The Profit Pulling Power of Trading Chart Patterns. Trade What You See, Not What You Think or Hear. Virtual Trading University

Transcription

1 CHART LESSON SECRETS The Profit Pulling Power of Trading Chart Patterns Trade What You See, Not What You Think or Hear Virtual Trading University Written By: Archie Johnson Virtual Trading University Disclaimer and Disclosure of Risk Statement All traders should understand that trading in the futures and or options markets is not for everyone. All traders should understand that there is substantial risk of loss when trading futures and or options. All traders should carefully evaluate whether trading in the futures and or options markets is appropriate for them, as such trading is speculative in nature. When trading futures, traders may sustain losses that may exceed their margin deposits. Option purchases may result in the entire loss of premiums paid for such options. Copyright Virtual Trading University. All rights reserved. Republication and/or dissemination of the contents of this book / information are expressly prohibited without prior written consent from Virtual Trading University Copyright Virtual Trading University 1

2 Introduction: Chart Lesson Secrets contains 315 pages, 88 individual chart lessons with 149 charts and 17 Videos to further explain trading opportunities. Chart Lesson Secrets is very easy to navigate through. Just click a link from the INDEX page to go to that lesson. You will also find a link (INDEX) at the beginning and end of each lesson which, when clicked, will return you to the index. If a lesson has a video associated with it there will be a link to it just under the title of the lesson. Each video opens in your Internet browser window to display the video. Videos are stored on our web server so in order to view the videos you must be connected to the Internet on a Windows based computer before you click the video link. Once you open videos in your browser you will see a link just below each video that allows you to download it and save in your computer if you wish. We produce chart lessons to further explain trading strategies from the VTU courses, additional information we ve gathered over the years and questions from our members. You ll see chart lessons from 1999 into You re Bonuses CLICK THIS LINK to open Chart Lesson Secrets Bonus Web Page. You must be connected to the Internet before you click. If you have any questions or suggestions for new lessons or need help please us at office@vtuniversity.com and we ll get back to you. Happy Trading, Archie Johnson & JD Kendrick Copyright Virtual Trading University 2

3 INDEX Click a link to go to that lesson Types of Orders Call Option Spreads & Put Option Sale How to Preserve Trading Capital! In-The-Money Debit Spread How to Move Stops to Protect Profits The "Pennant" Chart Formation Predicting Market Highs and Lows Chart Support and Resistance Fibonacci Retracements Why Trade Commodity Options? Head & Shoulders Top in Live Cattle FOREX Scammers! Three Bar Trend Line Identifying Trending Markets Making Money with Options Double you re Money Option Trading Plan Opportunity verses Risk Ratio Option Spread Trade with the Trend Confirming Chart Patterns Know your Market Cocoa Recession Don t Participate Are All Sugar Contracts Created Equal? Know your Market Grains Chart Support & Resistance Option Free Trade Strategy Corn and Soybeans Head & Shoulders Top No Trade Signal Using Options for Stops on Futures Contracts Seasonal Trading Futures & Options Sample Trading Plan Narrow Sideways Channels Gold Market Free Trade The Head and Shoulders Top Fundamental Analysis Is it Important? Know your Market Meats Support/Resistance Trailing Stops How to Determine Market Tops & Bottoms Crude Oil and Gasoline Triangle Triangles, Triangles, and more Triangles Non-Directional Option Strategies Bullish USDA Report Chart Patterns & Option Strategies Lean Hogs Sugar Market and Triangles Which Way for Gold Traits of a Successful Trader Soy Bean Oil Lean Hogs Soy Bean Oil 2 Crude Oil Silver Market Lesson US Dollar Chart Lesson Rough Rice Chart Lesson Dow Jones Chart Lesson KCBOT Wheat Chart Lesson Markets to Avoid & Why US Bond Chart Lesson Japanese Yen Chart Lesson Swiss Franc Chart Lesson Cocoa Chart Lesson Option Strategy Map Euro Dollar Chart Lesson Coffee Market Chart Lesson Sugar Market Chart Lesson Crude Oil Fundamentals General Electric Stock Chart lesson Gold Market Chart Lesson Gold Market Chart Lesson Feeder Cattle H&S Top Stair Step Trailing Stops Explained Chart Pattern Trading Head & Shoulders top in the March Japanese Yen Triangle Chart Patterns Rule! Option Implied Volatility Stock Market Trading Soybean Meal Sugar Free-Trade Option Strategy Trend Line Retest Crude Oil Again Is Paper Trading Futures & Options A Value or Not? Swiss Franc Copper Market Lesson Lumber Chart Lesson Unleaded Gas Chart Lesson Silver Chart Lesson Soybeans Chart Lesson Copyright Virtual Trading University 3

4 INDEX 06/05/2007 Call Option Spreads & Put Option Sale Click here for a Video of this Lesson In today's chart lesson we are taking a look at call option spreads with a naked (uncovered) put option sale. Some traders are confused with this type position as they are not sure of the benefits and the risk factors involved. The benefits of combining a put option sale along with an option purchase or a call option spread are many, and the risks are few if you know when to initiate such a position and how to manage it. We'll be looking at one of our in progress Option Alert trades in August soybeans where we initiated a call option spread consisting of purchasing an August soybean 8.00 call and selling the August 9.00 call and August 7.20 put option. This is a bullish (expecting prices to rise) position. There is no margin required for a call option spread but there is some margin deposit required when you combine a put option sale with the position. It usually is not a full futures margin but a partial margin is required. Why do we include a put option sale? To help reduce the cost of the call option spread. Since an option spread's profit potential is limited to the point difference between the two strike prices, we want to widen the distance between the strikes to as much as possible. For instance, the profit potential of the 8.00/9.00 call option spread is $5,000.00, however, at the time we initiated the trade the cost of this spread was $1, Not a bad cost for a spread with a $5,000 profit potential. However, we like to keep our overall trade costs for any position below $800 because many traders are trading with small trading accounts. So, we look to also sell the 7.20 put option for $1,000 which was the current price at the time we initiated the position. So, we sell the 7.20 for $1,000 which reduces the overall trade costs to $ Now the trade costs verses the potential profits looks much better. But hold on a second, we lowered our trade costs but increased the risk. So this is a position you do not want to do every time you consider purchasing an option spread. We only combine the put sale when the opportunity is right. Refer to the August Soybean chart below. Copyright Virtual Trading University 4

5 The risk when selling naked option premium is if the futures price exceeds the option's strike price you sold. So the risk here is if prices trade below the 7.20 put option we sold. You will begin losing $50 for every premium point the market trades below So, the question and deciding factor whether to sell the 7.20 put is 'what are the chances of August soybeans trading below 7.20 before option expiration?' This is where a commodity's fundamental value and seasonal trend tendencies come into play, and the only reasons we even consider selling naked option premium. There is a very reliable seasonal price pattern in the grain and soybean markets that once you become familiar with will make you more trading profits than any other trading method period! It's just like clock work year in and year out. The markets break lower from February into April as farmers get ready to plant crops. Once this process begins the markets trade higher into the summer months. I won t go into all the reasons why in this lesson but my course shows you how to trade each seasonal swing with confidence. Copyright Virtual Trading University 5

6 This year (2007) is an exceptional year where the fundamental value of soybeans lined up perfectly with the seasonal price pattern suggesting that it was very unlikely that August soybeans would trade under our strike price of But let's say that prices did not do as we expected and traded lower...what do we do? You certainly do not do what the unlearned do which is to chew the end of your fingers off and shake and quake and worry at every price tic of the market. You simply monitor the entire position (option spread and the put sale) and get out of the position at a predetermined money management stop out point. If the trade cost you $300 then risk that amount. When your position is at a negative of $300 simply call your broker and reverse your order that you placed to initiate the position. It's not difficult at all. Another point to make is never leave a naked sold option on the table regardless whether you expect it to expire worthless or not simply because soybean prices will reverse direction at some point and it could be before option expiration. I use a simple rule of buying back any sold option when I can collect 80% of the value I sold it for. With the 7.20 put we sold for $1000, I'll buy it back (reverse my initial sell order) when the value drops to $200. In fact, in the option trade alerts we have already bought back the 7.20 put for $200, and we still have the 8.00/9.00 call spread that's now worth $1, Our trade costs in the beginning were $300 plus the $200 that we paid to buy back the 7.20 put. This gives us a total trade cost of $500 with the potential of making $5,000. We also have basically the same position in November soybeans and one in December wheat. The Call Option Spread & Put Option Sale is not a position to use 100% of the time, but it can be very beneficial at opportune times. We are currently looking at November Orange Juice and November Natural Gas for our next opportunities as prices are low and we are entering the gulf hurricane season. If you found this lesson beneficial, you must get my full course and trade alerts. You'll find many more option and futures trading strategies that are even easier than today's topic. And, I'll guide you every step of the way to insure your success! Trade Well, Archie INDEX Copyright Virtual Trading University 6

7 INDEX 04/25/2007 Identifying Trending Markets CLICK HERE for a Video of this lesson Today's chart lesson answers the questions of identifying trending markets. It's very easy to identify a market's trend after it is established, but what constitutes a trend in the early stages. As you well know, getting into trades in the early stages of a new trend is of up most importance for traders because option premiums are still a value and futures positions present lower risk. The "three bar trend line" method of determining new trends is a very reliable method for following an already established trend and for identifying new trends. The rule for using the three bar method is simply this. When you can connect three daily price bar highs without passing through any other daily high, you can project that line lower to predict the future price direction. And, when you can connect three daily price bar lows without passing through any other daily lows, you can project the line higher to predict the future price direction. Take a look at the Canadian dollar chart: Copyright Virtual Trading University 7

8 The market reversed trend in late September 2006 from an up trend to a new down trend. After connecting three daily price bar highs together we can assume that the new price direction is down so we want to short (sell) this thing until prices trade back above the new down trend line. By adding positions during rallies you could have made some really impressive profits. After prices trade above the down trend line you do not want to sell because the market is hinting that a trend change is about to take place. So at that point you do not want to be short because the down trend line has been violated and, you do not want to be long because a new trend has not yet been established. We did see a large bottom chart formation which also suggests that a bottom is in place but a new up trend cannot be confirmed until we can connect three daily price bar lows and projecting the line higher. We were able to connect three daily lows just after the market broke out above the old down trend line so we should move from the sidelines into long (buying) positions. This gets us into a new developing up trend early where call options are still very well priced Copyright Virtual Trading University 8

9 and futures positions carry less risk. Option Implied Volatility (the option trader's number one weapon) is low making option purchases a good choice with the plan to sell a higher strike price option later as implied volatility increases to complete a free trade. There you have it, a very simple, yet powerful and often overlooked method of determining new trends early. The Canadian Dollar example shown in today's lesson is a market VTU Course Members are actually trading right now. On 04/10/07 I recommended to purchase the September Canadian Dollar call option for $600 while option implied volatility was low. Option Implied Volatility and the price has now increased substantially and as of 04/23/07 the call is valued at $1, That's over double your money in less than two weeks! In many cases when the implied volatility is low and a new trend has been established we purchase two options. We hold one for unlimited profits and create a free trade with the other. Late last week we sold a September Canadian Dollar call option for the same price ($600) that we purchased the call for completing our first free trade. You can go to this page for a complete explanation of a sugar free trade strategy and how you can trade a trending market with minimal risk: Identifying trending markets with the three bar trend line method is as good as it gets. You'll hear of many other methods and indicators for predicting trend changes early, but I doubt you'll find any that's more reliable that what I've shown you today. And the best part is, you can do the very same thing that trader s that spend thousands for market analysis software with nothing more than free charts from the internet and a pencil and ruler. I hope you found today's lesson an enlightenment and beneficial to your success! Trade Well, Archie INDEX Copyright Virtual Trading University 9

