We have attempted to give you a background in trading.  Overall I learned to trade from Dr. Alexander Elder’s Book and Workbook, “Trading for a Living” back in 1996.  I actually failed the tests in the workbooks several times before I got it right.  I still think that that book is a classic and in a class all by itself. 

A second principle I learned from Alex, is that trading is a triune skill of Mind, Money and Method.  It is the basis of our training program.  With the mental and money management the most important skills.  But like a three legged stool, if you cut off one leg, you can’t sit down.

In the Method area, which I will share with you one part of the method, you have three parts as well.  One of them is how to use Support and Resistance in your trading.  We use these daily Support and Resistance areas as targets.  Why do they work so well?  It is because other traders “Think They Work”.  Remember in your trading your job is not to think, but to observe what is happening right now.

Check out this short video on Support and Resistance  associated with Pivot Points and how we use it. 

The calculation for the new day are calculated from the High (H), low (L) and close (C) of the previous day.  Our recommended software calculates all of this automatically, however we use a trick to get a 24 hour Pivot and Support and Resistance Lines.  Here is the formula  used by floor traders.

Pivot point = P = (H + L + C)/3

First area of resistance = R1 = 2P – L
First area of support = S1 = 2P – H
Second area of resistance = R2 = (P -S1) + R1
Second area of support = S2 = P – (R2 – S1)  and so forth.

Now Support always becomes Resistance and Resistance becomes Support in the markets, so you have minor Support and Resistance in many places on your charts.  The trick is to know which on is the target, so as part of your money management, you should always select a level that offers at least a 3 to 1 win to loss potential..

There are many nuances to using Support and Resistance with other indicators, Fibonacci levels, Ema’s and other indicators.  However, once you master the skill of target shooting, you will be much more profitable.

For a detailed video of how our complete system work with all the indicators, please go to the Futures Trading Room

For most futures contracts traded on the Chicago Mercantile Exchange (CME) and Chicago Board of Trade (CBOT), the following expiration and rollover practices apply:

• Contracts expire on the third Friday of each quarter: March, June, September and December. Contract expiration months are represented by the following letter assignments: March=H, June=M, September=U and December=Z
• Rollover is 8 days before expiration. For example, this month, December 2007, the rollover date is Thursday, December 13.
• Rollover is always on a Thursday. Generally, rollover will be on the second Thursday of the month; however, if the first day of the month begins on a Friday, rollover will be on the first Thursday of the month.
• Trading volume shifts to the new contract at market open on rollover day (9:30 a.m. EST).
• New day trading or swing trading positions opened on rollover day should utilize the new contract expiration month irrespective of when you plan to close your position.
• If opened within a few days of rollover day, new swing positions should be opened using the new contract.

Market myths and rumors abound as expiration and rollover dates come due. Savvy futures traders will always check the source, study their market indicators and confirm the probabilities of the rumor before acting.

For more information, 11 free trading lessons and a free ebook, visit Futures Trading Secrets.

1. Discipline. Discipline is the primary key to successful futures trading. You must have the discipline to learn your system, study it daily and tweak it to perfection. You must have the discipline to keep a trading log that records your trades, as well as the market conditions, thought processes and external influences that affected each trade. Without such a log, you are doomed to repeat your mistakes, rather than learning from them. You must have the discipline to do your homework, to study and keep up with the market, to keep your system current.
2. Patience. You must be patient if your trading system is to be effective. By trading too soon, you negate the value of your trading system. You must exercise patience and give your system time to work.
3. Loss. Loss is part of the trading game. You must be able to take losses in stride and get right back in the game. When your system dictates that a loss be taken, you must have the discipline to follow your system, take the loss quickly, minimize the damage and move on.
4. Perseverance. There are no overnight success stories in futures trading. Success is a matter of building experience, working and perfecting your system, minimizing losses, and capitalizing on small gains. Success, particularly at the beginning, is more often a series of small steps than giant leaps.
5. Confidence. Above all, a futures trader must have confidence in himself. You must have confidence in your system and your ability to work your system — to pull the trigger. Futures trading is a game of risk. You can’t be afraid to act. You must have confidence in your ability to read your system and act. Those who hesitate are doomed to lose in the futures trading game.
6. Flexibility. The market and market forces are ever-changing. You must have the flexibility to change with the times, to make changes to your system so it remains viable and in tune with current market conditions.

