[File Auto Train Uiew Scale Garni Options

GET Copyright <c> 1188 v2.5 F1 = Help Stochastic r

V'liA

V ii

.¿jTradins 2c

1200 H080 «■TO0 C8M0 S120 ©600 6M80 6360 62M0 6120 6000 5880 5160 5SM0

100 15 50

.¿jTradins 2c

100 15 50

Dec dan Feb flap Apr

25 0

May dan Feb flap Apr rDA QPOQQQ Tucsdcy 11/01/88 6011 ¿tWlbb JKH Open- 68*1*1 High- 61« Low» Close« CT18 Osc

Chart 25 is also of the September 1989 Swiss Franc. G.E.T. stochastics are set at the longer, "slower" settings of 21 periods for A, and 14 periods for B - those defaulted by the software.

Compare Chart 25 with Chart 24. The longer periods of Chart 25 result in smoother stochastics, with less divergence and stronger trading indicators. Many of the stochastic "over-80" peaks of Chart 24 have been "rounded off' while many of the stochastic "under-20" valleys have been "filled in." More intermediate or major turning points can be identified.

In Chart 25, only 2 technical signals are generated - shorting the market in early December at about 7200 and again in late February at about 6600. The trendlines from the two stochastic peaks are downward - the same as the overall trend of the market.

Compare this to the stochastics of Chart 24, where stochastic trends rise AND fall, even though the general price trend is down.

ff O

©

Two "rules of thumb" are popular for trading with stochastics. These occur when %D and %K "cross over" each other, especially with values greater than 80 or less than 20.

When both %K and %D values are rising, generally prices will also be rising. When %Kand %D values have "turned" to the downside, (risen above 80 from the downside, crossed over each other, and are now falling below 80), the start of a bear trend could be expected, and the market could be sold.

When prices and stochastic values are falling and stochastics have "turned" to the upside (fallen below 20 from the upside, crossed over each other, and are now rising above 20), this may signal the start of a bull trend and the market could be bought.

Keep in mind that there is a small glitch with stochastics. Stochastics is a statistical, lagging, momentum indicator, rather than a strict price indicator. The signals will result from the most-current price activity. The stochastic scale though is limited to values between 0 and 100.

What happens is this. Often, prices will continue to rise or fall with greater strength than stochastics can reflect. In this case, stochastics will bounce around in the 0-20 or the 80-100 zone.

The same thing happens when you try to pour a gallon bucket of water (prices), into a quart jar (0-100 stochastic scale). The jar (stochastics) will hold only a "quart" of %Ks and %Ds. The rest of the water (rising prices) will pour over the sides of the jar. No matter how much water is poured into the jar, the water will only come up to the top (100 on the stochastic scale). This causes divergence - when prices continue to rise or fall, but stochastics do not.

The trick is to know HOW MUCH MORE WATER is in the price bucket before the gallon bucket is empty (prices will reverse).

The G.E.T. Software minimizes this "gallon-of-water-into-a-quart-jar" problem by using 2 "cycle-based," weighted stochastics in one stochastic signal. When the two stochastic signals do not simultaneously turn within the overbought or oversold zones, a solid bar appears above or below the stochastic signal. The "how-much-water-is-left" problem is not solved, but there is less of it. (There is no such thing as a "perfect" system or problem "cure-all" for futures trading.)

When the long- and short-term stochastics simultaneously "peak" or "bottom," a greatly-enhanced stochastic trading signal occurs. Stochastics is a fine technical tool and should be used. The theory of stochastics is not changed by G.E.T. - only the manner of generating stochastic signals.

Chart 26 is of the March '89 T-Bonds contract with stochastics and Gann Pivot Points. The solid, more erratic line is %K. The smoother, dotted line is %D.

There is truly order here. By calculating the 50% Retracement Zones, and using the supporting indicator of stochastics, trading could even become enjoyable.

Note the solid bars under and over some of the stochastic peaks and valleys, especially for the period of September through November. These bars indicate that the longer- and shorter-term stochastic signals have not synchronized for that price area, and should be disregarded. Prices could be expected to continue a rising or falling trend, even though stochastics turn down for a period.

But a person just starting to trade may not have software like G.E.T. What to do? There is an answer.

O

0

0

0

0

0

0

0

0

0

0

0

0

ui

0

in 0

Q

0

0

0

0

Q

0

0

0

0

0

0

0

r

in

ru

m

IM

ri

0

r

«0

r

in

T

m

ni

•ri

r

ir

r

r

<D

co

03

«0

(Si

«0

<D

«0

Trying to use overbought or oversold stochastics for an extended period of time creates "whipsaw" situations. You're buying when you should sell and selling when you should buy. Chart 27 is of the March 1989 T-Bond contract and is a good example of this.