10 INDEX 09/11/2007 FREE TRADE OPTION STRATEGY CLICK HERE for a Video of this lesson Greetings, and welcome to this week's chart lesson. Option Free Trades...are they really free? If you have browsed my web site you probably already know that I'm a big fan of creating free trades with options. And yes, once a free trade is completed it is really free. However, there is an initial cost ($300 to $700 on average) for purchasing a well priced call or put option. But if the market moves as you expect you can sell a much higher strike price option for the same price you paid for the lower strike price. This completes a free trade. Once the free trade is completed you have NO risk of loss regardless of where prices go period. Think about that...if you could remove the worry of losing money and tracking every price tic of a market, wouldn't you be a more relaxed trader and able to focus on more profit opportunities? Would you be willing to give up the "unlimited" profit potential of holding a single option that cost you $700, and limit your profits to the profit distance between the two strike prices (the one you bought and the one you sold) generally between $2,000 and $5,000? Not a bad trade off if you ask me. But I know many of you are concerned about selling an option. The rule is that there is "unlimited Risk" associated with selling options and that causes many to avoid them altogether without understanding how to sell options. First, yes there is unlimited risk selling options if you only sell an option without buying one first. The industry calls that "uncovered" or "naked option selling". I never sell uncovered option premium. I always buy an option and if the market moves as I expect I then sell a higher strike price...not before. But what if the trader I sold that option to decides to exercise it against me...doesn't that subject me to unlimited losses? No it sure doesn't. If in the unlikely event (I've never been exercised against) someone exercises their option you sold them against you, you simply exercise yours and since it is at a lower strike price you still receive the profit difference between the two strike prices because the option you purchase is always going to be worth more than the one you sold. Copyright Virtual Trading University 10

11 Easy enough, and you are never at risk of losing more than the initial $700 and you remove even that risk when the free trade is completed. Take a look at a recent Canadian Dollar and a current U.S. Bonds free trade: The September Canadian dollar call options free trade was great. We simply started watching our chart of this market back in March when prices traded above the trend line. Anytime that happens in a market that has been moving lower for the past year it's pretty significant. Then a bottom chart formation developed telling us to buy a September call option if prices trade above the #2 point. That's the chart formation's rule that signals a trade entry. Then we use an "option implied Volatility" ranking table to tell us if options are over or under priced in that market. The table web page is updated daily and ranks 46 commodity markets from One, being the market with the most over priced options, and forty-six being the most under priced options. At just a glance you immediately know if options are over or under valued...pretty simple stuff so far. Copyright Virtual Trading University 11

12 The Canadian dollar happened to be #44 on the ranking sheet telling us that options were undervalued. So we decided to suggest this trade in our course member's trade alerts. Next, after determining that options are undervalued, we must decide which strike price to purchase to begin the free trade. The goal in getting the free trade completed in this market is to buy a call option with a strike price as close to the current underlying futures contract price as you can afford. So my rule is to stay within three strike prices of the current futures price, and choose a contract month with a minimum of three months left before options expire to give the trade time to work. When prices traded above the #2 point in late March on the chart above, the futures price was near 87.26, and at that time the September Canadian Dollar call option was trading at $650. It was the first strike price away from the current futures price that fell within our $700 average cost range. So we purchased the call option for $650. In fact, I suggested purchasing two calls to hold one for unlimited profits and free trade the other. I do that often if I'm expecting a large price move. Now what? Remember we just started the free trade so we still have $650 at risk. I put a risk stop of half the cost ($325) on the option to sell it if the value drops to $325. Being stopped out does happen but not often if you wait for prices to trade above the chart pattern entry signal. In fact, once that signal is triggered prices generally continue on in that direction. That's exactly what happened in this trade. Now the question is, "now that prices are moving as expected, when do you sell a higher strike price call to complete the free trade?" Remember that we are trading unlimited profit potential for a limited profit potential so we want to sell the highest strike price that we can because the ultimate profit is the point difference between the option you purchased and the one you sell. We didn't have to wait for long as prices rallied during April. Prices began to pullback in early May and that's the time to sell an option to complete the first free trade. So we were able to sell the September call option for $650. So we now have the call that we purchased for $650 and we sold the call for $650 to complete the free trade. The point difference between the two strike prices is $2,000 so we have the possibility of making that much and we have zero cost and zero risk of loss for the trade. Next we look for a price pullback to the up trend line to purchase another strike price to start a second free trade. In an uptrend, prices always pullback at some point giving the best opportunity to purchase another call option. This occurred in early May so we purchased the September call option for $610. The market rallied again through May and we were able to sell a September call option for $650. This completed our second free trade with a profit potential of $3,000 with zero risk of loss on both positions. We now have two free trades completed with a total profit potential of $5,000 and zero risk of loss. You keep doing that to complete more free trades as long as prices move up Copyright Virtual Trading University 12

13 and down. You buy when prices dip back to the up trend line and sell when the market rallies. This is how we trade trending markets with options without futures margin requirements and no risk of loss. Let's look at the current trade recommendation in the U.S. Bond market: In the bonds trade we were late entering. We didn't enter this market until mid-august but when prices managed to stay above the 50% retracement level on our chart we decided to purchase a December call for $650. Prices moved higher through August and early September so in Today's option trade alert I recommend that we sell the December call for $650. This gives us our first free trade in this market with a $3,000 profit potential with zero risk of loss. We will do this trade just as the Canadian dollar trade by selling a higher strike price option when prices rally and buying another call when prices pullback but stay above the up trend line. Copyright Virtual Trading University 13

14 Free trading options are the most easiest and low cost way for beginners to trade options. It removes the risk while building up your trading account. Not to mention the amount of stress that it removes. I showed you these two trades because they are current trades showing you that these opportunities happen throughout the year. And, you need nothing more than charts and the simple implied volatility ranking table to make these trades. In my course I show you in detail how to locate and make free trades and I even supply you with the charts and implied volatility rankings that you need. Plus, my trade alerts find the opportunities for you. And if you think you don't have enough money to open a trading account, you'll be happy to know that we have found a brokerage firm that doesn't require a minimum amount to open a account for trading options. As long as you have the cost amount of the option in your account you can begin the free trade process. Happy Trades, Archie INDEX Copyright Virtual Trading University 14

15 INDEX How to Determine Market Tops & Bottoms CLICK HERE for a Video of this lesson Greetings Traders, welcome to this week's chart lesson! I'm going to start today's lesson with a question. "If you could consistently pick market tops and bottoms, how much money could you make?" Every trader wants to know how to do this and, that very question is what fuels our industry to continually come up with software, technical indicators, and such that promise to do just that. Unfortunately, The answer to that question cannot be found in those items because, in reality, it cannot be done consistently. So, what's the answer? Any type of market trading is speculative in nature, and we have to except the fact that even though we may have the latest and greatest software or indicator to help us determine tops and bottoms, they are only as good as the hard drive that sits between our ears. Software and technical indicators do aid our trading decisions but that's the extent of them. The true answer to the question lies in HISTORICAL PROBABILITIES and FOCUS. What's the historical probability percentage that a market top or bottom is in place for any given market? And to focus on only one or two things that aid you in determining that percentage. Your success as a speculator depends on those two things. It doesn't consist of a continual search for something new that promises to blow the lid off of commodity and stock trading, believe me, I made the mistake of doing just that. I learned this lesson the hard way and it's my hope that I can help you avoid it! My focus is on trading 32 chart patterns that have various percentage rates of predicting market tops and bottoms. Everything can, and has been charted since the markets began. Historical price pattern probabilities have been tested on these chart patterns and many predict market tops and bottoms with 90% accuracy. I highly recommend that you at least explore the chart trading method of trading because it is the most reliable that I've found in over thirty-years of tracking and trading them. In fact, I use nothing else in my trading! Charting software is a must have tool that you need to acquire for pinpointing chart patterns and I highly recommend Gecko Software's Track N' Trade 5.0 (TNT). I highly recommend that you download or request the the CD of the completely free demo version which comes with 20 to 30 years of historical charts so you can see for yourself just how accurate these chart patterns are. I'm going to show you one pattern here today that our lifetime members are watching for the signal to enter. This is the Head & Shoulders top (H&ST) formation that has a 90% probability accuracy for confirming market Tops. Copyright Virtual Trading University 15

16 The H&ST in the March Australian Dollar suggests that a market top is in place. However, the right shoulder of the formation has not been completed as of this writing. The trading signal to sell (go short) is when, and if, prices trade below the neckline at So you continue to watch until prices close below the neckline before trading it. As mentioned, the H&ST has a 90% accuracy rate meaning that, when found, this formation has historically pinpointed market tops 90% of the time. It doesn't get much better than this. Unless, of course, you use options which can, in fact, guarantee a 100% profit if you gain a CREDIT when you initiate a ratio option spread position. (another lesson for another time) To spot these chart patterns I use Daily, Weekly, and Monthly charts. The chart above is the daily chart where one price bar equals one day of trading. One price bar on the weekly chart equals one week of trading, and one bar on the monthly chart equals one month of trading activity. Our trading decisions are always based on the daily charts but Copyright Virtual Trading University 16

17 if the formation on the daily chart is accurate there should be a topping pattern on both weekly and monthly charts. Let's look: The weekly March Australian Dollar chart shows a large Ascending Triangle chart formation that dates back to 2004 with the top of the trading range at What does this tell us? If the two year trading range holds we can expect prices to drop which is what the H&ST on the daily chart is telling us. How about the monthly chart? Copyright Virtual Trading University 17

18 Here's the same Ascending Triangle on the Monthly chart. It also predicts a market top as the weekly and daily charts do. This is all three charts in the process of confirming the Head & Shoulders top found on the daily chart and it builds my confidence to sell a futures contract or purchase a put option when prices trade below the neckline on the daily. This is a strong indication that this trade may be one that falls within the 90% profitable group. However, it could also be one of the 10% that do not pan out. With that being said, always plan for the worse by using strict money management principles. In my course you'll find money management rules, specific trade signal entry rules for both futures and option positions, and I even help you spot trading opportunities to get you off to your very best start. Everything is included for one low price! Copyright Virtual Trading University 18

19 Happy Trading, Archie INDEX Copyright Virtual Trading University 19

20 INDEX 10/16/2007 Chart Pattern Trading CLICK HERE for a Video of this lesson Greetings, and welcome to this week's chart lesson. Chart pattern trading. Chart pattern trading is our bread and butter trading plan that often leads to some of the most powerful and profitable trades of the entire year. It's one of the most popular forms of trading because chart pattern traders need not worry about what other's say, they just trade what they see. Each of the 32 known chart patterns have their own individual rules for trading that particular pattern. Once you learn the rules from my course, you simply apply the rule to the pattern and place your order online or through a live broker. In today's lesson I want to show you five chart pattern option trades that began in September and are still in progress. You would have needed approximately $5,000 in your trading account to have traded all four chart patterns with options, but any one of these trades could have been traded with approximately $2,000 or less. I call these type trades bread and butter trades because they consistently make us money every month while we are waiting for one or more of these patterns to turn into the home run trade of the year. Let's look at the December Canadian Dollar (CD): Copyright Virtual Trading University 20

21 The ascending triangle formation in the Dec. CD is a very profitable chart formation. The rules for trading it are simply to buy or sell a futures contract or option when prices break out of the formation. Prices can, of course, go either way but historically when this formation is found within a trending market, the breakout will usually be in the direction of the prevailing trend. It's known as a consolidation pattern that historically leads to a price breakout after the consolidation phase is over. This ascending triangle has profited us over $7,000 in the past thirty-days. Take a look at February Gold: Copyright Virtual Trading University 21

22 Changing trend pattern. When a market has been in a down trend (red line) for a period of time and prices begin to trade above the down trend line we suspect that the trend is changing from down to up. You simply wait for prices to trade above the red down trend line to signal a buy. No one knows how high gold prices will climb, and you should run from anyone who tells you that they do. That's why I like chart pattern trading, you don't have to guess at what you are doing. You simply trade the formation by the rules in my course and let the market tell you when to get out of your trade. In other words, as long as gold prices remain above the up trend line (green line) we will stay in this trade. This trend line break pattern has made us over $7, in a little over thirty-days so far. Looks like our bread and butter trades are doing great...we may even be able to buy the wife a new dress this month. Take a look at December Lean Hogs: Copyright Virtual Trading University 22

