Getting Started in Futures 5th Edition (Getting Started In.....)

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<ul><li><p>Getting Started in</p><p>FUTURES</p><p>Todd Lofton</p><p>John Wiley &amp; Sons, Inc.</p><p>F I F T H E D I T I O N</p><p>00_fm_4469.qxd 7/22/05 9:00 AM Page iii</p></li><li><p>00_fm_4469.qxd 7/22/05 9:00 AM Page vi</p></li><li><p>Getting Started in</p><p>FUTURES</p><p>00_fm_4469.qxd 7/22/05 9:00 AM Page i</p></li><li><p>The Getting Started in Series</p><p>Getting Started in Online Day Trading by Kassandra Bentley</p><p>Getting Started in Asset Allocation by Bill Bresnan and Eric P. Gelb</p><p>Getting Started in Online Investing by David L. Brown and Kassandra Bentley</p><p>Getting Started in Investment Clubs by Marsha Bertrand</p><p>Getting Started in Internet Auctions by Alan Elliott</p><p>Getting Started in Stocks by Alvin D. Hall</p><p>Getting Started in Mutual Funds by Alvin D. Hall</p><p>Getting Started in Estate Planning by Kerry Hannon</p><p>Getting Started in Online Personal Finance by Brad Hill</p><p>Getting Started in 401(k) Investing by Paul Katzeff</p><p>Getting Started in Internet Investing by Paul Katzeff</p><p>Getting Started in Security Analysis by Peter J. Klein</p><p>Getting Started in Global Investing by Robert P. Kreitler</p><p>Getting Started in Futures by Todd Lofton</p><p>Getting Started in Financial Information by Daniel Moreau and Tracey Longo</p><p>Getting Started in Emerging Markets by Christopher Poillon</p><p>Getting Started in Technical Analysis by Jack D. Schwager</p><p>Getting Started in Hedge Funds by Daniel A. Strachman</p><p>Getting Started in Options by Michael C. Thomsett</p><p>Getting Started in Real Estate Investing by Michael C. Thomsett and Jean Freestone Thomsett</p><p>Getting Started in Tax-Savvy Investing by Andrew Westham and Don Korn</p><p>Getting Started in Annuities by Gordon M. Williamson</p><p>Getting Started in Bonds by Sharon Saltzgiver Wright</p><p>Getting Started in Retirement Planning by Ronald M. Yolles and Murray Yolles</p><p>Getting Started in Online Brokers by Kristine DeForge</p><p>Getting Started in Project Management by Paula Martin and Karen Tate</p><p>Getting Started in Six Sigma by Michael C. Thomsett</p><p>Getting Started in Rental Income by Michael C. Thomsett</p><p>00_fm_4469.qxd 7/22/05 9:00 AM Page ii</p></li><li><p>Getting Started in</p><p>FUTURES</p><p>Todd Lofton</p><p>John Wiley &amp; Sons, Inc.</p><p>F I F T H E D I T I O N</p><p>00_fm_4469.qxd 7/22/05 9:00 AM Page iii</p></li><li><p>Copyright 2005 by Todd Lofton. All rights reserved.Published by John Wiley &amp; Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.</p><p>No part of this publication may be reproduced, stored in a retrieval system, or transmitted in anyform or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise,except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, withouteither the prior written permission of the Publisher, or authorization through payment of theappropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive,Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the Web atwww.copyright.com. Requests to the Publisher for permission should be addressed to thePermissions Department, John Wiley &amp; Sons, Inc., 111 River Street, Hoboken, NJ 07030,(201) 748-6011, fax (201) 748-6008 or online at http://www.Wiley.com/go/permissions.</p><p>Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their bestefforts in preparing this book, they make no representations or warranties with respect to theaccuracy or completeness of the contents of this book and specifically disclaim any impliedwarranties of merchantability or fitness for a particular purpose. No warranty may be created orextended by sales representatives or written sales materials. The advice and strategies containedherein may not be suitable for your situation. You should consult with a professional whereappropriate. Neither the publisher nor author shall be liable for any loss of profit or any othercommercial damages, including but not limited to special, incidental, consequential, or otherdamages.