0508futuresmag PDF

Short-term E-mini trades 40
New look at ag fundamentals 48

www.futuresmag.com
May 2008
METALS
FEVER
US $6.95 CAN $8.95
f
Reproduction or use of the text or pictorial content in any manner without written permission is prohibited.
Copyright 2008 by Futures Magazine Group, 222 S. Riverside Plaza, Suite 620, Chicago, IL 60606
CH
OF ICAG
TH O
pa E W ON
ge
60 OR TOP
LD
?
PAGE 26
Contents
MAY 2008 VOLUME XXXVII NUMBER 5
26
cover story
Metals: Precious
little supply
By Steve Zwick
ILLUSTRATION BY:
Prices for gold, platinum and palladium

have skyrocketed in the last year,
and many wonder if commodities
were in a bubble that has now burst
and if gold is on its way back down.
We take a look at whats ahead for
global metals markets.
PICTURED: JIM ROGERS
EQUITY TRADING TECHNIQUES
TRADING TECHNIQUES
32 What goes down...
36 Idealized models for real profits
By James A. Hyerczyk
By Valerii Salov
44 Silver shining brightly

By David Morgan
Silver offers great opportunities to

How to use the hindsight provided by
Heres how to use Gann Theory to
profit in the metals market.
market prices to improve
break down stocks in the Dow Jones
Heres why and how.
overall returns.
U.S. Home Builders Index and gain
insight into a possible housing market
40 Five minutes to fame in the E-mini 48 Grain bears: Waiting for a miracle
recovery.
By Al Brooks
We explore a simple approach to

profitability using price action and
a basic five-minute chart.
Note: See Al Brooks online presentation,
Short-Term Trading Strategies That Work,
at the FuturesI-Tradeshow.
Register for free at futuresmag.com.
By Bill Biedermann
Unless powerful forces intervene,

the bull market for grains could
continue. Heres a closer look at the
acreage dilemma in the
United States and how to take
advantage of it in your trading.
Contents Continued, page 8

Futures (ISSN 0746-2468) is published monthly by The National Underwriter Co, DBA Highline Business Media, 5081 Olympic Blvd., Erlanger, KY 41018-3164. Subscriber rates in the
United States, are one year, $68; two years, $118. -All other areas, $121 per year. International online version also available; call (800) 458-1734 for details. All orders from outside the
United States must be paid in U.S. dollars by international money order only. Single copies $6.95 in the United States, $8.95 in Canada. Periodical postage paid at Covington, KY and
additional mailing offices. Postmaster: Send address changes to Futures, PO Box 2162, Skokie, IL, 60076-7822. Allow four weeks completion of changes. To Order: call (800) 4581734 or write Futures, PO Box 2162, Skokie, IL 60076-7822. CPC IPM Product Sales Agreement No. 1254545. Canadian Mail Distributor information: EMI, P.O. Box 25058, London, ON N6C 6A8, Canada. Printed in the
USA. COPYRIGHT 2008 by Futures Magazine Inc. All rights reserved. Reproduction or use of the text or pictorial content in any manner without written permission is prohibited. CONTRIBUTORS: Return postage must accompany unsolicited
manuscripts, photographs and drawings if return is desired. No responsibility is assumed for unsolicited material. Futures Magazine Inc. believes the information contained in articles appearing in FUTURES is reliable, and every effort is made
to assure its accuracy, but the publisher disclaims responsibility for facts or opinions contained herein. MICROFILMS and MICROFICHE of all issues of FUTURES are available from University Microfilms Inc., 300 N. Zeeb Ave., Ann Arbor, MI
48106; Information Access Co., 11 Davis Drive, Belmont, CA 94002. The full text of FUTURES: News, analysis and strategies for futures, options and stock traders also is available in the electronic versions of the Business Periodicals Index.
FUTURES | May 2008
Contents continued
group publisher / editorial director
Ginger Szala
D E PA R T M E N T S
10 Editors Note Second to none
20 Hot Commodities Gasoline, euro,

soybeans
12 Trendlines Treasury sparks debate

U.S. Futures Inc. Broker takes
twin hits New clearing landscape
22 Options Strategy The 2-to-1 ratio
contributing editors
James T. Holter
Murray A. Ruggiero Jr.,
art director Carl Walanski
spread
advertising coordinator Dan Hengehold
Chartview
24 Forex Trader Extreme market

16 Trading Places Lyall moves to ICAP
managing editor Daniel P. Collins

associate editor Chris McMahon
associate editor Christine Birkner
editor at large Steve Zwick
conditions
66 Dateline May and June
national sales manager

midwest/southeast sales
Chris Casey
phone: (312) 846-4606 fax: (312) 846-4638
e-mail: ccasey@futuresmag.com
17 Market Strategy Improve your odds

trading gold
68 Ad Index
74 Trader Profile Tom James: A matter
18 Managed Money Review
of degrees
F E AT U R E S
FUTURES 101
TRADE TRENDS
52 Ag fundamentals: Old and new
60 No more second city

By Chris McMahon
The growth of the CME Group
has Chicago at the top of the futures
and derivatives world. Heres a look
at how the merger went and a peek
at whats to come from the
exchange giant.
By Christine Birkner
Ag fundamentals are more than just

weather and USDA reports. Here are
the new ones to watch.
MANAGED MONEY
56 Alternatives for retail
By Daniel P. Collins
While the universe of alternative
investments is often out of reach for
retail investors, here are a few options.
For reprints of 500 copies or more and e-prints of FUTURES articles,

please contact PARS International at reprints@parsintl.com or (212) 221-9595.
east/west coast sales manager

Tracey Goldvarg
phone: (312) 846-4611 fax: (312) 846-4638
e-mail: tgoldvarg@futuresmag.com
classified & web sales manager

Jean Berger
phone: (312) 846-4626 fax: (312) 846-4638
e-mail: jberger@futuresmag.com
office manager & sales assistant
Kate Mullen
phone: (312) 846-4600 fax: (312) 846-4638
international sales representatives
Europe: Carolyn Hicks
London, England
phone: (44) 1843 280 728
e-mail: carolyn.deriv@tives.co.uk
futures magazine group office
222 S. Riverside Plaza Suite 620
Chicago, Ill. 60606
phone: (312) 846-4600; fax: (312) 846-4638
futures circulation offices
P.O. Box 2162
Skokie, Ill. 60076-7822
Circulation Service
phone: 1-(800) 458-1734 (U.S. only)
phone: (847) 763-9252 (outside of U.S.)
fax: (847) 763-9587
Calls accepted 8:00 am-4:30 pm CST
e-mail: futures@halldata.com
international subscription reseller
Ken Masunaga phone:(81) 03-3664-9271
(Japanese language version available)
page 36
A UNIT OF
chairman and ceo William F. Reilly
president and ceo Andrew L. Goodenough
chief financial officer Thomas M. Flynn
executive VP & group publisher Thomas A. Fowler
FUTURES | May 2008
Second to none
EDITORS NOTE
y office has a view looking

across the Chicago river at
the CME Group building,
and I can see the top part of the tower,
with Ceres above, of the Chicago Board
of Trade (CBOT). Though most trading has gone electronic, its always comforting to see the buildings and know,
especially now, that they both continue
to brim with activity...either trading wise or plotting their future.
That these two great exchanges and former competitors could
meld together with few glitches is one of their greatest accomplishments. The move of the CME floor over to the CBOT has proceeded well, and should be complete by the end of May. Further, the
CBOT electronic products move to Globex went smoothly, according to users. Now with the CBOT gold contract sold to NYSEEuronext, the CME Group is unencumbered and looking to bring
the New York Mercantile Exchange (Nymex) into the fold. If that
is approved by Nymex members and regulators, the CME Group
would capture about 98% of the futures trading business in the
United States, and about 42% of futures trading globally. Although
always a player in the global scene, the new CME Group, even
without Nymex, is a major factor in the financial markets, but with
Nymex, it pretty much would account for all futures trading in the
United States. As the United States trades the most derivatives in
the world, that is no small feat. (See No more second city, by
Associate Editor Chris McMahon, page 60.)
Now that the dust has settled from the merger aside from some
Department of Justice (DoJ) hiccups and an options exchange permit
lawsuit the CME Group needs to keep moving, something akin to
a shark in, well, shark-infested waters. At a panel at the Futures
Industry Association meeting in Florida last March, a major topic
addressed was the clearing model of the global exchanges. Why clearing has moved to the front seat of discussion is due to a comment
C U S T O M E R
Special supplements are published three times a year; the Economic

Calendar, in January; the Guide to Computerized Trading, which provides a list of software database, Internet and computerized services, in
July; and a trading issue in September. For credit card orders, send
information to Futures Magazine, P.O. Box 2162, Skokie, IL 60076-7822.
Call (800) 458-1734 or (847) 763-9252 (outside of U.S.) or fax (847) 7639587. Calls accepted 8:00am-4:30pm CST. Single special issue copies
vary from $10-$20 each.
FUTURES | May 2008
E-mail me at gszala@futuresmag.com
S E R V I C E
Subscription inquiries can be made toll-free at (800) 458-1734. Calls

accepted between 8:00am-4:30pm CST. If you reside outside the
United States, the number is (847) 763-9252. If you receive duplicate
or have missed issues, please contact the numbers above, fax
(847) 763-9587, or via e-mail, futures@halldata.com. Please provide
your full name, address and zip code. Address changes can be sent to
Futures Magazine, P.O. Box 2162, Skokie, IL 60076-7822. Please
include your old label with your new address.
10
from the DoJ recently that, in essence, said a single silo clearing structure was detrimental to competition. This caused the CME Groups
(and most other exchanges) share price to swoon and it still hasnt
regained its previous levels. Further, the main detractors of the single
silo clearing mechanism are the investment banks of the world, who
believe the huge exchange, by owning its clearing house, will arbitrarily hike fees. This has concerned them for years, but now they
launched the Electronic Liquidity Exchange (ELX), which will use
the eSpeed platform, to fight back.
The real problem may be the investment banks shortsightedness.
As every exchange representative on that Florida panel agreed, the
single silo method was the best, mainly because of new product development. Richard Sandor, chairman of the Chicago Climate
Exchange and developer of a few important futures products, such as
interest rates, noted that separating the clearing house from the
exchange can stop you from innovating. He said, I used to believe
we could outsource (clearing)...but how naive to assume that the
provider wont become a competitor. Thats a key reason Liffe is
restructuring its clearing arrangement with the London Clearing
House so it would have more control over launching new products. Nymexs Jim Newsome said, The clearing house helps with new
product formation because it can be faster to bring the product to
market. Andreus Preuss of Eurex added that the key of having a
clearing house is not the cost of clearing but the lost opportunity cost
by [products] taking too long to get to market.
So heres the thing: for the CME Group to continue to thrive, it
must stay relevant in an ever-changing world, as do all global
exchanges. That means feeding the roots that made it great in the
first place: new and useful products. They have to be brought to market regularly and fast.
C E N T E R
Article reprint orders of 500 copies or more or e-prints can be made

through Pars International at (212) 221-9595, or e-mail:
reprints@parsintl.com. Single issue copies ($10 each) can be
purchased at (847) 763-9569. Questions regarding past articles
location should be directed to (312) 846-4600, but may incur a $25 fee.
Article submissions: Call, write or e-mail us for a copy of our writers guidelines.
Questions about an article can be sent to the editors
(dcollins@futuresmag.com). Questions are welcome, but due to time, we
may not respond to everyone. For outside, by-lined articles, we provide
the authors e-mail address or Web site in the biography.
Futures Web site is our Internet version of Futures magazine
(www.futuresmag.com). The Web site includes the latest issue of the
magazine with full text of selected stories, daily updates with
commentary on hot markets, spreadsheet downloads, a library of
articles, market news and links to other sites.
Trendlines
News, trends and insights for traders

BLUEPRINT BUZZ
Treasury sparks debate

The U.S. Treasury Department made
some waves on March 31 with the
release of its Blueprint for a Stronger
Regulatory Structure, and the tsunami
for the futures and options industry was
its recommendation to merge the
Commodity
Futures
Trading
Commission (CFTC) and Securities
and Exchange Commission (SEC).
While several industry players
applauded the Treasurys study, those
plaudits were usually a prelude to saying what is wrong with it.
In a statement, CME Group said,
There has not been sufficient understanding of the function of the differences of [the] rules in the two markets.
The differences are organic, not accidental, and an effort to homogenize
the two regulatory regimes is certain to
cause more harm than good.
While the blueprint recognizes the
need for the SEC to adopt core principles modeled on the principles-based
approach initiated by the CFTC with

the Commodity Futures Modernization
Act (CFMA) of 2000 prior to a merger, industry insiders were skeptical that
those principles would be preserved.
CFTC Commissioner Bart Chilton
noted the importance of preserving the
benefits of the CFMA. If a merger
were to occur that in any way hampered our ability to exercise this type
of oversight authority, we would see a
decline in innovation and competition
in all of these areas, he says.
CFTC Acting Chairman Walt
Lukken in a written response to the
proposal touched on both the model
and function of the agency. Any regulatory reform effort must preserve the
benefits of the CFTCs principlesbased model and recognize the distinct
functions of the futures markets and
mission of the CFTC.
Chicago Board Options Exchange
(CBOE) Chairman and CEO William
Brodsky says the options industry is
just as innovative as the futures industry but is held back by regulatory
CHARTVIEW: CME UNLOADS HEAVY METALS

Just a few days before announcing its definitive agreement to acquire Nymex Holdings,
CME Group sold its CBOT metals complex to NYSE Euronext, clearing the way for the
possible acquisition of Nymex by taking potential antitrust issues off of the table. Pending
regulatory approvals, trading of full and mini gold and silver futures and options on
futures contracts will begin later this year on Liffe Connect.
This is our initial entry in the U.S. futures business, and is consistent with the goals
set forth in the NYSE Euronext merger, says an NYSE Euronext spokesperson.
While the CBOT metals complex lost significant market share once the Comex contracts
became available near-24 hours on Globex, volume has leveled off. In February, total CME
gold volume was 453,582, and total CME silver volume was 102,622.
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
2006
2007
2008
CBOT Gold
Comex Gold
Source: Futures Industry Association
12
FUTURES | May 2008
Note: Includes prorated mini gold contracts
issues, citing the three-year delay of

CBOE bringing gold ETF options to
the market as one example.
Brodsky, who is in favor of a merger, in a way makes the case for the
futures industrys cautiousness.
Theres as much innovation coming
out of the options side but we have to
do it within the structure of the SEC,
which is under a different regulatory
regime. The Treasury report recognizes
the issues that weve had and comes
out with solutions.
Futures Industry Association
President John Damgard believes the
industry recognizes that there has to
be some sort of harmonization between
the cultures and the regulatory
approach before anything would be
gained by just cramming these two
boxes together. He says, Merging the
agencies is almost the wrong approach.
What we really need is a fresh look at
how this would best work and that
involves creating a new agency.
Penson GHCO CEO Chris
Hehmeyer offered a fresh look in a letter to Treasury last November, suggesting a twin peaks regulatory structure,
wherein the CFTC and SEC would be
consolidated into two distinct divisions of a single agency with one division focused on capital formation and
the regulation of public companies,
and the other division focused on market participation, marketplace conduct
and ensuring market integrity.
The approach tries to distinguish
areas better served by strict rules from
those where a principles-based
approach would be more efficient.
In perhaps one step towards harmonization, the SEC and CFTC signed a
memorandum of understanding
(MOU) to formalize and extend
cooperation on March 11. While the
MOU would be moot in the event of a
merger, industry leaders say its a positive development. Brodsky calls the
MOU a recognition that there are
problems that beg for resolution.
Lukken says the MOU should be
given time to bear fruit, and it proba-
bly will as most people agree it will be

some time before the blueprint takes a
more formal legislative form.
By Christine Birkner and Daniel P. Collins
COMING SOON?
U.S. Futures Inc.

Now that the CME Group and Nymex
officials have a definitive merger agreement, the CME Group removed two
impediments to the deal by selling the
CBOT metals complex to NYSE
Euronext for an undisclosed sum on
March 14.
We had a decision to make with
the metals regardless of coming up
with a definitive agreement with
Nymex, says Terry Duffy, CME
Group executive chairman. Now for
sure we dont have any over-lapping
business with the Nymex.
Senator Charles Schumer (D-NY)
suggested that the sale would pave the
way for Department of Justice approval
of the CME/Nymex deal.
The harder part of shepherding the
deal may have fallen to Nymex management, who will need to sell the deal
to shareholders and members. In
March we reported that Richard
Schaeffers bonus was increased to $3.6
million, and that President James
Newsomes bonus was increased to $2.6
million, and that a 3X multiplier would
be applied in the case of a change in
control of the company. A fuller picture emerged in the April 7 definitive
proxy statement, in which Newsomes
total compensation in a change of control situation could be $25 million,
including $9.2 million in non-qualified
stock options (NSO) and restricted
stock units (RSU) plus $5.14 million
for his tax obligations. Schaeffer would
receive a total of $32.67 million,
including $9.2 million in non-qualified
stock options (NSO) and restricted
stock units (RSU) and $7.28 million
for his tax obligations. CIO Samuel
Gaer could receive $6.9 million, and
CFO Kenneth Schiffrin could receive
$5.44 million, and general counsel
Christopher Bowen could receive

$4.95 million under similar deals.
Perhaps unsurprisingly, some
Nymex shareholders, already unhappy
with the CME Groups offer, have a
problem with that. Mark Rifkin, attorney for the law firm Wolf Haldenstein
Adler Freeman & Herz, represents
Nymex member and shareholder
Cataldo Capozza who has filed a class
action lawsuit alleging that the definitive agreement with the CME Group
shortchanges Nymex shareholders and
accuses Nymex management of self
dealing and breaching their
fiduciary responsibility.
Capozza believes the initial offer,
equal to $119 per share, was inadequate, Rifkin explains, as the stock had
traded higher shortly before the deal
was announced. In addition, because

the deal was based on a 70% stock and
30% cash basis, and because it was
structured without a collar on the
value of CME Group stock, the deal
has since declined substantially in
value. The Nymex shareholders were
completely subject to fluctuations in
the price of CME stock So, what
was a bad deal to start off with has
become an even worse deal, Rifkin
says. At press time, CME stock was
trading at $499 per share; Nymex stock
was $95.57.
Another group of Nymex members
has successfully petitioned a meeting
to review Nymex bylaw 311 G, which
says that any floor traded contract that
is terminated and available only via
computer, or where 90% of the volume
MF!
Broker takes twin hits

Things may not be getting much better for MF Global but for now execs and
shareholders of the huge futures broker may be satisfied with things not getting
worse. In late February, the firm was forced to unwind unauthorized trades
placed by Evan Dooley, the Memphis-based rogue trader who exceeded authorized limits while trading wheat for his own account, causing a $141.5 million
loss. Then on March 17, in the shadow of Bear Stearns fall, MF Global stock
plunged to $3.64 per share after opening at $16.10. It closed at $6.05 for the day,
pushing the company to release a statement that investor Joe Lewis, a major
Bear Stearns shareholder who reportedly lost $900 million in the collapse, wasnt an MF Global client and offered details on its lack of exposure to shaky repo
lines of credit and subprime mortgage related securities.
With blood in the water, no fewer than three class action lawsuits were filed
against the firm; two alleging MF inflated the stock price by making material
misrepresentations to the market and a third alleging misrepresentations of operations and internal controls.
MF hired TD Ameritrade executive J. Randy MacDonald as CFO and also
modified an agreement with Man Investments that will free as much as $800
million of its existing liquidity. It came just one week after a statement that MF
held $1.4 billion in unused committed liquidity facilities and that rumors
regarding its liquidity position are without merit. The company maintains that
volumes and net revenues are higher than at the same time last year, and that
client funds were higher than before the $141.5 million loss. From Jan. 31 to
Feb. 29, customer segregated funds increased more than 25% to $13 billion from
$10.4 billion. In a press statement, the company said it has raised margin
requirements as a result of continued market volatility and dislocations.
That figure may change once the March figures are in as some brokers have reported a flight of business from MF Global after the twin black eyes it suffered this winter.
By Chris McMahon
www.futuresmag.com | May 2008
13
Trendlines continued
is via computer, that Nymex members
will receive 10% of the revenues or
100% of special fees.
Thats really the value in the seat.
The value in the seat is not being able
to have access to the trading floor anymore, because there is no derivative
value, says Nymex member
Eric Bolling.
I dont believe thats going to hold
this up, says John Vassallo, president
of Coquest Inc. and a Nymex member.
He says that if you compare the equity
and trading rights that Nymex members received through the demutualization and initial public offering, the
trading right is worth about $600,000,
and if members havent sold, their
equity is worth about $9 million. So
the $600,000 is not going to hold up
the $9 million, he says.
Despite member protestations, the
CME offer is still at a premium to
Nymex stock and without a higher
competing bid, there is not much
chance it will change.
The deal also would be subject to
regulatory approval, including the
CFTC and the U.S. Department of
Justice (DoJ), which approved the
CME/CBOT merger, but also recently
made known its objections to vertically integrated clearing of financial
futures. In that same comment letter to
the Treasury, DoJ also said energy markets should be exempt from
such changes.
By Chris McMahon
LONG VERTICAL JUMP
New clearing landscape

A panel of experts at the Futures
Industry Associations annual conference in Boca Raton, Fla. concluded in
March that clearing is where the
action will be this year, and that is certainly true in Europe where after two
decades of a slow drift towards centralized, consolidated clearing and settlement of futures and equities, a dramatic shift toward proliferation, competition, and vertical integration has
14
FUTURES | May 2008
taken place.
NYSE Euronext is launching a new
clearinghouse for its Liffe futures subsidiary and other futures exchanges are
talking of doing the same. Meanwhile,
on the equities front and in line with
the European Union Commissions
call for centralized clearing a start-up
called EuroCCP says it wants to
become the counterparty for equities
trades across the continent, just as the
Depository Trust & Clearing
Corporation (DTCC) does in the
United States.
And no wonder London-based
EuroCCP is a subsidiary of the DTCC,
and was set up specifically to clear
trades from pan-European multilateral
trading facility Project Turquoise. Both
DTCC and Turquoise are consortium
owned by the major banks that use
the services.
LiffeClear, on the other hand, will
provide clearing for derivatives traded
on Euronext.Liffe, but will outsource
the actual guaranteeing and banking
arrangements to LCH.Clearnet,
through which Euronext.Liffe currently clears its business.
So, why bother making the change?
The answer, in part, is control
for the way things stand now, its not
really clear in Europe who controls the
liquidity an exchange runs through a
clearinghouse. This means customers
could decide to leave their liquidity
with the clearinghouse should an
exchange switch to another clearinghouse, as ICE is doing as it switches
from LCH.Clearnet to ICEClear.
That scenario led to a pre-emptive
tug-of-war over ICEs liquidity on
LCH.Clearnet last year, delaying the
European Climate Exchanges (ECX)
Certified Emission Reduction (CER)
futures last year. If Euronext.Liffe owns
its own clearinghouse, such disputes
wouldnt happen, even if the guaranteeing and banking functions are outsourced to LCH.Clearnet.
And the idea is catching. ECXs
parent company, Climate Exchange
PLC, could form its own clearing
house for energy and emissions products and it isnt even a real
exchange yet, dependent as it is on
ICEs platform.
LCH.Clearnet doesnt appear to be
entering the Euronext.Liffe deal willingly, and its possible LiffeClear
wouldnt have been proposed if
LCH.Clearnet werent in talks with
Project Rainbow. Now speculation
abounds in London over how Rainbow
will respond to LiffeClears outsourcing
deal after all, without the ability to
outsource, Euronext.Liffe would need a
year at least to set up its own clearinghouse. Rainbow has a first-rate legal
team, and you can bet they will find
some grounds to challenge the
LiffeClear arrangement with regulators, who have long had their sights on
vertical clearinghouses, albeit mostly
in the equities sector.
Deutsche Brse so far has taken the
brunt of that regulatory pressure, with
a vertically integrated clearing and settlement apparatus that can margin
equities against derivatives in two separate clearinghouses under the same
ownership. As a result of vertical structures in equities, cross-border clearing
of equities transactions remains much
more expensive than in the
United States.
The European Commission is set to
release new guidelines for breaking
down these barriers at the beginning of
2009. The Commission has a longstanding threat to mandate consolidation unless clearinghouses can either
merge on their own or blend into some
sort of interoperability model to enable
cross-border trades, but so far the only
link of that sort in the works is a link
between Switzerlands SIS x-clear and
LCH.Clearnet.
ICE, for its part, says it formed
ICEClear because current clearinghouses just arent up to the task of
clearing their over-the-counter (OTC)
and exchange-traded products raising the other cherry on the clearing
sundae: OTC business.
By Steve Zwick
Trading Places
BY CHRISTINE BIRKNER
Lyall moves to ICAP

athryn Lyall was named
COO of exchange projects
at ICAP. Previously she
was a managing director at the
Chicago Board of Trade
(CBOT). Cathryn Lyall brings
substantial industry and
exchange market experience to CATHRYN LYALL
16
FUTURES | May 2008
this role. She has extensive

contacts in the markets and
we are delighted to appoint
someone of her caliber to
expand our business in the
exchange-traded markets,
said Mark Yallop, group COO
of ICAP, in a statement.
Send news of personnel moves to:

