Day Trading the MiniSized Dow Futures

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Trading Strategies for CBOT Agricultural and
Precious Metals by John F. Carter
In Cooperation with POLARIS MAN FINANCIAL Taipei,
October 12, 2006
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Outline

• Today I am discussing both long and short term
  trading strategies I employ in CBOT Agricultural
  and Precious Metals futures contracts.
• These strategies have been developed over a 20
  year trading career, and are the same strategies
  I use as a CTA (Commodity Trading Advisor) and
  Principle in Razor Trading, a private money
  management firm.
• I started off as stocks and options trader, but
  in 1999 switched over to mostly futures and
  currencies due to better and more consistent
  trading opportunities.
• I also trade the CBOT mini-sized Dow contract
  (symbol YM) and I make comparisons to that
  index.

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• Part I
• CBOT Agricultural Futures
• Trading Strategies
• __________________________________
• Contracts Corn, Wheat, Soybeans
• Pit Symbols C, W, S
• Electronic Symbols ZC, ZW, ZS
• I usually trade electronic now that they are
  available

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Trader Perspective How do the AGS work?

• Contract specification for AGS is just like the
  emini SP (ES) and mini-sized Dow (YM) futures.
• In the emini SPs, 1 quarter point tick US
  12.50 and 1 full point US 50.
• In the AGS, 1/4 cent tick US 12.50 and a full
  1 cent move US 50. This is for Corn, Wheat
  and Soybeans.
• The AGS have a similar cent movement each day
  that is close to the point movement in the YM
  and ES.
• 1 Full ES point 10 YM points and both 50
  move.
• So 1 full cent in the AGS is like catching 1 ES
  point or 10 YM points.

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Trader Perspective How do the AGS work?

• Maintenance Margin on ES and YM 2,000.00
• Maintenance Margin on AGS
• Corn 400
• Wheat 700
• Soybeans 750
• A full 1.00 move in the AGS equals 5,000 per
  contact, or the same as 100 ES points or 1,000 YM
  points.
• If you are comfortable with the emini SP and the
  mini-sized Dow, then there is no reason to trade
  the mini-AGS.
• This would be like trading a mini of the emini
  on the stock index futures.
• Just trade the full-sized agricultural futures
  contracts.

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The first question is, do grains provide traders
with volatility? Yes, but there are also times
when grains are quiet. Key is to have different
trading strategies for both instances.
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• Contract months are different than ES and YM,
  which trades each quarter. AGS have more trading
  months each year.
• Corn Jul, Sep, Dec, Mar, May
• Wheat Jul, Sep, Dec, Mar, May
• Soybeans Jul, Aug, Sep, Nov, Jan, Mar, May
• If you are unsure what the front month is, just
  check the CBOT website

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Key Points

• There are times when AGS trade in a slow, narrow
  range.
• And there are times when they explode
• When the AGS are quiet, they all generally move
  in about the same range.
• When the AGS explode Soybeans generally move 3
  to 4 times as much as corn or wheat.

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Trade The Markets (TTM) TrendWhat is it ?

• I use this indicator a lot, so here are a few
  slides on how it works.
• Modified Version Of the Heikin-Ashi Technique.
• Its just a easier way to look at candle sticks.
• The heikin-ashi method (heikin means "average"
  or "balance" in Japanese, while ashi means "foot"
  or "bar") is a visual technique that eliminates
  irregularities from a normal chart, offering a
  better picture of trends and consolidations.

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Trade The Markets Trend how is it calculated?

