10 Steps · 2012-09-18 · 10 Steps to a Successful Trade - 123 - Table of Contents Step One Identify a Market Step Two Patterns and Formations Locate & Identify Price Step Three

10 Steps to a Successful Trade - 3 -

10StepsTo a Successful Trade!By Lan H. Turner

Copyright (c) 2003 Gecko Software, Inc. All rights reserved.

Plan your Trade and Trade your Plan

Copyright © 2012

PitNews Press

All Rights Reserved

10 Steps to a Successful Trade - 123 -

Table of ContentsStep One Identify a Market

Step Two Patterns and FormationsLocate & Identify Price

Step Three Trend and RetracementEstablish Short-Term

Step Four Retracement

Establish Long-TermTrading Range, Trend, and

Step Five Seasonal BiasAnalyze the Market for a

Step Six Compare Like Contracts

Step Seven Added ConfirmationReference Indicators for

Step Eight Reward RatioEstablish Risk vs.

Step Nine Method of Market EntryDetermine the Best

Step Ten Method of Market ExitDetermine the Best

10 Steps to a Successful Trade- � -

10 Steps to a Successful Trade - � -

IntroductionWelcome to 10 Steps to a Successful Trade! This course will follow the 10 steps in making a successful Techno-Seasonal trade within the futures market. A Techno-Seasonal trade is a trade that not only analyzes the technical nature of the contract, but also the seasonal nature as well. I have found a much higher level of success when using both technical AND fundamental techniques when trading futures. Here is a brief step-by-step description of each section of the course:

Step One: “Identify a Market”Choosing the correct market to trade can be the key to success or failure; selecting the wrong market can cause disastrous results if your account cannot handle the capital required to cover margins and risk.

Step Two: “Locate and Identify Price Patterns/Formations”After selecting the market and contract to trade, your next step is to analyze the chart for technical formations and patterns like the Narrow sideways channel, 1-2-3 top or bottom, flag, triangle, wedge, etc.

Step Three: “Establish Short-Term Trend & Retracement”Establishing the short term trend lets you know how the market is moving in the over-all scheme of things. Is it bucking the long-term trend, or is it moving in line with the long-term trend? Remember, a trend in motion generally stays in motion.

Step Four: “Determine Long-Term Trading Range, Trend, & Retracement”To determine a long-term trading range, look over your historical long-term monthly charts, knock off the highest highs and the lowest lows, and determine a basic long-term range where your particular market trades between. This is very important to help you determine your bias and to let you know whether your market is currently cheap or expensive. Next, determine the long-term trend; this is done by simply looking at the weekly and monthly charts to determine if your overall market is in a major up swing or down swing. Again, this adds to establishing a bias in the direction you believe the market is heading. Lastly, when establishing a long-term retracement, you

STEPS�0


will be able to determine where the market may move to if it retraces, basically set-ting a possible target point.

Step Five: “Analyze the Market for a Seasonal Bias”Using the Track ‘n Trade Pro Seasonal plug-in, you can determine if a market’s his-torical trending pattern is in line with your current line of thought for market direc-tion. It is recommended never to buck the seasonal nature of a market.

Step Six: “Compare like Contracts”Watch market families. For example: Soybeans, Soybean Oil, and Soybean Meal. These are all very similiar contracts, but you will often find that one commodity will lead the way, and the others will soon follow. If you see Soybeans breaking higher, you can be sure that soon after Soybean Meal and Soybean Oil will follow suit.

Step Seven: “Reference Indicators for Added Confirmation”Using indicators as a method of confirming your other thought processes is a prudent way of reassuring yourself that you’re on the right track, but remember, indicators are not perfect. Using indicators alone as a method for market entry and exit is a quick way to give up your holdings to someone else.

Step Eight: “Establish Risk vs. Reward Ratio”Never enter into a trade where you are going against your bias, and never enter into a trade where your risk does not far outweigh your reward. Your reward should be 50% of the last major move, therefore giving you a point to guesstimate how far you can expect the market to move and how much money you would make if it achieved the predicted move.

Step Nine: “Determine the Best Method of Market Entry”Once you have determined the trade, you will need to decide the method of market entry. There are many types of orders to choose from, so you will need to decide which is the most appropriate for your trade. For example, you can enter the market on a stop when the market performs some type of validation move, or simply enter with a market order.

Step Ten: “Determine the Best Method of Market Exit”Once you are in the market, it is just as important to have your method of exit setup. Have your exit plan ready; for example, consider if you are going to follow with stop loss orders, or exit when target areas of profit have been hit.

