Lesson du Jour
Question:
I cannot trade with "real money" as yet; however, how do I go about setting
up a paper trading account?
Answer:
You can paper trade various ways and it really does not require that you
have anything more specialized than a notebook to track your trades and
access to charts.
Begin by funding your paper trading account with the amount of money you
think you will really begin with, whether it is $2000 or $20,000. I would
suggest that you begin with no less than $5000 and $10,000 is even better.
Next you need to decide on which markets you are going to trade. The more
money you have in your account, the more markets will be available to you.
If you are trading with a $5000 account there is no point in becoming
familiar with a market like Crude Oil that has a margin of $3000 per
contract!
Assuming that you are a smaller trader, you will be most interested in the
lower margin markets like the grains, some of the meats, maybe a metal and a
currency or two. I would suggest you limit your scope to about 6 - 8
markets, as these will be enough to track on a daily basis.
Even real money traders rarely follow more than 8 markets...it just becomes
too cumbersome, as I'm sure you will find when you've got more than one
paper trade going at a time.
If you don't know which markets to choose from, maybe I could make a couple
of suggestions:
Corn, wheat, oats, or canola - these are good markets for traders of all
levels, but especially the beginner. The margin is not too high and the
markets normally act predictably and trend well. Corn, oats and wheat have a
tendency to move together (but not always), so trading all three can be
redundant. Oats have a tendency to "lead" the other two markets, so you
might want to watch it for cues as to what corn and wheat are likely to do.
One of the members (JeffK) trades Canola, and while I've never traded it
personally, it does seem like a good trending market with decent volume and
very low risk amounts. It is certainly a good "training wheels" type of
market to help you get a handle on placing orders and dealing with your
emotions without costing you a lot of money in the process.
Cocoa - a good market to make money in as a small move can add up to good
profits. Also can be a good market to lose money in for the same reason. I
don't mind cocoa, although I know people who have sworn it off. This is the
time to find out if it is for you...when it doesn't cost you real money.
Sugar - a good market because it is easy to get in with minimal risk;
however the abundance of support and resistance can make it confusing to new
traders. The tools in The Truth About Trading Support and Resistance manual
(http://www.tradershelpingtraders.net) will help you identify which
resistance is likely to be most influential.
Live Cattle - a decent meat market. Some new traders avoid the meats
entirely because of their ability to make huge ranges. Cattle is the
"safest" of the meat markets.
Cotton - can be a good market, but is capable of making large ranges. I used
to avoid cotton like the plague, but have become fonder of it in recent
years.
Soybeans - the Pork Bellies of the Grain complex. If soybeans are too
volatile for you consider trading one of the bean cousins, like soybean oil,
or soybean meal. They tend to mirror soybeans, but are generally less margin
and less volatile.
Silver - I like the metals; however gold can be a little rich for the small
trader. Silver mirrors gold - the poor man's gold. Some people like copper,
but I consider it too thin and margins too high for small traders.
Canadian Dollar/Australian Dollar - two of the more reasonable currency
markets. The margins are lower, but there is excellent money making
potential. Other markets like Swiss Franc, British Pound, and Japanese Yen
are good markets too but require much more margin and risk. All the
currencies have a tendency to move in the same direction anyway (opposite
the US Dollar) so it doesn't really matter.
The Mexican Peso is a very good trending market, but some people shy away
from it because of the lower volume (relative to other currency markets).
Personally I like the Peso and have had good results with it. It is another
market that allows you to trade with very small risk amounts.
Now that you have a paper account and a mix of markets to trade you need to
search the markets to find trades to make. Once you have found a trade you
like, write down your entry, your exit and your profit target - exactly.
If you are dealing with a broker, you can call and ask them if your paper
order had been filled on a particular day. Alternatively you can just look
at the charts and figure it out for yourself.
Sometimes you will need to see an intraday chart to know exactly when you
got your fill. Barcharts.com offer free intraday charts. Just follow the
commodity chart link and then click custom charts to alter the time frame
displayed to a 5 or 10 minute interval.
Track your trades day by day keeping a journal of your profits and losses.
Allow an extra two ticks on your fills and exits as this will simulate
slippage. Brokerage fees are usually $40 round turn per contract.
Make sure to note what you did right and what you would do differently the
next time.
See how well you can do but be honest. Cheating here will not help you in
the future. I'm sure you've heard it before, but nothing changes when you
trade with real money. If you can't do it on paper, you won't make it for
real. Trust me. I've been there.
If you don't already have it, you might want to consider using Gecko's Track
'n Trade Pro. As the name suggests the software not only provides charts but
also "tracks your trades". You fund a fictional account, place your orders
and the software will automatically update your position day by day. It
really is phenomenal software. If you are halfway serious about trading you
should check it out. It is a legitimate tax deduction too. ;-)
You can get a free 30 day trial by following this link: http://www.trackntrade.com/demo/?abbr=SENFT
There is also paper trading software out there and on the internet which is
supposed to simulate trading; however in my opinion it is not realistic for
most small traders.
Some of the simulators only allow you to trade the e-mini and others start
you out with a $50,000 account. This is great if you want to trade the
e-mini, or if you are trading with a $50,000 account, but this is not the
case for most traders.
Anyway, that's paper trading in a nutshell. Hope it helps a little.
Got a question that
needs answering like an itch you can't scratch? Send it along to me at
Erich@tradershelpingtraders.net
and I'll be happy to try and clear things up for
you. PS. Don't skip this part of your education. Most
traders hurry through paper trading only to get killed in the markets. Don't
make this mistake.