Futures, 222 S. Riverside Plaza, Suite 620
Chicago, Ill. 60606, Fax: (312) 846-4602
Attn: Christine Birkner
E-mail: cbirkner@futuresmag.com
J. Randy MacDonald was named chief

financial officer at MF Global.
Previously he was COO at TD
Ameritrade.
Former CBOT president and CEO
Bernard W. Dan was nominated to the
board of directors at Penson
Worldwide. He is currently special
advisor for CME Group .
Benjamin Londergan, CEO of
Group One Trading, and Jonathan
Werts, managing director of Merrill
Lynch, were appointed to the board at
Chicago Board Options Exchange.
Gail Osten was named director of
corporate communications at CBOE.
Jill A. Harley was named managing
director and chief accounting officer at
CME Group. Previously she was chief
accounting officer for the CBOT.
Henry C. Lyons is now CFO at
GAIN Capital Holdings. Previously he
was CFO at ACI Worldwide.
Dr. Ranjan Bhaduri is now managing director of research at AlphaMetrix
Alternative Investment Advisors.
Kenneth M. Ford, managing director of Credit Suisse, was elected chairman of the Futures Industry
Association. Ira Polk, chief administrative officer at MF Global, was elected
vice chairman and Chris Hehmeyer,
CEO of Penson GHCO, was elected
secretary and treasurer.
Frank J. Jones reassumed the role of
vice chairman of International
Securities Exchange after the Securities
and Exchange Commission charged
former vice chairman John F. Marshall
with insider trading.
Michael Bailey was promoted to
head of FX Europe at Newedge.
Mark van Vugt has been promoted
to managing director, continental
Europe at Realtime Systems Group.
Market Strategy
BY ANTHONY DRAGER
Improve your odds trading gold

cial futures markets. Any market can be traded. That is what
we do as traders: try to figure out which way a market is
going, find good spots to enter and, more important, good
spots to exit.
Trading success is maintained not with the ability to take
profits on good trades, but with the ability to get out of bad
ones. Managing your risk is the number one concept that
will keep you trading and in the game. One useful strategy
involves intermarket analysis. How does gold stand up to
ancillary or correlating products that influence price action
in the yellow metal?
Silver, the other precious metal, often will chart similarly
to gold intra-day. So, look for a decoupling or divergence to
develop to indicate that gold might indeed be reversing.
Looking for a sign shows 15-minute bars of both silver
(red) and gold (blue) as they rally substantially on March 5.
Many traders often arbitrarily look to sell tops or fade without good reasons, other than maybe it went too far. As you
can see, silver and gold make highs (silver at $20.960
and gold at $993.60), pull back, then retest. Silver
LOOKING FOR A SIGN
shows signs of failing, while gold makes higher highs to
When silver fails to make a new high on the 11:30 bar along with gold, you
$995.10. That is when you should begin to question
have a sign that gold may have overshot and is ready for a drawback.
golds bullishness and whether it could possibly be
11:30 bar
10040
overdone. At that point, it is useful to look at gold on a
20860
five-minute bar chart and wait for the market to show
10000
10:15 bar
if its coming off its highs (see Pulling the trigger).
9980
9960
When the first five-minute bar makes a lower low to
9940
the previous bar, start to assign the risk/reward to the
9920
9900
trade. Your stop-loss should be right above the old
9880
high. If that rate is 2 to 1 or better, take the trade. In
9860
9840
this example, you would sell gold at $992.60. Look for
09:00
10:00
11:00
12:00
13:00
14:00
15:00
a target of possible support at $987.60 to cover the
Source: eSignal
trade for a winner.
Silver, however, is just one ancillary you can use this
approach with. Several other markets may offer you
more confidence to take the trade as they line up like
PULLING THE TRIGGER
silver did in this example. More good reasons that
Once the five-minute bar makes a lower low following the high (red line),
involve ancillaries, technicals, fundamentals, order
you can get short, providing your target support area (lower green line)
flow and risk/reward ratios make certain trades higher
offers a 2-1 or better profit potential based on your stop (top green line).
percentage trades. Remember, all we are trying to do as
9940
traders is to find the right side of the market at that
9920
moment. Find a good location to get in and most
9900
important, exits that make good risk/reward sense.
9880
Dont lose more when youre wrong than you make
9860
when youre right. Always know where youre getting
9840
out before you get in.
old, gold, gold thats all you hear about these days.
With the volatility in metals, and all commodities for
that matter, everyones a gold trader or wants to be.
But even a gold bull could have experienced serious losses
in recent years despite its huge run up because of the huge
volatility and tendency to produce stop-shattering corrections amid a strong bullish trend.
Unless you have unlimited capital or have the uncanny
ability to pick tops and bottoms, the gold market has been
too volatile to simply play it from the long side, even when
you are right on the direction. Gold futures dropped more
than $150 from March 17 to April 1 and the market didnt
even approach its 200-day moving average or change the
long-term trend.
Gold has traded substantial volumes electronically since
2006, which has increased its access and improved its liquidity. This has allowed traders to use many short-term strategies
in gold that were previously only appropriate for liquid finan-
9820
9800
10:00
Source: eSignal
11:00
12:00
13:00
Anthony Drager, a CBOT member since 1999, has traded futures

electronically since 2000. Anthony offers live educational sessions
on trading strategies, set ups, preparation, risk management and
market selection. He can be reached at antrading_1@yahoo.com, or
visit www.themarlinletter.com.
17
Managed Money Review

BY DANIEL P. COLLINS
Hedge your hedge fund

uring the course of the subprime
debt crisis that began last
summer, we have heard on a
number of occasions that this bank or
that bank did not have exposure to
subprime per se but were hurt by the
resultant liquidity crisis. But when
markets experience widespread turmoil, they begin to correlate.
Stonebrook Capital Management is
launching a proprietary hedging program targeted to funds of funds, aiming
to reduce risk and improve returns during times when diverse strategies may
begin to correlate.
Jerome Abernathy, chief investment
officer for Stonebrook, says, When
markets have risky episodes like the
one we have just gone through, all cor-
relations go to 1.0. He says it is a problem of contagion, which causes otherwise non-correlated asset classes to correlate and leads to huge losses. What
he was looking for was a way to, hedge
these events regardless of asset class.
The program has produced strong
pro forma results. Applied to one fund
of funds last August, the strategy would
have improved the funds performance
from -0.26% to 1.6%, says Abernathy.
Abernathy recommends an allocation of 3% of a fund of funds assets to
the program that works as a risk overlay. The strategy uses a number of measures of risk to determine when an allocation should be made, but the majority of the time that allocation will
remain in cash.
Comparing index returns

S&P 500 Total Return Index
Lehman Brothers Treasury Index
Morgan Stanley EAFE Index
Futures Public Funds (February)
February
-3.25%
+0.48%
+1.27%
+7.06%
YTD
-9.05%
+3.12%
-8.13%
+9.14%
Februarys top CTAs

February
Barclay CTA Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+5.48%
Barclay Sub-Indexes:
Agricultural Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . .+2.82%
Currency Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+0.83%
Diversified Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+9.87%
Financials and Metals Traders . . . . . . . . . . . . . . . . . . . .+2.47%
Discretionary Traders . . . . . . . . . . . . . . . . . . . . . . . . . . .+4.55%
Systematic Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+6.41%
More than $10 million under management
1. Fort Orange Capital Mgmt. (GI Strat.) . . . . . . . . . . .+47.81%
2. Quality Capital Mgmt. (Comm. Beta) . . . . . . . . . . . .+36.11%
3. William L. Crowley & Assoc. (Flag) . . . . . . . . . . . . . .+35.23%
4. Quality Capital Mgmt. (GI. Nat. Res) . . . . . . . . . . . .+34.03%
5. DUNN Capital Mgmt. (Combined) . . . . . . . . . . . . . .+31.62%
Less than $10 million under management
1. SwissDirekt AG (High Risk Fund) . . . . . . . . . . . . . . .+56.25%
2. Vision Capital Mgmt (GI Futures) . . . . . . . . . . . . . . .+44.16%
3. Ascendant Asset Adv. (JLDeVore) . . . . . . . . . . . . . . +38.27%
4. Valu-Trac Invest Mgmt. (Strategic 10X) . . . . . . . . . .+35.01%
5. Pere Trading Group . . . . . . . . . . . . . . . . . . . . . . . . .+32.93%
Based on estimates of the composite of all accounts under management;
does not reflect the performance of any single account.
Source: Barclay Trading Group Ltd., Fairfield, Iowa; (641) 472-3456
18
FUTURES | May 2008
YTD
. . .+7.47%
. . .+4.68%
. . .+0.69%
. .+15.06%
. . .+3.51%
. . .+7.51%
. . .+9.28%
. .+72.90%
. .+50.78%
. .+44.60%
. .+44.29%
. .+51.04%
. . .-50.46%
. .+31.96%
. . .-45.81%
. .+33.06%
. . . .-6.92%
The strategy is meant to handle

extreme events and is usually triggered
once every few years. These arent normal times though, and the strategy has
been triggered three times in the last
year. First in late July to mid-August,
second in late October through
November and most recently in late
December through January.
When the strategy detects the markets entering risky territory it does two
things: purchases flight to quality
type instruments in the form of U.S.
Treasuries and sells small cap and
emerging stock indexes.
The program has demonstrated outsized returns during down months, precisely when managers need it
most, Abernathy says.
Futures public funds summary

Number reporting: 48
March 2008
Average performance for the month: -0.43%
Funds up: 19
Down: 29
Unchanged: 0
Top performers in March

Fund
Mar. Return
YTD
Dean Witter Cornerstone Fund IV . . . . . . . .J.W. Henry Sunrise . . . . . . . . . . . . . . . . . . . . . . .8.53%

Dean Witter Cornerstone Fund II . . . . . . . . .Northfield Trading J.W. Henry . . . . . . . . . . . . .6.31%
Morgan Stanley Spectrum Currency LP . . . .John W. Henry Sunrise . . . . . . . . . . . . . . . . . . . .4.95%
Bristol Energy Fund . . . . . . . . . . . . . . . . . . . .SandRidge Capital Management . . . . . . . . . . . .3.99%
Triad Trading Fund LP . . . . . . . . . . . . . . . . .TMS Capital Management . . . . . . . . . . . . . . . . .3.65%
Worst performers in March
Smith Barney Tidewater Futures Fund . . . .Chesapeake Capital Corp. . . . . . . . . . . . . . . . . .-9.98%
FTC Commodity Fund Alpha* . . . . . . . . . . .FTC Asset Mgmt. . . . . . . . . . . . . . . . . . . . . . . . .-5.70%
Salomon Smith Barney Global Diversified . .Multiple managers . . . . . . . . . . . . . . . . . . . . . . .-4.20%
MSDW Spectrum Strategic Fund . . . . . . . . .Blenheim Capital Eclipse Capital . . . . . . . . . . .-3.81%
Citigroup Emerging CTA Portfolio . . . . . . . .Multiple Managers . . . . . . . . . . . . . . . . . . . . . . .-3.78%
. . . . . .14.84%
. . . . . . .8.47%
. . . . . . .7.83%
. . . . . .14.15%
. . . . . . .8.96%
2008 results
(through Mar 31)
Trading advisor(s)
. . . . . .14.67%
. . . . . . .5.26%
. . . . . . .6.42%
. . . . . . .3.61%
. . . . . . .5.99%
Number reporting: 48
Average performance for the year: +8.20%
Funds up: 43
Down: 5
Unchanged: 0
Top performers in 2008

Fund
Mar. Return
YTD
Smith Barney Westport Futures Fund . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.26%

FTC Futures Fund Dynamic* . . . . . . . . . . . .FTC Asset Mgmt. . . . . . . . . . . . . . . . . . . . . . . . . .3.51%
Dean Witter Cornerstone Fund III . . . . . . . .Sunrise Graham . . . . . . . . . . . . . . . . . . . . . . . . . .2.57%
Dean Witter Diversified Futures Fund LP . . .Hyman Beck & Co. . . . . . . . . . . . . . . . . . . . . . . .0.20%
Dean Witter Portfolio Strategy Fund . . . . . .Hyman Beck & Co. . . . . . . . . . . . . . . . . . . . . . . .0.26%
. . . . . .31.88%
. . . . . .23.50%
. . . . . .17.95%
. . . . . .17.80%
. . . . . .17.74%
Trading advisor(s)
Worst performers in 2008

SB Warrington Fund . . . . . . . . . . . . . . . . . . .Multiple managers . . . . . . . . . . . . . . . . . . . . . . .1.67% . . . . . . .-3.16%
Alternative Opportunities Fund* . . . . . . . . .Karin Kisling . . . . . . . . . . . . . . . . . . . . . . . . . . . .-1.86% . . . . . . .-2.65%
Dean Witter Principal Plus Fund . . . . . . . . .SSARIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-2.19% . . . . . . .-2.27%
Smith Barney Potomac Futures . . . . . . . . . .Campbell & Co. . . . . . . . . . . . . . . . . . . . . . . . . .-0.67% . . . . . . .-0.78%
MSDW Spectrum Global Balanced Fund . . .SSARIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-3.60% . . . . . . .-0.77%
Note: Listed return may not be fully attributable to listed advisor(s).
* Offshore fund.
TEAMING UP
With the worlds regulators talking
about greater cooperation, it only
makes sense for professional groups representing hedge funds to work together
as well. And in April, the Managed
Funds Association (MFA) and
Alternative Investment Management
Association (AIMA) announced that
they were entering an alliance to work
more closely together and collaborate
on key initiatives. Richard H. Baker,
MFA president and CEO, says the two
groups have already worked together
and have a common goal of supporting
principles-based regulation. The market is a composite of investors and
firms in the global markets, so the standards of AIMA and MFA should be
consistent, Baker says.
Hedge Funds
Hedge Fund Returns
Feb. return
Barclay Hedge Fund Index

1.28%
Barclay hedge fund sub indexes
Barclay Equity Short Bias Index
4.22%
Barclay Global Macro Index
3.78%
Barclay Merger Arbitrage Index
1.38%
Barclay Fixed Income Arb. Index
0.27%
Barclay Equity Mkt. Neutral Index
1.68%
Barclay European Equities Index
1.9%
Barclay Event Driven Index
1.38%
Barclay Fund of Funds Index
1.38%
Barclay Equity Long/Short Index
0.8%
Barclay Convertible Arb. Index
-1.61%
Barclay Distressed Sec. Index
-0.34%
Barclay Emerging Mkts. Index
2.54%
Barclay Equity Long Bias Index
0.64%
Barclay Technology Index
0.79%
Barclay Pacific Rim Equities Index
-0.41%
12 Mo. return
2008 YTD return
5.96%
-2.01%
19.43%
15.21%
9.03%
-2.81%
3.86%
4.69%
3.44%
5.07%
3.93%
-1.95%
0.51%
15.55%
3.22%
10.08%
-4.9%
10.76%
4.06%
0.48%
0.42%
-0.2%
-0.97%
-1.24%
-1.57%
-2.02%
-2.04%
-3.14%
-4.44%
-4.5%
-4.62%
-4.88%
Source: Barclay Hedge
19
Hot Commodities
B Y C H R I S M CM A H O N
Gassed
No European vacation
With crude oil trading above $110 per barrel and Memorial Day on the horizon,
gasoline futures should be poised for take off. But with inventory at a 17-year high
and demand dropping for the first time in 17 years, gasoline has failed to keep pace
with crude.
The market is not moving around very much, says Joe Marshall, analyst for
PitGuru. We are in a trading range, and we are in a very high trading range. So not
only is it expensive to trade, you are
$ per gal
Unleaded Gas (June '08) daily
not getting a bang for your dollar. In
2.850
2.800
May he says the low is $2.65 per gal2.750
2.700
lon and could go higher than $3.
2.650
2.600
2.550
The backwardation in the futures
2.500
2.450
spreads are not strengthening,
2.400
2.350
observes Darin Newsom, analyst for
2.300
2.250
DTN, meaning commercial buying
2.200
has yet to step in. He says support is
15 22 29 5 12 19 26 3 10 17 24 31 7 14 22 28 4 11 19 25 3 10 17 24 31 7
Nov
Dec
2008
Feb
Mar
Apr
at $2.4875 and resistance is at $3.05.
Source: eSignal
In a major economic downturn,
gas futures could drop to $2.40, says Darren Dohme, trader at Powerline Petroleum.
But he says Fed actions and global demand will keep crude demand up, and gasoline
prices will firm. Support is $2.60, resistance is $3. Crude might run as high as $125,
plus a $10 crack spread is $135, divided by 42 gallons per barrel, and that would give
you $3.20 unleaded gasoline futures. Thats my maximum high-side target, he says.
Since early February, the euro raced

from 1.44 to past 1.59, put in a triple
top and hit an all-time high on April
10 of 1.5914. Its been acting like a
completely different animal, says trader Michael Weiner, and support and
resistance are being redefined. Case in
point, the range on April 10 spanned
two thirds of Weiners short-term
range from 1.57 to 1.60.
Beans on a tear
I dont rule out a break to 1.6250,

but that will be unsustainable in the
short run, says Brian Dolan, chief currency strategist at Forex.com, adding
that the European Central Bank would
then start selling euros to reintroduce
two-way risk into the market. The
euro is threatening to become a destabilizing element to the Euro zone
economy. It becomes a self limiting
element in the outlook, he says. In
May, he expects the euro to trade
between 1.53 and 1.58.
But with the European Central
Bank concerned with inflation and
the U.S. Fed turning a blind eye to it,
the euro may be able to continue the
march upward or at least maintain
recent levels.
Inflation dominates Euro zone
monetary policy, says Heather
Mitchell, trading specialist at
OptionsXpress. The tone of these
comments could spark buying for
the currency.
Jason Yu, chief currency analyst for
ODL Securities, expects consolidation
between 1.5340 and 1.59.
After trading near $16 per bushel in early March, May soybeans dipped to below
$11.50. Victor Lespinasse, analyst for Grainanalyst.com., attributes the sell-off to
profit taking but adds, tight end$ per bu
Soybeans (May '08) daily
ing stocks and a long growing
16.00
season will keep weather premi15.50
15.00
ums high. So hes looking at the
14.50
14.00
spreads. November beans price
13.50
vs. December corn price, the
13.00
12.50
ratio is two to one. That strong12.00
ly favors planting corn. The
11.50
11.00
normal ratio would be 2.25 or
10.50
2.4 to one, Lespinasse says. A
5 12 19 26 3 10 17 24 31 7 14 22 28 4 11 19 25 3 10 17 24 31 7
Dec
2008
Feb
Mar
Apr
lot of people think that is whats
Source: eSignal
going to happen; never mind
the planting intentions report.
Thats written in sand.
He adds that cold wet weather could push beans down but dry weather could
draw acres to corn, pushing prices near the $15 high.
All the acres are going to go into beans at the expense of corn. Its the opposite
of last year, says Stephen Davis, broker for RJO Futures. We are going to back
and fill and the only thing that would stop us is Mother Nature. For May, he says
support is $12 per bushel and resistance is $13.
Tom McKenna, merchandiser at Scoular Grain, says U.S. bean prices have been
supported by the Argentinean farmers strike. They have shut in crops, protesting a
new tax on export goods. Farmers are good at responding to what the market
does, he says, and ultimately beans will be dependent on corn and weather.
20
FUTURES | May 2008
Euro FX (cash) daily
1.5800
1.5600
1.5400
1.5200
1.5000
1.4800
1.4600
1.4400
31 7 14 21 28 4 11 18 25 3 10 17 24 31 7
2008
Feb
Mar
Apr
Source: eSignal
Options Strategy
BY HOWARD TYLLAS
Question: How do you get unlimited profit potential and

reduce your initial cost to do so?
Answer: A 2-to-1 ratio spread.
two-to-one ratio spread is primarily used when you
have at least 90 days until expiration, where you
have a known risk if wrong and unknown reward if
right. In the case of a ratio call spread; this would be the
same as a short vertical call spread and a long call.
The goal is to have an unlimited profit potential, but at the
same time reduce the cost of ownership of the outright call,
reduce the cost of time decay, and lose a fraction of what
would be lost if wrong and having just a long call position.
If you already know what a vertical call spread is, the rest is
easy. Briefly, a vertical call spread is buying one strike and selling another strike with the same expiration date. If you buy
the spread, you pay the premium and that is the total risk. If
right in the case of a call spread, you want the futures price to
be above the strike you sold so the spread expires at full value.
When you buy a ratio spread you are buying two call
options above the strike you sell. You are expecting the market to go higher, and if wrong, lose less than spending the
same amount as an outright call for the same premium. It
also slows down the amount gained or lost on a daily basis. If
there is an explosion in price to the upside, this spread
should gain more than an out-of-the-money option of the
same premium. With the long time frame, options will move
in tandem. In this case, the lower strike moves more than the
higher strike. The market can go against you significantly in
the near term without forcing you to get out.
The soybean market could go much higher by August
because even if the bullish fundamentals wane, Mother
Nature could step in and drive prices higher. Options with
that much time are expensive to own for an unlimited profit potential. Here is one way to overcome some of that cost
of participation.
On March 28, the soybean market for November 2008
futures contract settled at $11.5950. The $12 call settled at
$1.37, and the $13 call settled at $1.0475. The ratio call
spread would be buying two $13 calls and selling one
$12 call.
be expensive and not worth the risk of ownership. But if soybeans were trading at $16, the $12 call is protected by one of
your $13 calls, so that would be $1 against you and the other
$13 call is worth $3:
$3-$1=$2 - 72.5 = $1.275 profit.
Buy two $13 calls at $1.0475 each = $2.0950 (-) selling

one $12 call at $1.37. You would pay 72.5 if you were buying the spread. (Each 1 on the spread is worth $50.)
However, ratio spreads for the most part arent meant to be

held until expiration. This strategy provides a way to own
premium for less money, and to make money if the market
goes up and not have a wasting asset. Normally you will hold
these positions for 40 to 60 days before getting out or morphing into another strategy.
With 90 days or more until expiration, the two strikes will
move in tandem, with the lower strike moving slightly more
than the higher strike.
What you are looking for in this strategy is for the market
to move up no matter how fast or slow (fast is better) with
plenty of time left, and this strategy will pay off nicely. How?
The options for November expire on Oct. 24, and if the market rallies, the options should increase in value, especially if
they go intrinsic and your two $13 calls should increase in
value more than the $12 call. If the market rallies, the premium of every option should increase, and the $13 calls should
start acting more like the $12 call.
You could just take the 72.5 and buy a call. On Thursday
you could have bought a November $15.80 call for about 72
and on Friday it settled at 63.625. This outright will not protect you like the ratio will from time decay, and it buys you the
right to be long from $15.80 instead of from $13. At $16 the
$15.80 option would be worth only 20 on expiration and the
ratio as explained above would profit for $1.275.
This strategy, like all option strategies, can be put on and
taken off as a whole or in part at any time. If the market rallied sharply and you wanted to take profit, you simply would
sell one of the $13 calls and stay short the $12 to $13 call
spread and know what the risk reward is at all times with
that short position.
With added volatility, it is easy to be right but still get
stopped out of a position. The ratio spread allows time for
your strategy to play out.
If you held the spread until expiration, you would lose the
entire 72.5 if the market settles below $12. If at $13 you
would also lose the $1 differential on the vertical. This would
Howard Tyllas is registered with the CFTC as a floor broker and CTA. Hes
a member of NFA and a veteran trader of 31 years. He has traded options
on futures since their inception. www.howardtyllas.com.
22
FUTURES | May 2008
Forex Trader
BY ABE COFNAS
Extreme market conditions