10 IntroductionSTEPS


should be able to trade any market you want.

Although this statement is somewhat true, in that each market does trend, each market will eventually break the trend and each market will eventually retrace, but, (and this is a big BUT), not every market trends and retraces exactly the same. For example, Wheat will trend rather slowly in comparison to Cocoa, and Corn will trend differ-ently than Crude Oil.

The statement that all markets form basically the same reoccurring price patterns and the assumption that once you understand and recognize this fact you should be able to trade all markets is not exactly true either. Each market has different requirements as far as initial margin, maintenance margin, volatility, and price movement. I want to discuss these three differences in this section of our course to give you a better idea on how to identify the markets that are right for you.When identifying the correct market to trade consider the following:

Can you afford the margin? Can your account cover the market volatility? Do you know and understand the market?

Can you afford the margin?What is margin?

Margin is the amount of money required by the exchange or brokerage to be in your account when you enter a trade in the futures market.

Each commodity has a determined margin amount that you need to provide when placing and maintaining an order. These margin amounts are set by the exchange. Let’s take a look at a margin example.

The margin amount on futures contracts are set by the exchange, and they are calculated on some magical and secret volatility number, keep in touch with your broker to always keep current on margin amounts. Then, input these amounts in Track ‘n Trade Pro to make your calculations easy!

Identify a MarketIdentifying the right market to trade is one of the most important key’s to success in trading commodities. Many traders, or teachers will tell you that it simply does not matter which market you trade, that every market trends, every market breaks trends, and every market retraces. Therefore, once you learn the basic principles of trading, you

STEP

�


Let’s say that you want to trade Corn...At the time I wrote this article, the initial margin amount for Corn was $540 per con-tract. What this means is that you would need to have $540 in your trading account for every contract of Corn you wanted to trade. For example, if you wanted to trade five contracts of Corn, you would need to have $540 X 5= $2,700. This is how much money you would need in your account for the first trading day—the day you initiated the buy or sell of your Corn trade. If you decide to stay in this trade beyond the first day, then the amount of money required to maintain this trade is lowered to the “Maintenance Margin” amount; therefore, on the second day and each subsequent day, you would only need to maintain $400 per contract in your margin account. Again, in our example, if you were to be trading five contracts, you would only be required to maintain $400 X 5 = $2,000 in your account. (See our chart below—notice that different commodities have different initial margin and maintenance margin amounts.)

Example Margin Sheet

The exchanges calculate these margin amounts based on a formula of volatility, which changes from time to time. Check with your broker for a current margin chart. Also, remember that the exchanges only set the minimum amount requirements. Each indi-vidual brokerage firm has the right to increase initial margin and maintenance margin amounts over and above the exchange minimums. Your brokerage firm maintains dif-ferent rates than their competitors, so always check around for the best rate.

What happens if your account drops below the exchanges margin requirements? Well, your broker will call you on the telephone and say, “John, your account needs to stay above $2,000 to stay in this Corn trade. You’ve lost $300 today, bringing your account balance down to $1,700. John, you have a choice. You can either wire me $300 to keep your trade alive, or we can close out this trade and leave your account balance at $1700. Which would you prefer?” (This is called a “Margin Call”.)

Tip: As a new trader, I recommend that you never fund a margin call. If you get a margin call, simply have your broker exit the trade. Step back, relax, and take a couple of days off. Reevaluate your trad-ing plan, then start again with a fresh new set of charts and indica-tors.

Identify a Market1

Most traders will not want to risk more than 10% of their margin account on any one trade.


Can your account cover the market volatility?Markets move in waves, and these waves are measured in dollars. Some markets move in $300 to $500 waves, others will move in $500 to $1,200 waves, and yet others will move in as much as $5,000 waves.

The reason this is important is because the prudent trader always follows the market with stop loss orders in an attempt to manage risk. The stop loss order is generally spaced back behind the last wave of the market. If the market you choose to trade moves in $5000 waves and you only have $2,000 in your margin account, you are not going to be able to cover the losses you may incur if your stop loss order gets hit on a miscalculated market position.

Most traders will not want to risk more than 10% of their trading account on any one trade. What this means to you is this: If you are trading a market that moves in $2,000 waves and you plan on holding your stop loss back behind the market by approximately $2,000, then that $2,000 would be your risk. Keeping to the 10% rule, $2,000 is 10% of $20,000; therefore, you would not want to trade any market that fluctuates in $2,000 waves unless you have at least $20,000 in your account. Thus the saying: “Don’t blow your whole wad on one trade!”

