How the Futures Markets Work by Jake Bernstein

Futures trading is one of the few investment vehicles that require a small amount of capital, but offer the possibility of virtually unlimited profit potential. The average investor - armed with information, persistence, skill, and ever easier access to the markets through e-trading - can earn significant returns on even a small investment. At the same time, the risks are high. There are as many as nine losers to every one winner in the futures markets.

In How the Futures Markets Work, Jake Bernstein, an acknowledged expert on futures worldwide, is your guide to the lucrative world of futures. He explains in easy-to-understand language the products, the players, the tools, and the strategies, including hedging.

Bernstein starts with the basics, discussing the history of the U.S. and foreign futures markets, their organization, and the specifics of daily operations on the trading floor. He takes you step-by-step through opening an account, selecting a broker, placing orders, doing basic technical analysis, managing risk, and developing a trading strategy suited to your goals.

Bernstein provides an up-to-the-minute overview of the electronic trading revolution, giving you the information you need to make hardware, software, and trading decisions. You'll find insights into the psychology of investing and tips for improving your possibility of success.

How the Futures Markets Work is your blueprint to making the futures markets work for you!

Contents

Introduction
What This Book Can Do for You 1

The Fastest Game in Town 1
Why Trade Futures? 2
Preliminaries 4

Chapter 1
The Journey Ahead 7

Myths and Misunderstandings 8
Commodity Trading versus Gambling: Comparisons and Contrasts 12
Realities and Necessities of Risk and Reward 16

Chapter 2
Beginning with the Basics 19

Definition of a Futures Contract 23
What Is Risk Transfer and Why Transfer It? 24
Market Participants 26
Price Risk 27
Regulation of the Futures Industry 32
Trading the Futures Contract 36
What Is a Hedge? 41
Essential Elements for Profitable Trading 44

Chapter 3
The Modern Futures Exchange 45

Management and Organization of the Exchange 48
Defining a "Cleared" Trade 52
The Role of the Exchange in Futures Trading 53
The Elements of Futures Trading at the Futures Exchange 54

Chapter 4
Life on the Trading Floor 57

The Pit 59
Layout of the Trading Floor 64
How an Order Is Filled 65
The Bid and the Offer 66
How Prices Reach the Quote Board 67
Electronic Trading 68

Chapter 5 The Variety of Futures Markets 69

Proliferation of Futures Markets 71
An Overview of Market Sectors 75
A 24-Hour Worldwide Market 78

Chapter 6 Getting Started in Trading Futures 81

Choosing a Broker 81
Opening an Account 92
Elements of a Trade 94
Placing an Order 99
Day Trading, Short-Term Trading, and Position Trading 108
Futures Options Trading 112
Market Analysis 121
Technical versus Fundamental Trading 122

Chapter 7
Hedging with Spreads 125

Spreads and Straddles 128
Trading Spreads 131
The Seasonal Spread 135
Sample Spread Charts 139
Spread Entry and Exit 144

Chapter 8
Fundamental Analysis 147

Supply and Demand 148
Market Reports 150
Seasonality 150
Cyclic Price Changes 154
Secular Trends 158
Other Forces and Factors Affecting Commodity Prices 159
Price Analysis 161

Chapter 9
Technical Analysis: Chart Patterns 163

The Wave Theories 164
The Bar Chart 165
The Point-and-Figure Chart 169
Candlestick Charts 171
Gann Charts 172
Trends 175
Reversal Patterns 180

Chapter 10
Technical Analysis: Timing Indicators 191

Moving Averages 192
Stochastics 208
Cycles 210
Momentum and Rate of Change 210
Key-Date Seasonals 211
Market Sentiment Indicators 211
Wilder's Relative Strength Index 212
Oscillators 215
Volume and Open Interest 217
Fibonacci Number Series 219

Chapter 11
Managing Risk 221

Preservation of Capital 222
Maximization of Capital 222
Profit Dispersal 223
Loss Management 223
Stop Losses: Double-Edged Sword 225

Chapter 12
Computers and Electronic Trading 231

Trading Hardware: How Much Computer Power Will You Need? 231
Software Decisions 233
Live Market Data 236
Historical Data: Access, Storage, and Retrieval 240

Chapter 13
The Psychology of Investing 243

The Behavior of Traders 243
Mastering the Psychological Aspects of Commodity Trading 247
The Paradox of Discipline and Emotion 250
Winners and Losers 255
What Do Traders Really Want? 259

Chapter 14
Trading Strategies and Systems 261

Developing a Trading Strategy 262
How to Develop a Systematic Approach to Trading 263
How to Choose a Trading System or Methodology 267
Alternatives to Being an Active Trader 269

Chapter 15
Making the Futures Market Work for You 277

How to Improve Your Odds of Success as a Trader 278
The Facts of Market Life 280

Appendix I References and Reading List 285
Appendix II Contracts Traded 289

U.S. Futures Contracts Traded 289
International Futures Exchanges Traded 293

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