When stochastic trends differ from price trends, the benefit of stochastics is minimized. Between September 5 and November 7, the stochastics of Chart 27 generally remain overbought (Line A) for the entire period, with the exception of a small drop during the week of September 26. Even then, prices are confined by the 45-degree line, Line B, from the significant low of8220 on August 16. The result is divergence between Line A and Line B.

On a daily chart like this, stochastics have little value. Unless you can project prices with either Gann, Fibonacci or Elliott Wave techniques during this period, and assuming you're long the Bonds from mid-August, there may be little value in using stochastics as a technical indicator.

But, just in case Bonds do fall, a target Retracement Zone has been plotted. The RZH is 8624 and the RZL is 8512.

HIGH 05- 16/32 on 03/04/87 LOW 0-00/32 on 10/30167 14 BAR RSI a£fl.681 14 BAR STO.- 50.82 UP AVG. 0.171 Stow %D- 69.2« DNAVG - 0.12 Skw%K- 81.72 AS OF 02/03/89

MARCH 89 T-BONDS

Ctr $100,000 & 8% Trading: 5-B:30PM >7:20 AM-2PM CT 1/32 -$31.25 Mui.Tick: 1/32 «32 per grid unit Ctr. Exp: Mar 21 Option Exp: Fab 17

9 C.aiwrlahl HIM Commode s^vio*

01/30

Opan «115

High »1191

Low 9027

ClOM I 9030 ¡

01/31

9030

9108

9018

9028

02/01

902«

9101

9019

9029

02/02

«103

9107

9029

9103

02/03

«103

9106

SSflS

Ctr $100,000 & 8% Trading: 5-B:30PM >7:20 AM-2PM CT 1/32 -$31.25 Mui.Tick: 1/32 «32 per grid unit Ctr. Exp: Mar 21 Option Exp: Fab 17

9 C.aiwrlahl HIM Commode s^vio*

10.14

14 BAR R.S.I. (dose): RSI-58.681 : UpAvg-0.171 On AvQ - 0.12

I 25

18 25 1 8 15 22 29 5 12 19 26 3 10 17 24 31 7 14 21 28 5 12 19 2S 2 Jul Aug Sep Oct Nov Dec

Recall that on page 22, one of Gann's techniques in pinpointing changes-in-trends was to start with a yearly chart to locate a general change-in-trend price or time zone. Then a weekly chartis used in the same way, and then a daily chart. We can do the same.

Chart 28 is the nearest-contract weekly chart for T-Bonds. Recall that on Chart 27, stochastics are overbought on about September 5. Yet, on the weekly chart, at about the same late-August-early-September time period (Point 1), stochastics are just beginning to rise from an oversold area. Prices and stochastics continue to rise into late October, when prices reach approximately 9100. %K then turns sharply down.

If, for whatever reason, you suspect stochastics are diverging from price on a daily chart, always check the monthly chart. The monthly chart will give you a larger view of price trends and activity, supported by stochastics.

On the weekly chart, Chart 28, Point 2 approximates to the week of October 31, the high of that week being 9028. Compare this time period to the same one on Chart 27.

While you're looking at Chart 28, plot two Retracement Zones.

Zone 1: PI is the mid-October, 1988 low at about 7600.

P2 is the late-February 1988, first high, at just under 9600.

Zone 2: PI is the late-February, 1988 second high at just under 9600.

P2 is the early-August low at 8400 (Point "-1-.")

Plot one Retracement Zone in red and the second Retracement Zone in blue. Pay special attention to the resulting price turning points and price actions, the associated stochastic level, and any stochastic divergence just before prices turn upward.

Compare the price and stochastic action of the weekly chart to the upcoming daily chart, Chart 29.

Chart 29 shows that stochastics, like prices, sometimes have trendlines. %K stochastics have peaked three times - September 14, October 10 and November 1. During this time stochastics have been divergent from prices, indicating an evolving change-in-trend. Trendline "A" connects the approximate stochastic highs.

On November 4, prices drop from a high of 9028 to a low of 8904. On the same day, %K and %D turn downward and break 75.

On November 7, prices open and close under the 45-degree line (Line B), drawn from the August 16 significant low of 8220. By this time, six signals suggest a short position:

1) 3 stochastic peaks.