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Currencies Market
Overview
The Australian Dollar was the big disappointment this week as the market
gapped our intended entry, only to post a very impressive rally for the
remainder of the week. The setup was solid, but the opening parameters
kept us out of the trade. Next time I might just run the trade without
the opening parameters, especially if the setup is as strong again.
The British Pound, EuroFX, Canadian Dollar, Swiss Franc and Japanese Yen
all followed suit and continued higher last week as well. We're
technically in a bull market in the currencies now and will continue to
focus on buying opportunities. The Peso is the only market against
significant long term resistance, so we'll have to see how the market
handles that.
US Dollar Index
We did manage to catch a nice little move in the US Dollar Index last
week as the market fell rather abruptly through support. This was a good
little trade because we had the market cornered between support and
resistance which made buying/selling the market easy. Once we identified
the support and resistance areas we simply bracketed the trade and let
the market show us the side we should take.
Did you notice the support and resistance? The support came on
Wednesday's low at 8611 and the resistance at the 8667 high from
Tuesday. While the 8670-ish line was a little more obvious, both lines
"pop" out when you draw in their respective trendlines. This is exactly
why a trendline is such a powerful tool: it helps you identify the
stronger support and resistance points. I left the old trendlines in
place on the chart so you could see what I was doing with the trade.
The first profit target for the trade is support at 8475 – 8480, but
rates have come down a little more quickly than expected and now RSI is
very near a third testpoint. As such I would probably expect a reaction
here on Monday which might send rates higher; therefore we need to focus
on stop management.
Technically the "ideal" stop placement is at breakeven, but with a
little over $500 in profit per contract as of the close, you might want
to consider something tighter, especially if you're trading multiples.
The intraday chart is showing resistance at 8543 so you could place your
stops just above here (above 8550 would be ideal) to protect more
profit.
What I think we'll see happen is a short term reaction to the trendline/RSI
support before the next decline, but how you plan on handling the
"reaction" is up to you and your pocketbook.
CONTINUATION of Short December US Dollar Index from 8599
Exit Order: breakeven (although I probably go 8547 – 8551)
Approximate Risk Exposure: $0 per contract
Profit Target: 8477
Approximate Potential Profit: $1220 per contract
RRR: n/a
Degree of Risk: Moderate to HIGH
Grains Market
Overview
A bit of a choppy week in the Grain complex considering how quickly these
markets rallied just the week before. We managed to pick up a few dollars in
a wheat trade; however corn is still too wild to trade. Given the current
trend it seems obvious that prices will continue higher, but I would like to
see prices settle down a bit first. Arbitrarily buying into the markets at
any point might be hazardous to your account.
Oats were a little more subdued and gave us an excellent buying opportunity
early in the week, but here too the opening gap kept us on the sidelines.
Sometimes avoiding a gapping market is a good thing and sometimes it ain't.
This was one of the latter as the market continued to push higher into the
weekend.
I'm not sure how much higher it will go however, as RSI dipped as Friday's
session rallied. This was true of many of the grain markets, and is a sign
of divergence and instability. I wouldn't be surprised if we saw prices fall
off on Monday as a result. Regardless it's enough to keep me on the
sidelines for now.
For a nice change the Bean complex was very cooperative last week allowing
us to pick up a $1000 profit in our Soybean contracts as well as giving us
decent gains in Bean Oil and Soy Meal.
Soybean Meal
In spite of getting off to a bit of a rocky start, Soy Meal prices continued
to rally into the weekend. We're currently long from 183's resistance;
however the gap 'n fade day on Friday has me a little concerned about what
prices will do on Monday. RSI is also quite overbought and hooking a little
lower. This too might cause prices to fall off on Monday.
The ideal stop placement for the trade is under Thursday's low as this gives
us the greatest flexibility on the trade; however with the other factors
taken into account it might be prudent to bring the stops in tighter still
and make the market perform on Monday or stop us out with more profit.
It's very much a judgement call however, as the trend is pretty strong and
should continue higher, but even a short term pullback could see prices
easily fall to the 183 support before recovering (and stop us out at/near
breakeven).
CONTINUATION of Long December Soy Meal from 183.1
Exit Order: 183.9 (or 186.3)
Approximate Risk Exposure: $0 per contract
Profit Target: 194.90
Approximate Potential Profit: $1180 per contract
RRR: n/a
Degree of Risk: Moderate to HIGH
Soybean Oil
Bean Oil paints a similar picture to Soy Meal. Here too the market is in a
good uptrend and likely to continue higher for the short/long term; however
RSI is hooking lower which could see prices fall off this week. At the very
least you would want to have your stops at breakeven; however if you are
trading multiple contracts you might consider making the stops tighter still
as we have nearly $400 in profit per contract as of the close.
As usual you need to let your account be your guide; however if you can
stand the risk I would recommend leaving the stops at breakeven and trying
to ride the rally higher. Bean Oil is likely to follow the rest of the Bean
complex around and right now that looks like prices will continue higher.
CONTINUATION of Long December Bean Oil from 2687
Exit Order: breakeven
Approximate Risk Exposure: $0 per contract
Profit Target: 2853
Approximate Potential Profit: $996 per contract
RRR: n/a
Degree of Risk: Moderate
The charts in this publication are all made using Gecko's Track 'n
Trade charting software. You can get a demo for free
here. The rest of the Markets
in all sectors are covered in the Subscriber Edition.
This is only a small sample of
the markets we cover!
For a detailed analysis of ALL of the markets
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If you have any questions at all about any of these chart
lessons, please feel free to ask at the
futures trading forum or
click here to email us. You can also chat with Erich and Tom live every Wednesday evening at 9:30pm eastern in
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watch the blog!
Tom's Trades for the week -
watch the blog!
Take
care, and good trades to you for the coming week!
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