• The heikin-ashi candlestick technique uses
  modified open-high-low-close (OHLC) values and
  displays them as candlesticks but I had them
  converted to paint bar studies . The modified
  values are computed using these definitions
• haClose (OHLC)/4
• haOpen (haOpen (previous bar) haClose
  (previous bar))/2
• haHigh Maximum(H, haOpen, haClose)
• haLow Minimum(L, haOpen, haClose)

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Regular Candlestick Chart
Same Chart with TTM Trend
Blue series of bullish candlesticks. Red
series of bearish candlesticks
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• Technicals Trading
• Intraday Trading Techniques

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Intraday Trading Techniques 21 EMA Trend Shift,
15 Min Charts and GAPS

• Use 14 period RSI (Relative Strength Index)
• Add 21 EMA (Exponential Moving Average)
• TTM Trend or Candlesticks
• Use a 15 minute chart of the pit session so you
  can see the gaps.
• Play the markets in the direction of the trend as
  they close above or below the 21 period EMA
• Look for gaps to fill within 5 trading days
• On a close through the 21 EMA, go with the trade,
  4 cent stop away from 21 EMA.
• Exit Wait for extreme RSI reading, then exit
  when TTM Trend shows two opposite color bars in a
  row

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• RSI TREND BREAK
• This is a play I use in Gold and YM and it works
  great on the AGS too.
• I use Daily and Weekly Charts

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Daily RSI Play Mechanics AGS

• Use 7 period RSI
• Daily and Weekly Charts
• When RSI gets overbought or oversold, draw
  trendline
• Go long on close above trendline or short on
  close below trendline
• Stop is a close back behind the trendline
• EXITS TTM Trend Change is good or waiting for
  RSI to reach the other extreme
• Also good to scale out of this trade as it goes
  in your favor.

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Metals

• Part I Fundamentals
• World Demand Outlook for Gold and Gold Futures
• Part II Technicals Trading
• Wheres the next price entry in Gold Futures?
• Trading and Hedging Strategies for Gold Futures,
  both long and short term
• Additional Resources

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Why is Gold Moving Higher?

• U.S. Federal Reserve and other central banks with
  high deficits want to continue to print money
  and keep interest rates low so that consumption
  continues to boom as long as possible. This also
  helps to finance the bigger countries attempts to
  control the earths remaining raw materials.
• But high budget deficits and debt levels in the
  United States, Japan and Europe will eventually
  force a correction through a surge in real
  interest rates.
• This leads to slowing economic growth, falling
  stock, bond and property prices, and accelerating
  inflationan ideal mix to trigger more gold
  buying.

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China Gold

• Gold consumption in China is huge, but is still
  low on a per person basis at only 0.25 grams
  per person.
• This is versus 0.75 grams per person in Taiwan,
  1.00 grams per person in India, and 2.75 grams
  per person in Singapore.
• The potential in China is tremendous as over a
  billion people add to their gold reserves.
• This amount will increase as the Renminbi is
  allowed to float more freely against the dollar.

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China Gold

• Its been suggested that a rate of RMB 5 might
  emerge over the next few years.
• This would be a disaster for many of Chinas
  fledging industries, but give increased
  purchasing power to consumers.
• In this case, China would look to import more
  gold, as a dollar denominated asset, as it would
  be 40 cheaper in RMB terms.
• Also, for both China and India, the main reason
  gold demand is so strong is that the metal
  represents the only store of value for the
  general population of the two countries.
• Because of the non to low-convertability of the
  Indian Rupee and Chinese RMB, locals are always
  susceptible to see their savings wiped out by a
  devaluation of the currency.

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Other Gold Demand

• In addition to the potential for China gold,
  demand for gold jewelry has grown largely in
  India.
• Sale of gold bullion, for both jewelry and
  accumulation, is at record levels.
• Gold demand is also strong right now due to
  seasonal factors typically HALF of global
  jewelry sales occur in November (Indian wedding
  season), December (Christmas), and January (Asian
  Lunar New Year).
• Gold prices generally peak in February and nearly
  every trough is in July-August.
• Whats the best way to take advantage of this?
• CBOT Electronic Gold Futures.

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• Volatility Plays
• CBOT Gold
• ZG

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Volatility Play Key Points

• There are times when gold trades in a slow,
  narrow range.
• These are the best times to take positions,
  because Gold is building up energy for its next
  major move.
• This creates short and long term trading
  opportunities in gold futures.
• It also tells holders of gold bullion when to use
  gold futures to hedge their gold holdings against
  substantial price declines.

