Happy Holidays From PitNews!

Vol 5 No. 2 December 2010

PitNews.com Magazine December 2010

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2 Peak Performance in Trading by Neal Weintraub

The Big Kahuna by Dr. Scott Brown

PitNews.com Magazine December 2010

by Neal Weintraub

1. Disciplined Trader: You make the trade, take the loss, and continue trading. You feel that one losing trade does not make you a bad trader. You have the discipline to stick with your chosen system.

2. Doubter: You sell as signaled, but you think, “I’m a failure. These things always happen to me.” These thoughts direct blame upon yourself and result in a loss of self-confidence.

3. Blamer: You blame having to take the loss on someone or something else. You think, “The technical indicators were wrong. There’s a ‘glitch’ in the computer program. The advisor doesn’t know anything about S&P futures.” Such feelings are dangerous. Responsibility is out of control, someone who has relinquished responsibility for making decisions. If you hear yourself making remarks like this, get out of the markets until you can regain perspective and objectivity.

4. Victim: A variation on the blamer is someone who

over-personalizes losses from one trade to the next. You say to yourself, “The market is never fair to me. Fate is against me.” This “poor me” attitude is a setup for failure. The “victim” has given up his/her inner focus of control and doesn’t know how to control his/her behavior.

5. Optimist: You think the trade went against you because you held onto it too long. You think, “I know it will bounce back. To hell with what the system says. Margin money isn’t real anyway. Maybe if I double upon my losses, I’ll win it back.” Stop trading and think about what has precipitated your unrealistic expectations.

6. Gambler: Gains and losses are irrelevant to you. The excitement of being in the market is paramount to you. A lack of concern for risk is a sign that you are not trading out of your strengths. You are being driven by addictive needs…the mark of a gambler. Gamblers Anonymous may be your best bet.

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PitNews.com Magazine December 2010

7. Timid: You follow your system and enter a trade logically and objectively. But once the trade is on, you panic and get out too soon before you get a sell signal, even when you take a profit. As you trade, repeated premature trades made ahead of signal reinforce your fears. You become ashamed of your lack of success. You are setup to feel more out of control, as though you are caught in a vicious cycle.

Do any of the extremes in thought, feelings or behaviors exhibited by the undisciplined traders describe you? If so, these feelings may be significant for you. Undisciplined traders experience a sense of being driven and feel forced to react in unproductive ways. They trade out of a sense of unmet needs or feelings of insecurity, rather than a feeling of self-esteem resulting from rational, consistent use of a trading system.

Think about the above trading styles. Are any of them becoming a pattern with you? Check your goals.

If your trading style develops undisciplined patterns, you may need help to restore your objectivity. Are you

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trading for the right reasons? Are you clear about how much money you are willing to devote to specific positions, win or loss?

Look for patterns of thoughts, feelings and behaviors when you are unsuccessful in your trades. Don’t keep trading if you see repetitions in your errors. A loss of your internal focus of control, giving up responsibility for decision making or loss of self-confidence are yield signs. You have lost a productive, trading style.

Step out of the markets to explore what factors may be interfering with your efforts to achieve your goals. Re-examine your goals, your journal, any negative thoughts, and finally, what stresses may be impeding your achievements. How you handle your losses is as important as how you handle your wins…

PitNews.com Magazine December 2010

The Big Kahunaby Dr. Scott Brown

Highlights from this article:

• There are 21 markets that are meaningful to you.

• Determining which groups you can trade.

• You need master only a few markets.

I live semi-retired from my investments in Puerto Rico. It's winter so we've gone from Snorkeling to Surfing season. I've been doing a lot of surfing lately and the language in this article will be reflective of that. The stupidest thing I have ever read is the 5% Money Management rule. 5% of what? Ask a big guru that question.

They'll pull something out of their rear end (I call this the "pull it out of your rear-end rule"). They'll look off into space for a moment and glibly reply; "of your account!" They'll follow it up with a look as if "you" are stupid.

The 5% rule is meaningless without one key component for futures trading. I call it the 45%

percent rule. This rule says, "never risk more than 45% of the initial margin on any trade…never ever! This is the key that assembles a steel trap money management strategy.

Here's why.

Initial margin on CBOT Mini Corn contracts is $297. If you take 45% of that you will be forced to set your initial stop loss at $133.65. Now take the best trading tool on the planet, "Track n Trade Futures Live" open up the CBOT Mini Corn chart. Use the money tool and pull it below the current market price until it reads $133.65. Do the same above the current market price. Use the drawing tool to draw a line at each level.

Guess what you have?

These two lines are the furthest any trader can ever place their initial stop loss when jumping into the market. These are your 45% LOSS LIMIT LINES. Do not ever, ever set your stop loss further away from your entry point than this or you'll be chewed up like a

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PitNews.com Magazine December 2010

by Carley Garner

Does a Change in the Weather Mean a Change in Your Trades?

www.TracknTrade.com/Seasonalswharf rat on a hurricane blown winter reef.

Now think about this 5% thing. If you express 5% as a decimal it becomes 0.05. If you take the inverse you will get 20 because 5% is one twentieth of 100 percent.

Hmm… so that means that a 5% rule means that you give yourself 20 tries at entering the market to ride a big movement…a Kahuna price wave.

Like the one I rode in the EUR/USD from November last year to early summer that grew the account from just over $500 to just over $5,000. Yah, those are the moves that make people rich, not the chump change nickel and dime intermediate moves that grind your account to dust and make your broker richer than Midas from giving him your account in commissions.

Anyway, if you simply multiple that maximum allowable loss in mini corn of $133.65 times 20 you'll see that you have to start trading Mini Corn with a minimum account size of $2,673.00.

