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Vol. 6 No. 1 November 2011

Futures Trading For Beginners, What is it? p. 2

Comparing Options to Futures by David Duty p. 5

PitNews.com Magazine November 2011

Futures Trading For Beginners, What is it?

Trade Forex, Futures & Stocks on Autopilot

2

4

5 Comparing Options to Futures by David Duty

PitNews.com Magazine November 20112

The world economy just collapsed. And it was all tied to the stock market somehow. Hundreds and hundreds of different explanations, but all the layman could get was that it had something to do with mortgage crisis and the stock market. People lost all or almost all of their nest-eggs. That makes this a good time for re-education on investment; because although it went bad, it does not mean that we should stay away or stop investing. It just means you should diversify your options, learn as much as you can about your investments and then go out there and invest again. Lets start with futures trading, an option that not so many people take. It has been around for centuries. The common term that you'll hear more often for it is "commodities trading". A futures contract is a contract for speculating on the delivery of a commodity at a certain price in the future. You choose a commodity, speculate on a price that it will sell at on a future date and based on your speculation, you will either make a profit or a loss. Commodities are usually agricultural products that

come in bulk - wheat, corn, rice, fruit-really anything agricultural that is consumed in quantity. Today however, futures trading has expanded and gone on to include other commodities like crude oil, foreign exchange and even financial instruments. As a futures trader, you will buy a contract on a certain commodity at a certain price. You hold on to this contract, hoping that the price of the commodity will go up. Let's say you are speculating on the price of wheat. If you think the price of wheat is going to go up, you buy a futures contract on it. If the price does indeed go up, you sell your contract and make your profit. If you speculate that the price will drop, you sell the contract and cut your losses. It operates much like the stock market in the sense that there are always willing buyers and sellers. When you are ready to buy, there will be someone who is ready to sell and vice versa. You never really get to handle the commodity; all you have is the contract. Some people consider it very risky, but again, remember that the rules of economics say that the

PitNews.com Magazine November 20113

higher the risk the higher the return. It's high risk, but the returns are good. If you have a good broker, or a great tracking software, you will get the hang of it soon enough and start making money. The only other initial cash outlay you will need is to have some money with your broker in case your trades are losers, so that you can cover them. Don't be intimidated. The best way to go about it is to do as much research as possible. Then get in touch with a broker, and talk to them for an even better understanding. To make sure that you are keeping up the speed with all the information that you need to know whether to buy or sell, get a futures software that can track, give information and show trends. This way, all you have to do is feed in the necessary information and at the right time, buy or sell. If you're wondering where to get started, visit the website http://www.TrackNTrade.com. You'll not only find a great futures software, but you will also get more information on futures trading!

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PitNews.com Magazine November 20114

Trade Forex, Futures, and Stocks on Autopilot

When it comes to market forecasting, it's an investor's job to have an opinion - to know exactly what's happening out there. During forex trading, these opinions are what will keep you afloat because based on them, you will know whether or not to buy or sell, which stocks to watch and just exactly when you should make a move. Imagine if you were so well informed that you could make your opinions or speculations by the second! This is becoming more and more critical, especially with so many withdrawals from the stock market that it's hard to know where to get good stocks any more. To find a good stock is not that easy any more. So here comes the option to trade in the index itself. The S&P 500, Nasdaq or The Dow Jones Industrial. It's now possible and the great thing about it is that you can get in and out of those markets at high speed - critical in this day and age of virtual trading. And you don't have to be a mega-trader either. With as little as $3000, you're in. It's not complicated. Think of it as a wholesale transaction. Instead of fronting thousands of dollars to hold on to company stocks that are hard to find and even harder to speculate on, you can now speculate on all the stocks being held at either S&P 500, Nasdaq or the DJI. The main advantage with this is that you stop limiting yourself to just stocks and go for futures trading. You open yourself to more options. Now you are into forex, futures as well as stocks. And think about it, how many times a day does the value of market rise

or fall? A lot, which means that you get a lot of trading opportunities. In regular stocks, you may have to wait for days, maybe even weeks at a time to see movement in stock prices - not so with the stock market option. And here is the best part. You don't need to leave the comfort of your office or your home to do it. All you need is an internet connection and software that's going to keep you posted by the second - literally show you stock movements as they happen. Thus, the term auto pilot came into existence. Once you make your initial move (and you don't need to make a trip to a brokers office to do this, you can do it online as well), the software will show you the stock market movements and you can sell and buy as you see fit. So you're enjoying all the benefits of being in the stock market without the hustle of taking time off your regular schedule to get updates. The software that you choose will of course play a major part in determining your returns. Make sure you choose one that has access to all major markets, that gives you investment options and also that has great customer service and support. It's critical to fix problems as they occur because down-time, at this kind of speed of transactions, most likely means that you will lose money. Go ahead and try it out. Investigate your options. We recommend a one stop shop where you can get all the information you need, as well as the software. Just visit the website www.TrackNTrade.com!