and move into safer havens. Investors should not count on
gold because during sudden moves there is likely to be a liquidity crisis causing gold to sell off. Such a sell-off happened
Aug. 16 when both gold and the Dow had massive drops.
A second lesson is the need to adapt trading tactics to this
environment. Traders more than ever need to avoid longerterm trades. Even overnight trades should be avoided.
Entries using 15- and 5-minute time intervals should be used.
They provide the opportunity for high probability trades
offering small pip moves. It doesnt have to be complicated.
For example, just by recognizing retracement failures, a trader
can have repeated patterns and opportunities, as we can see
in Short-term profits. In the current environment, sideways channels followed by breakdowns offering 20 pip ranges
are increasing in frequency.
Current conditions have also served to increase the
volatility of market reactions to economic data. These releases occur every day and provide the market a reason to
react to any level of surprise. They provide in a conSHORT-TERM PROFITS
centrated period of time a great probability of large
Todays volatile markets provide greater short-term trading opportunities
moves. An efficient forex platform is necessary to be
like this failed retracement.
able to play this trade. Skills in riding such explosive
1.580
moves can be acquired.
1.578
A third lesson is to become more contrarian. Perhaps
1.576
the most striking aspect of recent volatility is the
1.574
uncertainty among institutions and experts about the
1.572
underlying risk exposures. The forex trader needs to
1.570
respect the fact that this uncertainty can cut both
1.569
ways. While fundamentals do not point to dollar
RETRACEMENT FAILURES ON
strength, risks to the euro and pound have emerged
1.566
15 MIN CANDLES FOR EUR/USD
from their own sources of uncertainty. Britains housing
1.564
boom is over, and UBSs loss of nearly $19 billion has
1.562
caught the euro bulls off guard. The contrarian case for
Source: www.prorealtime.com
a dollar bounce can be made on the basis that the
other currencies may be caught in unexpected risk
exposure. A further case for dollar bulls is that Canada,
The first lesson is that intervention in the currency marBritain, Europe and Australia are likely not to increase interkets is more likely than ever. While official doctrine is to let
est rates and are facing slowdowns in their GDP.
the market determine the price of the dollar in foreign
A fourth lesson is to become familiar with options strateexchange, central bankers are brushing off the dust on how
gies. Options on currencies through futures exchanges,
to accomplish a massive intervention. One simply needs to
options exchanges and OTC markets are more easily availsee the increase in the frequency of intervention being
able and are a valuable tool given recent volatility. Traders
cited in the world financial press. Stephen Hanke, a worldcan use options to reduce risk in longer-term trades while
class currency economist and senior fellow at the Cato
maintaining opportunity. In this environment the forex tradInstitute, recently argued for intervention as a policy remedy
er needs to be armed with all the tools that are available.
to prevent a free-falling dollar.
No one knows what would precipitate an intervention scenario. It may be a sudden and massive drop in the Dow Jones
Abe Cofnas is president of learn4x.com LLC. E-mail him at
learn4x@earthlink.net.
Industrial Average leading foreign investors to sell dollars
he Federal Reserve Banks recent activism in the
interest of promoting psychological stability makes one
wonder about the qualifications of central bankers.
Perhaps they need advanced degrees in mass psychology or
more accurately, psychopharmacology. The Feds actions in
facilitating the saving of Bear Stearns, and its injection of a
great deal of money to dilute market pessimism, certainly
underscores that trading the forex market requires an
increased understanding of the psychology of the Fed. This
should not be a surprise to forex traders. If there are any laws
of price action, one of them is that markets do not tolerate
extremes. We see this every day along multiple time frames.
When currency pairs trace parabolic paths, there is a pullback. The price action of gold provided a classic case. If price
action doesnt tolerate extremes, why should central bankers?
What are the lessons that we can derive from this recent
period of price and policy turbulence?
24
FUTURES | May 2008
MARKETS
The price of gold has surged more than 50% in the past year, even with the
recent correction figured in, bringing platinum and palladium with it. So, is
this the end of fiat currency as we know it, as gold bugs have claimed? Or
were commodities in a bubble that has burst and is gold on the way
back down? What are the forces jostling the global metals markets?
METALS:
PRECIOUS
LITTLE
SUPPLY
BY STEVE ZWICK
26
FUTURES | May 2008
oris Schmitz-Thiersens family

has been selling jewelry in the
same location in Cologne,
Germany, for more than 100
years, with a brief sabbatical during World
War II. Only in the past year, however, has
he begun offering bracelets made of a peculiar white metal mined in South Africa.
Its pure palladium, he explains.
Pretty, isnt it?
Yes and relatively cheap, trading
around $450 per troy ounce at press time,
compared to just under $2,000 for the
same amount of platinum, and about
$1,000 for gold. Silver, by contrast, is
trading at between $17 and $18 per ounce.
Schmitz-Thiersens decision to peddle palladium instead of platinum is one of those
quirky little flips of the mind that, if multiplied by all the jewelry stores in the planet,
could have major ramifications for the price
of these two most precious of metals, and a
quick perusal of Colognes jewelry shops
indicates the minds are, in fact, turning over.
Samantha Trickey, precious metals consultant at the Commodities Research Unit
(CRU) in London, points out that jewelry
currently accounts for about 20% of total
platinum demand, but that, unlike gold,
platinum and palladium are primarily
industrial metals and not stores of value.
If prices of platinum get too high, you
could see a substitution on the industrial
side to palladium, she says (see Precious
industrials, page 28). This is why Im
more bullish on palladium than I am
on platinum.
Yet it is platinums secondary function as
a precious metal that is driving prices to the
stratosphere, along with a rickety South
African electricity grid.
ELECTRIC GRIDLOCK
Most coverage of golds rise focuses on two
factors: the plunge in the U.S. dollar and a
general fear of exposure to paper assets. Less
attention has focused on the supply side of
gold and silver, but more of platinum, palladium and plain old copper.
In South Africa, the main power supplier, Eskom, has run out of reserve capacity,
and this has caused rolling power cuts,
Trickey says. Many platinum and palladium
mines had to close temporarily at the end of
27
Markets continued
January, since power could not be guaranteed, and this posed a safety risk,
especially for the underground mines.
As a result, mines are operating at
just 95% capacity, at a time when
industrial demand, primarily in
China, remains at full throttle.
Theyre able to operate on that, but
companies are looking at ways to find
individual power sources of their
own, she says.
Palladium, thanks to these and
other factors, rose from less than $200
per ounce in March 2003, to nearly
$580 in February this year (after a
one-month surge of about 40%),
before settling down to its current
mid-$400 range.
COPPER BOTTLENECK
Supply concerns also are dominating the
copper market. The supply side seems
to perennially shoot itself in the foot,
and so far in 2008 it seems to have shot
itself in both feet, says Trickeys colleague, Allan Trench, who is CRUs
research manager for copper. He says
many of the bullets hitting those feet left
their chambers in the 1990s.
You had a lack of investment then
due to low prices. But when that
changed, you had all the usual quick
fixes being implemented, like expanding leach tanks and debottlenecking
the crushing circuit, or putting an extra
shovel in the pit in cases where an
operation was pit-constrained,
PRECIOUS INDUSTRIALS
While platinum and palladium have many industrial uses, theyre quite pricey and can
be substituted for each other.
$ per oz
700
650
600
550
500
450
400
350
300
250
200
150
$ per oz
2,250
Platinum
2,025
Palladium
Palladium
Platinum
1,750
1,500
1,250
1,000
750
500
2003
2004
2005
2006
2007
2008
Source: eSignal
GOLDEN OPPORTUNITY
Many people saw the bull market in gold when it was caught in a 20-year bear market
at the beginning of this century. It has quite a ways to go lower to indicate a reversal of
the trend started from below $300.
11000
10000
9000
8000
7000
6000
5000
4000
3000
2002
2003
Source: eSignal
28
FUTURES | May 2008
2004
2005
2006
2007
2008
Trench says.
What didnt happen was significant
re-tooling. As a result, everyone is
doing the same thing at the same time,
meaning major expansions and new
projects and suppliers are swamped.
He cites a litany of statistics: tires
that could have been delivered in four
months three years ago now sometimes
need almost two years to arrive.
Trucks that would show up in three
months now need two years.
You know how theyre dealing with
this? he asks. Theyre driving slower
to maintain tire life.
P-PROGNOSIS
Analysts seem at odds over the shortterm prognosis for platinum, which
recently traded up to $2,276 per ounce
before settling down to its current range
just below $2,000.
The consensus on its poor cousin,
palladium, however, is strong largely because of the paradox that, as with
platinum, most of the factors that can
make demand for the metal go down
actually make it go up. In other words,
the factors that hurt demand for palladium as an industrial metal actually
help it as a precious metal, and vice
versa at least, thats the perception.
A global deflationary trend would, in
reality, drag down the price of both
precious and industrial metals.
But in reality, South Africas electricity problems and strong industrial
demand are only half of the palladium
story. The other half is gold and platinum. Economic news from the USA
seems to be pushing gold around, and
thats also having an effect on platinum on a day-to-day basis, Trickey
says. Given platinums stellar performance so far this year and the risk to
the supply side, this should continue to
be supportive for palladium.
This quarter, she sees platinum averaging between $2,000 and $1,900, with
palladium remaining in the mid-$400s.
In the second half of the year, she sees
prices dipping for both.
Im expecting platinum to be
around $1,800 in the second half of the
year, and for palladium to be below

$450, she says. This is actually higher than we previously projected,
because our earlier figures included a
number of uncommitted South African
mining projects that were scheduled to
come online towards the end of this
year and in 2009. Now many of these
projects are rethinking their strategy
based on the energy situation.
EMOTIONAL GOLD
Gold has, of course, been the headlinegrabber over these past few months, and
what can you say about the yellow metal
that hasnt already been blogged and
bandied to death? Its risen 55% over the
past year, topping out above $1,000 per
troy ounce before settling back to $900
at press time.
Gold bugs those end-of-theworlders who seem to materialize by
the thousands whenever the global
economy shudders are justifiably

happy. But are their doomsday
scenarios justified?
Bob McKee, chief economist at
Independent Strategy, doesnt think so.
He started getting long gold between
$330 and $350 in 2003 (see Golden
opportunity, left), citing three drivers
that, in hindsight, are clear to all: the
current account deficits pressure on
the dollar, growing political uncertainty and an impending reversal of the
liquidity boom.
All three remain in effect today, and
the same counter-arguments are being
offered now as then, at least as far as
the dollar is concerned. Some people
argued then that money flowing into
Asian economies would be recycled
into dollars, McKee says. Theres
some truth to this, but there is also a
growing pressure to diversify.
One counter-argument petered out
three years back: namely, that the

worlds central banks would dump tons
of the yellow metal on the market if it
ever began to overheat. Up until
three or four years ago, that was a real
concern because the central banks still
saw gold as a dead thing, he says. But
they have done their dumping, and
have no more left to sell.
The other drivers have only gotten
stronger, and the question now is
whether they have become so strong
that the market has already discounted
them. McKee doesnt think so.
We still have some room to go in
all three drivers, he says. Assuming
that the U.S. economy went into
recession this last quarter, and knowing
that recessions tend to last nine to 12
months, we can expect dollar weakness
to continue for at least the next
two quarters.
Then, he says, just when the United
29
Markets continued
COPPER DOLLAR
Copper has rallied by a greater multiple than gold this century, moving from below 60
to more than $4 per lb.
42500
40000
37500
35000
32500
30000
27500
25000
22500
Feb Mar Apr Jun Jul Sep Oct Dec Jan Feb Mar Apr Jun Jul Aug Oct Nov Jan Feb Mar Apr
2007
2008
Source: eSignal
States begins to pick up steam, the

other OECD countries could be slipping into recession with low interest
rates sparking fears of inflation.
His recommendation: hold your gold
for now, but dont expect the vertical
trend of the last year to continue.
HSBC analyst James Steel is also
gingerly bullish but warns the end
could be near.
The bullish argument comes from the
safe haven argument. There are no
reliable estimates of how much toxic
debt remains in the (mortgage) market
and how that debt is distributed, he
wrote in a mid-March newsletter.
Regarding precious metals prices,
there is also the separate but related
question of whether a commodities
Tech Talk: MA in Gold

BY J O S E P H N I C H O L S O N
hough one of the least sophisticated technical indicators, the simple-moving average (SMA) has become a
useful tool for trading precious metals, particularly gold.
Smoother and slower moving than the more complex exponential-moving average (EMA), the SMA flattens short-term
volatility to help traders gauge trends and judge support
and resistance levels over intermediate time frames.
The chart shows weekly gold futures overlaid with fiveand 50-week simple moving averages. The sensitivity of the
five-week moving average makes it track actual prices closely, but more importantly, the chart reveals the five-week
moving average works as a key support level in periods of
increasing price, and that resistance there indicates further
price declines. Understanding the markets response at the
five-week moving average not only clarifies the direction of
the underlying trend, it also directs traders to where to
place buy, sell and stop orders to take advantage of both
the dips and the rips.
SOMETIMES SIMPLE IS BEST

$ per oz.
1050.0
50-week M.A.
1000.0
900.0
The 5 sma acts as resistance in declines
850.0
800.0
750.0
700.0
650.0
600.0
550.0
It acts as support in rallies
500.0
450.0
400.0
5-week M.A.
Nov Jan Mar May Jul Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr
2005
2006
2007
2008
Source: eSignal
Similarly, the 50-week moving average can be interpreted as a proxy for the bull market in gold, which is useful for
understanding price action and planning trades. Notice the
50-week SMA has been strong support for gold during the
bleakest periods of its recent history. Even after the sell-off
in May 2006 and the ambiguous price action of early 2007,
support at the 50-week moving average has been the base
on which subsequent advances were built. Though losing
the 50-week moving average could create serious doubts
about the bull market in gold, even the steepest declines are
merely corrective with price remaining above it.
30
FUTURES | May 2008
Buying in any market involves risks, but monitoring

developments in the simple moving average on these two
time frames will give the savvy investor advance warning of
future price action.
Joe Nicholson is an independent analyst and the resident metals specialist

at www.TradingTheCharts.com. His work appears on many Web sites and
hes a contributor to Precious Metals Monthly, a publication of the
Northwest Territorial Mint.
bubble is in the process of bursting, he

adds. Although the commodity rally is
in part related to the credit crisis, in
that the crisis has undoubtedly encouraged substantial purchase of hard
assets, commodity prices, including
precious metals prices, are also subject
to a slew of other factors.
Specifically, he warns of a divergence
between commodity prices and economic growth: prices cant keep going up if
the economies of the world are slowing
down. We believe the slump in commodity prices is evidence that investors
are reassessing likely commodity demand
levels, and therefore also prices, after the
recent run-up, he says.
COPPER ROULETTE
With copper hovering above $8,000 per
ton ($4 per lb.) and metals like gold and
nickel breaking long-respected milestones, the question on copper traders
minds is whether the metal can breach

the once unheard-of price of $10,000 per
ton. In the most recent edition of his
Copper Monitor, titled High Prices:
Market Flavour or Fundamentals?,
CRUs Trench identified 10 events that
would have to happen for that level to
be breached.
The five that are necessary (condensed to four for brevity) to stay above
$8,000 are: Chinese consumption maintains double-digit growth, U.S. consumption holds steady, Chilean and
Central African supply remains clogged
and non-fundamentals like market sentiment remain strong.
Five events that are necessary to get
above $10,000 (also condensed here)
are: some sort of nationwide supply
catastrophe like the one that has
impacted South Africa, a flurry of
micro supply disruptions, developing
world demand growth outpacing devel-
oped world contraction and hedge fund

lemmings going bonkers over the stuff
and buying it like mad.
The first five are already over the
line, which is why were at these levels, Trench says. Its like weve completed the pentathlon and now want to
see if they can do the decathlon.
Of the questionable five, he says
number six, a nationwide catastrophe
like the one that has befallen South
Africas mining industry, is the least
likely to take place. Thats something
you get once every few decades, he
says. The others have a fair chance of
coming through.
And, he might add, once every few
decades isnt as much of a long shot as
FM
it may seem.
Visit Your DAILY Futures Resource:
31
EQUITY TRADING TECHNIQUES

Gann Theory provides helpful strategies for stock and ETF traders. Here,
Gann is used to break down a sector index and analyze its component
stocks. Well look at the U.S. housing market, not only to demonstrate the
technique but to perhaps gain some insight into a possible recovery.
What goes down

BY JAMES A. HYERCZYK
ann Theory includes a number

of trading concepts above
and beyond the familiar
Gann angles. One of the lesser-known methods applies to why one
market goes down and another goes up.
When faced with such a strategy, stock
traders should immediately relate this
to pairs trading, and today, thanks to
the exchange-traded funds (ETF) market, we can devise even more creative
ways to apply this idea.
This particular discussion in Gann
Theory goes on to describe a trading
strategy that selects a sector that is relatively strong, and then a stock inside
that sector that is relatively strong.
Now, here is where the techniques
come into play. Using Gann angles,
retracement zones and a trend indicator chart, we can find ways to exploit
the inner-strength concept that W.D.
Gann proposed.
Ganns basic premise was to buy the
stocks in a strong position and sell the
ones in a weak position. He urged the
trader to observe price charts of the
individual stocks of interest, as well as
the charts of sectors that contained
those stocks. Gann also noted that sec-
32
FUTURES | May 2008
tors and stocks must be studied to

determine their relation to an index of
all stocks. This is the basic top-down
analysis technique.
THE HOME MARKET
To demonstrate this strategy in the context of Gann analysis, we can start with
the Dow Jones U.S. Home Builders
Index. This index demonstrates how
and when the trend turned based on the
main trend indicator and Gann angles.
It also shows how the index and stocks
moved in the same direction using
the main trend indicator and
Gann angles.
In addition, because
this market has trended
down for so long
and has now
become one of
the most
important
economic
indicators for
the U.S. economy, this analysis
suggests when
the trend may
turn, signaling
the start of either a retracement of the

downtrend or the start of another rally.
The first step is to gather information on the index in this case, the
Dow Jones U.S. Home Builders Index.
(Another option for this study would
be the S&P Home Builders ETF
(XHB), but the data do not start until
July 2006, a year after the top of the
housing market.) Then construct monthly, weekly and
daily charts to determine the
trend and trading style of
this market. Examine the
component stocks, and
come to an understanding
of which ones have been
performing strongly and
which ones have been performing weakly.
The Dow Jones U.S.
Home
Builders
Index includes several stocks. To isolate
the strongest and weakest individual homebuilders stocks, lets
focus on the top holdings. As of Feb. 28,
2008, the top home-
builder stocks that were part of the

index were:
Pulte Homes Inc. (PHM)
Hovnanian Enterprises Inc. (HOV)
Lennar Corp. (LEN)
Kb Home (KBH)
Toll Brothers Inc. (TOL)
Beazer Homes USA Inc. (BZH)
Centex Corp. (CTX)
Meritage Home Corp. (MTH)
At this point, we need to review
monthly, weekly and daily charts of
all the relevant stocks, applying a
trend indicator, price indicators and
time indicators. A Gann main trend
indicator is a good place to start, especially when used in conjunction with
Gann angles. Knowing the retracement zones of the various ranges that
are created on the charts is also
important. Finally, studying important
time periods such as cycles, seasonals
and anniversary dates can help you
assess the strengths and weaknesses of
the stocks. Studying time also helps
you know whether the tendency of a
stock is to lead or lag the index.
A stocks leading or lagging tendency can be found by studying time periods of tops and bottoms, then comparing them to an index or other individual stocks. Trying to pinpoint which
stocks are weakest or strongest is best
done with Gann angles.
Simply stated, the angles on the
monthly and weekly charts are more
important than those on the daily
chart. The major changes in trend tend
to begin on those stocks, while the
daily chart may change trend several
times within the main trend. Using
this method, we assess strength or
weakness by the position of the stock
in relation to the Gann angles drawn
from major tops and bottoms. The further away from the starting point of
the angle, the more important the
change in trend. This can occur when
crossing an up-trending angle from a
bottom or a down-trending angle from
a top.
In this case, we are trying to deter-
mine the weakest or the strongest stock

in the group. A stock is considered
weak when it has completed distribution and broken under a 45-degree
angle from a major bottom on the
weekly or monthly chart. It also can be
considered to be in its weakest position
when it has fallen below 50% of a
major range. Generally speaking, weakness can be shown when a market
breaks key retracement points, but
breaking Gann angles reveals even

more information. It is important to
watch when an index shows its first
sign of weakness because this may indicate the rest of the stocks in the index
will follow. Breaking the first important angle coming up from the last
main bottom in the final rally in a bull
market is usually the best indication.
Following a prolonged move down
in terms of price and time, it is impor-
THATS A TOP
Following the swing top formation on the monthly chart in September 2005, we can say
the housing index made a technical top. However, this does not necessarily mean it has
established a new downtrend.
1039.06
$DJUSHB MONTHLY
GANN ANGLE TRENDING ACTION
1,100.00
1,000.00
900.00
790.31
800.00
807.15
700.00
600.00
545.75
500.00
245.76
1x2
02
Jul
03
Jul
04
Jul
05
Jul
06
Jul
07
Jul
08
Jul
09
1x1
400.00
1x1
300.00
Jul
Source: Tradestation
BREAKING ANGLES
KBH topped in much the same manner as the housing index itself. From the chart, we can
see that the downtrend is currently being controlled by both the series of lower tops and
lower bottoms, along with down-trending Gann angles.
81.99
85.45
KB HOMES MONTHLY
GANN ANGLE TREND
80.00
70.00
60.00
56.08
60.82
50.00
2x1 40.00
37.89
30.14
02
Jul
03
Jul
04
2x1
15.76
Jul
05
Jul
06
Jul
07
Jul
20.00
1x1 1x1
08
Jul
30.00
09
Jul
33
Equity Trading Techniques continued

tant to draw up-trending Gann angles
once the market has made a main bottom. On the initial move from the
main bottom, a stock is always in the
strongest position when it is holding
above the most acute angles on the
daily, weekly or monthly charts, especially on monthly and weekly charts.
The best sign that an index or stock is
ready to turn higher following a large
sell-off is the breaking of the monthly
or weekly 45-degree angle from the
main top. An additional sign of
strength will be the crossing of a major
retracement zone. To get a signal close
to a bottom, watch for the breakout
above Gann angles from the last main
top before the bottom.
To trigger a trade, there must be
confidence in the analysis. The key to

using this technique for entry and exit
is to determine the leading and the lagging stocks in the group being studied.
Watch for the stock that breaks out
from the pack to overtake either a
down-trending Gann angle for the
start of a rally or an up-trending angle
for the start of a decline.
SEPARATE THEM
When comparing stocks to an index,
first define those stocks that are leading,
lagging or trading in sync with the index
by time. Using this to analyze from the
top yields some interesting information
about the housing index. None of the
stocks topped before the index topped
on July 20, 2005. CTX, HOV, KBH and
UPTREND IN MAKING?
If the housing index can hold the January bottom through April, and particularly through
August, we can declare a new technical bottom fully formed. A savvy trader would look for this
price action in both the index and component stocks, such as KBH (below).
1x1
81.99
85.45
KB HOMES MONTHLY
TOPPING ACTION
80.00
70.00
60.00
56.08
60.82
50.00
2x1 40.00
37.89
30.00
30.14
02
Jul
03
Jul
04
15.76
Jul
05
Jul
1039.06
06
Jul
07
Jul
20.00
08
1x1
Jul
09
Jul
1,100.00
$DJUSHB MONTHLY BOTTOMING ACTION

WITH FIRST UPSIDE TARGET
1,000.00
900.00
790.31
800.00
807.15
1x1
600.00
50.00% (518.04)
545.75
500.00
1x1
1x1
245.76
02
Jul
03
Jul
04
34
FUTURES | May 2008
Jul
05
700.00
Jul
06
Jul
300.00
1x2
07
Jul
08
400.00
Jul
09
Jul
TOL topped on the same date and BZH,