Placing a risk reducing type order such as a “stop loss order”, which is intended to limit a loss to a certain amount, may not be effective because market conditions may make it impossible to execute imme-diately.

Do you know and understand the market?Like I’ve always said, “Knowledge is the key to success in the commodities market.” I’m sure this rings true with any business strategy or adventure you may embark on, but never is it more true than with the commodities market. No one individual, trainer, or company can give you “ALL” knowledge regarding the futures industry. There are so many different strategies for trading the markets that the library is filled with volumes regarding every strategy, using every mathematical formula you can imagine.

Simply put, it is going to be next to impossible for you to go out and study everything there is to know about the futures industry. Even the experts still have questions and still need to look things up on occasion. Just know that this is a widely versed industry

“Knowledge is the key to success in the commodities market.”

Identify a Market1


with volumes of information on every kind of statistical method you can imagine to trade the markets, and that you cannot ever learn it all. In my humble opinion, it isn’t necessary or even advisable to try.

Market knowledge, for our application, is simply knowing about the com-modity you have chosen to trade.

It makes sense for an individual with a background in banking to trade the financial markets. It makes sense for someone who comes from a rural upbringing to trade the farm products such as the grains and the meats. It makes sense for someone who comes from the oil industry to trade the energies; so on and so forth.

Now of course, this does not mean that you need to have an intimate knowledge about the markets you are trading; a simple fundamental knowledge will suffice. You should know simple things like heating oil is mainly used during the winter, and then ask yourself how this would affect prices. You should know that most grains are harvested in the fall, and how this affects price. If you want to trade financials, you should know how interest rates and exchange rates affect price movement. These are some of the the basic fundamentals you need to be aware of.

In this 10 Steps course, we are going to discuss the simple, down to earth methods of recognizing tried and true historical reoccurring price patterns, then confirm the market direction using a series of confirmation tools or indicators. I like to keep it very simple.

The “Manual Method”I trade what I consider to be the “manual method.” Even though I use computers, indicators and electronic charts, email and the Internet, I still consider my method of trading to be the manual method. This is simply because at Gecko Software, we have worked very hard to automate the manual method of trading. What I mean by this is that we take charts that would have normally been printed on a piece of paper, and we make them electronic. Then we take a drawing tool which mimics a pencil, and we automate it so it becomes a drawing tool or a pencil on the computer. Next, we manually go through our charts and actually “LOOK” and “VISUALIZE” reoccur-ring price patterns. We don’t try to get the computer to decide what is a pattern or what is not a pattern. We let you, the trader, spot these occurrences yourself; there-fore, you are manually identifying chart patterns.

“[I]t is going to be next to impossible for you to go out and study everything there is to know about the fu-tures industry...Just know that this is a widely versed industry with volumes of information”

Identify a Market1


Trading is not so much a science as it is an art. If computers could predict market direction with any solid accuracy, then there would be no need for speculation and trading. The computer would simply be so accurate that the markets would have to close. If we were going to be able to create a computer program that could predict market movement that accurately, it would have been done by now, but it has not. That is because trading is not so much a science as it is an art. Art is one place com-puters have not been able to upstage man’s visual and artistic capabilities.

Again, I must reiterate what I mentioned earlier. There are thousands of different ways to trade the market and this is just my own personal method. Other people would not agree with me on this and I don’t expect them to; they have their way, I have mine. I don’t expect everyone to agree with me and want to trade my way, as I would hope that others would not expect me to want to trade their way either. That is the wonderful thing about trading, there are as many techniques for trading the markets as their are people trading; therefore, we can all participate and enjoy the thrill and excitement of trading commodities knowing that there is not one individual or group out there beating the pants off the rest of us simply because they have some great super-computer system.

“Keep in mind that anyone trying to sell you a secret, all new, wiz-bang, knock-your-socks-off ‘sys-tem’, is trying to sell it to you for profit”

Also, keep in mind that anyone trying to sell you a secret, all new, wiz-bang, knock-your-socks-off “system”, is trying to sell it to you for profit—obviously because it does not work well enough for them personally. Until that day comes when the markets are forced to close because some computer genius is continually cornering the market, I’m sticking to the “visual art” of trading—the manual method.

Identify a Market1

10 Steps to a Successful Trade- �0 -

10 Steps · 2012-09-18 · 10 Steps to a Successful Trade - 123 - Table of Contents Step One Identify a Market Step Two Patterns and Formations Locate & Identify Price Step Three

Documents