• Commodities are a class of assets that includes energy, metals, agricultural products, natural gas and oil, and other natural resources. Commodities are natural resources, actual physical objects with an inherent value of their own.
• Futures are investment vehicles through which you invest in commodities. Futures can also be used to invest in other asset classes such as currencies, bonds, interest rates, stocks, indexes, etc. Futures have no value in and of themselves. They are known as derivatives because they derive (or take) their value from the underlying financial instrument (i.e., the commodity, currency, stock, etc.)

We use futures to invest in or trade commodities. In a futures contract, two parties agree to buy and sell the underlying asset (i.e., a physical commodity such as corn, wheat, oil, etc.) at a mutually agreed price at a specific time in the future. Most futures traders never intend to take physical possession of the commodity they are trading. In fact, of the billions of futures contracts traded on commodity futures exchanges every year, somewhat less than 2% result in the physical delivery of a commodity. Futures traders trade contracts back and forth to hedge or speculate on the price movement of the particular commodity that is the underlying asset of the futures contract. Their goal is not to own the commodity, but to make money on changes in the price of the contracts they are buying and selling.

Elastic goods exhibit a high correlation between price and demand. When the price of the good goes up, demand decreases. Elastic goods are generally less-essential goods, meaning that you can live without them or at least use less of them or substitute a less expensive option. The dance between price and demand can be complex. For example, when the cost of milk rises, people buy less milk and fewer milk products. Some people will stop buying milk altogether until the price comes back down. Families with young children who still need milk will serve their children less milk or milk with a lower fat content and, therefore, cheaper price tag. They may substitute enriched soy milk or calcium supplements and calcium-fortified breads and cereals to ensure their children get a full dose of bone-building calcium. Sales on cheese, ice cream and other dairy products will plummet in concert with how necessary they are perceived to be. Ice cream is considered a luxury so when ice cream prices rise, sales fall.

Inelastic goods are goods that are so essential that consumers must have them no matter the cost. Price fluctuations have only a small effect on the demand for inelastic goods. Consumers may buy less, but they will have to buy some in order to survive. For example, in America oil costs have reached record highs. While it is true that some people are trying to cut back — making fewer and more efficiently planned trips to accomplish errands, car pooling, patronizing mass transit, walking more — the bottom line is that most Americans are dependent on their car. In most areas, there are no other options, you must drive your own car to get to work, get the kids to school, get to the grocery, etc. You may moan and groan, but you will buy gas for your car, no matter what the cost.

Most commodities are fairly inelastic goods. Commodities are the raw materials of our daily lives, the building blocks from which our homes are built, our clothes are made, our food is grown. We cannot survive in our world without the natural resources that are traded on the exchanges as commodities. In fact, it is the essential nature of inelastic goods that attracts futures traders. As long as man exists, there will be demand for commodities — and a way for futures traders to profit.

For more information, 11 free trading lessons and a free ebook, visit Futures Trading Secrets.

At the beginning of the 1848 Gold Rush, Sam Brannan, who owned a general store in Sutter’s Fort, discovered that John Sutter and James Marshall had discovered gold. Understandably, the discoverers wanted to keep the strike a secret. Brannan agreed, then quietly scoured northern California buying up every shovel, pick and pan he could find until he had cornered the market. He then went around town yelling, “We found gold!” and the Gold Rush was on. Hundreds of people flocked to northern California, all needing shovels, picks and pans to search for gold. And there was Sam, the only source for hundreds of miles around! Sam Brannan never lifted a shovel, never swung a pick, never shifted a pan in the search for gold, but he became the first millionaire of the Gold Rush — selling shovels.

There is often more than one way to profit from commodities. Money can be made not only by betting on the need for resources, but on the processing and transporting of those resources. Remember that futures trading is global. Creative thinking requires that you consider the need for resources in one part of the world and probable suppliers and processors who may be located in other parts of the world.