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Volatility Play Key Points

• But how does a trader know if the next major move
  is going to be up or down?
• By using Bollinger Bands and Keltner Channels
  with a Momentum Oscillator.
• Keltner Channels stay the same, while Bollinger
  Bands expand and contract with volatility.
• Momentum Oscillator indicates if market movement
  will be up or down.

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Volatility Play Key Points

• When the Bollinger Bands go inside of the Keltner
  Channels, that is an alert that a trade is
  setting up.
• Once the Bollinger Bands come back outside of the
  Keltner Channels, a trade is triggered.
• Use a Momentum Oscillator to tell you whether to
  go long or short.
• If above zero, long.
• If below zero, short.

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GOLD 240 Minute Chart
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Volatility Play Key Points

• Developed this into an indicator to make it
  easier to read and follow.
• Red dots mean Bollinger Bands are trading inside
  of the Keltner Channels.
• First green dot after red dots mean a trade is
  triggered.
• If histogram is blue, go long, if red, go short.
• Stay in trade until histogram loses momentum by
  changing color for 2 bars in a row.

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GOLD 240 Minute Chart
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Volatility Play Summary

• The Volatility Play, or Squeeze is a
  measurement of the relationship between the
  Bollinger Bands and the Keltner Channels with
  their standard settings (20/2 20/1.5).
• And a 12 period Momentum Oscillator
• It looks for the times when the Bollinger Bands
  trade in between the Keltner Channels.
• Works on all time frames.

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• Volatility Plays
• Shorter Term Trading Examples

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Volatility Play Key Points

• For shorter term trading, I like to use the
  following chart time frames
• 240 120 minute charts for multi-day plays
• 60 30 minute charts for multi-hour trades
• 15 minute charts for quick day trades
• Electronic fills are much fasterI dont want to
  wait a long time to get my fill from the pit.

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GOLD 240 Minute Chart
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GOLD 240 Minute Chart
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GOLD 120 Minute Chart
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GOLD 60 Minute Chart
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GOLD 15 Minute Chart
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Volatility Play Key Points

• STOPS
• 240 120 minute charts 6.50
• 60 30 minute charts 4.50
• 15 minute charts 2.20
• TARGETS
• Stay all in until momentum runs out
• Or, scale out every 2.00 until momentum runs
  out

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• Volatility Plays
• Longer Term Trading Examples

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Volatility Play Key Points

• For longer term trading, I like to use the
  following chart time frames
• Daily charts for multi-week trades
• Weekly charts for multi-month trades
• Monthly charts for yearly trend changes and
  position trades
• These are for both Trading opportunities and
  Hedging physical gold holdings
• www.tulving.com

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Daily Chart shows long entries
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Daily Chart shows short signal/hedging opportunity
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Daily Chart shows short signal/hedging opportunity
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• Additional Information

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Attitude of a Trader

• Right attitude will make or break a trader
• Biggest obstacles are Greed, Fear and Euphoria
• Greed Kills 10,000 account, 500 a day
• When you then go for 750 or 1000, greed takes
  over and mistakes kick in overtrading, not
  sticking to parameters, yelling at screen.
• All you can eat buffet no reason to overload
  your plate on 1 trip you can keep going back

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Attitude of a Trader (cont)

• Euphoria is worse than Greed
• Things are going great so double up, bet it
  all!
• This is like seeing two flies on the wall and
  betting which one will walk faster.
• It might work a couple of times, but it only has
  to not work once for you to lose all of your
  stake.
• Develop a plan of consistency and stick to it.

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Martha, my two-foot long Arrowana, reminds me
what happens to traders Who dont use proper
money management techniques.
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Newsletters Market Direction Software Indicators I
nstruction
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TTM Futures NewsletterReal Time Futures Plays
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Book released December, 2005
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QA / Contact Information

• John Carter
• Austin, Texas USA
• www.TradeTheMarkets.com
• jcarter_at_tradethemarkets.com1 512-266-8659
• CBOT
• www.cbot.com
• wwwcomments_at_cbot.com