Futures Education

It's a function of time

You can define the concept of trend only in relation to a particular time frame. When you determine the trend, it must be, for example, the two-week trend or the six-month trend or the hourly trend. So an important part of a trading plan is deciding what time frame to use for making these decisions.
For purposes of this course, trends are classified in three major time frames: primary, intermediate and short-term.

Primary Trends

Primary Trends last from nine months to many years. Primary trends are usually based on the fundamentals of the commodity and economy. Intermarket analysis is the study of the flow of money from one financial industry to another. The primary trend is largely determined by the fundamentals that cause money to flow from one industry to another, from one commodity to another.

Intermediate Trends

Intermediate Trends last from six weeks to nine months. Intermediate trends are considered market corrections, where the market responds to problems of over-supply or over-demand. An event that might precipitate a change in the intermediate trend could be an earnings announcement, or a management change. Here is an example of the intermediate term trend.

Short-Term Trends

Short-Term Trends last from two to four weeks. Short-term trends are usually based on random news events, such as an analyst upgrade or short-term shocks to supply. This is an example of the short-term trend.
It is important to note that longer-term trends are made up of shorter-term trends. The primary trend is formed by a series of intermediate term trends. The intermediate term trend is formed by a series of short-term trends. One of the first steps in trend analysis is to identify which trend you are looking at and how it relates to trends of other time frames.
The chart below shows the relationship between primary, intermediate and short-term trends.

It's a function of Volatility

Another consideration is the volatility of the markets you trade. There are about forty futures markets with sufficient liquidity to allow prudent speculation. However, it is important to select a good universe of markets that are appropriate for your account size, risk level and trading style.
It is also important that the commodities you choose to follow are diversified. There are always a number of big market moves every year, but no one knows in advance where they will be. If you trade a diversified portfolio, there is a greater chance that you will catch some of the truly big moves that make for successful trading.
Another consideration in choosing a market to trade is its historical propensity to have more big trending moves. Since the trend is your edge in trading, you can maximize your edge by selecting the most "trendy" markets. The following are some of the best trending markets in various trading sectors.
The currencies are the best trending sector. The currencies to trade are the Swiss Franc, the German Mark, the Japanese Yen and the British Pound.
Interest rate futures are also good trending markets. T-Bonds represent long-term interest rates and Eurodollars are for short-term interest rates.

• In the energy complex, Crude Oil, Heating Oil and Natural Gas are good trading vehicles.
• In the food sector, Coffee, Orange Juice and Sugar are recommended.
• In metals, you can trade Gold, Silver and Copper.
• In agriculturals, Corn, Oats, Soybeans and Cotton are the best.

Volatility and Risk

Another important aspect of trading futures is your ability to manage risk. In fact, this may actually be the most important aspect of trading futures because it is by managing risk that you limit losses and preserve your capital.
The most important element of managing risk is keeping losses small, which is already part of your trading plan. Never give in to fear or hope when it comes to keeping losses small. Preventing large individual losses is one of the easiest things a trader can do to maximize his chance of long-term success.
Some markets are more volatile and more risky than others. Some markets are comparatively tame. If you have a small account, don't trade big-money, wild-swinging contracts like the S&P 500 stock index. Instead you may want to trade the "mini" contracts to keep risk in proportion to your capital. Many traders feel like they have to trade the big contract to make big money, when in a sense, the smaller contracts are actually preferable due to the liquidity and better risk management opportunities. Successful traders emphasize risk control over achieving big profits.
The biggest risks to commodity traders come from surprise events that move the markets too quickly to exit at their pre-determined give-up point. While you can never eliminate these risks entirely, you can guard against them by advance planning. Pay attention to the risk of surprise events such as crop reports, freezes, floods, currency interventions and wars. Most of the time there is some manifestation of the potential. Don't overtrade in markets where these kinds of events are possible.
Trade in correct proportion to your capital. Have realistic expectations. Don't overtrade your account. One of the most pernicious roadblocks to success is greed. Commodity trading is attractive precisely because it is possible to make big money in a short period of time. Paradoxically, the more you try to fulfill that expectation, the less likely you are to achieve anything.

What's your style?

Time, trend and volatility meet to help you define your trading style.
Do you want to be a long-term trader, also called a position trader? They hold positions for weeks or months. Do you want to be a short-term trader who holds positions only for a few days? There are even very short-term traders called day traders. They watch the markets throughout the day and always enter and exit their positions on the same day.
Each of the types of traders uses a different strategy to achieve his goals. Here are a few of the different styles of trading used in the futures market.

Scalpers

A scalper trades in and out of the market many times during the day, hoping to make a small profit on a heavy volume of trades. Scalpers attempt to buy at the bid price and sell at the ask price, offsetting their trades within seconds of making the original trade. Scalpers rarely hold a position overnight and often don't trade or make predictions on the future direction of the market. Locals and market makers often employ a scalping strategy, which is the most common source of market liquidity.

Day Traders

A day trader is similar to a scalper in that he or she also typically does not hold positions overnight and is an active trader during the trading day. A day trader makes fewer trades than a scalper, generally holds his positions for a longer period of time than a scalper, and trades based on a prediction on the future direction of the market.

Short-term or Swing Traders

A short-term or swing trader will hold his or her position for just a few hours up to a few days. The swing trader tries to predict and catch the short-term trends of the market.

Position Traders

A position trader might make one trading decision and then hold that position for days, weeks or months. Position traders are less concerned with minor fluctuations and are more focused on long-term trends and market forces.
Many traders have difficulty holding a position trade long enough to make it profitable. They find it psychologically easier to keep the timeframe short. While it may be easier to hold your position over the short run, many successful traders will say the best results come from longer-term trading.