2) Stochastics divergent from price.

3) Stochastic Line C being broken to the downside.

4) Price Line B (45-degrees) being broken to the downside.

5) On the monthly T-Bonds chart:

A) Prices are at the mid-point of the Retracement Zone of PI = "-1-" and P2 = "-2-," and

B) Stochastic %K has peaked and is turning down. After the following week, stochastics will cross.

Using 8220 on August 16 as PI, and 9028 on November 3 as P2, a Retracement Zone results with a RZH of 8622 and RZL of 8512.

MlGH 05- 16132 on 03/04/87 LOW 0-0032 on 10/30/87 14 BAR RSI .58.681 14 BAR STO.- 50.82 UP AVG-0.171 Slow%0- 69.29

MARCH 89 T-BONDS

Ctr $100,000 @ 8% Trading: 5-8:30PM >7:20 AM-2PM CT 1/32-$31.25 Min.Ttck. 1/32 4/32 per grid unit Ctr. Exp: Mar 21 Option Exp: F«b 17

Data Op*n High Law CIom

01/30 ens fanal S027 ooao

01/31 0030 9106 8018 8028

02/01 8029 8101 8018 8028

02/02 8103 8107 8028 8103

02/03 8103 8108 ¡80131

10.14

14BABRS1 (dose) RSI -58 681 Up Avfl-0.171 DnAvg-0.12

, 75 50 25

18 25 1 Jul

8 15 22 29 Aug

5 12 19 26 Sep

3 10 17 24 31 Oct

7 14 21 28 Nov

5 12 19 26 2 Dec

9 16 23 30 Jan

6 13 20 27 Feb

F2?

Prices and stochastics continue to fall along LI until November 27 to a low of, you guessed it, 8621. This is only 1 point away from the 50% RZH of 8622.

Prices close above LI the next day (in this example, prices trend along LI so closely that LI could be considered S4 as well). Stochastics begin to turn up on November 28 and cross 25 to the upside on November 30. %D is in a definite uptrend as well, as prices show another nice move through December 12.

Using the daily AND weekly price and stochastics charts would have resulted in a profitable 4-month period. The up move from mid-August to late-October was about 230 points or about $7000. The November down move would have netted approximately another $3000. Merry Christmas!

Chart 30 is a section of Chart 26. The time period is from 5/13 to 8/18/88.

Prices begin to rise, starting on a Primary Gann Pivot Point day of 5/23 from the day's low of 8218. By definition, this is PI.

G.E.T. stochastics fail to give a strong indicator until 6/6. But then, stochastics are entering the over-80 area and give no clear indicator for future price direction. Stand aside for now.

Another Gann Primary Pivot Point registers for 6/12 at a high of 8802. Again, by definition, this point will qualify as P2 for a Retracement Zone. P3 is on 6/12 at the 8218 level. The RZH is 8508 and the RZL is 8413.

On 6/17, stochastics have crossed and fallen below 80. Prices are falling as well toward the Retracement Zone. As both stochastic values fall below 80, a short position could be taken. But remember, this is only a signal to enter the market. There is no guarantee of how long, or how far, prices will fall. A stochastic drop from 80 to 20 may equal a price drop of 10,100, or 1000 points.

S5 is drawn from P2 at a 75-degree angle. A 63-degree angle appears to be too "loose" for the price trend.

Price closes above S5, at 8503, on 6/20. This is above 8426, the midpoint of the Retracement Zone. These two indicators suggest a long position at the opening of 6/19 with a stop at 8412,1 point below the RZL.

Prices open higher on 6/21 (a good sign for you) and drop to a low of 8424; you risked $378.00. Stochastics have also crossed to the upside from about 50 -another good sign for you. Prices begin to rise. On 6/23, prices gap to the upside - a THIRD good sign for you.

S4 is drawn at a 45-degree angle for our illustration. Prices continue to follow this line until 7/5 at which time they close at the high of the day at 8626.

From 6/24 to 7/6, stochastics stabilize at about 65 while prices rise to a high of 8723 on July 1 (the Gann "I" Pivot Point). Prices are rising while stochastics are not - divergence. This is a sign of possible price weakness and a change in trend.

Anticipate liquidating your long position at the opening of 7/6, or placing a tighter stop, perhaps at 8617, the low of 7/5.

After 7/6, as suggested by stochastic divergence, prices fall into mid-July, when stochastics become oversold.