LEN, MTH and PHM topped on dates
after the index. Based on this analysis,
the trader should focus on CTX, HOV,
KBH and TOL.
When trying to decide if a valid bottom has been formed, the process
should be reversed. Isolate those stocks
that have bottomed with the index.
The housing index bottomed on Jan. 9,
2008. According to our simple analysis,
CTX bottomed before the index on
Nov. 27, 2007. BZH, HOV, KBH,
PHM and TOL bottomed on Jan. 9,
2008. LEN and MTH lagged the index
in terms of time.
This step helps to break down the
stocks into a manageable list. We now
can focus on the stocks topping with
the index (CTX, HOV, KBH and
TOL) when the market started its
decline, but currently, while the index
is developing bottoming action, our
focus is on BZH, HOV, KBH, PHM
and TOL.
After developing a focus list
designed by time, the next step would
be to analyze the index and stock by
trend. On July 20, 2005, the housing
index made a high at 1120.47. Using
the monthly chart, it was not until
September 2005 that we were certain
of at least a swing top formation as the
market made two consecutive lower
highs and lower lows (see Thats a
top, page 33). At this point, the
trend had not turned down because
the last swing bottom at 781.17 had
not been violated.
The market delivered a clue that a
top was being formed because the twomonth break from the top was greater
in price than the previous two-month
break from 936.91 to 781.17. In
October 2005, the market gave the
first solid sign that the trend was getting ready to turn when time overbalanced a previous down swing. The
next confirmation would be a rally less
than the previous rally in terms of price
and time. The previous rally was
781.17 to 1120.47, or 339.30 points, in
three months. Working off a low at
807.15 from Oct. 19, 2005, the next
rally would have to be shorter in duration and priced to indicate a top. The
next up move fell short of the objective at a down-trending Gann angle
and retracement zone. Following this
secondary lower top, the housing index
turned the trend down and broke considerably until its most recent bottom
on Jan. 9, 2008, at 245.76.
In addition to the swing analysis,
the down move was confirmed when
the market broke through up-trending
Gann angles drawn from the last
swing bottom before the top. Downtrending Gann angles from the top
and subsequent lower tops are controlling the trend at this time, along
with the lower tops and lower bottoms
from the swing chart.
A similar pattern developed in KBH.
The first leg down from the 85.45 top
on July 20, 2005, was 24.63 in three
months. This was considerably greater
than the previous monthly downswing
from 40.95 on March 31, 2004, to
30.14 on May 12, 2004. This first clue
was confirmed when the subsequent
rally failed to exceed the previous
swing rally. In addition, the market
found Gann-angle and retracement zone resistance before changing trend
and trading down to 15.76 on Jan. 9,
2008 (see Breaking angles, page 33).
Because we have substantial evidence regarding how the housing market stocks topped, we can use the same
tools to forecast how the market will
bottom. Even if a major change in
trend does not occur during the period
that our analysis takes place, the trend
trader may be able to use this information to manage trailing stop points.
CAN WE SEE THE BOTTOM?
The two-month higher-high, higherlow pattern from Jan. 9, 2008, makes
245.76 a main bottom. Since the
main top in 2005, the housing index
has only formed two main bottoms.
The first was 807.15 to 1039.06, or
231.91 points, in three months. The
second was 545.75 to 790.31, or
244.56 points, in seven months.
Based on the new main bottom at
245.76, the first clue that this index is

forming a major bottom would be an
overbalancing of price and time (see
the first chart in Uptrend in making?
left). The nearest balance point is
477.67 during April 2008. The second
balance point is 490.32 during August
2008. A sign that a good base is being
formed would be this index holding
the January low beyond April. The
best sign would be holding the January
bottom beyond August. This action
would be an overbalancing of time.
Holding the January bottom followed
by a subsequent rally to 490.32 before
August would overbalance price, also
an important long-term bottoming signal. Earlier confirmations could be the
crossing of a two-month swing top or
the breaking of a major down-trending
Gann angle.
A similar pattern is taking place in
KBH. April is an important month for
balancing along with August. Rallying
beyond April while holding the
January bottom will be a significant
sign of a bottom (see the second chart
in Uptrend in making?). Key balancing prices to watch for signs that the
trend is getting ready to turn higher are
33.95 and 36.93. Breaking the major
Gann angles from the last three main
tops will also be significant.
The best signals are a combination
of pattern, price and time. We can
connect time in the index and the
stock to the anniversary of a main top
on Jan. 11, 2006, as well as the swing
count on the monthly chart.
Important prices can be horizontal
support from historical lows and
retracements, Gann angles from main
bottoms and main tops, and swing
moves. The best patterns to watch for
are a closing price reversal bottom or
a swing top breakout.
The Jan. 9, 2008, low in both the
index and the stock formed monthly
closing price reversal bottoms. The
key to triggering a strong rally would
be a confirmation of these reversal
bottoms with a breakout to the upside
through the February highs. A move
of this caliber also would take out
down-trending Gann angle resistance

from the last main top before the
major low. This combination could
trigger a strong rally.
On the downside, counter-trend
traders who do not want to pay up in
this bear market are more likely to try
to buy a 50% correction of the first leg
up from the January bottom to the
February high. Up-trending Gann
angles from the January bottom would
provide additional support. If this pattern took place, it would be almost a
mirror image of how the housing index
and KBH topped.
Using the monthly chart may be
more suited for the long-term investor;
however, the analysis technique can be
applied to all time periods. This is a
universal pattern. The logic is that
once a bottom is formed, the shorts
cover on the first leg up, but buyers do
not come in until the market makes its
secondary retracement of the first leg
up. This is because it is usually safest to
buy or sell when there is a good purge
of weak money, like a new yearly low
or a new yearly high. This technique
also works more favorably at extreme
points in the market. Finally, time
turns the trend because the buyers will
not go away and the shorts get tired of
giving back gains.
Let the market tell you when it
wants to change trend. In the cases of
the Dow Jones U.S. Home Builders
Index and KB Home, it is going to take
holding the January bottom and, at a
minimum, higher bottoms beyond
April 2008 and perhaps into
August 2008.
FM
James A. Hyerczyk is a Gann technician and
trading educator who has been analyzing
markets since 1982. He is the author of
Pattern, Price & Time, and he writes a
futures, forex, ETF and equities advisory
newsletter for firms, traders and institutions
at www.PatternPriceTime.com. He can be
reached at jhyerczyk@yahoo.com.
35
TRADING TECHNIQUES
Curve fitting is the bane of system developers, but by embracing the hindsight
provided by market prices we can calibrate systems and time frames within
them to improve overall returns.
Idealized models
for real profits
BY VALERII SALOV
ong-time system developer

Robert Pardo defines potential profit as what could be
realized by buying every bottom and selling every top. More precisely, it is the sum of every price
change where each change is taken as
a positive number. Pardo goes on to
suggest that a viable measure of trading performance is the ratio of the
actual net trading profit to this maximum potential profit figure.
We can take this concept a step further by looking at the effect of transaction costs on the maximum potential
profit and the distribution of the optimal transactions. Then, by examining
the inter-relationships of two maximum potential profit systems that use
different transaction costs, we can generate real-time trading signals.
Here, well look at this process as
applied to the corn market. Keep in
mind that while the pre-analysis
phase certainly uses the benefit of
hindsight, the out-of-sample results
will be based on stepping forward
through previously unseen data.
While this approach shares the same
potential downfalls of other trading
36
FUTURES | May 2008
systems, such as curve-fitting and

over-optimization, it is not inherently
more at risk of falling victim to the
irresponsible application of hindsight.
MAXIMUM PROFIT STRATEGY
Like any other trading strategy, the maximum profit strategy can buy or sell or do
nothing with each additional price bar.
At any time, the trader may hold a long
or a short position or be out of
the market. Given industry
trading procedures and
margin requirements,
we can formulate a
maximum profit
trading strategy
for any sequence
of prices.
However, if
more than two
profitable transactions can be found,
then a maximum trading strategy is a reversal,
always switching from
long to short and vice
versa between the first
and the last transactions.
From here, maximum prof-
it strategies differ by how they reinvest

profits. However, in this discussion, we
are interested in the simplest type that
works with a fixed number of units and
simple, single-contract positions.
Always in (right) is one way to
depict prices and strategy actions. It
illustrates settlement prices of July
2007 corn futures, traded on the
Chicago Board of Trade (CBOT)
between May 8, 2006, and June
28, 2007.
The positions of two
different optimal
trading strategies
are shown below
the price chart.
When the oscillator is at the top of
its range, the system initiates a long
position. When the
oscillator is at the bottom of its range, the system initiates a short position. When the oscillator
is in the middle, it is holding the position. The only
difference between the two
systems is the one depicted
in the top oscillator uses a per-transaction cost of $12 and the one depicted
in the bottom oscillator uses a pertransaction cost of $500. (Keep in
mind that these transaction costs are
not intended to reflect realistic commission and slippage values, but are
being employed here simply as part of
the analytical process.)
As a reminder, there is no magic
about these trading strategies. They
simply use the benefit of hindsight to
determine the most profitable entry
and exit prices given the two pertransaction costs. Over the period
shown, the maximum profit returned
by the $12-cost system is $69,015.
The maximum profit returned by the
$500-cost system is $22,800.
Clearly, the number of optimal
transactions decreases as per-transaction costs increase. For unlimited
trading costs the best strategy is do
nothing. If the costs equal zero, then
each nonzero price change would
result in a profit.
NEW MARKET PROPERTY
A maximum profit strategy does not
describe the strategy of an individual
trader. Its determined by prices, transaction costs and the market access processes in use by the industry. As such, what
it tells us about the market relates to
other market properties, such as trend
and volatility.
The maximum profit, a strategy
returning it and time distribution of
successful transactions is another form
of studying markets and their repetitive
statistical behavior. These studies add
to the information conveyed by traditional studies because they combine
price information, variable transaction
costs and trading rules to express
results in the most interesting view:
trading profits.
Because maximum profit strategies
can be expressed as a general market
property, they can be used like any
other indicator. Consider moving
averages. They are calculated on past
prices with the benefit of hindsight.
They are then shifted forward, as new
trading days dawn, for generating realtime out-of-sample trading strategies.

This non-anticipating property of a
strategy is essential for real trading.
The maximum profit strategy can
work the same way. The initial calculations can be performed on historical
known data and then that information can be analyzed for establishing
future positions.
MOVING FORWARD
When a new price arrives, we rebuild
the maximum profit strategy using
this larger time interval. As we add a
new price, we may see a change in the
two most recent transactions.
Remember, we are using a simple,
always-in system. The last transaction
will close a position and extract
marked-to-market profit. The ideal
ALWAYS IN
The oscillators below the price chart of July 2007 corn demonstrate the buy and sell
signals of two perfect trading systems. The only difference is one has a per-transaction
cost of $12, and the other has a per-transaction cost of $500.
470
450
430
410
390
370
350
330
310
290
270
250
5/8/06 6/17/06 7/27/06 9/5/06 10/15/06 11/24/06 1/3/07 2/12/07 3/24/07 5/3/07 6/12/07
Data: www.cbot.com
COST COLLECTION
Heres a visual representation of how various system combinations performed. Each line
represents a different low-cost value, while the accompanying high-cost value is the point
along the horizontal axis.
8000
7000
6000
5000
4000
3000
2000
1000
0
-1000
-2000
-3000
-4000
-5000
-6000
-7000
-8000
25
50
75
100
125
150
175
200
50
100
150
200
250
300
350
400
450
37
Trading Techniques continued
PERFORMANCE MATRIX
Here are the evaluation reports for a number of low-cost/high-cost system combinations.
As you can see, combinations using $50 for the low-cost system did well across a range of
higher-cost values.
Large Cost/Small Cost
200/25 150/50
200/75
225/100 225/175
Total P&L
$5,934 $6,123
$6,647
$4,825 $7,263
Gross profit
$17,783 $15,272 $16,413 $13,919 $11,932
Gross loss
$11,849 $9,149
$9,766
$9,095 $4,669
Total number of trades
84
48
47
37
13
Number of winning trades
33
22
25
19
7
Number of losing trades
51
26
22
18
6
Average profit
$539
$694
$657
$733
$1,705
Average loss
$232
$352
$444
$505
$778
Largest winning trade
$3,114 $2,339
$3,114
$2,089 $3,614
Largest losing trade
$1,749 $2,124
$2,124
$4,724 $1,824
Max number of consecutive wins
5
3
3
3
3
Max number of consecutive losses
5
4
4
3
2
Maximum consecutive profit
$4,003 $2,790
$4,453
$2,427 $5,878
Maximum consecutive loss
$1,749 $2,124
$2,124
$4,724 $1,936
Maximum account value
$16,520 $16,284 $16,784 $15,912 $21,150
Minimum account value
$8,797 $8,421
$7,667
$8,094 $9,005
Largest drawdown
$3,358 $4,284
$3,950
$5,299 $4,950
Average drawdown
$377
$429
$304
$264
$279
location of this artificial transaction

depends on future prices, and its location may or may not change when we
add a new price.
For example, assume todays transaction is a buy. The order is to close
the existing short position and exit.
However, if tomorrows price is less
than todays price, then it is more
ideal to shift this trade to the new
day. If the next days price falls again,
then the transaction shifts further to
the right. This news does not change
the location of the previous transaction that entered the market on the
short side.
Eventually price increases. If the
increase does not compensate for the
artificial cost applied to the strategy,
then the last transaction remains. If,
on the next day, the price decreases
substantially, the last transaction shifts
again. However, if the price increases
too much, then the last closing buytransaction becomes a reversal transaction without changing its location. A
new closing sell-transaction is added
for today. When this happens, the last
38
FUTURES | May 2008
transaction becomes the previous one

with a now fixed location.
COMBINING STRATEGIES
We can gain even more insight by
comparing the signals from two maximum profit strategies, each using a
different cost.
Say the market falls. If the drop
exceeds both costs, then each strategy
fixes previous transactions. The trades
are either the first sell transactions or
the latest reversal transactions. With
each new decreasing price, both strategies generate the closing buy transaction, shifting to the right. Despite the
cost differences, as long as the price is
dropping, the two strategies agree.
An increase in price, however, may
cause the two strategies to work differently. The one with a smaller cost
may fix its new previous transaction as
buy reversal. However, at the same
time, the strategy with larger cost does
nothing. This is because the price
change does not compensate for the
larger cost.
This divergence rule catches a local
trend change. As all traders know,

identifying the advent of a new trend
can be quite profitable indeed. If the
price continues along this new trend,
the strategy with the larger cost eventually switches its position, as well.
The rules of this simple strategy and
the analysis of the system results are
performed in custom C++ routines,
some of which are provided here as a
convenience to those familiar with the
language. However, all of this should
be reproducible in off-the-shelf trading
analysis software And in any case, all
concepts are fully explained on the
conceptual level.
int action = 0;
if(largeLast == 0 && smallLast == -1)
{int newPosition = 1; action =
newPosition - position; position =
newPosition;}
if(largeLast == 0 && smallLast == 1)
{ int newPosition = -1;
action = newPosition - position;
position = newPosition;}
At the beginning, the position is set
to flat. The first three commands in
the loop iteration include a new price
in the analysis and determine whether
the positions of the low- and high-cost
strategies agree. A new position is set if
the signal from the high-cost strategy is
do nothing, and the signal from the
low-cost strategy is a transaction. The
new position is long, if the low-cost
transaction is sell, and short, if the lowcost strategy says to buy.
The rule does not change its position if both strategies generate the
same action when another price is
added. This allows the system to go
with the trend.
Well use a custom C++ application
to evaluate the performance of this
strategy. The additional inputs are the
symbol (C), the initial margin
($1,400), the maintenance margin
($1,050) and the initial account size
($10,000). The cost, $12 per real
transaction, is applied. Varying the
two costs, we can expect a loss or a
profit. The selection of proper costs is
an optimization task. Generally

accepted procedures for back-testing,
optimization and walk-forward analysis should be followed.
For our purposes, well adjust the two
costs from $50 to $400, and from $25
to $200, in steps of $25. Cost collection (page 37) shows how the total
final profit varies for different values of
the low-cost strategy at different values
for the high-cost strategy. Each line
represents a different low-cost value,
shown in the key. The point along the
horizontal axis identifies the value for
the high-cost strategy.
The time frame of data is about one
year. While the July 2007 corn contract traded for a wider time interval,
the initial period of low liquidity
(when open interest was below 20,000)
is excluded. The data for July 2007,
when the contract is close to expiration, are also skipped.
Performance matrix (left) shows
that, during one year, five perspective
strategies trading a single contract create 48% to 72% returns on the
$10,000 account. In the worst case,
200/75, before getting the final profit
the account drops to $7,667. The strategy 225/175 temporarily doubles the
account, $21,150. We see how the two
cost parameters affect the number of
transactions, wins and losses, the ratio
of the average win to loss, and other
profit and risk statistics. This information is useful for building money management strategies, where one of the
goals is to determine the fraction of
capital allocated for a next trade and
maximize profit and minimize risk.
Note that these are results of optimized back-testing. A full cycle of
building a trading strategy includes
other stages and tests needed for building confidence in the strategy. For
more information on more rigorous
trading system validation, see Pardos
Design, Testing, and Optimization of
Trading Systems (John Wiley and Sons
Inc., 1992).
However, at this point we can see
that this area of study has promise. The
maximum profit approach and strate-
gies associated with it can serve for

building real-time strategies. These
rich concepts represent a new form of
studying the markets. Comparing them
to approaches based on raw price, this
form operates with additional information on transaction costs and trading
process, providing a new way to look at
the past and, therefore, a new way to
predict the future.
FM
Valerii Salov is the author of Modeling

Maximum Trading Profits with C++: New
Trading and Money Management Concepts
(John Wiley and Sons Inc., 2007). His book
includes several routines for programming and
analyzing your own trading systems. E-mail
him at v7f5a7@comcast.net.
39
TRADING TECHNIQUES
Trading E-mini futures profitably is difficult and can become nearly impossible
when relying on too many time frames and indicators. Here is a relatively
simple approach that involves price action and a basic five-minute E-mini chart.
Five minutes to
fame in the E-mini
BY AL BROOKS
rading does not have to be
complicated. For most traders, if
they take time to look carefully
at candle or bar charts, they will
quickly discover that price action alone
is all you need to observe to be successful. As a bar develops, consider the tone
of the market, whether the bulls or
bears are in control, and more importantly, who is trapped and who will
have to get out. It can be that simple.
While this approach works with all
time frames and all markets, it is efficient on five-minute charts of the Emini S&P 500. Typically, there are
from 10 to 20 set ups per day on the
five-minute time frame, which is far
more than needed to do well. If you
trade enough contracts, you only need
to net one or two points a day
to succeed.
Its typical (right) is a five-minute
chart depicting a normal day in the Emini S&P 500, while First shift (page
42) is a closer look at the first four
hours of trading. For example, 37 is the
37th bar of the day. By reviewing the
price action as this day unfolds, we can
point out several opportunities as they
occur. Along the way, we might refer
to various formations, but general price
40
FUTURES | May 2008
action, not specific patterns, will be

our primary guide.
As a rule, it is usually best to enter a
trade on a stop one tick above or below
the prior bar because you want the market to take you into the trade. Place
your protective stop at one tick beyond
the prior bar until you can scalp out of
part or all of your trade. Alternatively,
risk four to 12 ticks, depending on the
size of the average bar.
If youre letting some contracts
swing, move the stop to breakeven
after taking four ticks profit on the
scalp portion. Often, it is more profitable to just scalp for four ticks, but
when there is a strong reversal at a possible high or low of the day, or when
there is a strong trend, it is far better to
swing part or all of your position.
SET UPS
One important concept is that of a
High or Low 1 or 2. Heres how it
works. The first time in an upswing
that there is a bar that has a low below
the low of the prior bar, that bar is
labeled L1 (Low 1). Examples are Bars
5 and 41 in First shift. The next
occurrence is an L2, such as Bars 7, 28
and 45. Bar 38 is an H1 and Bar 15 is
an H2. There are several nuances to

this approach, and one or two will be
seen as the day unfolds.
Another concept involves signal and
entry bars. A signal bar is a set up but
not yet an entry. If the next bar extends
one tick beyond the high or low of the
signal bar, then that bar becomes the
entry bar. Often, it is wise to enter on a
breakout of either side of a signal bar.
For example, if there is a bull signal bar
and if the next bar takes out the low
instead of the high, then its usually a
good idea to go short because the existing trapped longs will drive the market
down as they cover. Bar 25 is such an
example. It is a bear reversal bar at a
new swing high that never triggered a
short entry. It also demonstrates why its
important to place an entry stop at one
tick below the signal bar to go short and
another to go long on a stop at one tick
above the high of the signal bar.
The example day opens with a large
gap down from the previous days strong
close, leaving all traders who bought
into the close with a substantial open
loss. Whenever there is a large gap
down, the bears are momentarily in
control. Bar 1 has a down close but a
five-tick downward tail, indicating that
some buyers do come into the market.

At this point, two things are worth
looking for over the next hour or so.
First, theres a bullish reversal bar after
some additional selling (this occurs at
Bar 3), and then a short entry on an L2
near the 20-bar exponential moving
average, which forms at Bar 6, leading
to a new low of the day. Because the
bears are in control, an appropriate
order would be a short entry on a stop
one tick below the low of Bar 1, with a
plan to scalp four ticks of profit.
However, a good option might be to
swing up to one-third of the position
because some gap days form the high on
the first bar; although its rare, the
rewards sometimes warrant the risk.
Considering the market is above the
starting level of the previous days
strong bull close and Bar 1 is attracting
some buying pressure, its probably a
good move to forego carrying any swing
contracts until more bearish strength
presents itself.
The four ticks of scalp profits we
were after come on Bar 2. It was a
strong bear bar with a large body and a
close near its low.
Bar 3 is always critical because it
determines the look of the first 15minute bar of the day. Bar 3 is often a
smaller bar and a reversal bar, and it
often works well to enter on its breakout
in either direction. Here, it forms a
strong bull reversal bar with a low below
the low of the prior bar and a close near
its high and well above the close of
the prior bar. Whenever a strong reversal bar occurs in the first 15 minutes or
so on a day with a large gap open, odds
are high for at least a scalpers profit on
the trade (four ticks net, which requires
a move that extends at least six ticks
beyond the high of the signal bar).
An L1 within a bar or two of the long
entry often also traps bears into shorts
and traps longs out of a good long, so
consider exiting the long on a threepoint stop since the set up is particularly
strong. Consider exiting prior to the
stop being hit if there is a new swing
low or a pullback that reaches about
75% of the move up (the low of Bar 3
ITS TYPICAL
This chart shows a typical day in the E-mini S&P 500. Theres sideways action, big trend
moves and numerous opportunities for profit.
1,449.00
1,447.00
1,445.00
1,443.00
1,441.00
1,439.00
1,437.00
1,435.00
1,433.00
1,431.00
1,429.00
1,427.00
1,425.00
1,423.00
1,421.00
1,419.00
1,417.00
1,415.00
12:30 11/21 7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30 11:00 11:30 12:00 12:30 11/22
@ ES.D 5-min CME L=1417.75 -28.25 -1.95% MAX (20) 1425.87
to the top of Bar 4); however, neither

could happen in the example case
because the three-point stop would be
hit first. If Bar 5 extends more than two
or three ticks below the low of Bar 4,
the bulls are likely in trouble, but one
tick is usually safe.
ADDING & REVERSING
Often, any move below the low of the
bar after the entry bar (if the set-up is
strong) is a stop run trap, making that a
good place to increase any existing long
position. In this case, because Bar 5
reaches 11 ticks below the entry of the
long from Bar 4, the market probably
will run up about 11 ticks or more above
the entry. The market often moves the
same distance as the risk it forces you to
assume. Here, a good trade would be to
take half of profits at four ticks, which
happens on Bar 5, and to take another
25% off at 10 ticks (just shy of the 11tick goal). This is reached on Bar 6. The
stop now can go to breakeven on the
remaining 25%, with a consideration of
reversing to short on an L2 near the
EMA. Countertrend moves often end
after two legs and often around the
EMA. Bar 6 has a large bear tail that
tags the EMA, and it breaks above the
prior high of the day (Bar 1), forming
something of an awkward double top
(Bars 1 and 6). We should look to
reverse any longs under this bars low.
Again, the price action calls for a scalp

of four ticks on half or a third of the
position, with the protective stop moving to breakeven for the remainder, and
the rest coming off at any new low for
the day (and possibly another reversal
to long) if the market keeps dropping.
In this case, with an order to reverse to
long at one tick above the high of Bar 8,
Bar 9 will get us long. Because the market has had several reversals this day, it
is a signal to switch to scalp-only mode
until a strong swing.
However, markets are fundamentally
unpredictable, and we get that on the
next bar. Bar 10 again tests the EMA
and fails, forming a bear reversal bar.
This is the second test of the EMA, and
second tests usually lead to big moves.
Also, it forms a downward-sloping double top with the high of Bar 7 (it could
not go above this entry bar of an earlier
short). So, its fair to expect a breakout
of the range for a measured move down
(a move that extends below the range
for as many points that made up the
range, here nine points from the high of
Bar 6 to the low of Bar 8). Scalp out
four ticks on Bar 11 and move the stop
to breakeven. Plan to take more profit
at just shy of nine points, which happens on bar 17.
Bar 13 is a large bear trend bar and a
breakout to a new low of the day. Large
trend bars that break out often fail on
41

FIRST SHIFT
Each bar provides a plethora of information about whos in control, the bulls or the bears.
Armed with this information and careful entry points, you can produce significant profits.
@ ES.D 5-min CME L=1417.75 -28.25 -1.95% MAX (20) 1425.87
1,450.00
1,448.00
1,446.00
1,444.00
1,442.00
1,440.00
1,438.00
1,436.00
1,434.00
1,432.00
1,430.00
1,428.00
1,426.00
1,424.00
1,422.00
1,420.00
1,418.00
1,416.00
43
6
10
31
16
28
22
3
41
8
37
13
20
12:30
13:00
11/21
7:00
7:30
8:00
8:30
9:00
9:30
10:00
the following bar. However, there have

been several signs of the bears controlling this market, so the move likely will
extend for at least a second leg down.
Bar 16 is also a test of earlier short
entries (below Bar 8 and again below
Bar 12). At the close of Bar 14, you
should place an order to add to your
shorts at one tick below its low. This is
not filled. Bar 16 is the third up bar, but
both it and the prior bar have small bull
bodies and big tails, indicating that the
bulls are not strong. Move your sell stop
order up to one tick below the low of
Bar 16. You are filled on Bar 17.
THE TURNAROUND
Bar 18 is a small inside bull bar (neither
high nor low extend beyond the prior
bar). Inside bars often proceed a reversal
and usually indicate a higher low on a
smaller time frame. A higher low is a
necessary component of a bull swing, so
place an order to reverse to long at one
tick above the high of Bar 18 and an
order to add to your shorts at one tick
below its low. The result would be a
new short on Bar 19 and a four-tick
scalpers profit during Bar 20.
Bar 20 is another small bull reversal
bar. This second attempt at a bull reversal adds to the conviction that the bulls
are taking control and that the bears are
taking final profits. Having been
stopped out of all remaining short posi-
42
FUTURES | May 2008
tions, we would place an order to go

long at one tick above Bar 20 and a second order to go short at one tick below
its low. Bar 21 extends above the high
of Bar 18, the first bull signal bar that
wasnt confirmed. Bar 18 appears to be a
one-minute swing high, and now the
market has a higher high. Though the
first high was not part of the bull leg,
going above it is a sign of strength. Bar
21 also breaks the bear trendline across
the tops of Bars 10 and 16.
Bar 23 reaches down exactly to the
high of the long signal bar (Bar 20), just
far enough to run stops. If you exit, you
would have to return to long at one tick
above its high because you would now
have a small higher low and a successful
test of the breakout into a bull swing.
Also, it is a test of the trendline breakout. Signs that the bulls are gaining
strength is confirmed on Bars 24 and 26.
Bar 24 reaches above the high of the
minor prior high at Bar 22, so there is
now a higher high after a higher low.
Bar 26 extends above the Bar 16 high,
forming a higher high. The market runs
up to Bar 31 without a major pullback,
which is a sign of sufficient bullish
strength that traders will be looking for
at least a second leg up after a pullback.
Bars 26 to 33 all close above the EMA.
At this point, you should expect at least
one more leg up after an attempt by the
bears to reassert themselves.
BIGGER SWINGS
The sell off down to Bar 37 also breaks
the bull trendline from Bar 20 to 31.
The bear trap is set and the new bears
are worried by their inability to move
the market down forcefully. Also, bulls
are eagerly looking for any sign of
strength to add to their longs near the
EMA. Bars 35 and 37 have down closes,
and they are two attempts by the bears
to gain control and both fail. Bulls go
long and bears exit at one tick above
Bar 37. This results in a significant
higher low. Bar 38 is a strong bull trend
bar that broke above the EMA and
broke above the bear trendline from Bar
32 to Bar 34.
Now, you should expect at least two
legs up, which the market gives you:
one ending at Bar 41, and the other at
Bar 45. Bar 43 is a new high for the day
and a huge second leg up (Bar 20 to Bar
31 was the first). This second leg up also
had two legs (Bar 37 to Bar 39 and Bar
41 to Bar 43).When the day is not a
clear and strong trend day, you should
always be looking for set ups that allow
you to fade new swing moves and new
highs and lows for the day. Bar 43 gives
you several and you would sell, expecting at least a scalpers profit and likely
two legs down.
This approach is difficult to quantify
and requires practice to develop a feel
for the market; however, once learned,
it works consistently. For most of us, the
five-minute chart is the best time frame,
providing enough time to spot most set
ups and enter the market. The fiveminute chart offers an incredible opportunity to a day-trader if you remain
patient, trade within your means and
take time to understand what the price
action is telling you.
FM
Al Brooks, M.D., stopped practicing medicine 20
years ago to raise his kids. He has been day
trading for his personal account ever since. He
can be reached at Albrooks223@gmail.com.
TRADING TECHNIQUES
The metals markets have been booming and are showing no signs of slowing
down in 2008. Some of the better opportunities have been in silver, the industrial
and precious qualities of which make its story one of the most compelling.
Silver shining brightly