In thinking creatively about commodity futures markets, factor in the following and see where it leads you:

• Population. We are at the start of what is expected to be the greatest explosion in population growth in human history. The United Nations estimates that world population will increase by 1 billion people per decade for the first five decades of the 21st century. That means that the number of people on our planet will increase from 6.5 billion today to 9 billion by 2050. Population growth has become exponential. In the 19th century it took 130 years to add 1 billion lives to the planet. Barely 200 years later in the 21st century, it takes just 13 years. More people means greater demand for natural resources (i.e., commodities). Greater demand means rising commodity prices.
• Urbanization. People need a place to live and are increasingly being lured to cities where the bulk of the world’s jobs can be found. The exponential growth in population is being accompanied by the greatest increase in urban development the world has ever seen. In the early 20th century, less than 15% of the world’s population lived in cities, according to United Nations statistics. In 2005, 50% of the world’s population lived in cities. By 2030, the U.N. predicts that 60% of the world’s people will be crowded into cities. People in urban areas consume more natural resources than those in rural areas where life is more sustainable. As urban areas expand, more natural resources and industrial metals will be needed to provide the necessary infrastructure: houses, roads, buildings, cars, hospitals, schools, etc. Whereas cities may have been initially located near plentiful natural resources, the mega-cities of the future may require resources from across the globe.
• Industrialization. In the 19th century, the first industrial revolution transformed Western Europe and North America. While industrialization has slowly been creeping across the globe during the past century, we are now poised for a second major industrial revolution in what are called the BRIC countries: Brazil, Russia, India and China. The need for natural resources in these countries is enormous and rising fast, pushing up commodity prices as demand rises. In the next few decades, China is expected to become the world’s largest consumer of commodities. In 2004, China used half the cement, a third of the steel, a quarter of the copper and a fifth of the aluminum produced in the world and was second only to America in oil consumption.

For more information, 11 free trading lessons and a free ebook, visit Futures Trading Secrets.

Human physiology affects our ability to achieve the mental, physical and emotional control needed to succeed as a futures trader. Like primitive hunters, futures traders are competing in a hostile world that demands total concentration and lightening reflexes to survive. All the technology we use can make many of our tasks, like analysis and charting, easier and can increase our profitability as futures traders; but technology is just a tool. Ultimately, we must rely on our mind and our body to pull the trigger and make the trade.

The goal of the futures trader is to achieve the total synergy of mind and body called the Alpha Zone. You have entered the Alpha Zone when your mental, physical and emotional control is at its peak. When this happens you are trading “in the zone.”

While some traders utilize biofeedback techniques to help them learn to achieve this state, there are a number of common sense things you can do to get yourself in the zone.

• Listen to your biological clock. Humans are hard wired to hunt during the day and sleep at night. Over the centuries though the human clock has gotten shaken up a bit, so that today we don’t all reach our optimum operating peak at the same time of day. (We’ve all know people whose brains don’t seem to click on until noon, the “not a morning person” types.) Try to trade during the time of day when you know you’re at your best. You can help yourself by trading in a bright, well-lit area with, preferably, a fair amount of natural light. Light, particularly sunlight, makes us more alert.
• Tune up your body.  Trading is a sedentary occupation. Bodies at rest are easily fatigued. Jump-start your metabolism with an energizing walk or run early in the morning. During the day, relieve fatigue and stimulate your muscles with stretching or isometric exercises. Squeezing a small rubber ball helps some traders stay alert and focused.
•  Fuel your body. Don’t start your day with sugary foods. At first your blood sugar will spike and you’ll feel alert. But as your blood sugar drops during the day, you’ll feel increasingly fatigued and your performance will suffer. Some traders snack on energy bars mid-morning and afternoon to keep their bodies fueled. Make sure you check ingredients and avoid bars with high sugar contents. Sugary snacks will send you quickly careening from high alertness to dragging fatigue. Protein and complex carbohydrates will help you achieve and maintain alertness and concentration. However, beware of naturally sleep-inducing foods such as turkey, milk, bananas, fish and egg whites. Foods that can perk you up include coffee, tea, chocolate, soft drinks, and herbal teas. Be cautious about using caffeine to maintain alertness. It can send you on the same peak and valley ride as sugar, with increased caffeine needed to achieve the same level of alertness each time the previous dose wears off.
• Control your environment. Dry, cool air will help keep you alert and focused, as will bright light, particularly natural light. The smell of peppermint increases alertness. A spritz of mint in the air a couple of times between noon and 1 p.m. can help get you through the lunchtime doldrums. Dull, repetitive sounds like a computer or fluorescent light humming can be sleep-inducing. Sharp, irregular sounds like loud conversation or a radio can be distracting. A set of soft earplugs from your local drugstore can solve both problems, improving concentration.
• Recharge your batteries. Adequate sleep improves both performance and alertness. For your body to operate at peak efficiency, you must get enough sleep to enter the REM (rapid eye movement) cycle which promotes learning, creativity and imagination. This is also the most restful of the four sleep cycles and necessary to fully recharge your body’s battery.