Prices react to another 50% Retracement Zone in early August. Referring back to Chart 26, prices can be seen to eventually retrace 100% from the 5/23 low of 8210 to the Gann Primary Pivot Point day of 8/16, with a low at 8220.

i» ffl "3 3" T(\l O Q W ® Ö IT IM Q O O (O ÖT T W O U1

QPJnOPJrtSPJOPJrtQPJrtOIMQiynQPJrt © t~ !T<]0(DiDrr"ri9t9inininT3rTinini\ifMi\i*-iTi <0 «0 «0 Í0 OO (0 f.O (0 (0 (0 iß © Vi (.0 Vi Í0 OCl CO iß MJ (O O'J

© in in pj i» ffl "3 3" T(\l O Q W ® Ö IT IM Q O O (O ÖT T W O U1

QPJnOPJrtSPJOPJrtQPJrtOIMQiynQPJrt © t~ !T<]0(DiDrr"ri9t9inininT3rTinini\ifMi\i*-iTi <0 «0 «0 Í0 OO (0 f.O (0 (0 (0 iß © Vi (.0 Vi Í0 OCl CO iß MJ (O O'J

PART IX

United States Treasury Bonds

One of the first questions many beginning traders ask is, "What is the best market to trade?"

Well, what do you mean by "... the best... ?" If you have hundreds of acres growing coffee, why would you want to know the prices of Canadian rapeseed? Let's assume by " . .. the best...," you are asking which markets will be most profitable for you to trade.

By sending away for commodity information, your name may end up on mailing lists that send packets of advertising cards. Some of the claims, while they may have occurred in the past, should not be considered as a guarantee of what prices, or the company, may do for you in the future.

"$20,000 Profit In Just Two Months"

"Control over $40,000 of Gold for as Little as $500"

"Buy $20,000 Worth of Silver for $3,990"

"$4,000 in One Week ... in the S&P 500 Index"

"$5,000 Returned $15,000 Cash (with) Precious Metals"

"Double Your Money . . . 600% Profit in 5 Years"

And the claims go on and on and on.

After a while, the more information you receive, the more confused you become about which broker to use, or which commodity to trade. Appendix A is a list of markets currently traded on the American exchanges.

Of all the futures markets, the United States Treasury Bond market has proven to be, overall, the most responsive, liquid and fastest-growing market.

The beginning trader should consider the T-Bond market as the first market in which to trade.

A United States Treasury Bond is a security with a maturity longer than 10 years. The futures market trades those with twenty-year maturities. Bonds are auctioned four times a year - in March, June, September and December; hence, these are the contract months that are traded, with the last trading day being the eighth from the last business day of the delivery month. The worldwide, financial appeal of bonds results in billions of dollars flowing through these financial instruments.

Bonds tend to rank among the highest of all futures markets in terms of liquidity. The 1977 total annual volume for Treasury-Bond futures was about one million contracts. Inl986, that trading volume surged to almost52.6 million contracts. To the beginning trader, this means that there will always be either a buyer, or a seller, for any number of Bond contracts the trader may wish to transact.

The liquidity factor for Bonds in comparison to other commodities is reflected in Table 3 on the next page. Listed are 44 commodity futures, their exchanges, % margins, effective % margins, the number of contracts that are required to be traded for equal dollar profit, and the relative contract liquidity for each commodity. T-Bonds have the third highest rate of liquidity.

Treasury Bonds are traded on the Chicago Board of Trade. One Bond contract is an agreement to make delivery (a short position) or to later accept delivery (long position) of $100,000, face value, of Treasury Bonds.

Bond prices are quoted in a percentage of par value. The minimum increment is 1/32 of a point, or $31.25. (Appendix A will explain how to calculate Bond prices.) If, for instance, a trader is long one contract and prices rise from 78% to 79% par value, the trader has made $1000 (32 points x $31.25). The daily limit for Bonds (the maximum amount trading rules will allow Bond prices to move above or below the previous day's closing price) is 3 points (96/32nds), or $3000 per contract.

Trading hours for Bonds are unique. Like most other futures, they are traded during day sessions - 8:00 AM to 2:00 PM, Chicago time. But unlike other futures, Bonds are also traded during evening hours - 5:00 PM to 8:00 PM, Standard Time, and 6:00 PM to 9:00 PM, Daylight Saving Time.*

T-Bonds are directly related to changes in interest rates. From a low of approximately 7.25% in 1977 to the mid-14% experienced in 1981-82, interest rates, and Bond prices, have had a financial roller-coaster ride. The new trader can expect dramatic results trading T-Bond futures in days, rather than weeks or months.