BY DAVID MORGAN
ithout a doubt, most

investors, if they could,
would only employ
investment strategies
that maximize their profit opportunities, minimize their risk and take little
time or effort. Call it human nature.
Call it wishful thinking. Call it pure
fantasy. Weve all at least hoped for
such a dream investment.
The truth of the matter, however, is
that such dream investments do exist
with hindsight. If you had, for
example, bought into the Japanese
markets in the early 1980s, rode
through the ups and downs and cashed
out in 1990, you could have retired on
the spot. The same goes for the U.S.
tech boom during the 1990s. The gains
in that decade could have been
truly spectacular.
Alas, we cant trade on hindsight,
but we can learn from it. Perhaps
lessons learned during these two recent
massive bull markets can guide us as we
assess a current bull move, the one
occurring in the metals markets. We
will apply some of that perspective to
the silver market, discuss some of the
major fundamentals that drive silver,
44
FUTURES | May 2008
and examine some techniques for guiding your entries into the market.
MONEY METALS
Gold and silver have been recognized
as stores of value for thousands of
years. Gold has certainly done its job,
preserving wealth for those who have
invested in the yellow metal. But
despite its exceptional performance of
late, gold hasnt always offered the
best returns. In 2004, silver outperformed gold. While the price of gold
increased approximately 6% from the
last day of 2003 until the last day of
2004, the price of silver increased
more than 15% during the same period. Silver also outperformed gold in
2005 and 2006; however, gold
returned to the lead in 2007.
Going forward, there are several
reasons silver likely will continue its
position of strength. One of the most
bullish factors is simply that demand
outstripped supply for 16 straight
years. That means that from 1990
through 2005, the world used more
silver each year than what mines took
out of the ground. Because of that, the
above-ground stockpile of roughly two
billion ounces of fine silver has fallen

to around 500 million ounces or less.
While weve returned to a net gain in
silver production in the last few years,
silver investors also have flipped from
net sellers to net buyers, easily taking
the excess production back out of
the market.
Silver also has a considerable industrial use. Indeed, few realize that there
actually is less silver bullion available
for investment than gold, which continues to move higher despite not
experiencing the same demand/supply
imbalance that persisted in silver (see
Which is more precious? right). For
both silver and gold, we are not talking about jewelry or art forms of the
metals. However, if silver coinage
were added to the silver bullion, the
total would still be approximately one
billion ounces, which is less than onethird of the gold supply, if gold coins
are added to the mix as well.
The silver market is not only much
smaller than the gold market physically, but it is also smaller monetarily.
The total amount of silver, in price
terms, might equal $18 billion (factoring in bullion and coins), whereas
PRICE-INELASTIC
The largest use of silver comes from
industrial demand, jewelry/silverware
and photography, in that order (see
Uses for silver, below). Industrial
demand for silver makes up 51% of total
demand, and this area is also the fastest
growing area of silver demand. The
industrial portion of the market is growing at about 2% per year. It is important
to understand that in almost all
instances, the amount of silver used in a
cell phone, laptop computer or
microwave oven is so small that it cannot be recovered. For all practical purposes, the silver used in these applications is lost and unrecoverable.
Economists describe the industrial
demand for silver as price-inelastic.
Price inelasticity means that demand
for the product does not move much
relative to changes in price. One reason might be that because a small
amount of silver is used in each application its an insignificant factor in the
price of the product.
The amount of silver used in the
manufacture of a battery, an automobile, a computer or cell phone is
insignificant when compared to the
price of labor and other materials. A

doubling in the price of silver would
not affect, for example, Hondas cost in
making an automobile. Because the
price of silver has such a small relationship to the cost of the finished product,
companies have had little incentive to
seek out a reliable substitute.
tle in the way of people sending in

their used silver items to be smelted
down. (Yes, some of this does take
place, but it is insignificant.) Almost
the entire scrap silver market comes
from film recycling.
So, does digital photography, which
eliminates the need for film processing,
impact the silver market? Yes, in the
areas of graphic arts and radiography, it
does impact the market slightly.
However, although some cant seem to
accept it, photography always has been
such a small factor that there really is
no noticeable impact.
In terms of future growth, there are
more patents issued for silver on an
annual basis than for all other metals
combined. Reasons are numerous.
Silver reflects light better than any
THE DIGITAL EFFECT

A lot of analysts like to point to the
photography industry as a major driver
of silver prices, but the color photography market uses no silver, because all
silver on the film is brought back out
into solution when the color print is
made, allowing it to be recycled.
The industry jargon for the silver
from photo recycling is, as you might
imagine, scrap. Certainly, there is lit-
WHICH IS MORE PRECIOUS?

According to the CPM Groups Silver Survey for 2007, there are approximately 400 million
oz. of silver bullion and 2 billion oz. of gold bullion.
2,500
1990
1990
2007
2,000
Million ounces
gold bullion and coins would be worth

well over $1 trillion. This fact plays
out in the price action of the two metals, making silver far more volatile
than gold. However, as the precious
metals markets continue to gather
strength throughout this decade, just a
small increase in new silver purchases
could have a far greater impact on silver prices than the same amount of
money invested in gold.
Although no one can predict when
it will happen, the infrastructure of the
silver market itself suggests that once
the physical supply is so small that
commercial users sense a coming shortage, silver will show price strength that
few believe possible today. At that
point, silver users in the defense, medical, automobile and electronics industries will all compete for limited stocks,
while investors and traders are chasing
the profit potential.
1,500
1,000
2007
500
0
Gold
Silver
Source: CPM Group
USES FOR SILVER

Silver isnt just used in earrings. Its also a significant ingredient in water purification
systems, electrical components, catalysts and other industrial applications.
Batteries
Bearings
Brazing and Soldering
Catalysts
Coins
Electrical
Electronics
Electroplating
Jewelry and Silverware
Medical Applications
Mirrors and Coatings
Photography
Solar Energy
Water Purification
Source: The Silver Institute
45
SPIKED!
Capturing big moves in silver requires lots of patience. However, it can pay off. Notice
how quickly the spike low follows the spike high.
SILVER - CONTINUOUS CONTRACT (EOD)) INDX 28-FEB-2008
Open 16.94 High19.97 Low 16.23 Close 19.71 Chg +2.71 (+15.98%)
20
Spike high?
19
18
Spike high
17
16
15
14
Spike low 13
Spike low
12
Spike high
11
10
9
8
Spike low
7
6
5
4
00 A J O 01 A J O 02 A J O 03 A J O 04 A J O 05 A J O 06 A J O 07 A J O 08
$Silver (Monthly) 19.71
MA (50) 10.27
MA (200) 6.18
Volume undef
Source: StockCharts.com
other element. It also is an excellent

conductor of electricity. In fact, its the
only element for which this attribute
doesnt change with oxidation. Plasma
screen TVs use silver. All of these
attributes add up to make silver one of
the best non-stock technology stocks
you can buy.
TRADING TECHNIQUES
It is best to develop a strategy based
on our overriding assumption that silver is in the midst of a long-term bull
market. Our goal here is to capture
intermediate-term pullbacks in this
extended up move in the context of
the current silver fundamentals.
A solid base is to study the
Commitments of Traders Reports
(COT), looking specifically for spike
high and lows. The COT reports are
issued by the Commodity Futures
Trading Commission (CFTC) and tell
us the positions of commercial entities
and extremely large traders. You can
find them on the CFTC Web site at
www.cftc.gov. Silver, more than most
commodities, exhibits a behavior of
going parabolic for approximately
three trading days before the intermediate top is reached. If the parabolic
move coincides with a COT report
46
FUTURES | May 2008
that shows large short open interest

for commercials, a favorable entry
point
may
follow
(see
Spiked! above).
There are two significant drawbacks
to this method. First, the number of
trades per year is few, so extreme
patience is required. Second, after
youve spotted the downturn, you now
need more patience to wait for the bottom to completely form. Often, but not
always, a spike bottom is a good indication that the market is safe to be reentered on the long side.
DOLLARS ROLE
Investors are concerned with profits, but
also security. This often extends to
preparing yourself for retirement, but
theres something even more basic than
investing for the future. Theres the core
issue of money itself. Consider this statement by Robert H. Hemphill, credit
manager of the Federal Reserve Bank,
Atlanta, Ga.:
We are completely dependent on
the commercial banks. Someone has
to borrow every dollar we have in circulation, cash or credit. If the banks
create ample synthetic money, we are
prosperous; if not, we starve. We are
absolutely without a permanent

money system. When one gets a
complete grasp of the picture, the
tragic absurdity of our hopeless position is almost incredible, but there it
is. It is the most important subject
intelligent persons can investigate and
reflect upon. It is so important that
our present civilization may collapse
unless it becomes widely understood
and the defects remedied soon.
Although this statement seems
harsh, it is accurate. The main problem
with modern money is that it does not
constitute a store of value. Since the
founding of the Federal Reserve
System, todays dollar is equal to less
than four cents were worth back then.
The only two assets that are fundamentally money, and do not rely on credit,
are silver and gold.
Many financial authors explain that
silver is simply a commodity and, as
such, lacks monetary or investment
demand. This belies that the word for
silver and the word for money are
identical in languages used in 51 countries. Just because Americans or
Canadians do not think silver is money
does not mean the rest of the world
thinks the same way.
Time has shown that, eventually, all
fiat currencies eventually reach the
dustbin. Throughout monetary history,
people have sought alternatives to currencies to protect their savings. This
action takes place as increasingly more
people wake up to the reality of a credit-based monetary system. When
enough people wake up, silver will no
longer be a sleeping opportunity, but
one of the brightest and smartest
FM
investments one can own.
David Morgan is a silver trader and analyst. His
books include: Get the Skinny on Silver
Investing and Ten Rules of Silver Investing.
He also publishes The Morgan Report
newsletter. You can reach him via his Web site
at www.silver-investor.com.
TRADING TECHNIQUES
The current acreage dilemma for the United States makes grain fundamentals
even more critical and ensures a prolonged bull market unless powerful
forces intervene.
Grain bears:
Waiting for a miracle
BY BILL BIEDERMANN
ommodity markets are caught

in a perfect storm and it might
take an act of God or Uncle
Sam to put them at rest.
Heres the landscape that commodities are facing today: An energy policy
that mandates 36 billion gallons of biofuels by 2022, an agricultural policy
that restricts acres and prevents supply
from meeting the mandated demand,
inflation-oriented fiscal policy
designed to help banks re-collateralize
real-estate loans, and otherwise solid
world economic conditions driving
investors to commodities as promising
vehicles for growth.
All of these ingredients have fueled a
massive run toward commodities. Last
year investment funds rose from $110
billion to estimates of $150 billion to
$200 billion. Commodities are in a bull
market, and grains, as much as any, are
feeling the upward price pressure.
MARKET SUSTAINABILITY
Investment money is historically
involved with non-essential markets or
third-party investment vehicles. Thus,
the influx directly into commodities is
not only new for the investor but also
48
FUTURES | May 2008
the cash industry that the exchange

represents. Some of the impact that
this influx of money has had on the
industry is important to understand to
avoid potential investment losses. It is
also important to understand how
closely governments around the world
monitor essential markets such as food.
The U.S. energy policy mandates
biofuel production to increase from
seven billion gallons to 36 billion gallons by 2022 (see Exuberance has
peaked, right). Of this, grain-based
ethanol will make up 15 billion gallons.
Current build-out pace will accomplish this by 2010, but there are not
enough corn acres planted in the
United States to supply the corn needed for these plants. Thus, the U.S.
energy policy is mandating the
demand, but the U.S. farm policy is
restricting the use of acreage via the
Conservation Reserve Program. With
total acres restricted, farmers are just
shifting the acres they have to the crop
they think will pay the most. The U.S.
Department of Agricultures (USDA)
March 31 acreage report confirmed
corn acres will decline 7 million acres
as farmers increase soybean and
wheat acreage.
As a result of flat acreage, corn-ending stocks will fall from 1.9 billion
bushels in 2005 to a projection of only
650 million bushels in 2008. This barely meets pipeline supplies and assumes
a trendline yield. Any adverse weather
would immediately result in a shortage.
About the only way to avoid a tight
stocks situation would be an act of God
or, more to the point, a gift from
God in the form of great weather and
record yields.
Although the Secretary of
Agriculture has authority to release
acres into production, if potential
stocks dictate the need, the U.S. government currently seems content betting on weather and scientific plant
genetics rather than releasing more
acres into production. This can
change and any change in policy
would have a huge impact on prices.
If theres no acreage release and bad
weather reduces yields, then corn could
rally beyond $8 per bushel and soybeans could climb above $20. It sounds
almost fantastical, but Minneapolis
wheat hit $25 in February, and soybeans traditionally have traded higher
Possibilities include:
Allowing foreign ethanol to enter
the United States without tariff
Releasing some acres from the setaside program
Temporarily mandating all or a portion of U.S. ethanol plants to close
for a period of time to free up supplies; U.S. plants would continue to
receive their scheduled subsidy to
maintain financial stability
Ban exports of U.S. grain (this one is
highly unlikely but has been implemented overseas)
Obviously, if any of these options
were enforced, it would have a dramatically negative impact on prices and
liquidity would be questionable.
of Dried Distillers Grains with

Solubles (DDGS, a high-nutrient feed
thats a co-product of the ethanol production process).
Secondly, many grain elevators are
not buying forward contracts from
farmers because they would need to
sell futures for a hedge, which could
require more margin money than their
lines of credit will allow. For these reasons, current volatility has removed
some of the liquidity in the futures
market. This could cause an issue for
an investor if there is a reason or need
EXUBERANCE HAS PEAKED

Ethanol growth is forecast to level off, while government mandated limits will continue to
rise on schedule.
16000
14000
12000
10000
8000
6000
300
U.S. ETHANOL CAPACITY (GRAIN STOCK BASED)
250
Energy Bill mandates:

36 bil gal biofuels by 2022 v 7.0 current
15 from grain and 21 cellulose
Capacity Production
2007
7.229 7.040
2008 (all const)
12.865 9.081
2009 (all planned)
15.298 14.74
Ethanol Growth Peaks in 2008
200
150
Plants
18000
100
4000
50
2000
2010e
0
2009e
2008
2007
Total Plants
2006
2005
2004
Production
2003
2002
2000
2001
Total Capacity
0
1999
OUTSIDE INTERVENTION
Of course, this type of price explosion
could cause some serious potential
issues that investors would have to
monitor. Food processors are already
under intense pressure to raise retail
prices or operate in the red. This
income squeeze has become so heightened that the first protest since World
War II against high food costs took
place in Washington on March 12.
The march, organized by the
American Bakers Association, lobbied
officials to change agricultural policy to
get markets under control. The organization actually has cooked up a good
argument based on the law that
requires the U.S. Secretary of
Agriculture to maintain a reliable and
affordable supply of food.
If lobby efforts are successful, or if
poor weather develops and reduces
stocks even more, the USDA likely
will be forced to make some decisions
that would destroy the bull market
with the stroke of a pen. Getting
involved, right, shows what has happened during past periods of government intervention.
LIQUIDITY CRUNCH
The volatility and influx of investor
funds have already impacted the liquidity of the market. Cash traders have
pulled away from the market for two
reasons. First, end users do not want to
be stuck owning too much inventory
at current prices because many sectors,
such as the ethanol industry, are not
able to turn a profit on the end product they sell (see Profit profile, page
50). Currently, nearly every ethanol
plant is in the red at todays cost of
corn, even when considering the value
Millions of Gallons
than wheat. From current levels, those

prices would equate to a $45,000 gain
on an initial margin deposit of approximately $4,000 for either a corn or soybean contract.
Source: Renewable Fuels Association
GETTING INVOLVED
One sure way to end a bull market in grain is for the government to get involved. Heres a
look at past, short-lived bull markets in corn.
1973
1977
1983 1984 1985
1994 1996
2002
We have highlighted with a measurement the moves associated with big demand:
Great Grain Robbery in 1973 and 1974 Russia buys
Great Grain Robbery II in 1996 China buys
Great Grain Robbery III in 2006-2007 Ethanol Expansion
4000
3750
3500
3250
3000
2750
2500
2250
2000
1750
1500
1250
1000
1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Source: Allendale Inc.
49

to exit the market quickly.
Fiscal policy that encourages a weak
dollar will likely continue until the
banking crisis is solved. This is adding
fuel to the raging bull commodity
markets. With the underlying tight
stocks situation and the current fiscal
policy, money seems to be pouring
into commodities. Even pension funds
are allocating to commodities.
Because of this, as well as mandated
demand, restriction on acres and
relaxed fiscal policy, the bull market
looks pretty solid for grains throughout the year.
WHAT TO DO NOW
Buying breaks in commodities will likely
remain the fad of most traders. But with
this surety of success comes the contrarian thinking that one of the two mentioned arrows will pierce the heart of
this bull. A better way to approach this
market, with an eye toward the bearish
risk, is to employ some option positions
designed to provide some precautionary
fiscal health.
Option programs can be employed
against futures positions to help manage the exposure of an adverse move.
For example, we can convert an open-
PROFIT PROFILE
With corn as expensive as it is today, its difficult for ethanol producers to turn a profit.
$7
ETHANOL PROFITS NET RETURN PER BUSHEL OF CORN PURCHASED
$6
$5
Per bushel
$4
with $.51 subsidy
Value of ethanol an DDGS minus a

bushel of corn and assumed prodution
cost for a Nebraska plant
without subsidy
$3
$2
$1
$0
-$1
-$2
02
03
04
05
06
07
08
THE COST OF INSURANCE

If you dont mind limited upside potential, you could limit your downside risk in the event
of a bumper crop in corn or government intervention by combining a long futures position
with a short call and a long put.
LONG DEC FUTURES, LONG MAY 500 PUT, SHORT DEC 750 CALL
PROFIT / LOSS BY CHANGE IN CORN MAY FUTURES PRICE
Profit / Loss
4200
3600
3000
2400
1800
1200
600
0
-600
-1200
-1800
-2400
-3000
risk trade into a controlled-risk position by purchasing a put. This will

establish an emergency exit if we need
one. The cost of a May 500 put is only
15 and would limit losses through
April 25 to $3,400. This position
would keep the upside open as the
position would continue to profit as
futures rallied.
If a trader is willing to cap the upside
at $7.50 per bu., then selling a 750
December call would result in a credit
in the account to cover the cost of the
put. The cost of insurance (left)
shows how the long futures, long put
and short call reduce the potential
exposure to $2,500. The resulting
reward-to-risk ratio (3.8 to 1) is still
pretty good.
Investment money has ventured
into essential commodities. Societies
cannot live without food, and
economies cannot afford excessive
prices. Investors in the past normally
traded equities or the stocks of food,
seed or tractor manufacturers. But
now with the massive injection of
investment funds in commodities,
there has been a dramatic effect on
commodity prices.
The risks of commodities are different than those of equities because
there is a much greater risk of government intervention. The reward, however, can be huge especially this
year as a near-perfect storm for a bull
market exists. But for the same reasons
that we have a bullish scenario, the
political pressure of high-priced essential commodities increases. Thus, the
higher the market goes, the greater risk
to the investor. The only other risk we
can identify at this time would be
record yields. Both risks can be
managed by using some discipline and
a few options.
FM
Bill Biedermann is the senior vice president of
Allendale Inc. in McHenry, Illinois. Reach him
via the Web site www.allendale-inc.com.
400.00 425.00 450.00 475.00 500.00 525.00 550.00 575.00 600.00 625.00 650.00 675.00 700.00 725.00 750.00
-1,900 -1,981 -2,106 -2.281 -2,519 -1,575 -706 94 819 1,475 2,063 2,581 3,038 3,444 3,800
Source: Allendale Inc. and OptionVue
50
FUTURES | May 2008
FUTURES 101
Understanding the fundamentals of ag markets is no longer as simple as
following the weather and knowing what USDA reports to watch. Speculative
money flows, non-U.S. demand and energy fundamentals often trump the more
traditional supply and demand measures.
Ag fundamentals:
Old and new
BY CHRISTINE BIRKNER
e are entering a new

world for agriculture fundamentals. Weather and
governmental reports on
inventory, planting intentions and
other traditional measures of supply
and demand used to be the main
drivers for agricultural markets, and
while theyre still important factors,
several new fundamentals have
become relevant. If traders want to
stay profitable in this new world, they
need to pay attention to the shifting
dynamics to harvest bigger profits.
The old fundamentals of supply and
demand are measured by U.S.
Department of Agriculture (USDA)
reports
(see
Supply
and
demand,right). Many analysts give
the greatest weight to the stocks-touse ratio for grain markets, which is
calculated by dividing ending stocks
for the year by total use. The stocksto-use ratios give a picture of how
tight supplies are, which is the primary measure used to project prices (see
Little left for rainy day, right).
However, with more speculative
money flowing into agricultural
futures markets, supply and demand
52
FUTURES | May 2008
fundamentals are fading into the

background. If investors simply look
at old school supply/demand fundamentals, they are likely going to have
a very difficult time making sense of
agricultural commodity markets, says
commodities analyst Shawn Hackett.
Prices are being set more by the
investment monies today than ever
before, he adds.
Bill Biedermann, senior vice president at Allendale, says Today,
because of the imbalance of the
money, the supply and demand in
grain inventory is not driving [the ag
market]. [Rather], its the supply and
demand of money chasing contracts.
(For Biedermanns article on grain fundamentals, see page 48.)
A new kind of investor is also
putting the old fundamentals on the
back burner. Elaine Kub, commodity
market analyst for DTN, says that
with more speculative interest in the
market, the idea of inflation or the
idea of increased demand from Asia
may be enough to encourage buying
by some event-driven funds, regardless
of demonstrated supply and demand,
or regardless of supply issues at all. As
far as seasonal fundamentals, she says,

The commercial traders who are
experienced with seasonal tendencies
dont have as much market influence
in the face of all the new speculative
money as they used to. Biedermann
expects speculative money to continue to pour into the agricultural markets until July or August unless theres
a fiscal collapse and a pull out of
the market.
Some analysts claim that the speculative money is causing extreme moves
and high volatility. Currently, the agricultural market is experiencing weekly
ranges equivalent to yearly ranges,
according to Biedermann. Were seeing major, major firms pull their contracting capabilities. Theyre not offering these contracts anymore because
they dont want to be caught in this
futures volatility. Right now, the
majority of the grain industry has
yanked all of its cash contracts. If
youre a farmer, and you want to take
advantage of todays high price of corn
for fall delivery, you cant even sell it.
No one will buy it.
While large speculators have always
had the ability to distort market prices,
FOOD VS. FUEL

Energy policy also has considerable
influence over todays grain markets.
Energy policies mandating increases in
ethanol from corn and biodiesel from
soybeans are increasing demand for
each, but government acreage policies
are limiting the expansion of crops.
The policies that are driving food and
fuel are colliding, Biedermann says.
We have an energy policy thats
expanding ethanol usage, so weve got a
huge build-out program, which is driving
total demand for corn and affecting total
usage for corn. But were not expanding
acres at all because we have an agricultural policy thats restrictive on acres.
In fact with the huge rallies in soybeans and wheat in 2007, analysts
expect farmers to pull acres away from
corn and plant more wheat and soybeans in 2008 (see Robbing Peter to
pay Paul, page 54).
William Adams, managing director
at JKV Global, says that the current
energy bill could have a much greater
impact on farmers than the U.S. farm
bill. Converting acres to fuel will cre-
ate some short-term challenges,