PitNews.com Magazine November 20115

Years ago, when I started trading, I incorrectly looked at Options as foolhardy strategies. I thought if I was making money trading Futures then why trade Options at all since they say over 80% of them expire worthless. Well, this way of thinking goes to prove that one doesn't have to be brilliant to make money trading. I could not have been more incorrect. As a matter of fact, it was one of the more stupid observations in my entire life. I was even stupid enough to look at Options and try to compare them with Futures contracts, thinking that since a Futures contract always seemed to make more money than an Option, then why would I want to trade Options? What I was failing to do was to look at how powerful different Option strategies can be and to

look at the Risk/Reward ratios Options can offer. Not only can I limit the risk on a trade to the amount I pay for an Option, often I can even risk less money with an Option and I can also have a higher rate of return per dollar risk! READ THAT AGAIN!

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What Does a Change in the Seasons Mean for Your Trades?

Also, Options allow someone to trade markets that they would be unable to trade with a small account, like the Energies for an example. Now I'm not saying that Futures contracts should not play a vital role in your trading strategy because you want to use both Futures and Options. Now, I want to show you what I mean about Options vs. Futures and money Put at risk vs. profits that can be made. Look at Figure 3.12 (p. 5). We have the perfect trade set up here. A possible trend reversal, a bottom Blip, positive looking indicators, 3:1 and 10:1 Risk/Reward ratios and with a $10,000 account I can buy three contracts and still be within my 5%

risk on a trade. Trades like this one just don't come along every day. As a matter of fact, I'm so confident in this trade that I've already told the kids to pack for Disneyland for that dream vacation I've been promising them for years.

PitNews.com Magazine November 20117

So, I Call the broker, go long three contracts and go around telling everyone how smart I am for finding such a perfect trade. I even tell them what I'm planning on doing with all the profits I'm about to make. I'm in the trade now and the market is doing exactly like I thought it would. I'm filled on three contracts and making money on the trade. I feel so confident

now and I'm kicking myself for not buying ten contract rather than just three. Figure 3.13 (p. 6). Well, sometimes the best laid plans don't always work out do they. Let's take a look at Figure 3.14 (above) and see what really happened. I can't believe it! Why did they do this to me? This was the perfect trade; a "no way to lose" proposition

PitNews.com Magazine November 20118

and I got stopped out and missed the entire move. The market did exactly what I thought it would too. I feel like an idiot. What am I going to tell the wife and kids now? Has this ever happened to you? Well it has to me and I can tell you it's very frustrating when the trade does exactly what I thought it would after getting stopped out for a loss. Talk about adding insult to injury! Now of course losses happen in Options but they do allow you to have more staying power. Remember earlier in the course I showed you a way to use an Option as a protective stop? This is a perfect example of how that would have been a better choice. Would you have made as much as you would have made on the Futures contracts if you had not been stopped out? Let's look at Figure 3.15 (p. 7) and see what we could have done. Notice that 200.00 Puts were selling for $287.50. Now, if we had a $10,000 account, how many Puts could we buy and still keep our risk to 5% or $500? Did you say just one or did you say three? Well if you said one or two you were only partially correct. Why? Because we were going to be long three Futures contracts, we want to buy three protective Puts. Now the Puts cost us $287.50 each or $862.50 plus commissions but who said we had to risk the entire premium? What you needed to look at was risking $500, not $862.50! How do you do that is the question and the answer is easy. If the ENTIRE TRADE loses $500 in value total, then you exit the trade. Of course you do not have to keep the Puts if they go against you. Take a look at Figure 3.16.

As you can see, the biggest draw-down we had was in the middle of January for $112.50 and we are still in the trade. Remember, we were taking a $500 TOTAL risk on this trade, so we were not stopped out like we would have been with a straight Futures contract using a sell stop for protection. These Options gave us some breathing room. Now of course we could have taken profits when the price went up and hit 220.00 at the first of January, when it hit resistance at the top of the 50% level, but since this is for example purposes only we will assume that we didn't do that and are still in the trade, long three Futures contracts from 202.00 with three 200.00 Puts for protection. Of course let's see if the price did hit our target(s). We know it hit our first target, the 50% level, but did it ever hit our 2nd target? Let's look at Figure 3.17 (p. 9) to find out. It did hit our 2nd target as well and the interesting thing is that after it hit the first target the price came back down and then rallied again. See the little Green circle on the chart in the middle of January. This marks the biggest draw down we had during this entire trade, $112.50. In other words the most we were ever losing on this trade was $112.50. Now look at the profits at the top of the chart, $2,793.75 after commissions. This is almost as much as we would have made on the 3 long Futures contracts if we had not been stopped out ($3,225.00). But of course we would have been stopped out of the Futures contracts with a loss while we made almost $3,000 with the same risk by combining the Put Options with the long Futures contracts.

PitNews.com Magazine November 20118

I would not have offset the Puts at this time since they were only worth $6.25 each. I would just let them expire worthless. Why? Just in case the market dropped like a rock in the next few days and if it did then the Puts might even be worth a few dollars more and we could sell them at that time. Who knows what can happen and we still have about a week left until they expire. Now, we have only looked at a couple of different Option strategies so far, buying or selling Puts and Calls and using Options as stops with a Futures

contract. But there are dozens of different Option strategies that we could have used on these trades that could have lowered our risk, increased our profits, or both! Now if that doesn't get your "blood boiling" you might want to go sit on a hot stove and read this paragraph again! Just kidding.... don't go sit on a stove. And if you are thinking that you could have sold the Puts and added a protective stop you would also be correct. This is just an example. Lots of ways to trade options.

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