Margin requirements (the amount of money that is put "at risk" to trade) may vary with individual brokers and a futures' volatility. For Bonds, you may expect a per-contract margin of $2500 to $3500, again depending upon many variables. But compared to margins for other financial and agricultural markets, which have been as high as $7000, $10,000 and even up to $20,000 PER CONTRACT, margins for Bonds are very attractive for the per-dollar return that could be realized.

* Information taken from the C.B.O.T. pamphlet, "U.S. TREASURY BOND FUTURES."

Table 3, appearing below, is reprinted here with the permission of Technical Analysis of Stocks and Commodities Magazine. c1989 Technical Analysis, Inc., Seattle, WA 98146-0518.

Trading Liquidity: Futures

Commodity Futures Exchange % Margin Effective % Contracts to Relative Contract Liquidity

Margin Trade for Equal Dollar Profit

Eurodollar

IMM

0.4

8.7

Standard & Poor's 500

CME

9.7

23.4

U. S. Treasury Bonds

CBT

2.2

13.0

Crude Oil

NYM

10.0

19.4

Gold

CMX

3.4

10.6

Silver

CMX

4.6

4.7

Soybeans

CBT

4.0

8.8

Japanese Yen ¥

IMM

1.8

5 2

West German Mark DM

IMM

2.2

6.0

Sugar-World #11

CSCE

14.5

22.6

Corn

CBT

4.3

8.9

Swiss Franc

IMM

2.3

6.5

Gasoline. Unleaded

NYM

7.1

12.7

10-Year Treasury Notes

CBT

1.6

13.1

Coffee "C"

CSCE

11.5

9.8

Heating Oil #2

NYM

10.1

11.1

Soybean Meal

CBT

4.4

9.0

Cattle, Live

CME

2.8

10.1

Cotton #2

CTN

4.5

8.1

Wheat

CBT

3.8

9.1

Soybean Oil

CBT

4.2

9.3

Pork Bellies

CME

8.1

4.1

Copper

CMX

8.6

15.7

British Pound (new) £

IMM

1.6

7.1

Canadian Dollar

IMM

0.8

4.6

Cocoa

CSCE

7.6

7.8

NYSE Composite Index

NYFE

4.6

11.6

5-Year Treasury Notes

CBT

1.3

22.8

Major Market Maxi Index

CBT

3.4

7.0

Wheat

KC

3.4

7.2

Municipal Bonds

CBT

1.4

6.6

U.S. Treasury Bills

IMM

0.3

9.5

Hogs

CME

4.2

11.7

Platinum

NYM

6.0

17.2

Cattle, Feeder

CME

2.3

7.0

Orange Juice

CTN

5.3

9.3

U.S. Dollar Index

CNT

2.4

9.0

Wheat

MPLS

3.5

8.2

Value Line Average

KC

3.6

9.8

Canola (Rapeseed U.S. $)

WPG

4.3

11.2

Soybeans

MCE

4.0

8.6

CRB Futures Price Index

NYFE

2.9

15.3

Silver

CBT

6.2

6.3

Lumber

CME

3.0

12.7

Trading Liquidity: Futures is a reference chart for speculators. It compares markets according to their per-contract potential for profit and how easily contracts can be bought or sold (i.e.. trading liquidity). Each is a proportional measure and is meaningful only when compared to others in the same column.

The number in the "Contracts to Trade for Equal Dollar Profit" column shows how many contracts of one commodity must be traded to obtain the same potential return as another commodity. Contracts lo Trade = (Tick i value) x (3-year Maximum Price Excursion).

Chicago Board of Trade Chicago Mercantile Exchange Commodity Exchange. New York Coffee. Sugar S Cocoa Exchange, New York New York Cotton Exchange International Monetary Market at CME. Chicago Kansas City Board of Trade MidAmerica Commodity Exchange, Chicago Minneapolis Grain Exchange New York Futures Exchange (New York Stock Exchange) New York Mercantile Exchange Winnipeg Commodity Exchange

Margin source: REFCO. Inc. 12 10

"Relative Contract Liquidity" places commodities in descending order according to how easily all of their contracts can be traded. Commodities at the top of the list are easiest to buy and sell: commodities at the bottom of the list are the most difficult. "Relative Contract Liquidity" is the number of contracts to trade times total open interest times a volume factor which is: /"In (volume)

10 3

5 nyfe

28 WPG

18 3

Was this article helpful?

0 0

Post a comment