</p><p>For general information on our other products and services or for technical support, pleasecontact our Customer Care Department within the United States at (800) 762-2974, outsidethe United States at (317) 572-3993 or fax (317) 572-4002.</p><p>Wiley also publishes its books in a variety of electronic formats. Some content that appears inprint may not be available in electronic books. For more information about Wiley products, visitour Web site at www.wiley.com.</p><p>Library of Congress Cataloging-in-Publication Data:</p><p>Lofton, Todd.Getting started in futures / Todd Lofton. 5th ed.</p><p>p. cm. (Getting started in . . .)Includes index.ISBN-13: 978-0-471-73292-1 (pbk. : alk. paper)ISBN-10: 0-471-73292-3 (pbk. : alk. paper)1. Futures market. I. Title. II. Series.</p><p>HG6024.A3L64 2005332.6452dc22 2005048620</p><p>Printed in the United States of America</p><p>10 9 8 7 6 5 4 3 2 1</p><p>00_fm_4469.qxd 7/22/05 9:00 AM Page iv</p><p>www.wiley.com</p></li><li><p>To Beth, James, Christine, and Margaret, whom I love more than they know.</p><p>And, to the incandescent minds at Apple Computer, to me anonymous, from whichsprung my marvelous Macintosh iBook. Without it I would be mute, engaged in amind-numbing spiral of writing and rewriting. Without it, this book would notexist.</p><p>00_fm_4469.qxd 7/22/05 9:00 AM Page v</p></li><li><p>00_fm_4469.qxd 7/22/05 9:00 AM Page vi</p></li><li><p>vii</p><p>Preface</p><p>If you would like to know how futures markets can help you reduce risk or earn greater profits, you have come to the right place. Futures enable youto:</p><p> Set now the purchase price of a financial instrument that youll buy later</p><p> Protect a foreign currency bank balance from changes in the exchangerate</p><p> Reduce the market exposure of a single-stock or a large stock portfolio</p><p> Benefit from a favorable change in interest rates without owning thecash instruments</p><p> Protect an inventory of an actual commodity against a decline in its cashprice</p><p> Make a bet on the price trend in any traded commodity, from corn tothe Canadian dollar</p><p>This is the fifth edition of Getting Started in Futures, and a lot of the informationis new. But our goals have not changed. Our first goal is help you understandhow futures markets work. Our second goal is to show you how you can usethese fast-moving marketplaces to your own personal economic advantage.</p><p>And we do it all in simple, easy-to-read prose, with lots of examples.</p><p>Begin at the Beginning</p><p>We begin by introducing you to the basics using the traditional commoditymarkets as examples. Then we move on to financial futures, the newest andfastest growing futures markets in the world. These include futures and futuresoptions in interest rates, equities, and foreign currencies. Finally, we talk aboutthe modern marvels that the personal computer has wrought: rock-bottom com-mission costs, lightning-fast online trading, and the ability to get up-to-the-minute market information at the touch of a computer key.</p><p>In between, youll learn how to set yourself up for trading online, where todig when youre mining the Internet, ways to forecast prices, and how day trad-ing works.</p><p>00_fm_4469.qxd 7/22/05 9:00 AM Page vii</p></li><li><p>Whats New</p><p>A modern Rip Van Winkle who had snoozed for the past 20 years would barelyrecognize todays futures markets. What began 150 years ago as relatively simplelocal trading in grains, meats, and metals has evolved into an international worldmarketplace where millions of dollars worth of financial futures and options aretraded every day.</p><p>The most recent innovation are futures contracts on single stocks, and anew chapter in this edition is devoted to the subject. (If single-stock futures arewhat have drawn you to this book, you might read Chapter 13 first. It is de-signed to stand alone; it refers you to earlier chapters, when necessary, to explainbasic concepts.)