Adams says. A third or more of the
U.S. total corn production will go to
ethanol. As far as soybeans are concerned, the U.S. will probably relinquish its export market to South
America. He expects increased
demand to affect feed corn and soy
meal short-term and for the prices to
level off over time. But the bottom
line is that corn and soybeans can be
viewed as energies as well as ags so
energy fundamentals have to be calculated into the mix when looking at
these markets.
Cattle has not garnered the trading
interest that the grains have experi-
enced, but livestock in general has

been affected by the soaring grain
prices, Adams says. And meats are
affected as they are competing for the
limited supply of grain for feed.
Its important for traders to keep
commodities relationships to each
other in mind, as the governments
restrictive acreage policy affects the
supply and demand balance of agricultural commodities across the board.
All these different agricultural commodity markets are interlinked with
each other, Hackett says. We do not
have enough farmland in the United
States to plant all the acreage we need
for all the agricultural crops needed.
SUPPLY AND DEMAND

This table shows supply and demand for wheat, corn and soybeans from 2004-2007 and
Allendales estimates for 2008. As you can see, the amount of grain leftover (carryout)
for reserve has declined overall for most grains.
2004
2005
2006
2007
2008 est.
Corn
Total supply
12,776
13,237
12,514
14,393
13,595
Total Use
10,662
11,270
11,211
12,955
13,113
Carryout
2,114
1,967
1,303
1,438
482
Wheat
Total supply
2,776
2,727
2,505
2,613
2,571
Total Use
2,235
2,156
2,049
2,371
2,235
Carryout
541
571
456
242
336
Beans
Total supply
3,242
3,322
3,647
3,165
3,260
Total Use
2,986
2,873
3,072
3,025
2,915
Carryout
256
449
575
140
345
LITTLE LEFT FOR RAINY DAY

The stocks-to-use ratio in ag markets has been mostly declining, which increased market
volatility.
30%
Wheat
25%
Stocks to use ratio
at least temporarily, there is something

completely different with newer speculative money in the ag markets that is
benchmarked to long-only commodity
indexes. Funds benchmarked to the
S&P Goldman Sachs Commodity
Index (GSCI) and other long-only
indexes arguably are not price sensitive. They are long and simply roll long
positions based on the index prospectus. Their allocation to corn, wheat or
soybeans is significant to the market
but not significant to the index itself so
huge price movements in these markets have little affect on the underlying
index. A spokesperson for Standard
and Poors Index Services estimates
that money benchmarked to the S&P
GSCI will grow to about $100 billion
in 2008 and that the universe of longonly commodity indexes will grow to
$150 billion. That is up from $18 billion to $20 billion for the S&P GSCI
and $30 billion total for all long-only
commodity indexes in 2003.
Corn
Soybeans
20%
15%
10%
5%
0%
2004
2005
2006
2007
2008
estimates
53
Futures 101 continued
ROBBING PETER TO PAY PAUL

Farmers want to plant crops that will earn the greatest returns, so despite the increased
mandates for corn, many farmers are expected to dedicate more acreage to wheat and
soybeans based on recent price spikes.
100
90
80
70
60
50
40
30
20
10
0
Corn
Soybeans
Acers in millions
Wheat
2004
2005
2006
2007
2008
estimates
On March 31, the USDA released its Prospective Plantings report for 2008. The most
important figures in the report are the total expected acres for soybeans, corn and wheat.
The chart above shows actual acres for the past four years and the USDAs estimates for
2008. USDA reported corn at the low end of expectations, a bullish figure. Soybeans came
in above expectations, a bearish figure, and wheat was close to expectations.
So each year, certain markets

will be left with an insufficient
supply/demand equation. He says to
invest in those that are not likely to
get what they need.
The USDAs Prospective Plantings
report lists how many acres farmers
intend to plant each growing season,
and has repercussions on supply and
demand and how the available acreage
will be distributed. Adams called this
years report one of the most highly
anticipated planting intentions reports
in recent history.
It is very likely that some of the
agricultural crops will not receive the
acreage they need to maintain a comfortable supply to meet the expected
demand. No matter which way you
look at it, agricultural markets no
longer have a safety net in excess to
cover any supply shocks. This means
that if either acreage or weather misses
the mark, food shortages and record
high food inflation could be seen sooner then we think, Hackett says.
Other key reports include the
USDAs August crop production
54
FUTURES | May 2008
report, which reflects yields, and the

USDAs monthly World Agricultural
Supply and Demand Estimates
(WASDE) report, which shows planting intentions worldwide. Like the
USDA supply and demand reports, the
most important figure in the WASDE
reports is the stocks-to-use percentage,
which shows actual supply and demand
and how tight supplies are. A lower
stocks-to-use percentage year to year,
for example, signifies tighter supplies
due to higher demand. The reports are
important for the short-term, but for
the long term, keep your eye on additional market factors. The most influential report well receive [was] the
FOMCs rate cut, Kub says, adding
that the USDA reports tend to bring
out a lot of short-term speculators and
volatile movement on the report days,
[but] from a long-term perspective it is
probably more important to keep track
of the trend of the dollar and other
commodities crude oil, especially.
The volatility in ag markets is an
opportunity for traders but they must
be able to factor in these new funda-
mentals because there is less room

for error.
Opportunities in the marketplace
are enormous this year, says
Biedermann, but he cautions that
additional risk management is needed. In this kind of a market environment, you need to put on slightly
more complex covered positions,
Biedermann advises. Keep your eyes
open for a rebalancing in either the
policies in energy vs. agriculture vs.
fiscal policy, or a balancing trend in
the amount of fund money. If you see
the market trending more towards
balance, then the market itself will
become more focused on the fundamentals of supply and demand of
grain inventory rather than the
supply and demand of money driving
the market.
Ag traders also should keep their
eyes on stock market moves and events
in China. Watch for money being lost
in the stock market that will generally spur a flight to liquidity out of commodities. Also be aware of whatever
news you can trust out of China. If
their economy begins to struggle and
their [consumption] stops growing at
its current rate, some of commodities
demand-driven arguments could be
washed off, Kub says.
Adams says that most opinions will
be bullish about where prices are headed this year, but when it comes to predicting the future, Weather, disease,
fiscal policies, and international crises
all have huge, unpredictable influences
on market prices.
Dont throw out the old agriculture
fundamentals, but expect the new
ones to remain dominant for the time
being. Biedermann says, There will
be eventually a return to the underlying economics of the actual commodity that were trading, but right now,
thats not what were trading. Were
FM
trading money.
MANAGED MONEY
The amount of money allocated to alternative investments, particularly hedge
funds and managed futures programs, has grown immensely over the last
decade but unfortunately and it is unfortunate most retail sized investors
do not have access to these alternatives.
Alternatives for retail

BY DANIEL P. COLLINS
ublic commodity pools are

basically the managed futures
version of mutual funds. They
are sold in increments as low
as $1,000 and there are few restrictions
as to who can invest in them. But that
is where the similarities end. Public
commodity pools are regulated by a
web of regulatory agencies including
the Securities and Exchange
Commission (SEC), Commodity
Futures Trading Commission (CFTC),
National Futures Association (NFA),
the Financial Industry Regulatory
Authority (FINRA, which replaced
NASD) and all 50 states. In addition
to that burden, the NASD in 2004
reversed a policy exempting public
commodity pools from Rule 2810,
which limits the level of underwriting
compensation for selling agents of all
direct participation programs (DPPs,
which the pools fall under) to 10% of
gross proceeds. This change caused
concern in the industry that it would
limit the creation of new pools and
that selling agents could switch end
users to different vehicles once their
trail commissions ended.
Investors in public pools are not subject to suitability requirements like
56
FUTURES | May 2008
accredited investor or qualified purchaser status, which are required for

private placements.
There has been an ongoing debate at
the SEC and industry lobbying groups
about those requirements. The SEC
has wanted to raise the bar because the
accredited investor threshold, due to
inflation, has grown to include retail
participants. They want a higher bar
for retail investors to access sophisticated investment vehicles. Many of
these private placements are beyond
the scope of the retail investor,
whether through regulation or simply
due to minimum investment levels of
several hundred thousand and beyond.
To understand these vehicles an
investor must read and sign off on
offering material or disclosure documents that often run between 25 to 50
pages. So what does the ultra retail
investor the one too unsophisticated to invest in private alternative
investment vehicles even when they
are offered within their investment
means have to sign off on? Well,
the prospectus for the Frontier Fund
family of public commodity funds is
535 pages long. Thats right, 535.
While lengthy because they encompass
multiple funds, typically the offering

materials for public pools are much
larger and include more complex material than those for private placements.
It is because of this overarching regulatory barrier that most successful
alternative investment strategies, managed futures in particular, are out of
reach of the retail investor.
It also is the reason why there is not
a rush to create additional products for
retail. Who wants to pay a minimum of
$1 million to go through the hassle of
setting up a retail fund and deal with a
smorgasbord of regulators including all
50 states? It is a lot easier to set up a
private CTA and sell your strategy in
$1 million chunks.
We have a number of retail products, says Walter (Tom) Price III,
chairman and CEO of Price Futures
Group. But the ruling by NASD (now
FINRA) in 2004 that limited trail
commissions has affected their offering.
Price has closed the Price 1 Fund to
new investments and began offering it
as a private placement. You are not
going to see any new public funds. As a
private fund you can charge anything
you want to, you can structure it any
way you want, you are not regulated to
the extent [public pools] are,

Price says.
THOSE WHO DARE
There are, however, a few hardy souls
who are venturing into this arena.
Christian Baha, founder of Superfund
Asset management, launched his retail
trend-following managed futures programs in Europe in 1996 and in the
United States in 2002. Baha has been
a huge advocate for the expansion of
retail hedge fund strategies in general
and managed futures in particular. We
think that retail needs diversified products that can lower their overall risk
and increase their performance at the
same time and we can achieve that in
the best way with managed futures
funds based on systematic trend-following, Baha says.
Baha has put his money where his
mouth is, increasing the firms
resources towards education and opening store fronts in New York and
Chicago where retail investors can
come in off of the street and learn
about diversification.
Another relatively new entrant into
the public commodity pool arena is the
Frontier Fund. Frontier is a family of
public managed futures funds sponsored by Equinox Fund Management.
Richard Bornhoft, chairman and chief
investment officer of Equinox, says,
We tried to create a new paradigm for
public commodity funds.
Bornhoft was in the process of registering the funds when NASD changed
the rules but still saw it as an opportunity. Frontier, which offers both fee
and commission based structures, tried
to fill the anticipated void due to the
regulatory structure. While many in
the public fund space decried the new
rules, Bornhoft saw opportunity.
There was a very limited selection of
public commodity fund products,
he says.
Frontier has attempted to fill that
void with single and multiple manager
products, low fees and more flexibility.
I wanted to take public funds to a new
paradigm, Bornhoft says. He is doing
that by offering daily liquidity, a family

of funds, diversification within the
asset class and the ability to easily
transfer money within the family of
funds. He estimates the breakeven cost
for most of his products to be 2.25%.
We are actively supporting our selling agents. Our distributors know we
are committed to this space, he adds.
Frontier and Superfund have added
energy to a public fund space that had
been written off by many insiders.
We are committing ourselves longterm to the public commodity space,
Bornhoft says. Frontier has $460 million in their various funds, which is an
impressive number given that the
funds have been offered in a difficult
period for managed futures. To us that
is a testament that we are doing it
right, he adds.
For Baha, it is all about education
and he is encouraged that the
Managed Funds Association will make
more of an effort to reform regulation.
They are trying hard to convince
the lawmakers to make some changes.
It is education that this is the greatest
asset class in the world [that is

needed], Baha says.
Baha does not want to be exempt
from regulation, Just to implement
the same kind of framework for hedge
funds that there is for mutual funds.
Not to discriminate hedge funds anymore from the public. Why not? It is
less risky, Baha says.
HEDGED MUTUAL FUNDS
But the universe of alternatives is not
limited to public commodity pools.
The Rydex mutual fund family has
been successfully offering alternative
products for several years and more
recently has ventured into the managed futures space. Rydex Investments
claims to be the first mutual fund company to offer alternative products to
retail. They offer numerous alternative
products including their Absolute
Return Strategy Fund, which includes
long/short equity, equity market neutral, merger arbitrage, fixed income
arbitrage and global macro.
Edward Egilinsky, managing director
of alternative investments at Rydex,
A BETTER ALTERNATIVE
The S&P Diversified Trends Indicator has similar returns to equities with less risk.
S&P DTI
S&P 500
Lehman Bond index
Returns from 1985-2007
11.50%
12.83
8.55%
STD 1985-2007
5.95
14.69
4.29
Sharpe Ratio 1985-2007
1.43
0.67
1.29
Source: Rydex
PORT IN A STORM
Both the S&P DTI and the Barclay CTA index show why managed futures are such a good
diversifier. Here is what they do in the S&P 500s five worst performing months.
10.00%
5.00%
0.00%
-5.00%
-10.00%
S&P 500
-15.00%
S&P DTI
-20.00%
Barlclay CTA Index
-25.00%
Oct 1987
Aug 1998
Sep 2002
Feb 2001
Aug 1990
Source: Rydex and Barclay Hedge
57
Managed Money continued

MORE SELECTION
The universe of low minimum CTAs is increasing due to an influx of option programs and
short-term forex strategies.
200
180
160
140
120
100
80
51
60
40
20
0
Started by 2002
CTAS WITH MINIMUMS OF $50K OR LESS
182
152
122
95
68
2003
2004
2005
2006
Feb 2008
Note: Programs include some public commodity pools and private funds.
Source: Barclay Hedge
says they have seen a lot of interest in

their managed futures fund. The Rydex
Managed Futures Strategy Fund
reached the $500 million benchmark
quicker than any of their products, getting there in a little over a year.
Most CTAs have an emphasis on
financial futures, Egilinsky says. The
Rydex fund tracks the daily performance of the S&P Diversified Trend
Indicator (S&P DTI) that is comprised
of 14 sectors and has a 50% allocation
to physical commodities.
The S&P DTI compares favorably to
the S&P 500 over the last 22 years on
a risk-adjusted basis despite it encompassing a huge bull equity market (see
A better alternative, page 57).
Rydex does not trade actual futures
but rather structured notes that try to
replicate the underlying commodities.
Baha doesnt view the Rydex success
as competition as much as confirmation of his philosophy. You can call it
competitors but I call it allies [in] this
education we are conveying together.
This is the asset class that should be in
every portfolio because it is first highly
diversified, second you can make
money in up and down cycles and
[third] it doesnt correlate to any equity
strategy. It does not correlate to any
other hedge fund strategy and you cannot find any other hedge fund strategy
[that can say that]. It is an undiscovered asset class.
58
FUTURES | May 2008
Bornhoft argues, It doesnt do an

investor good to have diversification if
he doesnt pick-up meaningful noncorrelation. Not only does managed
futures not correlate with equity strategies but there is evidence that it is negatively correlated with equities during
bear market conditions (see Port in a
storm, page 57).
HIGH NET WORTH RETAIL
In addition to the public commodity
pools, hedged mutual funds and ETFs,
there are a limited number of CTAs
who offer their strategies at lower minimum investment levels. While about
50% of CTAs have minimums of a half
million or more, there are an increasing number of CTAs with reasonable
minimum investment levels (see
More selection, above).
CTAs with lower minimums usually
involve funds, single market programs,
option writers and forex funds. Forex
programs can offer strategies with
lower minimums because there is no
set contract size.
Rick Gallwas, president of RJO
Futures, is attempting to offer the
advantages of managed futures to highend retail by offering lower minimum
CTAs and trading systems for minimums of less than $50,000. The shelf
life of retail traders is short and we try
and preserve their equity by introducing them to retail products,
Gallwas says.
Our goal is to get people into diversified products, Gallwas says. RJO
does this by creating portfolios with a
diversified group of CTAs. But even
this is bringing them to the high end.
Gallwas says that the minimum investment for a group of CTAs would be
$250,000. While not traditional retail,
the vast majority of CTAs have minimums of several hundred thousand, so
he is serving a niche.
Peregrine Financial Group also is
trying to fill that niche and is actively
searching out emerging CTAs with
lower minimums, says Russ Wasendorf
Sr. We are able to take these CTAs
and give them proprietary capital to
develop their track records,
says Wasendorf.
PFG runs contests for emerging
CTAs that reward them with allocations. The goal is to build low barrier
to entry products, Wasendorf says.
The purpose of regulation, especially
on the retail side, is to protect John Q.
Public from unscrupulous players
attempting to take advantage of less
sophisticated investors. While a noble
goal, it is one that has failed. A simple
perusal of CFTC enforcement actions
will indicate that there is no shortage
of bad apples out there. And some may
suggest these onerous rules have served
to protect powerful interests to the
detriment of retail investors, who as a
result have less diversified portfolios.
The good news is that while they are
more difficult to find, there are alternative products that retail investors can
access to diversify their portfolios.
However, those attempting to offer
alternative investment products to retail
have to go through a gauntlet of regulators and retail investors, and ironically
must be much more sophisticated and
industrious to find these products than
the supposedly more sophisticated high
net worth individuals.
FM
Funds Review
2008 public funds returns

Name of fund
Starting Unit value Change

unit through
for
value 3-31-08 2008
Date
started
Trading advisor(s)
U.S. CLOSED
(through March 31)

Starting Unit value Change
unit through
for
value 3-31-08 2008
Name of fund
Trading advisor(s)
Date
started
Marathon System Financial Portfolio
Multiple Advisors
Mar-95
1000 -0.71%
0.48%
Smith Barney Diversified Futures II
Multiple managers
Jan -96
1000
-1.99%
3.17%
Campbell Strategic Allocation Fund LP
Campbell & Co.
Apr-94
1000 -0.22%
0.74%
Smith Barney Diversified Futures
Multiple managers
Jan -94
1000
-2.52%
6.13%
Marathon FX
Multiple Advisors
Jan-98
1000
0.17%
1.24%
Dean Witter Principal Plus Fund
SSARIS
Feb -90
1000
-2.19%
-2.27%
Marathon Currency & Financials (CFE) Portfolio Multiple Advisors
Jan-00
1000 -0.60%
1.39%
Smith Barney AAA Energy
AAA Capital Management
Mar-98
1000
1.39%
2.59%
MSDW Spectrum Strategic Fund
Blenheim Cap.; Eclipse Cap.
Nov-94
10
-3.81%
3.61%
Salomon Smith Barney Global Diversified
Multiple managers
Feb-99
1000
-4.20%
6.42%
Marathon Plus Portfolio
Multiple Advisors
Apr-98
1000
-1.14%
5.10%
Salomon Smith Barney Orion Futures Fund
Multiple managers
Jun-99
1000
-1.98%
6.69%
Diversified 2000 Futures Fund
Multiple managers
Jun-00
1000
-0.21%
7.17%
Citigroup Diversified Futures Fund
Multiple managers
May-03
1000
-2.46%
6.70%
Dean Witter Cornerstone Fund II
Northfield Trading; J.W. Henry Jan-85
975
6.31%
8.47%
Citigroup Fairfield Futures Fund II
Graham Capital Management
Mar-04
1000
0.73%
7.67%
Dean Witter Cornerstone Fund IV
J.W. Henry; Sunrise
May-87
975
8.53%
14.84%
Morgan Stanley Spectrum Currency LP
John W. Henry; Sunrise
Sep-05
10
4.95%
7.83%
Dean Witter Diversified Futures Fund III LP
Hyman Beck & Co.
Nov-90
1000
-0.06%
17.62%
Marathon Diversified Portfolio
Multiple Advisors
Mar-95
1000
-0.74%
7.86%
Dean Witter Portfolio Strategy Fund
Hyman Beck & Co.
Feb-91
1000
0.26%
17.74%
MSDW Spectrum Technical Fund
Multiple Advisors
Nov-94
10
-2.61%
8.90%
Dean Witter Diversified Futures Fund LP
Hyman Beck & Co.
Apr-88
1000
0.20%
17.80%
Triad Trading Fund LP
TMS Capital Management
Nov-94
1000
3.65%
8.96%
Dean Witter Cornerstone Fund III
Sunrise; Graham
Jan-85
975
2.57%
17.95%
Morgan Stanley Charter WCM
Winton Capital Mgmt.
Dec-06
10
-1.68%
9.32%
MSDW Charter Graham LP
Graham Cap. Mgmt.
Mar-99
10
1.08%
10.63%
MSDW Spectrum Select L.P.
Multiple Advisors
Aug-91 10
-1.48%
13.22%
Smith Barney Tidewater Futures Fund
Chesapeake Capital Corp.
Jul-95
1000
-9.98%
14.67%
Smith Barney Westport Futures Fund
J.W. Henry
Aug-97
1000
1.26%
31.88%
Atlas Futures Fund, L.P.
Clarke Capital Mgmt., Inc.
Oct-99
N/A
-2.99%
10.97%
Alternative Opportunities Fund
Karin Kisling
Mar-04
100
-1.86%
-2.65%
Northfield International
Northfield Trading
Mar-91
10
3.65%
4.91%
FTC Commodity Fund Alpha
FTC Asset Mgmt.
Apr-05
100
-5.70%
5.26%
FTC Futures Fund Classic
FTC Asset Mgmt.; Pomeranz & Prtnr. May-98 1000 1.01%
13.97%
SMN Diversified Futures Fund
SMN Investment Services Ltd. Oct-96
72.67 -3.36%
17.20%
FTC Futures Fund Dynamic
FTC Asset Mgmt.
1000
23.50%
Salomon Smith Barney
U.S. OPEN
SB Warrington Fund
Multiple managers
Feb-07
1000
1.67%
-3.16%
SB AAA Energy Fund L.P. II
AAA Capital Management Jul-02
1000
1.35%
2.49%
Citigroup Emerging CTA Portfolio
Multiple Managers
Mar-02
100
-3.78%
5.99%
CMF Institutional
Multiple managers
Jan-06
1000
-3.22%
8.03%
SSB Fairfield Futures Fund L.P.
Multiple Managers
Jun-02
1000
1.17%
9.42%
CitiGroup Abingdon Futures Fund LP
Multiple managers
Feb-07
1000
-1.39%
9.45%
Morgan Stanley Charter Aspect
Multiple Advisors
Dec-06
10
-2.57%
10.58%
Bristol Energy Fund
SandRidge Capital Mgmt. Mar-02
1000
3.99%
14.15%
Smith Barney Potomac Futures
Campbell & Co.
Oct-97
1000
-0.67%
-0.78%
MSDW Spectrum Global Balanced Fund
SSARIS
Nov-94
10
-3.60%
-0.77%
MS Charter Campbell
Campbell & Co.
Oct-02
10
-0.36%
0.45%
OFFSHORE
May-02
3.51%
The following fund has the following cash distribution, which should be added to the funds current value to get a true picture of the funds
actual returns since beginning trading.
Fund: Hutton Investors II
Total: $200
See page 16 for top CTA performance rankings.