What is an option on a future? An option gives the buyer the right but does not obligate him to buy or sell a particular futures contract at a set price at any time prior to a specific date. When the option is exercised, it is the actual futures contract that is delivered to settle the transaction, not cash.

How are options and futures different? While often confused, there are distinct differences between these two financial instruments. When purchasing an option, the buyer is purchasing the opportunity to buy or sell a futures contract by a certain date. To acquire the option, the buyer pays an up-front fee (called the premium). He can choose not to exercise his option and, therefore, accepts no risk. All risk resides with the writer of the option who is obligated to the sale or purchase if the buyer chooses to exercise his option. With futures, the contract binds both sides equally. Both buyer and seller share the risk and both make a good-faith deposit (called margin) to guarantee that they will meet their financial obligation. The buyer must buy and the seller must sell at the agreed price on the agreed date.

There are two types of futures options:

• Call options: The buyer of a call option buys the right but is not obligated to buy a particular futures contract at a set price at any time before the option expires.
• Put options: The buyer of a put option has the right but is not obligated to sell a particular futures contract at a set price at any time before the option expires.

In trading options on the futures market, futures traders need to be aware of and understand the relationships between:

• the futures contract and the commodity, security or index being traded and
• the relationship between the option and the futures contract.

It is this last point that makes trading in futures options both complicated and volatile. While there is tremendous potential for profit and risk is limited to the up-front cost, traders unfamiliar with options can quickly run amuck. Success is in large part dependent on the trader’s ability to accurately anticipate future price levels, a combination of experience, skill and feeling for the markets.

There are three basic types of spreads:

• Intramarket spread. On the same exchange, in the same commodity, a long position is taken in one contract month balanced by taking a short position in a different contract month.
  For example: Buying November corn and selling May corn.
• Intermarket spread. Futures contracts are bought on one exchange balanced by the sale of the same contracts on another exchange.
  For example: Buying wheat on the Chicago Board of Trade and selling wheat on the Kansas City Board of Trade.
• Intercommodity spread. A long position is taken in one commodity, balanced by a short position in a related commodity.
  For example: Buying oats and selling corn.

Trading on the spread is considered to be less risky than holding a long or short position. Why? Because you are not trading on changes in the actual prices of the commodity. You are only trading on changes in the price difference.

Making practice trades allows you to:

• Test and fine tune your trading system.
• Learn to successfully pull the trigger.
• Perfect your charting system.
• Develop productive trading habits.
• Practice self discipline.
• See if you have what it takes to be a futures trader.

That last item is very important. You can have the best system in the world but if you don’t believe in yourself, if you don’t believe in your system, if you don’t have the passion to trade, no system in the world will make you a successful futures trader. Like I tell my students, successful futures trading is 90% attitude. Not everyone has the skill, passion, ability or discipline to succeed. Better to find out before you lose your money.

In my Futures Trading Secrets course I recommend that students practice trading on the e-Mini with Sims Broker until they achieve a certain level of confidence and consistency in their trades. Log and study your profits and losses. Look for patterns that indicate when you successfully pulled the trigger and when you failed. Work to increase successful strategies and decrease unsuccessful ones.

Develop successful daily trading habits and routines. Practice the discipline to stick to them even when you don’t feel like it or they don’t seem to be working. Discipline and routine are essential habits of the successful futures trader. Every trader loses sometimes. You have to have the discipline to follow your routine and have faith in your system even when you’re losing if you are to ultimately succeed.

Practicing futures trading on paper is important before you attempt the real thing. Before you start trading with real money, you must develop the discipline to control your emotions and stick to your system. Plunking down cold, hard cash opens the door to greed and fear which can submarine even the best system if not held in check. Practice will give you the skill, confidence and courage to succeed as a futures trader.

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