctuations in the deficit. These fluctuations tell us little about long term budget trends. To the extent that the market analyzes the monthly Treasury data, the focus is on year/year changes in receipts and outlays, since the data are not seasonally adjusted. Only in April, the most important month for tax inflows to the Treasury, does the market pay any attention to this report. The data can be predicted with reasonable accuracy by using daily data in the Daily Treasury Statement.


THURSDAY, JUNE 11

8:30 a.m. - Retail Sales, Retail Sales ex-auto

• Importance (A-F): This release merits an A-.
• Source: The Census Bureau of the Department of Commerce.
• Release Time: 8:30 ET around the 13th of the month (data for one month prior).
• Raw Data Available At: http://www.census.gov/svsd/www/advtable.html.

The retail sales report is a measure of the total receipts of retail stores. The changes in retail sales are widely followed as the most timely indicator of broad consumer spending patterns. Retail sales are often viewed ex-autos, as auto sales can move sharply from month-to-month. It is also important to keep an eye on the gas and food components, where changes in sales are often a result of price changes rather than shifting consumer demand.

Retail sales can be quite volatile and the advance reports are subject to rather large revisions. Retail sales do not include spending on services, which makes up over half of total consumption. Total personal consumption is not available until the personal income and consumption reports are released, typically two weeks after retail sales.

8:30 a.m. - Initial Claims

• Importance (A-F): This release merits a C .
• Source: The Employment and Training Administration of the Department of Labor.
• Release Time: 8:30 ET each Thursday (data for week ended prior Saturday).
• Raw Data Available At: http://www.dol.gov/opa/media/press/eta/main.htm.

Initial jobless claims measure the number of filings for state jobless benefits. This report provides a timely, but often misleading, indicator of the direction of the economy, with increases (decreases) in claims potential signalling slowing (accelerating) job growth. On a week-to-week basis, claims are quite volatile, and many analysts therefore track a four week moving average to get a better sense of the underlying trend. It typically takes a sustained move of at least 30K in claims to signal a meaningful change in job growth.

There are two other statistics in this report -- the number of people receiving state benefits and the insured unemployment rate; neither is watched closely by the market. Some analysts track the number of people receiving state benefits from month to month as a guide for job growth, though this series has a poor track record in predicting the monthly employment report. The insured unemployment rate changes little on a weekly basis and is never a factor for the market.

10:00 a.m. - Business Inventories

• Importance (A-F): This release merits a C-.
• Source: The Census Bureau of the Department of Commerce.
• Release Time: 08:30 ET around the 15th of the month (data for two months prior).
• Raw Data Available At: http://www.census.gov/mtis/www/current.html.

The business inventories report includes sales and inventory statistics from all three stages of the manufacturing process (manufacturing, wholesale, and retail). But by the time it is released all three of its sales components and two of its inventory components have already been reported. Because retail inventory is the only new piece of information it contains, the market usually ignores the business inventories report.

However, sometimes retail inventories swing enough to change the aggregate inventory profile. This may affect the GDP outlook. When it does, the report can elicit a small market reaction.

The aggregate sales figures are dated and they say little about personal consumption. They are actually a good coincident indicator, but the market is far more interested in forward-looking statistics.

The inventory-to-sales (I/S) ratio measures the number of months it would take to deplete existing inventory at current sales rates. A relatively low (high) I/S ratio may mean that manufacturers will have to build up (draw down) inventory levels. Depending on the strength of final demand and the degree to which recent inventory changes have been intended or unintended, this can have an effect on the industrial production outlook. Note that this information is much more useful to market economists than it is to other market participants.

FRIDAY, JUNE 12

8:30 a.m. - Export Prices ex-ag, Import Prices ex-oil

• Importance (A-F): This release merits an D.
• Source: Bureau of Labor Statistics, U.S. Department of Labor.
• Release Time: Typically in the second week of the month at 8:30 ET for the prior month
• Raw Data Available At: http://www.bls.gov/news.release/ximpim.nr0.htm.

Though not a market-moving release, export/import prices are a useful indication of inflation pressures created by changes in foreign exchange rates. For example, when the dollar is strong, import prices tend to be under downward pressure. If an item in Japan costs 500 yen and the exchange rate is 100 yen to the dollar, the US$ price $5. If the dollar then strengthens to Y120, the US$ price falls to $4.17. Because US exports must compete with foreign goods, there is also downward pressure on export prices when the dollar is strong.

Economists typically look at import prices excluding oil and export prices excluding agricultural. In each case, the category in question is excluded because prices for those items are volatile and the swings are unrelated to foreign exchange rates. Oil prices tend to swing in response to OPEC decisions, and agricultural prices are often affected by weather, neither of which say much about long-term trends in traded goods prices.

9:55 a.m. - Michigan Sentiment-prel

• Importance (A-F): This release merits a B-.
• Source: The University of Michigan.
• Release Time: Preliminary: 10:00 ET on the second Friday of the month (data for current month); Final: 10:00 ET on the fourth Friday of the month (data for current month).

The Michigan index is almost identical to the Conference Board Consumer Confidence index, though there are two monthly releases, a preliminary and final reading. Like the Conference Board index, it has two subindexes - expectations and current conditions. The expectations index is a component of the Conference Board's Leading Indicators index.