</p><p>There are also several other new futures contracts, especially in the finan-cial futures. We tell you about the ones that are catching on.</p><p>Options on futures (puts and calls) offer special advantages, and they be-have differently than futures. Well explain.</p><p>Finally, weve taken care of the nits: Weve verified that any phone num-ber that we give you still works; that the market reports mentioned are still avail-able; and that the Suggested Reading section at the end of each chapter lists themost up-to-date books.</p><p>Whats Not New</p><p>This is still the most readable book ever published on the subject of futures.Theres no gobbledegook. Theres no higher math. Everything is written in sim-ple English, and there are lots of everyday examples, to make sure that you un-derstand.</p><p>When youve finished reading this book, youll have the know-how to getstarted in futures. Thats a promise.</p><p>Thanks</p><p>Christopher Lown is the editor-in-chief of Commodity Research Bureau (CRB)in Chicago, which has been producing price charts, price forecasting tools, andmarket research reports for its subscribers since 1934.</p><p>Mr. Lown and CRB graciously provided all of the charts that we have usedas illustrations. We thank CRB and Mr. Lown, personally.</p><p>One final word: To avoid repeating the phrase (or she) throughout thebook, we have restricted our use of the singular personal pronoun to he. It isnot intended as a slight. We are fully aware of the increasing presence of suc-</p><p>viii PREFACE</p><p>00_fm_4469.qxd 7/22/05 9:00 AM Page viii</p></li><li><p>cessful women in every aspect of futures: as owners of brokerage firms, brokers,exchange members, market research analysts, and private traders.</p><p>Errata</p><p>If you run across any mistakes in these pages, I request your patience. Theres noone to blame but me.</p><p>TODD LOFTONMcLean, VirginiaJuly 2005</p><p>Preface ix</p><p>00_fm_4469.qxd 7/22/05 9:00 AM Page ix</p></li><li><p>00_fm_4469.qxd 7/22/05 9:00 AM Page x</p></li><li><p>xi</p><p>Preface vii</p><p>Chapter 1Introduction 1</p><p>Chapter 2Basic Terms and Concepts 3</p><p>Chapter 3Futures Markets Today 11</p><p>Chapter 4The Speculator 21</p><p>Chapter 5The Hedger 27</p><p>Chapter 6The Green Stuff 31</p><p>Chapter 7The Orders 39</p><p>Chapter 8The Arena 47</p><p>Contents</p><p>00_fm_4469.qxd 7/22/05 9:00 AM Page xi</p></li><li><p>Chapter 9Fundamental Analysis 53</p><p>Chapter 10Technical Analysis 61</p><p>Chapter 11Hedging Revisited 89</p><p>Chapter 12The Financial Futures 99</p><p>Chapter 13Single-Stock Futures 123</p><p>Chapter 14Money Management for Speculators 131</p><p>Chapter 15Futures Options 141</p><p>Chapter 16Rules and Regulations 169</p><p>Chapter 17Contracts in Brief 175</p><p>Chapter 18Discover Electricity 217</p><p>Chapter 19Trading Futures Electronically 227</p><p>xii CONTENTS</p><p>00_fm_4469.qxd 7/22/05 9:00 AM Page xii</p></li><li><p>Chapter 20Day Trading 233</p><p>Appendix AMore Chart Patterns and What They Mean 241</p><p>Appendix BMore About Point-and-Figure Charts 255</p><p>Appendix CMore About Moving Averages 261</p><p>Appendix DMore About Stochastics and Relative Strength 265</p><p>Appendix ESingle-Stock Futures Traded on OneChicago 269</p><p>Appendix FSingle-Stock Futures Traded on LIFFE CONNECT 273</p><p>Appendix GOverseas Futures Markets 277</p><p>Appendix HFirms with Direct Access for Electronic Trading 279</p><p>Index 281</p><p>Contents xiii</p><p>00_fm_4469.qxd 7/22/05 9:00 AM Page xiii</p></li><li><p>00_fm_4469.qxd 7/22/05 9:00 AM Page xiv</p></li><li><p>Getting Started in</p><p>FUTURES</p><p>00_fm_4469.qxd 7/22/05 9:00 AM Page xv</p></li><li><p>00_fm_4469.qxd 7/22/05 9:00 AM Page xvi</p></li><li><p>1</p><p>1ChapterIntroduction</p><p>Suppose that you and I lived in rural Iowa. I raise beef cattle. You raise corn15 miles down the road. Each fall, when your corn comes in, you truck theentire crop to me, and I buy it to feed to my steers. To make things fair,</p><p>we agree that I will pay you the cash price for corn on the Chicago Board ofTrade on the day I take delivery.