23 Many traders felt that they missed the down move in Dec. hogs as prices plunged below the 50% retracement level. However, chart pattern traders found this non-symmetrical triangle developing just above the 50% level. This chart pattern is much like the ascending triangle in the Canadian Dollar except prices converge to more of a point. This pattern is also a continuation chart pattern and historically leads to a continuation of the trend. In this case the trend was down so we expected prices to break out below the pattern. When everyone else thought that they missed the price move, chart pattern traders were getting ready for the continuation pattern to unfold. Bam, in about two weeks the nonsymmetrical chart pattern formed and our order to purchase put options was filled. Another bread and butter trade that's currently in progress and has $3,600 in profits so far. Copyright Virtual Trading University 23

24 Wow, I love these continuation chart patterns. The trend is up in Feb. gasoline and when the non-symmetrical triangle formed within the up trend we knew we had a winner. Prices did break up and out of the triangle as expected signaling a buy. Nearly $4,000 in three-days so far. The four market trades I've singled out for this lesson have made approximately $21, in real-time profits for the month. I don't know about you, but I think that is a very good return for a $5,000 trading account. Even if you had taken just one of these trades your percent return on your investment is astronomical. Trading chart patterns with either futures contracts or options is by far the simplest and most profitable form of trading that I know of. Why? because there is very little input on your part. You simply follow a few short rules that I show you for trading each pattern. Copyright Virtual Trading University 24

25 It's a purely mechanical style of trading where you don't need other's advice or any expensive software to trade. You never second guess your trading decisions and you know up front what your risk is and, in many cases, how much profit you'll make. In my course I show you in detail how to trade chart patterns with options and locate and make free trades and I even supply you with the charts and implied volatility rankings. Plus, my trade alerts find the opportunities for you. And if you think you don't have enough money to open a trading account, you'll be happy to know that we have found a brokerage firm that doesn't require a minimum amount to open an account for trading options. As long as you have the cost amount of the option plus commissions and exchange fees in your account you can trade options. Get my course and trade alerts today and I'll send you chart pattern trades to consider for all active commodity markets. Trade Well, Archie Johnson INDEX Copyright Virtual Trading University 25

26 INDEX How to Preserve Precious Trading Capital! CLICK HERE for a Video of this lesson Greetings Traders, welcome to this week's chart lesson! The lesson for today is the importance of protecting profits in current trades. You've heard me say many times that "It's not how you enter a trade that determines the amount of profit you make, it's how you exit that counts!" 12/18/06 The March Silver triangle trade in Chart Watch is a perfect example of the above statement. Getting into this trade is simple as your signal to enter long (buy) is when, and if, prices break above the triangle line. That signal was generated in March Silver on 11/06/06 at Getting into a trade is very simple because each of the 32 chart patterns has it's own unique rules to follow, and many have specific exit rules (profit objectives) as well, just as in the U.S. Dollar Head & Shoulders top lesson last week. But taking profits is where many traders drop the ball. They get caught up in all the excitement of possibly making many thousands of dollars from this price move but forget the most important rule in trading (the preservation of trading capital). However, it's not all their fault because very little is written in books and courses about how to manage a trade once you've entered it. Why?, it's simply because new traders are more obsessed with finding the latest, greatest method of getting into trades rather than what to do once they're in a trade. Our industry educators add fuel to this obsession by flooding the market with the latest, greatest software, or course for getting into trades with very little mentioned about managing trades.. However, any successful trader will tell you that you must have an even mix of trade entry techniques and preservation of trading capital techniques or you will likely to end up as a statistic rather than a success! Take a look at March Silver: Copyright Virtual Trading University 26

27 Wow, this triangle formation is a text book example! You simply buy (go long) the futures contract, or purchase a call option when, and if, prices trade above the triangle. Ok, that was easy enough; you entered on 11/06 when prices broke through at Your initial stop-loss (preservation of trading capital) is placed back inside the triangle because the triangle line acts as support. In this trade, a $500 risk-stop is far enough inside the triangle. The ultimate profit objective target for this trade is ($11,000.00) which is the top of the triangle formation. What are you thinking about right now? The $11,000 in possible profits and not the $500 guaranteed risk...right? You probably are because that's what this business is all about...making enormous profits! Or is it? No, it's not and if you continue focusing on how much you can make rather than focusing on preserving precious trading capital, you'll see trading capital evaporate much faster than profits accumulate. Don't get me wrong, it's perfectly natural to think of the profit potential of a trade because there's no other business that consistently makes these huge profits in such a short time and for so little work. Even after thirty-years of trading I still get very excited determining possible profit targets, but the school of hard knocks has taught me that the preservation of trading capital is the most important part of any trade. There is a popular saying Copyright Virtual Trading University 27

28 among successful traders in our industry that states "take care of your losses and the profits will take care of themselves." So, rather than asking yourself how much I can make off this trade, ask yourself how much can I lose on this trade. Why focus on losses rather than profits? Look, any honest annalist/guru or successful trader will tell you that they are wrong about a market's price direction at least 50% of the time. In reality, no one knows for sure where a market's price is headed today, and much less anytime in the future. But if you focus on minimizing your losses and locking in small profits, you'll be preserving capital so you'll be in the market when it does make that $10,000/$20,000 or more price move in a month! Preserving trading capital is not difficult and my lifetime membership course gives many specific ways to do it. But for this lesson, we are going to focus on one way and that's to use chart support and resistance as our guide. So, if we entered March Silver at and have $500 at risk, what should we do? Well, you have $500 of trading capital at risk so your first goal should be to move your stops up to a breakeven point for the trade, just above your entry price. But, you don't want to do this too soon or you could be stopped out prematurely as prices often retest the breakout price zone. Previous chart Support/Resistance becomes your trading guide. On the chart above you can see that the only resistance between your entry point of and the profit objective at is just above However, you cannot move your stop up to just below that resistance until prices trade through and close above the resistance. Reason being, once prices trade through and remain above that resistance, the resistance becomes support if prices retreat. As you can see, this was the case so you move your stops up to to lock in a little over $3,000 in profits. Ok, now we feel better, our stop appears to be out of harms way, and we have locked in a profit so it really doesn't matter where prices go from here. Of course, all indications were that the price pause just above resistance was nothing more than a pause before heading higher to our ultimate profit objective of This is a common bullish sign. All signs including prices remaining above resistance, and higher lows lining up with the new uptrend line pointed out that the market was developing a new uptrend and should continue on higher to our profit objective. Wow, that's what I get for thinking...right. Last Friday prices plummeted taking back an entire month's gains in a single day! It's certainly obvious that the market knows more than I do, but if we hadn't acted on moving our stops up locking in $3000 in profits we would have seen $3000 bucks dwindle to nearly nothing by the end of the day and we would be right back where we started. I think it's much better to grow your account by $3000 rather than hoping for a reversal. But, hey the market may find support at the top triangle line and move higher again, we just don't know. But if it does, we'll start this trade over and see how we do. Only this time we'll be starting out with $3000 more in account balance than we had. The old saying "a bird in hand is worth two in the bush" makes good sense here doesn't it. Copyright Virtual Trading University 28

29 But, there will be times when you move your stop up too close and be stopped out only to see the market reverse and head to the profit objective without you! Ouch, and no that is not a good feeling! But, over time you'll find that moving your stops up to protect trading capital will save you much more in losses than you miss in profits. There are no worries anyway because trading opportunities are ever present, just make sure you're still in the market to take advantage of them by preserving your trading capital. Two more things to add to this final lesson of 2006, and this is something you won't find in most books, trader Friend, because this knowledge can only come from someone who's been through it: "Never worry about a trade...period!" Worry, whether it's about a loss or a missed profit, is very painful, so don't concern yourself with it because it's a part of this business. If you made a mistake, fine, correct it and move on to the next opportunity! Worry causes much pain and, more importantly, causes even the best trader to make fatal mistakes! Trading is not difficult, if you plan for and minimize your losses and plan for and maximize your profits. I hope you don't look over the above paragraph without it sinking in. If I could have had someone to literally drill a hole in my head and pour this knowledge in I believe it would have been less painful than being humbled by the markets. Second, I'm getting a lot of letters and s lately from new VTU course members after having been through my courses, they are not so happy about being enticed into this business with not so ethical practices. They find that I tell the truth about trading and give clear methods to avoid the pitfalls where many others do not. Mostly, the inability to do what they say they can by hiding the risks and hawking their entry techniques rather than real-life examples of managing trades. So, don't be misled when searching for more trading education. Make sure an educator shows you for free what they do in-real-time, ie trades before the fact so you can see first hand for yourself if they know their stuff or not. A reputable educator will also have an Archive where they share at least some of their techniques with you for free giving you precise complete rules so you can take that knowledge and profit from it without ever making a purchase. Excellent hour (weekends & holidays excluded) customer support is an absolute must! You'll have questions, everyone does, but sadly many times they go unanswered due to lousy support. This is often not so easy to determine before you make a purchase, but try ing them with a couple of questions first. Pay close attention to your reply, if you get one. I think after today's lesson you'll know what to look for and what not. In closing for this year, I would like to thank each and everyone of you for following my courses and chart lessons. I am continually amazed at how I can teach trading, literally, to every corner of the world with just a click. In fact, I do, and it would be easier for me to list the countries that our courses and chart lessons members are not in rather than the other way around. For me, it's pure pleasure doing it and I hope you have gained knowledge from it. Knowledge you can use now and not just something else to add to your library. Copyright Virtual Trading University 29

30 2007 will in no doubt be a very exciting and profitable trading year because many markets may be setting lows now that may not be revisited for years to come as the Decade for Commodities continues. Happy Trading, Archie INDEX Copyright Virtual Trading University 30

31 INDEX 06/20/2007 Making Money with Options I receive many s and letters from new traders and from those traders who are not yet successful asking, "is it really possible to make 300% to 1000% return on my money trading options?" And "How much money does it take to get started?" Since these are common questions I receive daily, I've come to the conclusion that these same questions are on just about everyone's mind as well so, I've decided to show you that you can, in fact, make those type returns and with far less starting capital than you may think! Would an investment of $600 that within 48 trading days turned into $5, profit sound like a wise investment? That's almost a 900% return in about six weeks! Sounds too good to be true doesn't it? Well, I can assure you that it is reality and that's why I chose to show you actual trade recommendations that VTU course members are currently trading or have recently traded. And for those of you who think you need some sort of crystal ball, option software, inside information, or a lot of money to make these type profitable trades, you'll be happily surprised. Copyright Virtual Trading University 31

32 Chart A Chart B Spotting the opportunities on bar charts couldn't be easier. I use chart patterns for signals to purchase an option. The bottom chart formation in the Canadian Dollar (CD) is one of the thirty-two chart patterns that I teach. It accurately predicts market bottoms about 75% of the time. That simply means that if prices trade higher beyond the #2 point you have a 75% chance that prices will move much higher. The CD had been in a downtrend for over one-year so this was a great chart formation to pursue. My rule is to purchase a call option no more than three strike prices away from the current futures price if prices trade above the #2 point. We found that the September call option strike price was within the rule guidelines and was fairly priced at $600. So the trade alert to our course members was to purchase one or two September CD call option (s) for $600 in chart A. You hold that option until prices trade below the green up trend line on chart B. It's not all shown on chart B but prices are still above the up trend line so this trade is still in progress. Copyright Virtual Trading University 32

33 But let's say you purchased two September call options. You could have cashed one in on 06/04/07 for $5, and still be holding the other for unlimited profit potential. Now what's difficult about that? You can do this with free charts from the Internet if you wish. In fact, VTU course members have access to charts, quotes and much more in the Ultimate Trader's Resource course member's private web site at no cost. But these type trades don't come along very often--do they? Oh, how about $700 turned into $4, in March Corn. This was another recommendation that was closed out in February 07. How about the current November soybeans option spread trade alert that is still in progress. A total trade cost of $300 and is currently worth $2, and has a profit potential of $5, Or the December Wheat trade option spread recommendation that cost us $250 and is currently trading at $2, with a profit potential of $5, But brokerage firms require a large amount of money just to open an account--don't they? The average is $3,000 to $10,000. But, we'll show you a fantastic brokerage firm that doesn't require a minimum at all for an option trading account!! As long as you have the cost amount of the option you are buying plus commission and exchange fees in your account, you are good to go! So if you had $700 in your account, you could have purchased the Canadian Dollar option. I'm not trying to sugar coat risk because there is always risk. Let's say the CD price dropped lower after you purchased the call option...25% of those bottoms do fail as I mentioned. I use a simple rule of getting out if an option I purchased loses half it's value. If the CD call cost $600 I'm going to close it out by reversing the original order if its value drops to $300. What are the odds of a successful trade with the CD option? 75/25. You have a 75% chance of being right and only a 25% chance of being wrong! I don't know about you, but I like those odds! These are the type opportunities my course members see each week. I think I've dispelled many of the myths surrounding option trading, except maybe the fact that you can test all of my course and trade alerts without every risking a single cent to see for yourself. So what's holding you back from getting started? This business is not a pipe dream, or a too good to be true scam, it is a reality! Banks and Insurance companies are paying you 5% yearly while they are making 300% to 1000% return on YOUR money every month doing this very same thing! Realistically, how much money can I make per year and how long will it take me to get to that level? Your potential income is unlimited...so how much do you need or want? Copyright Virtual Trading University 33