59
TRADE TRENDS
No more second city

BY CHRIS McMAHON
CLEARING THE DECKS

The CME was the first U.S. exchange to
restructure itself as a publicly held forprofit corporation from a mutually
owned not-for-profit in November of
2000, and on Dec. 6, 2002 it became the
first U.S. exchange to have an initial
60
FUTURES | May 2008
public offering. Converting access to

equity proved difficult and was no easier
for those that followed, requiring years of
debate and legal battles. But those
exchanges that have completed the
transformation now have a more nimble
form of corporate governance; one that
is focused on profits and customer service rather than balancing the many
competing interests of its members.
The enormity of these changes and
the pain and profits associated with
them cannot be overstated. Before
demutualization, exchange seat holders
were more than simply the gate keepers
to the trading pits; they literally owned
them and made their fortunes by trading and by granting access to those trading floors for a price, either through
leasing seats or charging commissions.
But completing that process also
removed much of the subjectivity associated with valuing the exchange, creating a common currency that has
allowed the wave of consolidation. It
also sharpened the exchanges mission
to a single point: increase shareholder
value. And the surest way to increase
shareholder value, regardless of the
industry, is to increase efficiencies, and
that meant utilizing clearing as a revenue stream and allowing users to have
direct electronic access to the markets
on a near 24-hour basis.
SETTING THE STAGE
The Common Clearing Links advantages are vast but can be summarized by
stressing the one word: single, said
CBOT Chairman Charles P. Carey of
the historic clearing link between the
CBOT and CME in his July 10, 2003
Mid-year Chairmans Report. The new
Common Clearing Link helps assure
benefits for CBOT customers, members
and member firms via a simplified clearing system that combines a single point
of collateral management; a single location for positions; a single risk management platform; a single clearing interface; and a single guarantee fund. And
for customers, the CME Group says the
savings have been profound.
We looked at the capital savings of
bringing the two markets together, and
that figure is north of a billion dollars
that we have been able to save our
clients from a capital standpoint, says
Rick Redding, managing director of
products and services for CME Group.
PHOTO BY CARL WALANSKI / FUTURES MAGAZINE
hicagoans jokingly refer to

their hometown as Americas
second city, but that sort of
self deprecation is probably
more the norm outside the exchange
space. For 160 years Chicago has been
the center of futures and derivatives
trading, but with the consolidation of
Chicagos two futures giants into the
CME Group, accounting for 85% of
U.S. futures volume in 2007, CME
Group is now a global player capable
of competing in the over-the-counter
space on a global basis.
Just for perspective, the nearest competitor was the New York Mercantile
Exchange, with 10.85% of the futures
volume. The Intercontinental
Exchanges piece of the futures pie is
less than 2%; and now CME Group
and Nymex have announced their
plans to merge.
For the exchange, there are two ways

to benefit: first by cutting costs, and
second by providing increased efficiencies to traders, which increases volume.
You dont need two people doing
accounts payable in two locations. So
there are expense synergies related to
headcount, IT programs or having two
people doing the same functions on
the trading floor, Redding says. Post
merger, the CME Group says it
reduced headcount by 380.
And on the business side, combining
CBOT and CME interest rate products
onto the same platform allows the
exchange to get a better handle on risk
in the system and create new trading
opportunities by allowing traders to
execute more trades faster and harmonizing rules. It brings easier ways to
look at the risk across a firm in the
positions that they are carrying,
Redding says. By having those on
there, they can execute trades faster
and see more trades that could be profitable to them. Thats more volume for
the exchange. So we pick up the revenue synergies from that trading.
SHOW TIME
Adding the CBOT contracts to Globex
took time, money and effort, but apparently less than allotted for. Initially, the
CME said that electronic integration
would take 12 to 18 months. Then a
competitive
bid
from
the
Intercontinental Exchange (ICE) stalled
the CME/CBOT merger for more than a
month. But after the CBOT members
voted to approve the CME deal on July
9, 2007, something remarkable happened: CME moved the integration date
forward and the commodities and equity
indexes went live on Globex on Jan. 13,
and interest rates went live on Jan. 27,
just seven months from the closing of
the merger.
For us, it was transparent. We had
no technical issues, says Michael A.
Manning, president and CEO of Rand
Financial Services. From the customer
standpoint, they are coming in through
one of the third-party systems, so as
long as their front end is working, they
THE WHOLE PIE

The consolidation of CME and CBOT created a behemoth, add Nymex and it is nearly the
whole pie of U.S. futures trading.
2007
CME Group
One Chicago
CBOE Futures
Nymex
KCBT
CCX
ICE Futures U.S.
MGEX
USFE
Source: Futures Industry Association
Up and comers
C
hicago is home to several other very innovative exchanges, including

OneChicago LLC, the U.S. Futures Exchange, the Chicago Stock
Exchange and the Chicago Climate Exchange. OneChicago is an electronic
exchange that trades futures on single stocks, narrow based indexes and
exchange traded funds (ETFs) and is a joint venture between the CME
Group, the CBOE and IB Exchange Corp.
David G. Downey, CEO of OneChicago says, Customers who are going
to buy stock should at least look at the alternatives. Downey adds that
with credit currently so tight, and with leverage being restricted, funds carrying stock on margin can EFP those transactions and maintain their delta
position, and in doing so they would free up cash currently tied up in loans
and could then use that money to execute additional transactions.
Single stock futures have not been very successful domestically but have
seen volume growth overseas, and with the promise of regulatory reform
and the threat that one of the successful non U.S. exchanges can list U.S.
equity futures, that could change.
The Chicago Stock Exchange (CHX) is the third largest stock exchange in
the United States and trades equities listed on the NYSE, AMEX and
Nasdaq-listed securities. The exchange is fully demutualized and trades are
electronically executed through the CHX Matching System.
Climate Exchange Plc is the parent of the Chicago Climate Exchange
(CCX), the Chicago Climate Futures Exchange (CCFE) and the European
Climate Exchange (ECX), where they trade emissions, offsets and standardized and cleared futures and options contracts on emission allowances and
other environmental products.
At the CCX, members trade credits to reduce six major greenhouse gases.
The program is voluntary but legally binding and the intention is to reduce
greenhouse gas emissions. Companies that reduce emissions below targets
sell credits to those needing them, thus rewarding compliance and raising the
cost of emissions. Compliance is verified by the Financial Industry Regulatory
Authority (FINRA, formerly NASD). For an in depth look at emissions trading,
see Carbon exchanges gear up, Trade Trends, March 2008.
61
Trade Trends continued

dont even know whats going on in
the background.
And other futures commission merchants had similar responses. It was
nothing but a blip on the radar, says
Dave Glancy, VP at Iowa Grain. We
had experience with Globex, so it really was a non event.
Mark Sachs, president of LindWaldock, says the integration was
seamless. It went as it should have.
They did a great job, he says.
Brian T. Durkin, CME Groups chief
operations officer, led the team responsible for the integration and says a long
planning cycle has been critical to their
success. When we moved from eCBOT
onto Globex, the very first thing we did
was gather our user base together very
early on into the planning stages, he
says. We found that the secret to our
success was proper engagement: over
communicating, wherever possible, in
terms of what our plan of execution
would be. He says even though many
client firms had access to Globex, they
spent time with those firms calibrating
communications infrastructure to maximize performance. We have a whole
CBOE: Unbowed
W
team that is dedicated, from our technical support arena, to making sure that
these thousands of user sessions are
properly aligned to garner that performance efficiency.
And so far, the system has remained
stable, even with the increase in trading volumes. There havent been any
significant drop downs to note, says
Boyd Cruel, analyst for Alaron Futures
and Options. There were days the
eCBOT system would go down and
wed have to go straight to the pit.
Integration of the trading floor
also was moved forward, and was
scheduled to begin on April 7 for equity indexes, April 28 for interest rates
and foreign exchange, and May 12 for
commodities.
They have had a half-dozen meetings for our market. And they are
doing it in a very orderly and thought
out way, says Kevin P. Hubbell, a
partner at Bear Brokerage. He says that
traders in the Eurodollar options pit
have visited the new trading floor and
that the few complaints he heard were
related to the physical space and limited to sightlines and angles, nothing
hen CBOT members wrote the bylaws for Chicago Board

Options Exchange (CBOE), they did not explicitly give
themselves ownership over the fledgling exchange. In an effort
to avoid regulation by the Securities and Exchange Commission
(SEC), they gave themselves access to the CBOE trading floor
through an Exercise Right Privilege (ERP). Owning an ERP entitled CBOT members to trade on the CBOE at will; when things
slowed down, CBOT members could simply walk across the
street and trade equity options.
The arrangement made for periodic battles between the
two neighbors, which where exacerbated by two movements
that radically altered the exchange world: the massive push to
convert mutually owned exchanges to publicly traded for-profit corporations, and the exchange consolidation movement.
Until the CBOE can answer who owns the CBOE and how much
they own, the CBOEs efforts to raise cash through an IPO or
take part in a merger will be stymied.
Last year, the CBOE declared that because the surviving
entity in the CME/CBOT merger was the CME Group, there
were no longer CBOT members to exercise the 1,322 ERPs they
held. Their right to do this is being challenged by CBOT members in a Delaware Court and the CME Group has pledged to
62
FUTURES | May 2008
that couldnt be modified to satisfy

their needs, he says.
Listing CBOT contracts on CMEs
Globex electronic trading system will
save the exchange $150 million, and
the revenue synergies, increased profitability based on more trading volume,
are another $75 million, according to
the CME. One of the most important
synergies will be the consolidation of
the CBOTs five separate Treasury pits.
And as for the CME trading floor at
20 S. Wacker Drive? The CME Trust
sold the trading floors to real estate
firm Tishman Speyer, which will convert them to office space. CME Group
also extended its lease at the building
through the year 2022.
ON THE ROAD
The CMEs Globex is perhaps the best
distributed electronic trading platform,
supported by intense marketing and
multiple communication hubs around
the world, but acquiring the CBOT also
gave the CME Group a boost in its
globalization efforts.
Redding says that legacy CBOT
commodity products, such as wheat,
support the cost of the litigation.

The SEC agreed to CBOEs rules change, and now the economic rights of the former CBOT members will be decided by
the Delaware Court. And its safe to say that given how long
the issue has been disputed, how much money is at stake and
the fact that the CME Group has removed a $15 million cap on
litigating the issue, any decision is likely to be appealed. Efforts
to settle out of court have repeatedly failed.
To get a decision could take so long that I buy into Bill
Brodskys argument that a reasonable settlement on a timely
basis could be more valuable to us than the correct settlement
that takes an awful lot longer, says Brendan Caldwell, president and CEO of Caldwell Investment Management LTD.
Caldwell owns 44 CBOE memberships, which he values at more
than $100 million. He also notes that the CBOE is now the last
privately held equity options exchange in the United States,
and should become a publicly traded corporation soon. Its
not now fighting against Philadelphia or even the ISE. Its fighting [NYSE Euronext], the Nasdaq, the Deutsche Bourse the
biggest exchange on earth by market cap. Thats who their
competitors are now. Its pretty hard to compete on a level
footing if you dont have the same access to the capital mar-
corn and soybeans are much more global in nature than CME legacy commodity products, such as cattle and hogs.
And thats very important. Thats very
strategic for us to help globalize our
product base and globalize our market,
he adds. Another example would be an
international client who was buying or
hedging with CBOT U.S. Treasuries
products. That trader could benefit
from having CME interest rate products, such as the Eurodollars, on the
same platform, which could result in
new trading strategies.
The CME Group is aggressively
extending itself through international
projects, like the recent equity swap
with The Brazilian Mercantile &
Futures Exchange, which includes
order routing, offshore collateral management and super-clearing membership. CME Group also has proposed a five-year agreement to list
KOSPI 200 futures contracts on
Globex and has offered a super-clearing membership and access to CME
foreign exchange and interest rate
products to the China Foreign
Exchange Trade System.
COMING SOON
The CME began hosting New York
Mercantile Exchange (Nymex) energy
and Comex metals contracts on
Globex in the second quarter of 2006,
and since then Nymex has had six
consecutive record volume quarters.
If CME Group successfully acquires
Nymex, it would do more than add
the extremely valuable energy and
metals suites to their product mix.
They would pocket all of the transaction fees currently split with Nymex
and capture all of the clearing fees
that had been going to the Nymex
Clearing House. CME Group expects
$60 million annually in expense synergies from the merger, beginning 12
to 18 months from closing the deal.
And the deal is compelling on several
other fronts as well, helping CME
Groups plan to expand its share of
the over-the-counter (OTC) market
and feeding globalization efforts.
The OTC market is huge, and
Nymex is a big player in those markets.
According to the Bank for
International Settlements (BIS), at the
end of June 2007, the notional value of
kets as the people youre fighting.

In midst of the conflict, industry consolidation and larger
international competition, William Brodsky, CBOE chairman
and CEO is unbowed.
It has virtually no effect, Brodsky says. They are all dealing with integration issues, he says of the NYSE, which merged
with Euronext and is integrating Arca and potentially the
Amex; the Nasdaq, which acquired the Philadelphia Stock
Exchange; and the ISE, which is now part of Eurex. We are
what we have always been: totally focused and dedicated to
the options and options-related products. So even though we
own our own futures exchange, where we traded a million VIX
futures last year, it all feeds our options business. We created
our own stock exchange so we could have the synergy between
options and stocks. So CBOE has been and continues to be the
leading options exchange in the world. And while CBOE has
not demutualized, it has been operating as a for-profit corporation for three years, and Brodsky says 2007 results, which
havent been released yet, blew away last years.
Brodsky says that the utility of the new products, such as the
VIX and Buy/Write indexes, has increased the CBOEs user base.
The recent market volatility caused by the U.S. economic crisis
has increased volume for CBOE because the CBOE suite of
volatility products is now being used by investment consultants
OTC derivatives totaled $516 trillion,

135% higher than the level recorded in
2004, representing an annual compounded growth rate of 33%.
The average daily volume trading on
Nymexs OTC ClearPort Clearing platform was 511,527 contracts. By gaining
access to Nymexs OTC market and
the Nymex ClearPort Clearing platform, CME Group would dramatically
increase its share of the OTC world and
could potentially use the ClearPort
OTC trading and clearing platform to
drive more expense synergies with
CME Groups OTC initiatives.
Durkin declined to talk about the
technical merger with Nymex, except
to say, We have an excellent template for handling migrations,
whether it be from an electronic trading platform or consolidating trading
floors. And we have a very strong
team that has a high level of expertise
in doing that; and I and my colleagues
have been through a number of platform changes, so we know what that is
all about.
Nymexs energy and metals contracts, much like the CBOT legacy
for clients who had never previously used futures or options.

When you have institutional money managers who understand what has happened in the stock market for the last 12
months, they usually show the S&P as the indicator, if you overlay the VIX against that, you will see how counter cyclical that
is. So we have really created a new asset class here.
And while CME Group likes to cite its history of innovation,
CBOE has had great success with new product offerings. We
have created a cottage industry of products that different types
of investors can use. On top of that, we have firms that have
been spawned out of the CBOE: Options Express, Think or Swim,
or OptionsHouse, all homegrown Chicago firms where their
founders came off the CBOE floor and where they have made
their raison d'tre to educate retail investors, Brodsky says.
CBOEs unique hybrid strategy, where open outcry and electronic trading are integrated on the CBOEdirect trading platform, has allowed CBOE to fight off competition. We now do
96% or 97% of our trades electronically. The 3% that we are
not doing electronically represents about 25% of our volume.
The floor is still adding value, providing liquidity, handling complex orders, Brodsky says, adding, The future of trading on
the CBOE floor is brighter because of the way we developed
our system, which I predict is not the case for other floors in
town as it relates to futures.
63
Trade Trends continued
SIZE MATTERS
Volume at the CME Group dwarfs all others, including
cap, which traded 1.9 billion contracts in 2007.
2007
CME Group
2,804,998,291
Korea Exchange
2,709,140,423
Eurex
1,899,861,926
Liffe
949,025,452
Chicago Board Options Exchange
945,608,219
International Securities Exchange
804,347,677
Bolsa de Mercadorias & Futuros
426,363,492
Philadelphia Stock Exchange
407,972,525
National Stock Exchange of India
379,874,850
Bolsa de Valores de So Paulo
367,690,283
New York Mercantile Exchange
353,385,412
NYSE Arca Options
335,838,547
JSE (South Africa)
329,642,403
American Stock Exchange
240,383,466
Mexican Derivatives Exchange
228,972,029
IntercontinentalExchange
195,706,040
Dalian Commodity Exchange
185,614,913
OMX Group
142,510,375
Boston Options Exchange
129,797,339
Australian Securities Exchange
116,090,973
Total
13,952,824,635
Eurex, worlds largest by market

2006
2,209,148,447
2,474,593,261
1,526,751,902
730,303,126
675,213,772
591,961,518
283,570,241
273,093,003
194,488,403
287,518,574
276,152,326
196,586,356
105,047,524
197,045,745
275,217,670
140,284,755
120,349,998
123,167,736
94,390,602
100,572,434
10,875,457,393
% Change
26.97%
9.48%
24.44%
29.95%
40.05%
35.88%
50.36%
49.39%
95.32%
27.88%
27.97%
70.84%
213.80%
21.99%
-16.80%
39.51%
54.23%
15.70%
37.51%
15.43%
28.30%
* Note: Ranking does not include exchanges that do not report their volume to the FIA. Exchanges under common
ownership are grouped together.
Source: Futures Industry Assoc.
products, also serve an international

client base, with a heavy concentration of users in the Middle East and
Asia. And in the same way that the
CME Group has been able to increase
volumes by combining contracts onto
a single trading platform and clearing
house, the CME Group could increase
both expense and revenue synergies
and increase trading volumes. Nymex
also has strategic relationships with
the Dubai Mercantile Exchange.
If the deal is approved by the U.S.
Department of Justice, the
Commodity Futures Trading
Commission (CFTC), CME shareholders and Nymexs shareholders
and members, the combined
exchange would host more than 97%
of the futures volume in the United
States. Its no wonder that the New
York investment banks are getting
nervous, nervous enough to band
together to announce the launch of
their own exchange.
64
FUTURES | May 2008
THE CRITICS
Some traders are cheering at the
prospective efficiencies that would
come to the futures markets, including
presumably lower clearing costs and
cross margining opportunities. But a
group of New York based investment
banks and technology firms have
teamed up and plan to create a competitor: the Electronic Liquidity
Exchange (ELX). The backers of the
ELX are formidable and include
JPMorgan, Merrill Lynch & Co.,
Citadel Investment Group, eSpeed
Inc., Bank of America, Credit Suisse,
Barclays Plc, Citigroup Inc., Deutsche
Bank AG, GETCO LLC, PEAK6 and
Royal Bank of Scotland Group.
Although a headquarters and CEO
have yet to be chosen for the
exchange, it is widely expected that
the first contracts to be listed will be
U.S. Treasury futures.
Another threat may prove to be
Nymex members, who have filed law-
suits claiming the CME Group bid is

too low. Another group successfully
petitioned a meeting to review
Nymex Bylaw 311 G, which says that
any floor traded contract that is terminated and available only via computer, or where 90% of the volume is via
computer, that Nymex members will
receive 10% of the revenues or 100%
of special fees.
The deal also would be subject to
regulatory approval, including the
CFTC and the U.S. Department of
Justice, which approved the
CME/CBOT merger, but also recently
made known its objections to vertically integrated clearing of financial
futures. In that same comment letter
to the Treasury, however, it also said
energy markets should be exempt
from such changes.
Preventing this merger can only
weaken the U.S. futures industry at a
time when it is truly a global industry,
Manning says. You wouldnt dream of
doing anything that would be antiglobal competitive to the auto industry
or the electronics industry. Everybody
in the country knows the competition
that we are against in those industries
and we are against that same competition in the futures industry.
But with its size, CME Group is not
simply competing as a futures
exchange on a global scale but as a
financial services behemoth competing against every large investment
bank, which are also, by the way, its
largest customers. CME Group, however, increasingly looks at the end
users of its products as its customers, a
fact not lost on the large investment
banks who view CME Group as a
threat. How this conflict plays out
over the coming years will determine
what the industry looks like down the
road. And while the view will be global, expect Chicago to be a prominent
FM
part of that picture.
Dateline
SPONSORED BY:
M AY
MONDAY
30
29
28
WEDNESDAY
TUESDAY
FRIDAY
THURSDAY
2
Employment
Crop summary
France merchandise trade,

UK production index
Futures I-Trade Show, Online and free, May 6-7.

www.futuresmag.com
12
13
UK merchandise trade
19
26
Crop summary, France

balance of payments, UK CPI
20
Australia merchandise trade

U.S. Holiday
14
27
Australia employment,
Germany production index,
merchandise trade
15
CPI, France CPI, Japan PPI,

balance of payments
Cotton ginnings,
merchandise trade, Canada
employment, France
production index
16
Cattle on feed, France
employment
Germany CPI, balance of

payments
22
21
Crop summary, PPI, Germany PPI
23
Canada CPI
28
Crop summary
Livestock slaughter
29
30
Canada balance of payments,

Germany employment
Canada production index, PPI,

France PPI, Japan production
index, employment, CPI
C O N T R A C T D AT E S
1 LTD: CME Frozen pork bellies OF, Butter OF, BM&F Alcohol OF
4 LTD: CBOT Ethanol F
6 LTD: ICE Futures US Cotton F
8 LTD: CME Currencies OF, Mexican Peso OF, BM&F Alcohol F, Jun Arabica
coffee OF, Jun Conillon coffee OF
11 LTD: ICE Futures US Orange juice F, Euronext-Liffe Milling wheat F
12 LTD: Nymex Jun Russian Export Blend Crude Oil F
13 LTD: CBOT Corn F, Oats F, Rough Rice F, SA Soybeans F, Soybean Meal
F, Soybean Oil F, Soybeans F, Wheat F, Mini corn F, Mini soybeans F, Mini
wheat F, CME Lean Hogs F, OF, KCBT Wheat F, MGEX Wheat F, Nymex Jun
Brent crude F, DCE No. 1 Soybeans F, No. 2 Soybeans F, Corn F, Soybean
meal F, Soybean Oil F, Euronext-Liffe Cocoa F, WCE Canola F, Feed Wheat
F, Western Barley F
14 LTD: CME Eurozone Index of Consumer Prices F, Diammonium Phosphate
F, Lumber F, Urea F, ICE Futures US Cocoa F, BM&F Corn OF, Feeder cattle OF,
Eurex SMI, SLI O, Italian Single Stock F, O, Euronext-Liffe Jun Corn OF
15 LTD: KCBT Value Line OF, Nymex London Copper Grade A F, London
Primary Aluminium F, London SHG Zinc F, BM&F Gold O, Jun Soybeans OF,
Eurex OMXH 25 O, Stoxx 50 O, Titans O, Single Stock F, O, Euronext-Liffe
American style stock O, Cac 40 F,OF, TGE Soybean meal F, Coffee F
18 LTD: CME Currencies F, Mexican Peso F, Euroyen Libor F, OF, China
Renminbi/Euro F, OF, China Renminbi/Yen F, OF, Chinese Renminbi F, OF,
BM&F Jun Soybeans F
66
FUTURES | May 2008
19 LTD: CFE Volatility Index F, CME Butter F, ICE Futures US Coffee F, Nymex
Jun Light sweet crude oil F, Jun Gulf Coast Gasoline F, Jun Gulf Coast Ultra
Low Sulfur Diesel F, BM&F Corn F
20 LTD: BM&F Arabica coffee F, JSE White Maize F, Wheat F, Sunflower Seeds F
21 LTD: CME Feeder cattle F,OF
22 LTD: CBOT Jun 30-yr. treasury bond OF, CME Housing Index F, KCBT Jun
Wheat OF, MGEX Jun Wheat OF, Nymex Uranium F, Eurex Bobl OF, Bund OF,
Schatz OF, Buxl OF, CONF OF, Euronext-Liffe Feed Wheat F, Tocom Jun
Gasoline F, Jun Kerosene F
25 LTD: Nymex Jun Singapore Fuel Oil 380 Swap F, Tocom Rubber F
26 LTD: CBOT Jun 100 oz. Gold OF, CME Frozen pork bellies F, Nymex Jun
Natural gas F, TGE Azuki F, Raw Silk F, Vegetable F
27 LTD: CBOT Silver F, Mini Silver F, Nymex Palladium F, Platinum OF, Silver
OF, Copper OF, Gold OF, Aluminum OF
28 LTD: CME Milk F,OF, Class IV Milk F, OF, Mid-size Milk O, Nonfat Dry Milk
F, OF, Cash-settled Butter F, Dry Whey F, Nymex PJM Electricity F
29 LTD: CBOT 30-Day Fed Funds F, OF, Ethanol forward month swap F, CME
Jun Real F,OF, Jun Ethanol F, MGEX HWI/NCI/NSI F,OF, Nymex Jun Heating oil
F, Jun Gasoline F, Jun New York Harbor Ultra Low Sulfur Diesel F, BM&F Jun
Euro F, Jun Gold F, Jun IDI O, Jun US dollar F,O,OF, Jun Ethanol F, Conillon
coffee F, Feeder cattle F, Live cattle F, Live cattle OF, Mini Live cattle F,
Euronext-Liffe Robusta coffee F, Tocom Jun Gold OF
30 LTD: Nymex Jun Propane F
JUNE
MONDAY
WEDNESDAY
TUESDAY
12
13
Employment, Canada
employment, France
merchandise trade, Germany
production index
Crop summary, Australia

balance of payments
France CPI, balance of

Crop summary, merchandise
payments, Japan PPI, balance
trade, Canada merchandise
of payments, UK employment,
trade, France production
merchandise trade
index, UK production index
IDX:International Derivatives Expo 2008, The Brewery,
London, June 10-11.
10
Germany merchandise trade
11
17
16
18
Crop summary, PPI, balance

of payments, Germany
balance of payments, UK CPI
23
24
Crop summary
Australia merchandise
trade
Australia employment
19
Canada CPI
25
2
CPI, Germany CPI
20
Livestock slaughter, cattle

on feed, Germany PPI
Traders Expo Los Angeles, Ontario Convention Center, Ontario, CA, June 18-21.
Canada PPI, France PPI,
Japan production index,
employment, CPI, UK
balance of payments
NIBA 2008 Conference,
Chicago, June 28.
26
27
Managed Funds Association Forum 2008, The Fairmont Chicago, June 23-25.
30
FRIDAY
THURSDAY
Australia production index,

Canada production index
ABOUT THE CALENDAR Dates are believed to be correct but sometimes do change. Holidays may affect government offices or banks
but not trading. Check with your broker or the exchange. Reports are U.S. reports unless indicated otherwise. Contracts traded are for
current month unless indicated. Abbreviations used with contracts: F futures. OF options on futures. O options. LTD last trading day. FND first notice day. LND last notice day.
Last trading day

Contract month MAY JUNE
Last trading day

MAY JUNE
Last trading day

MAY JUNE
CBOT
Corn F ..............................5/13 ............-
T-bonds/10-yr.
T-notes/inflation-indexed
Treasuries F..........................-........6/18
Oats F ..............................5/13 ............-
13 week T-bill F, OF ............-........6/15

