Sunday, March 26, 2017

Schwager & Etzkorn, A Complete Guide to the Futures Market, 2d ed.

The first edition of Jack Schwager’s A Complete Guide to the Futures Market came out in 1984. No, that’s not a typo. It was 33 years ago. In revising and updating his classic work for publication this year, Schwager teamed up with Mark Etzkorn.

At nearly 700 pages, A Complete Guide to the Futures Market: Technical Analysis and Trading Systems, Fundamental Analysis, Options, Spreads, and Trading Principles covers all the bases, or at least all the bases traders knew about back in the day.

Today the book seems almost quaint. With the exception of six appendixes on statistics in general and regression in particular, there’s almost no math, certainly no machine learning. Quantitative traders would undoubtedly argue that no one can make money with the techniques described in this book. But we’ve heard similar arguments before—technical traders claiming that one couldn’t make money trading fundamentals, fundamental traders countering that they never knew a rich technical trader. The reality is that trading’s incredibly difficult, and the more ways you can think about it the better off you probably are. Unless, of course, you’re willing to accept a completely black-box strategy.

The authors devote about half the book to chart analysis, technical indicators, trading systems, and performance measurement. With the exception of the problem of how to link contract series (nearest futures versus continuous futures), most of the material in this part of the book is not specific to futures trading.

The fundamentals of the various futures markets are trickier. As the authors explain, “Because of the heterogeneous nature of commodity markets, there is no such thing as a standard fundamental model. Among the key substantive characteristics that differentiate markets are degree of storability, availability of substitutes, importance of imports and exports, types of government intervention, and sensitivity to general economic conditions. Consequently, in contrast to technical analysis, in which a specific system or methodology can often be applied to a broad spectrum of markets, the fundamental approach requires a separate analysis for each market.”

Many commodity traders use spreads, simultaneously buying one futures contract and selling another either in the same market or in a related market. As a general rule, spread traders who expect price appreciation in a commodity will initiate an intramarket time spread, long the near month and short the distant month. Gold and silver, however, move inversely to this rule. And the rule has no applicability to nonstorable commodities (cattle and live hogs).

Commodity traders can also use options to express their opinions. The authors devote a chapter to option trading strategies, complete with risk graphs and profit/loss calculation tables for a range of strategies.

The final part of the book is devoted to practical trading guidelines, including 75 trading rules and market observations and 50 market wizard lessons. There’s a lot of wisdom here.

A Complete Guide to the Futures Market lives up to its title and then some. Even those who have no intention of ever trading futures can profit from this book. Yes, it’s old school, but ‘old school’ in this case doesn’t mean ‘passé’.

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