34 Honestly, it is reachable! Of course you must crawl before you can walk and walk before you can run, so it depends on how much trading capital you begin with. On average, the survey conducted with my course members starting with $2000 to $5000 say that they match their full time job income in less than one-year. Just read some of the letters on the left of this page and below this lesson! So, if this is for real and so easy why isn't everyone doing it? I'm working on that, but option trading has received a bad rap. It's not because the business itself is bad causing people to lose money...it's from a lack of knowledge. Traders purchase options for all the wrong reasons! I show you in my course all of those reasons and how to do just the opposite. Think simple and use common sense and you will be very surprised as to how simple trading can be. In fact, we exploit many option trader bad habits to make much of our money. Happy Trades, Archie Johnson INDEX Copyright Virtual Trading University 34

35 INDEX 11/30/06 Corn & Soybeans CLICK HERE for a Video of this lesson Greetings Traders, welcome to this week's chart lesson! Today we're going to look at two markets to determine why one is following the other even though the follower has different fundamental reasons for doing so. The markets are corn and soybeans. It's no secret that corn and soybean traders have enjoyed really great profits during this year's supply/demand led rally. The increased demand for corn to produce ethanol fuel has skyrocketed due to increased crude oil prices. This coupled with short supplies from a less than robust growing season has left very little corn in the bins until the 2007 crops are harvested. In fact, our supplies on hand for 2006 have fallen to 1995 lows. That following year led to the all time 1996 high of in July corn. Copyright Virtual Trading University 35

36 The fundamental case for soybeans was quite different coming into 2006 with the largest crop in history and, the United States Dept. of Agriculture (USDA) estimates puts this year's final crop estimates to be even larger. If you've been following corn and soybeans this year you've seen soybean prices decline while corn prices steadily increased. But, in September soybean prices took off higher. This has left many traders scratching their heads in wonder? Although there is an increase in demand for soybean oil to produce alternative fuels, there are plenty of soybean stocks on hand to meet the demand. So why have soybean prices rallied so since September until now? Copyright Virtual Trading University 36

37 Soybean prices are rallying for one reason, because corn prices are. Even in the face of negative fundamentals soybeans are moving higher along with corn. Why? On the surface it would seem quite contrary to all you've learned to see soybeans rally considering the present supply/demand fundamentals. However, there is one important seasonal fundamental issue that many traders overlook. It's the March 31, planting intentions report from the USDA. As the new year begins farmers decide which and how much of a particular crop to grow and these intentions are reported by the USDA in the March 31 report each year. Now let's see, if I was a farmer and could grow either or both corn and soybeans I would certainly plant more of the commodity that was high in price and/or had fundamental issues for moving even higher before harvest as corn does, yes, of course? So, if soybean prices remain low farmers would plant more corn. So, soybeans must follow corn to some extent to bid more acres away from corn early next year. Copyright Virtual Trading University 37

38 I feel that the March 31, USDA planting intentions report is the most important agricultural report of the year. There is a lot of anticipation among traders during Jan- Feb as planting intentions become more clear which often leads to seasonal lows for the grain markets in that same time period. The report also sets the tone for the rest of the new growing season. So soybeans are known as the follower this year in an attempt to bid planting acres away from corn. You can relate the current rally in soybeans like the little child in class raising his hand saying "my price is high, pick me pick me". The 2007 agricultural growing season is expected to be full of fire works with many annalists predicting new all time highs above in July corn. The supply/demand fundamentals certainly support those prices but, we'll just have to see. I'm the type that trades what I see on the charts rather than the news or reports, and especially hearsay. Regardless of the future price direction of either of these markets, I'll be there profiting from them. If you are a new VTU course member I can assure you that 2007 will be your best opportunity to make your mark in your new business. The Low-Risk Option Alerts, Chart Watch and Trend Tracker charts will keep you aware of every profit opportunity with specific trade instructions. And, you are encouraged to ask me any questions you might have before entering or for managing the trade. My goal is to see you profitable and, that's why my personal coaching is for you. Happy trading, Archie INDEX Copyright Virtual Trading University 38

39 INDEX Crude Oil Fundamentals...Are They Important? Greetings Traders, welcome to this week's chart lesson! 12/05/06 Crude oil is a hot topic these days. Everyone, both rich and poor, has felt the crunch of high prices at the pumps this past summer, so the twenty-percent drop from the August 2006 highs to current lows was a welcome sign. Now, however, the big question is 'has the price decline ended being a simple correction in a long term bull market? Or is this the start of a major price correction?' There are a growing number of annalists who feel that a major top in crude oil and related markets is under way. And, these are good arguments because there are a growing number of fundamental facts that support those arguments. For instance, crude oil stocks have risen to an all time high here in the United States due to storage in anticipation of the 2006 hurricane season which was, thankfully, a dud this year. and the fact that all out war in the Middle East looms overhead. Another fact that adds to the bearish fundamentals is the fact that Americans used less gasoline this year compared to This hasn't occurred for many years; however, it's not surprising as prices reached three bucks a gallon for cheap unleaded this past summer! So, is their a bullish argument for crude? Of course their is and that's the very reason why trying to trade fundamental information leaves traders more confused than sure of themselves. But let's examine them. The oil producing nations (OPEC) are planning future production cuts to lower supplies therefore raising the price. Also, lower pump prices will in no doubt increase demand as traveling picks back up. Also is the fact that the world can either live with a nuclear Iran or stop them. And a military confrontation with Iran would certainly disrupt oil supplies at least temporarily. So where are crude oil prices headed from here? Good question and it's one that I certainly cannot answer, and those who try are just full of hot air! I mean, there are both arguable bullish and bearish fundamental evidences. Just do a search for "crude oil fundamentals" in Google and you'll see what I mean. However, a word of caution is advised when reading the search results, meaning, "Don t believe anything you read or hear, and only half of what you see". I think it would be a good lesson for you though because you'll see first hand how dangerous taking other's advise can be...my advise included because about two or three weeks from now Google will have this page listed there. So, what to do? Taking other's advice seems to be a toss of the coin. Ok, so let's consider believing in "only half of what we see". Copyright Virtual Trading University 39

40 Wow, without listening to anyone we traded the top chart formation that developed in crude this August and made about 12,000 bucks. And we only believed in half of what we saw by placing a stop out order in case we were wrong. In fact, we traded unleaded gas at the same time. But those trades are in the history books and we are only as good as our next trade. So, our work starts over with the question, 'where are prices headed from here?' We've heard from the annalists; now let's let the chart have its say. Bingo! After making a great profit from the price decline, we didn't have to wait very long before the chart gave us our next trading signal. After trading above the red down trend line which was our signal to exit short trades, the market just went sideways for a bit hinting that the trend may be changing. Then a new number one point for a possible bottom formation developed last week and a long (buy) signal was generated a few days later when prices traded above the number two point. So, you are long from and are currently (as of last Friday's prices) in profits of about three grand! Yikes, now what, It's great that the market has moved in your favor...but what to do now? Unfortunately, this is where many traders drop the ball and start seeking other's advice, and as you've seen, there's plenty of it to go around making something more Copyright Virtual Trading University 40

41 complicated than need be. But wait a minuet, sound/wise advice is what we are supposed to seek when we need answers, even the bible teaches this. Well, let's see...who's the wiser here...the annalists or the charts? For me, that's an easy one. I've been seeking the charts advice now for thirty-years and I can say with confidence that with accurate predictable price patterns for nearly one-hundred years, the chart knows much more than I do. So, let's ask the chart and see what it says. What questions do we ask? Well, we need to know #1 if the trend has indeed changed to up or is this just a price correction (profit taking) in a bearish (down trending) market? #2, we need to know where support and resistance is and move our profit stops there and for points to add additional contracts or options if prices exceed through them or find support from them. #3, we need a longer term profit objective so we are not trading blindly. Let's look back to the above daily chart of March 2006 Crude Oil. You are already in this trade at and have accumulated about three thousand in profits but your stop loss order is still below the #3 point which are the rules for trading the bottom. This is risking about $1,400 bucks, so from a money management position you should move your stop up to about which is a breakeven point for the trade in case prices fall. See, that makes you feel much better knowing that you are protected from a loss and less likely to seek other's advice. (Note: if you didn't have $1,400 to risk on this trade, don't worry, my Low Risk Option Course shows everyone how they can profit from this move by giving several option positions to use where you can enter this trade for about $400 to $500 bucks with absolutely no additional risk!) Now with that out of the way we need to know if the trend has changed to up or not. The chart says that when you can draw a trend line by connecting a minimum of three-daily price bar lows, you then, and only then, project that trend line up higher with confidence that, at minimum, the short term trend has turned up. That's good news because we were able to do that by starting at the #1 bottom point. In fact, we have five days that we connected giving more credit to the charts advice. That is a bit more confidence we needed that we are trading in the right direction. Now we need advise for moving our profit stops up to lock in more profit, and for possibly adding more contracts to our position. This is where the chart's advise really shines because entering a market is a no-brainier you just follow the chart pattern rules to enter, but it's not how you enter that makes you money, It is how you exit that determines how much money you make. The chart's advice is as it's always been, "use my support and resistance points". Ok, that's easy; you can see that the chart shows two resistance points with the current price, as of last Friday, between the two. Now, the chart says to move your profit stops up to first resistance when current prices trade above it on a closing basis, meaning the daily close is above the resistance line. But here we have two resistance lines very close together. The chart's wisdom here reflects back on its historical data base of similar situations and advises you to wait for a closing price above the second resistance point before doing anything. Once, or if, this occurs add another contract and move all your stops up to the first resistance. Copyright Virtual Trading University 41

42 Let's assume that occurs...what's next? Well, as you can see there is very little resistance to use up to the 50% retracement level at So the chart is saying that if the two resistance points are cleared there is a good chance that prices will trade to near the 50% level. But hey, the chart's historical data base shows over and over again how markets generally retrace 50% of the last major price move! So the 50% level, or just below it, (don't get greedy) has drew markets like a magnet over the years. Gosh, that's priceless advice! But that doesn't necessarily mean that prices will trade to the 50% level or even beyond the two resistance points for that matter, but the chart's wisdom already has you in a position where you cannot lose if prices do turn south! I wonder if the chart could share some further wisdom as to where prices could be headed in the future. Well, it has in the past so let's expand our March Crude Oil chart out to weekly and monthly prices bars where one bar equals one week or one month to see: Copyright Virtual Trading University 42

43 Well now, what do we have here? The above weekly chart and the monthly chart below both show a possible Head & Shoulders top formation developing. That is a longer-term bearish sign. We're not to be concerned with our current trade because it's protected and on track to make profits. But if you take into consideration that if our current trade makes it to the 50% level, it would go a long way towards creating the right shoulder of the H&S top on the weekly and monthly charts. If that right shoulder forms and weekly prices trade below the neckline at 60.25, a new down trend will be confirmed. And you know, those bearish annalists calling for 30 and 40 bucks per barrel for crude oil might not be too far off. A full 50% retracement or a trade all the way back to the weekly up trend line would still keep the overall trend up. There you have it. A trade in progress using nothing more than sound wisdom from the chart itself. You know, it's ok to listen to other's advice I suppose, but never take and use other's advice without first checking them out in the charts. If you'll do that, you'll become a much more confident and successful trader. Copyright Virtual Trading University 43