</p><p>Corn is important to both of us. It is your principal crop; it is my main costin feeding cattle. I hope for low prices. All summer long you are praying thatsomething benignan unexpected Russian purchase, for examplewill sendcorn prices up.</p><p>One spring day you come to me with a suggestion. Lets set our corn pricenow for next fall, you say. Lets pick a price that allows each of us a reasonableprofit and agree on it. Then neither of us will have to worry about where priceswill be in September. Well be able to plan better. We can go on about our busi-ness, secure in the knowledge of what we will pay and receive for the corn.</p><p>I agree, and we settle on a price of $3.00 a bushel. That agreement is calleda forward contracta contract because its an agreement between a buyer(me) and a seller (you); forward because were going to make the actual trans-action later, or forward in time.</p><p>Its a good idea, but its not without flaws. Suppose the Russians did an-nounce a huge surprise purchase, and corn prices went to $3.50. You would belooking for ways to get out of the contract. By the same token, I would not betoo eager to abide by our agreement if a bumper crop caused corn prices to fallto $2.50 a bushel.</p><p>01_4469.qxd 7/22/05 8:12 AM Page 1</p></li><li><p>There are other reasons why our forward contract could fail to be met. Ahailstorm could wipe out your entire corn crop. I could sell my cattle-feeding op-eration, and the new owner not feel bound by our agreement. Either one of uscould go bankrupt.</p><p>Futures contracts were devised to solve these problems with forward con-tracts, while retaining most of their benefits. A futures contract is simply a for-ward contract with a few wrinkles added.</p><p>2 INTRODUCTION</p><p>01_4469.qxd 7/22/05 8:12 AM Page 2</p></li><li><p>3</p><p>2ChapterBasic Terms </p><p>and Concepts</p><p>There are some basic concepts that you should understand if you are goingto deal with the futures markets. The first is the futures contract itself. Inthe Introduction we stated that a futures contract is simply a forward con-</p><p>tract with some added wrinkles. One of those wrinkles is standardization.A forward contract can be written for any commodity. It can also be writ-</p><p>ten for any amount or delivery time. If you want to make a deal to buy 1400bushels of silver queen corn for delivery to your roadside stand next July 2, youcan do it with a forward contract. You cant in the futures market.</p><p>A futures contract is for a specific grade, quantity, and delivery month. Forexample, the futures contract for corn on the Chicago Board of Trade (CBOT)calls for 5000 bushels of No. 2 yellow corn. Delivery months are March, May,July, September, and December. There are no other delivery months. All futurescontracts are standardized in this way. Thats done to make specific futures con-tracts interchangeable. Grade, quantity, and delivery months are specified by theexchange when they design the contract. Only the price is left to be determined.</p><p>Smart Investor Tip</p><p>A futures contract is a standardized forward contract that can be brokenby either party with simply an offsetting futures market transaction.</p><p>02_4469.qxd 7/22/05 8:13 AM Page 3</p></li><li><p>Another difference is where business may be done. A forward contract canbe drawn up anywhere. Futures contracts are bought or sold only on the ex-change trading floor by members of the exchange.</p><p>Money</p><p>Three other differences between a forward contract and a futures contract in-volve the important matter of money. If two parties make a forward contract, nomoney need change hands until the cash transaction is completed at a later date.If you buy a futures contract, you will have to put up margin money. This is nota down payment, and no money is borrowed, as in stocks. It is a good-faith de-posit, or earnest money, to demonstrate your intention to pay for the com-modity in full whe...</p></li></ul>

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