To have a steel trap money management system all you have to do is use what I just explained and only trade the most liquid futures contracts.

Here they are.

A big advantage of futures trading over stock trading is the fact that you only have to watch a handful of contracts to be successful. There are over 15,000 stocks traded in the U.S. alone. The worldwide futures market is slight in comparison where all futures contracts total just a few hundred.

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www.StopLossSecrets.com

PitNews.com Magazine December 2010

And of these few hundred futures contracts but 21 are worth your attention. If you're going to become a successful futures trader you have to first decide which markets are best for your bankroll.

The futures markets fall into two major categories. First there are physical raw materials for production of everything we consume in our modern economy; grains, meats, metals, fuel for energy, and agricultural products called "softs" that don't fit the meat or grain category. These are commodity futures.

The second group deals with financial assets needed to fuel the engines of growth in our world economy. These financial futures include bonds, stock market indices, and currencies.

Here's the handful of markets you can safely trade (Exchange: Symbol) …

The 21 Worthwhile Futures Markets Start With Grains!

The grains futures markets put bread on your table, tortillas around your tacos, and vegetarian meats in your diet. Just a handful of contracts here are worth looking at. Soybeans (CME Group: S), wheat (CME Group: W), and corn (CME Group: C) make up the 3 contracts with sufficient liquidity to trade.

The rest, especially oats, are illiquid. Illiquid means that there isn't enough activity among traders to develop a strong market in terms of trading volume and open interest. Open interest is the number of contracts sellers have opened with counterparty buyers. Trading volume is simply the number of futures contracts changing hands every day.

In the meats there are only 3 commodity markets worth watching; pork bellies (CME Group: PB), lean hogs (CME Group: LH), and feeder cattle (CME Group: FC). The hog and pork belly markets are where you can place your bets on price changes of pork chops and bacon in your local supermarket. The feeder cattle futures contract is one of the best examples of what economists call a "perfectly competitive market" where forces of supply and demand interact in equilibrium to determine price.

The 3 most important metal markets are copper (COMEX: HG), gold (COMEX: GC) and silver (COMEX: SI). These are the only markets you need monitor to know what metal prices are doing. Copper is an industrial metal used in wiring homes and has a vital link to the worldwide housing market. Both precious metals gold and silver used to be linked to currencies but that ended in 1972. Today speculation is the major force in the precious metals markets making them highly volatile and unpredictable in the short run.

Perishable and semi-perishable food stuffs are called softs. There are but 5 markets worth trading in this group with sufficient volume and open interest; orange juice (ICE Futures: OJ), cocoa (ICE Futures: CC), sugar #11 (ICE Futures: SB), coffee (ICE Futures: KC), and cotton #2 (ICE Futures: CT).

There are just 2 energy contracts that are worth your while; light crude oil (NYMEX: GCL) and natural gas (NYMEX: NG). All other futures contracts in this commodity group are derivatives of light crude oil or simply to illiquid to trade.

Financial Asset Futures Put the "C" In Capitalism

In the financials you need focus on just 2 contracts to see the entire picture; the 30 year U.S. T-bond, in trader slang called the long bond (CME Group: US), and the Eurodollar contract (CME Group: ED). With the long bond you're betting on interest rate changes in the United States. The Eurodollar contract, on the other hand, allows you to speculate on changes in overseas interest rates.

Towards the end of the last century folks figured out that it would be nice to have futures contracts on stock indices to help portfolio managers hedge their bets in the stock market. There are just 2 contracts in this market worth watching; the S&P 500 (CME Group: SP), and the NASDAQ (CME Group: ND).

There are only 3 currency contracts worth paying attention to; the euro FX (CME Group: EC), Japanese yen (CME Group: JY), and British pound (CME Group: BP). That's because these are the three most heavily traded currencies.

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PitNews.com Magazine December 2010

A secret Forex trading advantage to these markets is that currency futures offer option contracts that can help you. Forex is another way to invest that's closely related to futures trading but the contract sizes and margins are different.

In Forex you can speculate on the same price movements on much less margin than in the currency futures. You can also get a guarantee that your Forex account won't go negative.

How to Decide Which Futures Contracts You Can Trade!

Traders generally fail because they start out undercapitalized - they initially fund their account with too little mullah to safely trade.

Let me explain agan…

There's a hard and fast rule to futures trading. Limit your losses to no more than 45% of the initial margin of any futures contract you trade. After that you must decide to trade a prudent money management rule.

If you risk just 5% of your portfolio you'll give yourself 20 tries to beat the market. Some "gurus" say to risk no more than 2% (I don't agree with the 2% rule but you'll see this in places like Jack Schwager's "Market Wizards" book).

With a 2% rule you're giving yourself 50 chances to beat the market. But hey, if you need 50 tries to beat the market, your trading is pretty crappy!

With this information you can determine which markets you can safely trade by figuring in the margin for each of the 21 most viable futures markets. You can also trade mini-contracts for a lot less margin than the full sized contract. So in the table (located on this page) I've added information wherever a mini version of a futures contract is traded.

Look at the "Capital Needed 5%" column above. You can trade a mini corn contract for as little at $2,673 in

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PitNews.com Magazine December 2010

your trading account and have 20 tries at beating the market as long as you don't let yourself lose more than $134. But you need a quarter of a million to safely trade the S&P 500 index futures contract.

You can see why successful futures traders master just a few markets at a time… they don't run around trading all the markets willy-nilly. Not only does it take research, Monte Carlo back testing, and patience but also the right amount of trading capital to succeed in this game of chance! Now the trick is timing the market to catch a price wave that returns back 20 to 40 times your initial allowable loss.

If you follow the table above you'll be ahead of 95% of all people who begin trading futures. And you'll be one of the few starting out with a true advantage from the start!

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