44 [A side note] Did you know that $45 dollars a barrel for crude oil translates to about a buck fifteen for unleaded gas! Wow, that would get the demand wheels churning again! Happy Trades, Archie Johnson INDEX Copyright Virtual Trading University 44

45 INDEX 10/23/2007 Crude Oil and Gasoline - Triangle Greetings, and welcome to this week's chart lesson. In last week's lesson you were shown several real-time chart patterns in progress. Most of these are still in progress but I wanted to take another look at the February Unleaded Gas chart. Last week we discussed the power of trading chart patterns and why it is a purely mechanical trading system that doesn't require much trader input. Trader input is simply your "thought process" in analyzing a market for possible trades and profit targets. For instance, if you look at the first gasoline chart below you can see that the market is in an uptrend and a symmetrical triangle or, if you wish, a Large bull flag was developing. These are continuation chart patterns meaning they are a pause in the prevailing trend and an eventual breakout is expected in the direction of the current trend. So you place your order to go long (buy) when prices break up and out of the chart pattern and place a money management stop out point. That was easy enough, as getting into a trade is easy. You have your order in place to enter the trade and an order placed to take you out if prices move against your position. Purely mechanical with no trader input. But now we have a potential problem...where or when to take profits if this thing moves in our favor? Taking profits can be a problem because you are tempted to allow your "thinking process" to enter into your trade. Of course your goal is to maximize profits on every winning trade but if you begin thinking about the market you can find good arguments for both a bullish and bearish case. Copyright Virtual Trading University 45

46 Copyright Virtual Trading University 46

47 Okay, the market is moving in our favor...now what? Be careful, don't think about it too much or greed and fear will begin to enter into your trading decisions. I mean, this trade has generated $4,900 in only five days so your anxiety is beginning to boil...right. This one could turn out to be one of those $20,000 in one month trades! Are you beginning to see how greed can affect you? Many traders would allow greed to take over in fear of getting left behind on this rally rather than following a strict plan. The results of this, in many cases, are traders seeing profits erased by holding a position too long in hopes of more profits. I use this illustration to show you how difficult taking profits can be. It's a nice problem to have, but a problem none the least. In fact, it's one of the main reasons traders lose money. Very little is written about taking profits because the amateur trader demands courses and books containing the next latest greatest trade entry technique. It's almost like they feel that profits will take care of themselves if they can just into the market. Copyright Virtual Trading University 47

48 Sadly, nothing could be further from the truth. Amateur traders end up "thinking" about the trade so much that it dooms them right from the start. Here is a reality; "It's not how you enter a trade that determines the amount of money you make, it's how you exit that counts!" If I had to sum up the solution to this problem in one sentence it would be, " get use to taking profits because you cannot lose money by taking profits." I am fully convinced that if the amateur and not yet successful trader would focus on a trading system that gives both a trade entry signal and a profit taking signal will have the best chance of becoming a successful trader. It removes most of the thought process or trader input. Chart pattern trading with futures and/or options is such a system and that's why I feel it is the best system for new traders to start with and for the not yet successful trader to effectively build his or her account back up. It is a simple and easy to follow system that requires very little trader input by giving specific trade entry and profit taking signals. For instance, the non-symmetrical triangle in February gasoline has a specific profit objective. You simply measure the two widest points of the formation and project that amount higher from where prices break out to arrive at a profit objective. No guess work to that. Notice how prices reversed the day after the profit objective was met. Does that mean the price move is over? Beats me, but we can always enter again using our trend trading technique if prices are just pulling back. But the reality is the fact that our trading account has just grown by $4,900 in five days using a specific profit objective. And that's real money that you can spend anyway you wish! The old saying "a bird in hand is worth two in the bush" applies very well to trading. Do yourself a favor by learning a system that has you taking profits often rather than holding out for the possible "unlimited gains". You'll begin to see your profits slowly build into a massive trading account that even surprises your highest expectations. Trading chart patterns with either futures contracts or options is by far the simplest and most profitable form of trading that I know of. Why? Because there is very little input on your part. You simply follow a few short rules that I show you for trading each pattern. It's a purely mechanical style of trading where you don't need other's advice or any expensive software to trade. You never second guess your trading decisions and you know up front what your risk is and, in most cases, how much If you found this lesson beneficial, consider getting my full course and trade alerts. You'll find many more option and futures trading strategies. And, I'll guide you every step of the way to insure your success! Trade Well, Archie Johnson INDEX Copyright Virtual Trading University 48

49 INDEX 01/24/2008 Recession Don t Participate Greetings, and welcome to this week's chart lesson. Recession, recession, recession is all we hear these days for the US economy. Does it bother you? Are you concerned? You shouldn't be! Trading is the best recession proof business I know of. We are not concerned with which way market prices are moving, we just want them to move and leave behind chart patterns for us to trade, and that's going to happen regardless of the economy. I've traded through three major US recessions, 87 stock market crash, and 9/11 and profited nicely from chart patterns, so when someone mentions recession, I tell them that I don't participate other than to profit from them. January 2008 has been a very successful month so far for chart pattern trades and I want to show you six markets here and there is four more that I didn't have room for in this lesson. Copyright Virtual Trading University 49

50 In January 2007 we started the year off with bottom chart formations in the energy markets. But this year we are starting off with top chart formations in the energies. The head & shoulders top in the three energy charts signaled trade entries about a week ago and are on track to reaching the profit objective. If these objectives are met we will have pocketed $25,000 for these three trades. Copyright Virtual Trading University 50

51 Copyright Virtual Trading University 51

52 Copyright Virtual Trading University 52

53 Prices have broken out of the triangle in December cotton and trades were signaled. This is going to be a good market to be in this year and it's not too late to get on board. Copyright Virtual Trading University 53

54 These triangles are powerful chart formations. Notice the profit objective of the triangle is $7, and it was met just at the market highs before the decline this week. Copyright Virtual Trading University 54

55 The triangle profit objective in silver has not been met yet but we still have a few weeks to go before contract expiration so we are still holding this trade. If just these six chart patterns play out as we expect they will we will have profited $48, for January, and I didn't include four other trades. Recession?...not at our house! One thing for sure, 2008 is going to be one of the best trading years ever for chart patterns! And, it may be a bad time for our economy, but you don't need to participate in the recession if you don't want to. If you found this lesson beneficial, consider getting my full course and trade alerts. You'll find many more option and futures trading strategies. And, I'll guide you every step of the way to insure your success! INDEX Copyright Virtual Trading University 55

56 INDEX 01/03/2008 Greetings, and welcome to this week's chart lesson. I hope you had a wonderful holiday, but it is time to get back to work because the markets don't wait on us. In today's lesson I want to show you the last profitable chart pattern for It is the Head & Shoulders top in the March Japanese Yen. Copyright Virtual Trading University 56

57 In early December the right shoulder had completed and a short trade was signaled when prices traded below the neckline at So you sell a futures contract or purchase a put option because you expect prices to move lower. The profit objective is determined by measuring the distance from the top of the head to the neckline. That measured out to a $4, profit objective. Next, we take that measurement and project it from the neckline lower and this becomes our profit objective for the trade. This measurement ended at which is the profit objective for the trade. I've shown you these patterns many times before but I wanted to drive home the fact of how reliable the method of determining the profit objective is. What most traders fail to realize is that chart patterns are a self fulfilling prophecy. Think about it, most all traders use charts in one form or the other to determine their trades. So basically we have millions of traders out there all seeing a top formation in the JY at the same time. When all these orders to sell came in to the trading floor there was enough orders to move the market in the desired direction. It sounds almost like it's rigged doesn't it? Well, basically it is, and as long as some fundamental news is not driving prices these chart patterns become a self fulfilling prophecy. Take a look at the chart again and see for yourself. Prices went through very strong support at the up trend line to touch our profit objective. In fact, the low price of that day was and after touching our profit stop prices moved right back above support to settle for the day. If that is not precision then I don't know what is! It's a perfect example why the H&S Top has a 90% success rate of meeting the predetermined profit objective! You could have entered your orders for both entering and exiting this trade even before prices moved below You could have went on vacation and not even looked at the market to make another $4,000 in profits! I'm often asked "why do you teach rather than just trading"? I always give three answers: 1) I love to teach. 2) Teaching helps me refine my own trading skills. 3) The more traders I can get trading chart patterns, the easier trading becomes for all of us. Chart pattern trading is by far the easiest and most consistently profitable form of trading period! But most new and not yet successful traders don't know it. They come into this business usually because of some slick advertisement promising easy money and no work if you will just buy their course or software. I have had numerous traders come to me and say "I like what you teach but I'm afraid to purchase your course because I've been burned so many times with other courses and software and broker recommendations". In fact, I had a potential course member last year ask me that very question. This trader, who I will not name, started out trading with $20, After trying one method after another, and trading those "can't lose" broker recommendations his account was now down to less than $2,000. He asked me could I help or should he just quit. Copyright Virtual Trading University 57

58 I just love a challenge so I said yes I can help if you are willing to fire your broker and listen and follow my directions. After analyzing his losses and the very reasons why he was trading in the first place we formulated a trading plan using chart patterns and options and only $2, I mentioned this today because I just received an from him and he said he closed out most of his trades before the holidays, just as I informed him to do, and his account now stands at $13,000.00! That, dear trader, is a real success story. I have no doubt that he will gain back all he lost and much more this year by trading chart patterns and options. I can't take credit for him turning his account around, he realized through many losses that what he was doing wasn't working, and that's the first step to becoming successful. I just helped him put together a plan that would work for him if he followed it, and he did. Take another look at the chart above because you are going to see many more just like it this year. My question to you is "will you profit from these chart patterns this year?" If you found this lesson beneficial, consider getting my full course and trade alerts. You'll find many more option and futures trading strategies. And, I'll guide you every step of the way to insure your success! Trade Well, Archie Johnson INDEX Copyright Virtual Trading University 58

59 INDEX 01/16/2007 IN-THE-MONEY DEBIT SPREAD Greetings Traders, welcome to this week's chart lesson! Today we are going to discuss an option strategy that is very popular and an affective alternative to trading futures contracts. The option position is called the In-The-Money Debit Spread. The in-the-money debit spread is a very simple option position that has many advantages over straight futures contract trades. The in-the-money debit spread consists of purchasing an in-the-money option and selling an out-of-the-money option of the same expiration month. It is a position that requires us to pay a premium - the cost difference between the option we purchase and the one we sell in exchange for the possibility of making the point difference between the two strike prices as our profit. The first and probably the most important advantage is limitation of risk. While an open futures contract burdens the trader with unlimited risk, the risk of the in-the-money debit spread is absolutely limited to the cost of the spread...you can't lose more than that! This can be a more substantial benefit than most traders realize. Even though many traders feel that they can limit their risk by using "stops" what is not taken into account is that many times they can be stopped out because of the risks of taking large loss in a market that has begun to make a big move against the position only to see the market reverse and move in their favor. With the in-the-money debit spread the trader knows that not only is his risk limited to the cost of the spread, he is actually hedging some of his losses by the gains on the option he sold. These factors can be very important especially to a trader who finds that although his ability to predict the market's direction is good, he is emotionally and financially unable to handle the market "noise" of corrections even when the market is trading in his favor. This psychological advantage of knowing that your losses are limited can make the difference in a winning or losing trade. The second advantage to this position is being able to take advantage of disparity between option strike prices. This can be a very substantial benefit! And, the position doesn't require any margin above the cost of commissions. The advantages of this position makes one wonder why more traders don't use it rather than trading a market with futures. Still, there are some disadvantages one should Copyright Virtual Trading University 59

60 consider before they initiate this position. First, we are initiating two positions instead of one so there will be another commission. Second, we are limiting our gains to the point difference between the strike prices. Third, orders should be placed using specific "limit orders" to avoid slippage in less liquid markets. However, I feel that these disadvantages are a small price to pay between a profitable and unprofitable trade. Let's take a look at a real-time example of how to apply the in-the-money Debit Spread. Let's say you are watching the bottom formation in silver and you would like to trade it because you know it's a reliable formation. Your futures contract signal is generated when "if" prices trade above the #2 point ( ) and your stops go below the #1 or #3 points. Copyright Virtual Trading University 60