Canadian dollar F ................-........6/16
Canadian dollar OF, O ..........-..........6/5
Mexican Peso F ..............5/18........6/15
Mexican Peso OF ..............5/8..........6/5
Real F,OF ..............................-........5/29
Eurodollar F, OF....................-........6/15
E-mini bundle F ..................-........6/12
Euroyen F,OF ........................-........6/15
Euroyen Libor F, OF ........5/18........6/12
Japan gvmt bond F ..............-..........6/9
China Renminbi/Euro F, OF5/18 ....6/15
China Renminbi/Yen F, OF5/18......6/15
Chinese Renminbi F, OF 5/18........6/16
E-mini Eurodollar F ............-........6/15
Eurozone Index of
Consumer Prices F ........5/14........6/18
Housing Index F ..............5/22 ............Nikkei 225 F,OF ....................-........6/11
Weather F ..........................6/1 ............Nasdaq 100 F........................-........6/18
E-mini Nasdaq 100 F ..........-........6/19
Russell 2000 F,OF ................-........6/18
E-mini Russell 2000 F ........-........6/19
E-mini Russell 1000 F ........-........6/19
T-bonds/5-,2-yr.
T-notes/inflation-indexed
Treasuries F..........................-........6/29
Rough Rice F ..................5/13 ............SA Soybeans F ................5/13 ............Soybean Meal F ..............5/13 ............Soybean Oil F ..................5/13 ............-
30-Day Fed Funds F, OF 5/29........6/29
Soybeans F......................5/13 ............-
100 oz. Gold F ......................-........6/25
Wheat F............................5/13 ............-
100 oz. Gold OF ....................-........5/26
Mini corn F ......................5/13 ............-
30-yr. treasury bond F........-........6/18
Mini Dow F............................-........6/18
30-yr. treasury bond OF......-........5/22
Mini soybeans F..............5/13 ............-
Silver F ............................5/27 ............-
Mini wheat F....................5/13 ............-
Big Dow DJIA ($25) F............-........6/18

DJIA F, OF..............................-........6/18
Dow Jones US
Real Estate Index F ..............-........6/18
CFE
Volatility Index F..............5/19........6/16
Variance F ............................-........6/18
Dow Jones AIG

Commodity Index F..............-........6/18
CME
Mini Gold F............................-........6/25
Midcurve eurodollar O ........-........6/12
Mini Silver F ....................5/27 ............-
Currencies F....................5/18........6/15
Ethanol F............................5/4..........6/3
Currencies OF ..................5/8..........6/5
Ethanol forward
month swap F ................5/29........6/29
CME $ Index F ......................-........6/15

CME $ Index OF ....................-..........6/5
Last trading day

MAY JUNE
S&P 400 F,OF........................-........6/18
S&P 500 F,OF........................-........6/18
E-mini S&P Mid-cap 400 F -........6/19
E-mini S&P 500 F ................-........6/19
S&P Small cap 600 F ..........-........6/19
E-mini MSCI EAFE F ............-........6/18
Feeder cattle F,OF ..........5/21 ............Live Cattle F..........................-........6/29
Live Cattle OF........................-..........6/5
Frozen pork bellies F......5/26 ............Frozen pork bellies OF ....5/1 ............Lean Hogs F, OF ..............5/13........6/12
Milk F,OF..........................5/28 ............Class IV Milk F, OF ..........5/28 ............Mid-size Milk O ..............5/28 ............Nonfat Dry Milk F, OF......5/28 ............Butter F............................5/19 ............Butter OF............................5/1 ............Cash-settled Butter F ....5/28 ............Dry Whey F......................5/28 ............Diammonium Phosphate F5/14 ..........Ethanol F ..............................-........5/29
Lumber F ........................5/14 ............Urea F ..............................5/14 ............-
Last trading day

MAY JUNE
Last trading day

MAY JUNE
ICE Futures US
Heating oil F..........................-........5/29
Cocoa F............................5/14 ............-
Natural gas F ........................-........5/26
Cotton F..............................5/6 ............-
Gasoline F ............................-........5/29
Coffee F............................5/19 ............-
Gulf Coast Gasoline F ..........-........5/19

Gulf Coast Ultra Low
Sulfur Diesel F......................-........5/19
Russell 1000 F......................-........6/18

Russell 1000 mini F ............-........6/18
Russell 2000 mini F ..........-........6/18
Orange juice F ................5/11 ............-
New York Harbor

Ultra Low Sulfur Diesel F ....-........5/29
KCBT
Russian Export Blend

Crude Oil F ............................-........5/12
Value Line F..........................-........6/18
PJM Electricity F ............5/28........6/26
Value Line OF ..................5/15........6/18

Wheat F............................5/13 ............-
Singapore Fuel Oil 380

Swap F ..................................-........5/25
Wheat OF ..............................-........5/22
Palladium F ....................5/27........6/25
Platinum OF ....................5/27........6/25
MGEX
Propane F ............................-........5/30
Wheat F............................5/13 ............-
Silver OF ..........................5/27........6/25
Wheat OF ..............................-........5/22
Copper OF........................5/27........6/25
HWI/NCI/NSI F,OF............5/29........6/29
Gold OF ............................5/27........6/25
Aluminum OF ..................5/27........6/25
Uranium F........................5/22........6/29
Nymex
Brent crude F........................-........5/13
Light sweet crude oil F........-........5/19
London Copper Grade A F5/15 ......6/12

London Primary
Aluminium F....................5/15........6/12
67
Next month in Futures
Dateline continued
Grain outlook
AD INDEX
ADVERTISER
PAGE
ADVERTISER
PAGE
Alaron . . . . . . . . . . . . . . . . . . . . . . . . . . . .c3
Global Forex Trading . . . . . . . . . . . . . . . .25
Alpari . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Global Forex Trading . . . . . . . . . . . . . . . .31
Buytherumorsellthefact.com . . . . . . .19, 65
Interactive Brokers . . . . . . . . . . . . . . . . . . .9
CBOE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
KRX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .c2
CME Group . . . . . . . . . . . . . . . . . . . . . . . .11

Deutsche Bank . . . . . . . . . . . . . . . . . . . . . . .29
Dukascopy . . . . . . . . . . . . . . . . . . . . . . . . . .c4
eSignal . . . . . . . . . . . . . . . . . . . . . . . .18a-18b
Fidelity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Lind Waldock . . . . . . . . . . . . . . . . . . . . . . .3
Market Technologies . . . . . . . . . . . . . . . .15
Nymex . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
ODL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
Field Financial . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
PFGBest.com . . . . . . . . . . . . . . . . . . . . . . .51
Futures Magazine . . . . . . . . . . . . . . . . . . . . . . . .29
Puretick . . . . . . . . . . . . . . . . . . . . . . . . . . .39
Futures I-Trade Show . . . . . . . . . . . . . . . .55
Traders Expo . . . . . . . . . . . . . . . . . . . . . . .69
Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
TradeStation . . . . . . . . . . . . . . . . . . . . . .4-5
SEE CLASSIFIED ADVERTISING ON PAGES 7073
EVENTS COMING UP
Visit the Web sites listed for more information. For other seminars, see the classifieds on pages 70-73.
Futures I-Trade Show. MAY 6-7, 2008. Online
and free. Visit www.futuresmag.com to register.
FIA Law & Compliance Division Workshop. MAY

7-9, 2008. Renaissance Harborplace Hotel, Baltimore,
Md.www.futuresindustry.org
IDX:International Derivatives Expo 2008.
June 10-11, 2008. The Brewery, London.
www.futuresindustry.org
Traders Expo Los Angeles. JUNE 18-21, 2008

Ontario Convention Center, Ontario,CA.
www.tradersexpo.com
Downes-ONeill/eDairy Outlook Conference.
JUNE 18-19, 2008. The Deloitte Building,
Chicago. www.downesoneill.com
Managed Funds Association Forum 2008.
JUNE 23-25, 2008. The Fairmont Chicago.
www.managedfunds.org
Beyond Black-Scholes:
Option pricing models
Well take a fresh look at option
pricing models, and show what
futures traders can learn from
options on those contracts.
Capturing short-term
swings in Nasdaq futures
We will discuss how and when
setups for short-term price swings in
the E-mini Nasdaq can be used for
greatest profit.
Commodity Options 101

Well show you how to maintain
your opportunity while capping your
risk through the use of options.
Last trading day

Contract month MAY JUNE
Last trading day

MAY JUNE
London SHG Zinc F..........5/15........6/12
Soybeans OF ........................-........5/15
Bund F ..................................-..........6/5
Milling wheat F ..............5/11 ............-
Feeder cattle F ................5/29........6/29
Schatz F ................................-..........6/5
Equities O..............................-........6/19
BM&F
Feeder cattle OF..............5/14........6/15
Buxl F ....................................-..........6/5
Non focus group stock O ....-........6/19
Ibovespa F ............................-........6/17
Live cattle F ....................5/29........6/29
CONF F ..................................-..........6/5
Focus group stock O............-........6/19
Mini-Ibovespa F ..................-........6/17
Live cattle OF ..................5/29........6/29
Dax F ....................................-........6/19
American style stock O ..5/15........6/19
TGE
IBrX-50 F ..............................-..........6/1
Mini Live cattle F ............5/29........6/29
OMXH 25 F ............................-........6/19
FTSE 100 F,OF ......................-........6/19
Azuki F ............................5/26........6/24
Stoxx 50 F ............................-........6/19
FTSE 250 F ............................-........6/19
Soybean meal F ..............5/15 ............-
Euro F....................................-........5/29
Last trading day

MAY JUNE
Corn, wheat and soybeans have all

experienced unprecedented
volatility in recent months.
How will this volatility
play out this summer?
Our experts will tell you
what to expect.
Last trading day

MAY JUNE
Last trading day

MAY JUNE
All Constant Month
Contracts F ..........................-........6/18
Titans F..................................-........6/19
FTSE Eurotop F ....................-........6/19
Soybeans F ..........................-........6/12
Gold O ..............................5/15 ............-
No. 1 Soybeans F ............5/13 ............-
OMXH 25 O ......................5/15........6/19
FTSE Eurofirst F ..................-........6/19
Non-GMO Soybeans F ........-........6/24
IDI O ......................................-........5/29
No. 2 Soybeans F ............5/13 ............-
Stoxx 50 O........................5/15........6/19
Cac 40 F,OF......................5/15........6/19
Coffee F............................5/15 ............-
US dollar F,O,OF ..................-........5/29
Corn F ..............................5/13 ............-
Titans O............................5/15........6/19
EuroMTS Eurozone
Raw Silk F........................5/26........6/24
Sugar OF ..............................-........6/12
Soybean meal F ..............5/13 ............-
SMI, SLI F..............................-........6/18
Govt. Broad Index F..............-..........6/5
Vegetable F......................5/26........6/24
Alcohol F............................5/8..........6/8
Soybean Oil F ..................5/13 ............-
SMI, SLI O ........................5/14........6/18
MTS Deutschland
Single Stock F, O ............5/15........6/19
Govt. Index F ........................-..........6/5
Italian Single Stock F, O 5/14........6/18
MTS France Govt. Index F....-..........6/5
Tocom
MTS Italy Govt. Index F ........-..........6/5
Rubber F..........................5/25........6/23
Arabica coffee F..............5/20 ............-
Eurex
Alcohol OF..........................5/1..........6/1
3-mo. euribor F,OF ..............-........6/15
Arabica coffee OF ................-..........5/8
Bobl OF ............................5/22........6/22
Euronext-Liffe
Conillon coffee F ............5/29 ............-
Bund OF ..........................5/22........6/22
Robusta coffee F ............5/29 ............-
Conillon coffee OF................-..........5/8
Schatz OF ........................5/22........6/22
Cocoa F............................5/13 ............-
JSE
Alumunum F ........................-........6/24
Corn F ..............................5/19 ............-
Buxl OF ............................5/22........6/22
Feed Wheat F ..................5/22 ............-
White Maize F..................5/20 ............-
Gasoline F ............................-........5/22
Corn OF............................5/14........6/12
CONF OF ..........................5/22........6/22
Corn F....................................-..........6/4
Wheat F............................5/20 ............-
Kerosene F ..........................-........5/22
Soybeans F ..........................-........5/18
Bobl F....................................-..........6/5
Corn OF ................................-........5/14
Sunflower Seeds F..........5/20 ............-
Crude Oil F ........................6/1........6/30
FUTURES | May 2008
Canola F ..........................5/13 ............Western Barley F ............5/13 ............-
DCE
68
WCE
Feed Wheat F ..................5/13 ............-
Gold F....................................-........5/29
Ethanol F ..............................-........5/29
Last trading day

MAY JUNE
Precious Metals F ................-........6/24

Gold OF..................................-........5/29
THE FCM IB NETWORK

Where Introducing Brokers, Associated Persons and Futures Commission Merchants make the Right Connections.
GFS Forex & Futures specializes in the development

of existing and start up Introducing Brokers.
NO DEALING DESK - STP EXECUTION
24 HOUR BACK OFFICE & CUSTOMER SERVICE
CO-BRANDING
WEBSITE DEVELOPMENT & HOSTING
COMPETITIVE REBATE SCHEDULE
TRAINING & START UP ASSISTANCE
FAST & RELIABLE EXECUTION
Established in 1999, GFS supports a global network
of fund managers, institutional clients and
IB partners. Our focus is providing the necessary
tools to facilitate the growth of your business.
Contact Institutional Sales for a consultation.
212-660-6128
ibpartners@gfsforex.com
www.GFSforex.com
GFS Forex & Futures, Inc. is a Registered Futures
Commission Merchant (FCM) with the Commodity
Futures Trading Commission (CFTC) and is a
member of the National Futures Association (NFA).
Forex trading involves high risks, with the
potential for substantial losses and is not
suitable for all investors.
FCMs! For advertising details contact: Jean Berger 312-846-4626 or email: jberger@futuresmag.com
70
FUTURES | May 2008
Classifieds
DORMAN TRADING LLC
Where Chicago Trades

Clearing Member CBOT & CME
Dorman IBs enjoy the same personal
attention and service that we offer
to our local floor traders.
Online Account Opening
Electronic Access to All Markets
Numerous Trading Platforms
Managed Futures/Trading Systems
Commission Rates that only a
Clearing FCM can Offer
We encourage you to contact us
about the Dorman Difference, the
personal attention of a small firm with
the technology of a large firm.
INTRODUCING BROKER
DIRECTORY
Are you looking for a new broker?
Look no further, our new IB
directory will help you find the
right broker to meet your needs.
For more information on how to be
listed in our new IB directory
contact Jean Berger at
312-846-4626 or
email: jberger@futuresmag.com
DORMAN TRADING LLC

Please Contact:
Marc Nagel
866-915-1777
312-341-7894
MN@dormantrading.com
www.dormantrading.com
Advisory Services
Trade with todays most
accurate S&P daytrader.
Our Seventh Year!
Free trial and Nightly Report. 888-231-4702
P a g e Tr a d e r. c o m
71
Classifieds
Advisory Services
Brokerage Services
Discount Brokerage
Trade ALL Futures Online!
www.ExpressFutures.com
Low Discount Rates!
Educational Services
The Daily DOW

Cycle Based Index Trading
CycleSurfer.com
Charting Services
UP +103 S&P500 POINTS IN THE LAST FOUR

WEEKS! (10/16/07-11/16/07) OVER 300% RETURN
ON CONSERVATIVE DAY TRADING MARGIN
19 winning days out of 23 trading days
Database Services
FREE 2 week trial and daily Pro reports
www.scalptrader.net
Brokerage Services
Attention Option Traders!
Commission Rates as low as $9!
Trade Confidently with former CME
Options Specialist
Trade Electronically or Direct to the Floor
No Monthly Quota
At Lakefront, our brokers understand your
option strategies no matter how complex.
Call us today at 888-748-8122 or visit us at
www.lakefrontfutures.com.
Futures trading is not suitable for all investors
Daytrading
Our 6th Year of Daytrading Profits!
RJ will teach you to follow the smart money.
Learn a simple, exact S&P e-mini signal.
RobertJacksEmini.com
Discount Brokerage
Trade Futures & Options Online
with Field Financial Group
$2.98 Flat Per Side

(Emini S&P 500)
No Fees! No Charges! No Hassles!
Dont Trust Your Futures to Just AnyoneTM
1-800-800-6304 /www.fieldfinancial.com
72
FUTURES | May 2008
Rule #1: Minimize Risk

www.TradersQuest.com
Classified advertising works! Call Jean Berger @ 312-846-4626 jberger@futuresmag.com
Educational Services
Free Trading Tools
Trading Systems
NEED MORE LEADS

FOR YOUR BUSINESS?
Post your free offer on:
http://freestuff.futuresmag.com/freebies.asp
and recieve emailed leads daily.

This is a web based lead generation
program this is a great way to generate
qualifed leads for your business.
For more info, contact

Jean Berger at 312-846-4626
or
email jberger@futuresmag.com
High speed, high volume, FULLY HOSTED,

LOW LATENCY electronic order execution
at leading futures exchanges via R | API.
Serving institutions and private clients.
(877) 748.4642
E-mail: sales@rithmic.com
Web site: www.rithmic.com
Want to Know Tomorrow's High and Low?
Revolutionary new equation measures and
projects market energy, and allows us to
pinpoint major highs and lows intraday
within 10 minutes and 1 point of exact.
www.techniques-of-an-astrotrader.com
Hosting Services
SP500guru.com
Speed up your trading system or

API with direct-exchange access in
our ultra-modern data center.
Real Time Trading WarRoom, 10th year of

90% ACCURACY Timing SP with 1 point stop
Stop 1291, Buy 1292, Target 1299 in 27 mins
http://hosting.fptrade.com
Top Ranked Expert System

TradingZoo.com
Learn how to consistently win in the market
through price action interpretation and tape read
only! Thats all you need to consistently beat
90% of all traders. Learn to concentrate on what
matters and throw away all the noise. Visit us at
our S&P e-mini trading room to see us in action.
1 week free trial
One-on-One 5-Day E-Mini Futures

course with a full year of personal mentoring.
14 years educating daytraders worldwide.
www.DayTradingCourse.com
Precise, Simple, & Profitable Trading System
Learn to trade eminis S&P successfully

Private tutoring / live online coaching.
Day,Swing,Position Trading Systems & Signal
800-500-5207 | www.WinningEdgeSystem.com
New Timing Tutorial Reveals Secret of

Precision Market Timing
KeyTurningDates.com
New Release "The Trading Method That
Can Make You Rich" by Roy Kelly
www.trendpro.com
Professional Services
ATTORNEY
Commodities Litigation / Appeals & More
866-543-2818 thmpson@pacbell.net
Real Estate
Want to purchase minerals and other
oil/gas interests. Send details to:
P.O. Box 13557, Denver, CO. 80201
For TradeStation & MetaStock

www.TradersSoftware.com
"LIVE" S&P eMini Calls - Free Trial

www.Cajun-Trader.com
500+ Trading Systems...1 Website
www.SystemRank.com
Software
FREE TRIAL--View Live Real Time Signals

www.trendpro.com
Trading Seminars
Classified Advertising WORKS!

For Classified Information,
Jean Berger
312-846-4626
Fax
312-577-0979
Email: jberger@futuresmag.com
LEARN HOW TO SELL OPTIONS

Put time value to work for you instead
of against you and trade with the
PERCENTAGES every time.
Sign up for the NEW Option Seller Email
Seminar Series -Initial Free offering at
www.LibertyOption.com
(futures trading involves risk of loss)
Try as we might, its impossible to

know each Futures advertiser as
well as wed like. For that reason,
Futures magazine cannot
endorse any product or service
Learn before you lose!

[See What Others Say]
www.WolfeWave.com
The Law of Charts Online Seminar

Profitable trading through simple chart reading
Get $50 OFF: CouponCode: fmtloc
http://tradingeducators.com/lawofcharts.html
advertised, we urge you to use

discretion when ordering.
73
Trader Profile
BY STEVE ZWICK
Tom James: A matter of degrees

hen Tom James was nine years old, he swapped a
In 2001, James joined Credit Agricole in Europe to build a
favorite comic book for a copy of the Financial
business around his ideas for a credit risk mitigation and
Times. Seven years later, he launched a little busiclearing platform that would encompass futures, OTC swaps
ness trading warrants on equities.
and physical commodity deals a hot topic after Enron
Thats when I heard about these things called futures and
imploded in the winter of that year.
options, he recalls. I applied for a job on the floor of the
If theres a theme to my career, its trying to find niches in
International Petroleum Exchange, now ICE Europe, instead
the real needs of the market. Asian oil firms needed to be
of going to university.
trained and guided in trading and price risk management
That was 1989. He was 17 years old and his family was
solutions, and I filled that need, he says.
shocked. Theyre a very academic bunch with PhDs coming
When I started in the industry, there were no courses or
out of their ears, he says.
degrees remotely applicable to commodity and energy tradBut what he wanted to learn couldnt be found in a classing, he says. You had to just do it and learn on the job, and
room, so he hit the floor and was soon filling paper, a task he
I started giving ad hoc talks to other professionals in 1995.
left after six months to segue onto the energy trading desk of
A self-described technofundamentalist, James teaches young
Mocatta Commercial. That gave me a chance to learn about
traders to learn their fundamentals, but keep an eye on the
and see how the international
charts. You have to start your
markets operated, he recalls.
day looking at the charts and
He saw quite a lot in 1991,
then look at the real world to see
when the Gulf War sent a wakeif it all stacks up, he says. Pure
up call to Asian oil refineries.
technicians will have big blowups
At the time, the only hedging
because they miss the sidewinder
vehicles available to them were
missile that comes in after a funcrude oil futures contracts, he
damental shift in the real world.
says. But after the war, they had
The first of his five books,
a new appreciation of the evolvEnergy Price Risk: Trading and
ing over-the-counter (OTC)
Price Risk Management, was
swaps markets.
published in 2003.
James, working from London,
Although hed never gotten an
mentored Asian clients in hedgundergraduate degree, the books
ing both crude oil and refinery
led to a masters in energy marmargins for petroleum products in
kets from Middlesex University.
Asia, moving to Singapore in
I wanted to see if I could quanti1996 at the age of 23 to set up a
fy in an academic context what I
new derivatives marketing and
had learned, he says. And, he
trading operation for Credit
also wanted to pass that knowlLyonnais Rouse Derivatives.
edge on by mentoring young
TOM JAMES
Working from Singapore had
people, most recently as a chair
its disadvantages and James learned to utilize emerging techprofessor at Indias University of Petroleum & Energy
nology. That convinced me that I should leverage the thenStudies, a five-year-old start-up that has more than 3,000 stuemerging Internet as much as possible to get the most out of
dents across five campuses.
the limited specialized human resources available.
But I never really stopped being close to the market, he
He set up a Web site for clients to request quotes online
recalls. I was always trading or advising on trading for firms,
before confirming deals over the phone, and in 1999 set up
but by 2007 I really wanted to get back onto the
SwapNet Ltd., the first secure Internet-based platform for
trading desk.
OTC commodities swaps. We built our own IT and legal
Specifically, he wanted to develop a new kind of commodiframework from scratch, he recalls. There was no precety fund, one hes in the process of developing at Londondent for trading on the Internet for determining how parbased Liquid Capital Markets, a major market-maker in equiticipants were identified and trades concluded.
ties derivatives looking to branch into various commodity
A joint venture with Garban Intercapital (now ICAP),
asset classes.
SwapNet enabled straight-through processing of data, secure
Besides asset classes, hes also focusing on the classes and
trading, and automated risk management. It pioneered many
lessons-learned hed like his children to emulate. James is
tools in use today, including a mechanism for providing denow a sure-fire candidate for a doctorate in energy price risk
facto credit clearing controls.
management. You can bet his professors are taking notes.
74
FUTURES | May 2008
PHOTO BY JOHN ROGERS / GETTY IMAGES FOR FUTURES MAGAZINE

0508futuresmag PDF

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

0508futuresmag PDF

Uploaded by

Copyright:

Available Formats

Short-term E-mini trades 40

New look at ag fundamentals 48

Prices for gold, platinum and palladium

PICTURED: JIM ROGERS

EQUITY TRADING TECHNIQUES

32 What goes down...

36 Idealized models for real profits

44 Silver shining brightly

Silver offers great opportunities to

We explore a simple approach to

Unless powerful forces intervene,

Contents Continued, page 8

FUTURES | May 2008

20 Hot Commodities Gasoline, euro,

12 Trendlines Treasury sparks debate

22 Options Strategy The 2-to-1 ratio

24 Forex Trader Extreme market

managing editor Daniel P. Collins

66 Dateline May and June

national sales manager

17 Market Strategy Improve your odds

18 Managed Money Review

52 Ag fundamentals: Old and new

60 No more second city

Ag fundamentals are more than just

For reprints of 500 copies or more and e-prints of FUTURES articles,

east/west coast sales manager

classified & web sales manager

FUTURES | May 2008

y office has a view looking

Special supplements are published three times a year; the Economic

FUTURES | May 2008

Subscription inquiries can be made toll-free at (800) 458-1734. Calls

Article reprint orders of 500 copies or more or e-prints can be made

News, trends and insights for traders

Treasury sparks debate

approach initiated by the CFTC with

CHARTVIEW: CME UNLOADS HEAVY METALS

FUTURES | May 2008

Note: Includes prorated mini gold contracts

issues, citing the three-year delay of

bly will as most people agree it will be

U.S. Futures Inc.

Christopher Bowen could receive

was announced. In addition, because

Broker takes twin hits

www.futuresmag.com | May 2008

New clearing landscape

FUTURES | May 2008

Lyall moves to ICAP

FUTURES | May 2008

this role. She has extensive

Send news of personnel moves to:

J. Randy MacDonald was named chief

Improve your odds trading gold

Anthony Drager, a CBOT member since 1999, has traded futures

www.futuresmag.com | May 2008

Managed Money Review

Hedge your hedge fund

Comparing index returns

Februarys top CTAs

FUTURES | May 2008