61 The Margin requirements for one futures contract of silver is about $8, total and the amount of risk is the distance between the #2 and #3 points which is $5, Not bad if you're trading with a $50,000 trading account size. But, this trade would be out of reach for small trading accounts. What if you used the same trading signal of buying when prices trade above the #2 point at but this time look to purchase the in-the-money March Silver 1175 call option for $1,500 and sell the out-of-the-money 1300 March Silver Call option for $900. The spread cost is $600. Your maximum profit potential is the difference between the strike prices which is $6, That's well within reach of most trading accounts. To close this trade for profit simply wait until silver prices reach or go beyond the 1300 call you sold and simply reverse your order by selling the 1175 call and buying back the 1300 call. You may or may not get the full profit potential before both options expire in-the-money but it will be near that because you started out with an in-the-money call which is always worth more than the higher strike price out-of-the-money call you sold. This option position allows even the small account trader to participate in markets where they could not trading futures. It's incredibly easy to do this position and you are never at risk of loss above what you initially paid for the spread plus commissions. Traders who don't incorporate the use options in their trading plan are limiting their trading opportunities and taking on unnecessary risks. So don't sit on the sidelines because of a lack of knowledge, use options. There are more strategies I would like to teach you and my VTU Lifetime Membership course will show you trading plans and styles that fit any size trading account to get you into the game and off the sidelines. Happy Trading, Archie INDEX Copyright Virtual Trading University 61

62 INDEX 09/25/2007 Double You re Money Option Trading Plan Greetings, and welcome to this week's lesson. A double your money option trading plan. In today's lesson I want to show you a very simple and reliable method for starting out option trading with very little capital. If you ask a dozen traders or educators, "how much money do I need to start trading?", you'll probably get twelve different answers. Their answers range between $5,000 and $25,000 as that amount reflects on their system parameters or the learning curve they have endured. I personally feel that the less money you have to start option trading with the better off you are. That certainly goes against conventional thinking, but consider this. If a trader doesn't have a trading plan based on his or her starting capital, they're going to make the same mistakes regardless of how much money they have...and it doesn't take much to see that a $500 mistake is much easier to endure than a $5,000 one. In short, if you start with $1,000 you are forced to only take the highest probability of profit trades because you cannot afford to be wrong. On the other hand, a trader with a $25,000 account makes the same mistakes over and over again until they are busted, thinking that it was just bad luck in the markets. Fortunately, some of those not yet successful traders find me before they are completely busted and I show them this same simple double your money option trading plan. If a trader has $1,000 to $5,000 to start trading with, the number one concern should be to build that account up to a more comfortable level of say $10,000 to $15,000 as soon as possible. This will give you the needed capital to diversify between a number of markets and option trades at once. Until that point, you only concentrate on doubling your investment one trade at a time. You are giving up unlimited profit potential of an option purchase, to only see your investment money doubled in value. Why? Because it's much easier to double your money, very quickly, than it is to hold out for "possible" unlimited profits. Most traders who purchase an option and hold for unlimited gains usually end up losing as their option expires worthless. They feel that any day now the market will turn and save them...but it rarely happens. On the other hand, a trader who is very careful with trade selection and focuses on doubling his money in one week to two months for each option purchased has a much higher probability of successfully building his small account up from very low levels. Copyright Virtual Trading University 62

63 The great thing about the trading plan is the fact that you only need minimal tools and knowledge to make it work. Here's a list: 1. Brokerage account...easy to set one up in less than 24 hours with no minimum required for trading options. 2. Commodity Charts: Track N' Trade Pro charting software is by far the best. However, if you're not ready to purchase it we have all the charts listed for you in the VTU course member's private web site. 3. Option Implied Volatility Rankings: This tells us whether options in a particular market are over or undervalued...priceless information and we have it updated daily in the course member's private site. To put a high probability of profit option trade together we simply scan our charts and locate one of the five of the highest probability of profit chart patterns. They are, the bottom formation, top formation, head and shoulders top formation, the narrow sideways channel, and the 50% retracement chart formation. These powerful chart formations most always lead to extended price moves giving us a probability of profit of up to 90%. Simply meaning, that when one of these chart patterns are found, you have up to a 90% chance of doubling your money in a short time with option purchases. Option implied volatility is also most important. Once you find one of the chart patterns you simply look at the implied volatility ranking table to see if the IV is low or high. We only want to purchase options for this plan if the IV is very low. Reason being, when prices begin moving the IV will move up also which makes the option we purchased increase in value very quickly. Although there are 32 known chart patterns which you can learn as you go, the five I listed will give you the highest probability of being right in determining the next price direction your first time out. The Narrow Sideways Channel is my favorite of the five chart patterns because I've NEVER seen one that didn't lead to an explosive price break out at some point in time. You can see a perfect example of our free trade option plan using the narrow sideways channel in sugar in the next lesson. You can use the same plan as the free trade example for the doubling your money plan, just buy the best priced option and sell when the price doubles. And if you feel the market will move on further wait for a price pullback and purchase another. The next question is, "how long will it take me to build a $1,000 account to $10,000?" That's hard to determine because we don't control the markets, we only trade what we see. So, patience is the key to making the plan work. I will say that there are many trades every year that explode from these chart patterns. To be more recent, course member's have doubled their initial investment this year in corn, wheat, soybeans, soybean meal, Canadian Dollar, gold, US Bonds, unleaded gas, cotton and a few others with each trade averaging about one month, and three months for free trades. It's very easy to reach that level in just a few months. Copyright Virtual Trading University 63

64 You don't need much education; it's the discipline to follow the plan that makes it successful. I am fully convinced that this method of trading is the only way for the complete novice or not yet successful trader to build a very small trading account up to a more comfortable level. You can't do it with futures contracts, and day trading/forex is just too stressful. If you found this lesson beneficial, consider getting my full course and trade alerts. You'll find many more option and futures trading strategies. And, I'll guide you every step of the way to insure your success! Trade Well, Archie Johnson INDEX Copyright Virtual Trading University 64

65 INDEX Feeder Cattle Head&Shoulders Top CLICK HERE for a Video of this lesson Greetings, and welcome to this week's chart lesson. We have one of my favorite chart patterns developing in January Feeder Cattle. It's the Head & Shoulders top (H&ST) formation. The H&ST is a great chart formation that predicts a price drop equal to the distance from the neckline to the top of the head. You simply take that amount and project it lower from the neckline to arrive at the possible profit objective. Once you locate a high probability of profit chart pattern like this you simply buy a put option (expecting prices to drop) or a put option spread if single put option purchases are too expensive. In Thursday's (10/04/07) option trade alert we recommended buying the January put option spread. January put option spread. Buy the put and sell the put for a spread price of $700 to $ Copyright Virtual Trading University 65

66 If prices drop lower as we expect, we take profits when prices reach on our chart. It's a very simple option trade that has the opportunity for a nice profit. The H&ST chart formation is about 90% reliable, meaning that there is a 90% chance that prices will reach the first profit objective at I put this lesson up so you can track the position to see how course members are doing with this position. You can track our progress using this quote source. FEEDER CATTLE OPTIONS Simply take the cost of the January feeder cattle put option and subtract it from the cost of the put option to arrive at the spread price. This is a current trade which shows you how we trade the markets using chart patterns and options. Copyright Virtual Trading University 66

67 If you found this lesson beneficial, consider getting my full course and trade alerts. You'll find many more option and futures trading strategies. And, I'll guide you every step of the way to insure your success! Trade Well, Archie Johnson INDEX Copyright Virtual Trading University 67

68 INDEX Head & Shoulders Top No Trade Signal CLICK HERE for a Video of this lesson Greetings, and welcome to this week's chart lesson. In our last lesson we saw how the head & shoulders top formation signaled a trade in the Japanese Yen and met the profit objective perfectly. In this week's lesson I'll show you how chart patterns, and the rules for trading them, keeps us out of potentially dangerous trades. Copyright Virtual Trading University 68

69 The H&S top in the Australian Dollar formed at the same time as the one in the Japanese Yen, however, prices did not trade below the neckline in the AD which is our signal to go short or purchase a put option (expecting prices to move lower). You can see that prices traded down to the neckline in mid December but did not trade below it, and, in fact, found support at the neckline and moved higher again. Our trading rule for entering a short position when, and if, prices trade below the neckline kept us from entering a losing position. So chart patterns not only get us into really fantastic trades at the beginning of a price move which is very important for doubling and tripling your money very quickly. They, more importantly, keep us out of losing trades when we follow the simple rule of not entering a position until the market tells us to. The market already knows its direction, but we don't. And rather than 'guess' we simply use our chart patterns to become a follower and not a predictor or forecaster. Forecasters are often wrong but the market is not! If you found this lesson beneficial, consider getting my full course and trade alerts. You'll find many more option and futures trading strategies. And, I'll guide you every step of the way to insure your success! Trade Well, Archie Johnson INDEX Copyright Virtual Trading University 69

70 INDEX 12/11/ VTU Chart Pattern Trade Review is in! See how chart patterns profited over $255, for Free Download Greetings, and welcome to this week's chart lesson. Triangles, triangles and more triangles. Yet, another triangle to discuss for today's lesson. Why do these triangles surface so often? The four types of triangles (symmetrical, nonsymmetrical, ascending, and descending) are known as "continuation chart patterns" meaning that they are found more often within a trending market rather than at the beginning or the end of a trend. To simplify the explanation further, they are the market's way of taking a price breather before continuing on in the same direction. Triangles are also some of the simplest formations to trade. For instance, there are only two possible outcomes for a triangle trade because prices can either breakout to the upside or downside. It's also equally as easy to trade by simply letting prices decide their direction then placing your trade in that direction. I personally call these triangles my "bread and butter trades" because they pop up so often and generally don't produce as much profits as a chart pattern found at the beginning or the end of a trend. However, don't discount these formations because of that because these formations can also turn out to be "home run trades" just as all chart patterns can. Triangles are very easy to trade. Once you spot one developing as we did in March cocoa simply wait for prices to break out of the triangle to place your trade. You can see that you would have a buy signal at You can use a predetermined profit objective ($870) if you wish by measuring the triangle and project that amount higher from your entry point (19.68). Or let prices run without a predetermined profit objective and use future support/resistance to lock in profits 'if' prices move on up. I personally like using the latter because you really don't know how far prices will go. By using an open-end profit target and utilizing future price support and resistance you are letting the market price action take you out of the trade when prices turn. In other words, if prices trade back below an important support area, we want out because something in the market sentiment has changed. I also want to stress the point that this style trading is not a style where you have to watch price action all day. In fact, I recommend that you don't follow prices all day. My chart data is updated after the markets close for the day and that's all I go by. At times, I visit several trusted web sites for market fundamental news but my trading decisions are based on what I see on the charts. I plan my trade, call my broker to place my order, or do it myself electronically, then I'm off doing fun things for the rest of the day like teaching you how to trade. I just said that because too many new traders try to make trading more difficult than it really is. Copyright Virtual Trading University 70

71 Getting back to our long position in March cocoa, if you used the $870 pre determined profit stop you would have made $870 in three days. Not bad, and it's great for the beginner to use this method until he/she learns how to effectively identify support and resistance to use the open-end unlimited profit objective. let's look at how to use support and resistance as our guide for truly having an 'unlimited' profit potential trade. But first, it's important to note that regardless of the method of taking profits you use, the first goal of any trade position is to remove the risk from the trade. For instance, your money management plan may allow you to risk $400 on this trade. Your first and foremost goal should be to move your stop out risk point to breakeven or lock in a small profit ASAP. You can see on the chart that we used the support area at because prices have now moved beyond that area. That locks in about a $370 profit if prices reverse. Okay, now we are in the trade with zero risk and a guaranteed profit near $ What now? Since we are in a profitable position regardless of the future price direction our job of maximizing the trade is less stressful and easier...that's important because nervous traders make disastrous mistakes. Our profit stop is at and we are looking for the next level of support to develop to move our stop up again to lock in more profits. We can see that the next area of support is developing at However, we don't want to lock in more profits just yet because prices could stop us out too soon. Our goal is to stay one support level behind the current price action so daily price fluctuations don't stop us out too soon. The next level of support now developing is at If prices can continue moving higher beyond we'll lock in more profits by moving our stop up to And we'll keep doing that as new support develops. What may stall or reverse the price direction? I'm thinking that the high of set back in July will be strong resistance for future prices. That doesn't mean prices will turn but simply for us to expect at least some price consolidation in that area. Just stick to using support to lock in profits and if prices reverse, so be it. Using support to lock in profits is like walking up steps and you certainly will not put your foot on a step that's not yet completed so stay just a little behind the market. Learn to use support and resistance in your trading and you will be smiling all the way to the bank. The biggest problem I've seen among new and unsuccessful traders is they try to over analyze a trading opportunity. It's no wonder considering that there are so many technical methods of trading to consider, and the fact that trading forums and message boards can completely overwhelm the new trader. In fact, trading opportunities pass most by as they consider way too much analysis. Take a couple of things you are interested in and concentrate on those. Copyright Virtual Trading University 71

72 If you found this lesson beneficial, consider getting my full course and trade alerts. You'll find many more option and futures trading strategies. And, I'll guide you every step of the way to insure your success! Trade Well, Archie Johnson INDEX Copyright Virtual Trading University 72

73 INDEX 02/06/2008 Triangle Chart Patterns Rule! Greetings, and welcome to this week's chart lesson. The recession is in full bloom and has been for the past five months, it just hasn't been declared by the US Government yet. Trading during these times can be difficult if you get caught up in all the news and the trader emotional rollercoaster ride. If you've been trading for any length of time you know how your emotions can be so high one day when you're making money, then oh so low the next day when the market moves against you. Daily price fluctuations are a natural part of the markets, just as emotions are a natural part of our being and we can't change either. However, trading like you are on a rollercoaster chasing the market will cause stress, and stressful traders make very costly mistakes. The way to control emotions when trading is to use a strictly mechanical trading method that leaves no room for your emotions to come into play. A trading system that gives you specific entry prices, profit target prices, and a stop out price if the market moves against you. You don't second guess your trades, nor do you worry about day to day price fluctuations. Trading chart patterns is a mechanical trading system that removes your emotions from trading and if you will look at the following chart patterns you'll see our emotions under control and how we do not participate in economic problems, in fact, we profit from them. Here, see for yourself: Copyright Virtual Trading University 73

74 The descending triangle is a wonderful chart formation to trade. Over $12,600 in about one month. Or, stay one support level behind current price action and ride the trend up. Notice how the predetermined profit objective of $12, occurred two days BEFORE the market reversed. Our risk stop was never threatened and the profit objective turned out to be the market high before prices reversed. Copyright Virtual Trading University 74

75 JULY SILVER UPDATE March 2008: This market is moving on up. If you didn t take the profit objective and decided to trade one support level behind current prices, continue adjusting your stop up to next support until you are stopped out. Copyright Virtual Trading University 75

76 Wow, did you catch the symmetrical triangle that formed last week in July corn? You would have drawn the triangle then measured it to determine your profit objective of $3, Project that amount in the direction of the breakout which is up and you have a profit target of Let's see if it gets there. Copyright Virtual Trading University 76

77 JULY CORN UPDATE March, 2008 Just about at the profit objective. Or trail one support level behind. Copyright Virtual Trading University 77

78 Another symmetrical triangle formed and has signaled a trade this week! The profit objective is $8, let's see if it gets there. Copyright Virtual Trading University 78

79 JULY COFFEE UPDATE March 2008 You can see that prices did in fact, trade to our profit objective. Trading triangle chart patterns in trending markets is a very easy form of trading. Copyright Virtual Trading University 79

80 What a move in KC Wheat! Numerous points along this rally to start new positions and to add contracts to existing positions. If you traded the sideways channel and the symmetrical triangle as the market moved up you could have made over $10,000. On the other hand, if you got in at the trend change back in July you would have about $16,000 per contract, and there was at minimum four opportunities to add contracts which would put your total up to near 50 or $60,000. Keep your profit stop one support level behind current price action and keep moving it up with the market until you are stopped out. Here is another CBOT Wheat trade: same basic rules apply here as well. Copyright Virtual Trading University 80

81 Copyright Virtual Trading University 81

82 WHEAT UPDATE March, Kansas City Wheat and Chicago Wheat are moving on up but maybe developing a top. Lots of money made in these two markets. Copyright Virtual Trading University 82

83 How about a quick $1200 in April Lean hogs last week from the small symmetrical triangle. Pretty easy, and all done automatically without emotions! Copyright Virtual Trading University 83

84 How about the descending triangle in November soybeans that signaled an entry last week? This market is moving really well and I may lift the $5,000 profit objective and let this one ride until another triangle forms. How about you? Will you trade the next triangle? Copyright Virtual Trading University 84

85 NOV SOYBEANS UPDATE March, 2008 Oh yes, I ll be trading triangles. Here s another one that met the profit objective very easily. Most traders are concerned with making BIG profits per trade, but these bread and butter trades add up quickly!! Copyright Virtual Trading University 85

86 Hey, like soybeans, soybean meal is on the march higher and we are on board since last week and are looking for another $4800 in profits! Copyright Virtual Trading University 86

87 SOYBEAN MEAL UPDATE March, 2008 Oops! I was beginning to wonder if one of these triangles would fail. But this one hasn t yet failed and since the market did move up you should have your initial stop moved up to breakeven for the trade at Copyright Virtual Trading University 87

88 How about the trade from the first triangle in July sugar, you should be in for about $1400 in profit so far, and look...another triangle is now in progress! Are you ready to trade it? Trading triangles is very easy but you do have to act on what you see! Copyright Virtual Trading University 88

89 JULY SUGAR UPDATE March, 2008 [NEEDS NO EXPLANATION] If the recession has you down and you're worried about losing your job or just making ends meet, or if the stock market is eating away at your retirement account, fight back! You don't have to participate in bad economic times unless you want to. We have a profit potential of over $30,000 with the trades initiated in just the last week! Sure is much easier than trying to scrape a few 'pips' from day trading the FOREX markets or scratching your head wondering when the stock market is going to turn again. You can even reduce your risk further and participate in market moves regardless of your starting account size by trading options! Copyright Virtual Trading University 89

90 If you found this lesson beneficial, consider getting my full course and trade alerts. You'll find many more option and futures trading strategies. And, I'll guide you every step of the way to insure your success! Trade Well, Archie Johnson INDEX Copyright Virtual Trading University 90

91 INDEX 11/13/2007 How to Move Stops to Protect Profits CLICK HERE for a Video of this lesson Greetings, and welcome to this week's chart lesson. Today I'm showing you how to move your profit stops to protect gains and not be too close to the current price action to avoid being stopped out prematurely. The December Swiss Franc was on our watch list back in June just before prices broke above the red down trend line. The mortgage crises were just beginning and prices appeared headed higher. We suggested call option spreads to profit from the coming rally. Well, we had to wait for a while but the trade is really making money now. But what I want to call your attention to is how to manage the trade to maximize the profit because December options expire on 12/07/2007. With a little less than a month to go until option expiration and considering that the mortgage crisis is far from over, most of your spreads may expire in-the-money as the Swiss moves higher and you'll receive full profit potential of the spread and you don't have to lift a finger, the exchange takes care of it and will deposit your profits in your trading account. But for those who may be in single call option purchases or futures contracts may wish to use my support/resistance method of taking profits. It simply follows behind current prices far enough to hopefully avoid being stopped out prematurely from daily price swings. After prices broke above the down trend line and made the price and retreated, we knew that the price would be future support if prices could get above that price level. When prices moved above in September you would move your profit stop up to that point. But prices traded higher for a week or so then retreated below your stop. So you were taken out of those trades with profits. Now, remember the support area because if prices climb back above there we want to enter new long trades because the trend continues higher. Then you wait until prices get above to move your stop up to there. You keep doing this until prices reverse and stop you out with profits. If you move your profit stop too close and are stopped out, so what. You can enter a new position in the March contract since the December is near expiration. Copyright Virtual Trading University 91

92 Remember, "It's not how you enter a trade that determines your profit, it's how you exit". So get use to taking profits...you can't lose taking profits. If you found this lesson beneficial, consider getting my full course and trade alerts. You'll find many more option and futures trading strategies. And, I'll guide you every step of the way to insure your success! Trade Well, Archie Johnson INDEX Copyright Virtual Trading University 92

93 INDEX 01/04/2007 Opportunity Verses Risk Greetings Traders, welcome to this week's chart lesson! The holidays were fantastic for us, but it's time to get back to work. I thought a good lesson to kick off 2007 with would be to focus on risk. Since risk is your enemy in the markets your goal should be reduce risk, and in some cases eliminating it with options or passing on the trade all together. I know there are many who feel like they must be trading at least four or five times a week, but managing risk and "sitting on the sidelines watching" are positions as well. The wise trader manages his/her risk according to the amount of money they have in their trading account, and sits quietly and waits for the one trade that really jumps up off the charts at them. I say that because most new traders start with $5000 or less. You must be very cautious in your trade selections or one or two losses and you re out. Let's look at coffee below: Copyright Virtual Trading University 93

94 The coffee market can be a very volatile market to trade. In fact, it s not a good market for trading futures contracts with less than a $25,000 trading account. There are some wide daily price ranges that require large stop-loss amounts. But regardless of the amount of trading capital on hand, there's another equally important fact about the top formation in coffee. I call it "Opportunity Verses Risk". When I first consider a trade I use my basic formula of a 2:1 risk/ratio. There has to be TWICE the amount of profit objective than the amount of money at risk (stop-loss). In a top you sell below the number two point and place a stop-loss order above the number three or number one point. That's $3, in Coffee. So I'm looking for a clear shot to twice that amount with no major support/resistance in the way as the profit objective. Copyright Virtual Trading University 94

95 But there is major support just under the number two point, the 50% retracement level. That puts red flags up because from past history markets tend to retrace 50% of the last major price move then reverse. But prices can trade on through the 50% level but the risk is there for a reversal from that level. Now a trade down to the 50% level would be profitable but it's about half as much as you have at risk with your stop-loss order. Does that mean you shouldn't trade the formation? The risk is higher because the 50% level is so close, but you could trade it with that in mind and move your stop to a breakeven point if prices do move below the #2 point. But the reality is many of you will have to pass on this trade if you trade futures alone. You are looking at about $4, total for margin to trade one futures contract, and you are risking $3, of it with your stop-loss placement. How about options? You know, you do not need any margin above the cost of the position plus transaction costs, and your risk is clearly defined to the cost of the position, or limit it to half the cost of the position as a stop-loss if you like. Let's look at that a moment. We can use the same trading signals for options as with trading futures contracts. If prices trade below the #2 point we could do this: Buy one May Coffee put option (expecting prices to drop) with a strike price as close to the #2 point as possible. That would be the put option currently trading for $2, This option would gain in value as much as a futures contract if prices move as you expect with unlimited profit potential. Still expensive though which is the case in volatile markets. "Unlimited Profit Potential" really sounds good but again, that's a lot to pay if you are a small account size trader. How could we reduce this cost further? You could sell a further out strike price option, say, the May put option for $1, You could buy the May put option and sell the May put option as a spread (meaning both orders placed at the same time) for a difference of $ $2, $ = $ There is only one disadvantage for this position and that is we no longer have the opportunity to make unlimited profits. Our maximum profit potential is now the point difference between the two strike prices ($1,875.00) even if the May futures trades below the 120 strike price we sold. Many traders will not use the option spread strategy simply because the "unlimited profit potential" is blocked by the sale of a further out strike price option, and they are scared of selling options period. I'm sorry, because of a simple lack of knowledge traders miss some of the best opportunity verses risk positions you can possibly trade like: 1. In the option spread above, you cannot lose more than $ commission regardless where the price of coffee goes. I personally only risk half ($400). Copyright Virtual Trading University 95

96 2. Your opportunity verses risk is a two or more to one fitting within our trade guidelines. 3. You have the opportunity now to trade in a market that you may not have been able to due to a small trading account. Wait a second, I hear your question...i get it quite frequently. "What if the person I sold that option to exercises it against me?" Think about it, an option spread consists of purchasing a near-the-money option and selling a further out-of-the-money option. So, with May Coffee futures trading near the May 125 put option and the 120 put you sold is below the 50% level, which of those strike prices will always be worth more than the other? The 125 put that you purchased, of course, will always be worth more than the 120. Even in the "remote case" that someone did exercise the 120 against you, you simply exercise your 125 and you still get the $1, profit. I'll let you decide. We took an out-of-reach trade for most futures traders and developed a possible trading strategy with options that any size trading account can take advantage of. You know exactly how much you can lose, and how much you can make. It's all about "Opportunity verses Risk". Happy Trading, Archie INDEX Copyright Virtual Trading University 96

97 INDEX Using Options as Stops for Futures Contracts Greetings Traders, welcome to this week's chart lesson! Using options for stops on futures contracts is a fantastic method for controlling losses. In my How to Succeed Trading Commodities course the strategy is well explained with chart examples, but I'm going to introduce the strategy here for you today. If you have been trading futures for any length of time you already know the frustration of being stopped out prematurely using money management dollar amounts for stops. You've seen that even though you practiced good stop placements, you are stopped out at times for a loss only to see the market eventually reverse and trade in the direction you expected. For the majority of our Chart Pattern trades in Chart Watch we use predetermined money management stop out points which in most cases are all we need. I've had years of experience in placing money management stops to keep you out of harms way. But, in some instances using options for stops overshadows any other type stop. So how do you use options for stops? It's a very easy to learn strategy and we don't even need a chart to explain it. Lets say you found the Head & Shoulders top (H&ST) chart pattern in the May corn futures contract. The rule for placing stops is to place it just above the right shoulder. But the problem is there is $2000 at risk from the neckline to the right shoulder. That's out of reach for many traders so most just sit on the sidelines and miss a possible $10,000 price move. The rule for trading the H&ST is to sell if prices trade below the neckline with a stop above the right shoulder or above the head. This should keep you out of harms way if the formation completes. Let's say for this example trade that the neckline is at 4.00 in May Corn futures so you want to sell (go short) if prices trade below But you must place a stop above the right shoulder which is $2,000 away. If your trading account cannot support that amount of risk, the questions begin to arise. Should you compromise your stop by placing it somewhere between the neckline and right shoulder? The answer is NO because a stop above the right shoulder has been proven to keep you from being stopped out more times than not. Follow the rules and never compromise your stops, it just adds more risk and you don't want that. What if you could get into this trade with about $800 and actually risk only half that amount ($400) and receive complete protection of not being stopped out of the futures contract? That's much less cost plus the added benefit of not being stopped out is great. Copyright Virtual Trading University 97

98 I hope you are beginning to see the leverage that using options for futures stops can have. Here's how it works: If you sell (go short) one futures contract at the neckline at 3.50, and at the same time you purchase a CALL Option with a strike price as close to 3.50 as possible. Let's say a 3.50 May Corn Call option for $800. Here's what happens: If the market moves lower as you expect you begin building profits in the short futures contract. At the same time, however, your call option is losing value because it profits if the price rises. Let's say prices continue moving lower and you are now able to lock in some profit by placing a regular futures stop. Your call option is worth less that you paid say $400. Simply sell the call to liquidate it and continue moving your futures stop lower to lock in more profits. But here is where this position really shines. Let's say you put on the same trade and prices did not move as you expect. You are short one futures contract at 3.50 with a 3.50 call option for protection. The futures price begins moving higher rather than lower. You start losing on the short futures and profiting from the 3.50 call option. And since you purchased a strike price (3.50) closest to the current futures price (3.50), it will gain in value point for point at the same rate the futures contract loses. You can hold this position at breakeven regardless of how high the futures price rises. Simply liquidate both positions and you are at breakeven. That's much better than sweating as the market moves closer to you're $2000 dollar stop loss! There is a downside to using options for stops and that is it will cost you up front to purchase the option. A futures stop doesn't actually cost you money until it is hit, whereas the option costs you money up front. It's basically like an insurance policy; it costs you until you use it! It all boils down to possibly risking $2,000 or in fact losing $800 for the option. This is a very easy and powerful trading strategy that can have you participating in trades where the average futures contract trader is left on the sidelines. Happy Trading, Archie INDEX Copyright Virtual Trading University 98

99 INDEX 05/08/2007 Non-Directional Option Strategies CLICK HERE for a Video of this lesson In today's lesson we're going to look at a non-directional option strategy called the "Option Purchase Straddle" (OPS). The position is non-directional because it involves purchasing both a call option (expecting prices to rise) and a put option (expecting prices to decline). The non-directional option straddle purchase is an often overlooked option strategy because most traders are too busy trying to determine the markets future price direction rather than using an option position that can profit regardless of which way prices go. The OPS requires that we pay a premium for both options and that cost plus commissions is the most you can lose. The only way the OPS will not make profit is if the market does not move. For that reason, I like to use the strategy when markets are consolidating in triangle patterns where the future price direction is difficult to determine. In triangle patterns prices converge to a point where an explosive breakout ALWAYS occurs, the only problem is determining the direction of prices and that's where this position outshines all others. I also like to use the OPS when: 1. Before important reports, meetings and releases of important information that can potentially move the market. 2. When option implied volatility (premium cost) is low. 3. When a market's technical pattern suggests a large breakout is imminent. Take the first May coffee chart below. May coffee had settled into a descending triangle formation. These triangles most often lead to large breakouts one way or the other. Using the OPS consisting of purchasing a close-to-the-money May call option and purchasing a May put option; we are in a position that profits from a price move in either direction. Copyright Virtual Trading University 99

100 Now, as long as prices move one way or the other we make money. Copyright Virtual Trading University 100

101 As you can see, prices broke up and out of the triangle pattern leaving us with one side the 112 call option making money and the other side a 105 put option losing money. Once the direction of the market is known we close out the losing side of our trade by selling the losing option. My rule is to close out the losing side of the trade when that option loses half it's value. In other words, if you paid $500 for the 105 put option you sell it when its value drops to $250. This takes you out of the losing side of the trade and you have unlimited profit potential of the 112 call option. So the next time you are undecided about a market's future price direction consider purchasing an option straddle. It only loses if prices do not move and that never happens when prices are converging to a point as they do in triangles. I hope you found today's lesson an enlightenment and beneficial to your success! Copyright Virtual Trading University 101

102 Trade Well, Archie INDEX Copyright Virtual Trading University 102

103 INDEX 06/26/2007 Option Implied Volatility (IV) Option implied volatility (IV) is the option trader's number one weapon. Knowing what is and how to use it to profit from and protect against losses is the key to successful option trading. Option implied volatility (IV) of a market is computed using an option pricing model such as the Black-Scholes. In contrast to historical volatility, which is a measure of price changes in the past, Implied Volatility reflects expectations regarding the market's future volatility. It gauges whether options are cheap or expensive. Rising implied volatility causes option prices to rise or become more expensive; falling implied volatility results in lower option premiums. Therefore, with everything else being equal, when implied volatility on an option is high, it is better to sell that option; If the implied volatility is low, the option more suitable for buying. Option traders who do not incorporate IV in their trading generally end up purchasing options that are overvalued, and even though the underlying market may move in the direction expected, their option gains little or even loses money. That is not a good feeling and it is referred to as being caught in an implied volatility crush. Implied volatility is measured and ranked on a six month, one year, and two year scale. This simply is a measure of where the IV is now in relation to the appropriate scale. We use the two-year scale as it gives a broader look and more accurately predicts future IV. As I mentioned it takes an option pricing model with daily data to rank each commodity's Implied Volatility. However, VTU Lifetime Members have this work already done for them on a daily basis. We track 46 active commodity markets and rank them 1-46 daily. The #1 ranking market on our list is the market with the highest implied volatility (most expensive options) and #46 being the lowest (cheapest options). You simply look at our ranking table at the end of each trading day to see the changes. Here's how course members use the IV ranking table. Let's say you were looking to purchase an option. You simply look at the ranking table to see the markets where the option premiums are undervalued. The last ten markets on the list are good candidates for purchasing options because they are undervalued markets. Then, go to the underlying futures charts of those markets and look for chart patterns like top and bottom chart formations. When you spot a chart formation you purchase an option with the confidence that you are purchasing the most undervalued option. Copyright Virtual Trading University 103

104 Let's look at it the other way around. Let's say you found a chart pattern in a market that you wish to trade but are unsure which option strategy to use. You go to the daily IV ranking table to see what position the market holds. Let's say that particular market is #5 on the list. This tells us that option premiums are overvalued and not a good candidate for purchasing an option. So, we consider an option spread which incorporates both purchasing an option and selling an option. You get to take advantage of the high premiums for selling an option thus reducing the cost of purchasing one. Our Option Implied Volatility rankings give the option trader an edge over unlearned traders who always seem to lose money trading options. It's a trading tool we provide for members who do not wish to purchase expensive option pricing models. Members simply click our ranking table link and instantly see how the markets are ranked. There is never any guessing which markets are under or overvalued, and my course shows you which option strategy to use for any given ranking. Many option traders lose money because they have no knowledge of implied volatility. Don't you make the same mistake! It couldn't be easier, and there is no software or anything other than joining the VTU trading family needed to give you the trading edge you desire. If you found this lesson beneficial, consider getting my full course and trade alerts. You'll find many more option and futures trading strategies. And, I'll guide you every step of the way to insure your success! Trade Well, Archie Johnson INDEX Copyright Virtual Trading University 104

105 INDEX 02/05/2007 The "Pennant" Chart Formation Greetings Traders, welcome to this week's chart lesson! In today's lesson we are going to examine the 'pennant' chart formation. Pennants are similar to the symmetrical triangle but are generally shorter to the converging point. Pennants, along with bull and bear flags, are known as 'continuation' chart patterns. They simply represent a short price consolidation period within trends. Usually, but not always, pennants lead to an eventual breakout in the direction of the prevailing trend. The pennant found on the oat chart formed after a two-month price rally, and was simply a case of the market taking a breather before moving on in the direction of the trend which was up This particular rally in oats follows the normal seasonal rally pattern for many of the grain markets during April through July. There are two possible trading scenarios for using the pennant formation found in oats so let's look at both. First, if you were already trading oats from the May 05 lows you are looking for price areas to add additional futures contracts or options to your already profitable trade position. Good money management practices say to wait for price pullbacks or consolidation periods for entering new positions. Once you've drawn the pennant on your chart you simply add new positions when, and if, prices trade through the upper axis line of the pennant. If the pennant develops near the up trend line, as it did in this case, do not sell if prices breakout below the lower axis line. Wait until prices close below the up trend line before considering a short position. Often prices will break below the pennant to retest the up trend line before moving on in the direction of the trend. Remember, the pennant is a continuation pattern and must be considered as such until the trend changes. Second, let's say you missed the initial start of this rally back in May and would like to trade it. Again, good money management practices tells you not to chase prices higher but wait for a price pullback or consolidation before considering a trade. The pennant continuation pattern was an excellent second opportunity to enter this market. Want to see a more current pennant that you may wish to take advantage of? Take a look at the second chart. Copyright Virtual Trading University 105

106 There are certainly no secrets surrounding the corn market rally this year as the increased demand for alternative fuels (ethanol) has left the corn bins high and dry here in the United States. And even though this market has already rallied substantially since September 06, we haven't yet entered the normal seasonal rally time period (April through July). Does this mean anything? Well, that and three-bucks will get you a cup of coffee but it sure looks like a perfect example of a pennant to me in September 07 Corn! Copyright Virtual Trading University 106

107 Happy Trading, Archie INDEX Copyright Virtual Trading University 107

108 INDEX 02/20/2007 The Ratio Option Spread Greetings Traders, welcome to this week's option trading lesson! In today's lesson I'm going to discuss one of my favorite option strategies. The Ratio Option Spread. The "RATIO OPTION SPREAD" A ratio spread is initiated by purchasing a close-to-themoney option and selling two or more farther out-of-the-money options; for example, with July soybeans trading at $8, we may decide to purchase a July soybean $9 call and sell two $12 calls. Let's assume that the $9 call is trading at a premium of 20 cents and the $12 call at a premium of 12 cents. We would then pay 20 cents for the $9 call ($.20 x $50 per penny = $1,000); and receive two times 12 cents or 24 cents for the $12 calls we sell ($.24 x $50 = $1,200). In this case, since we receive $200 more than we paid out, we are doing the spread at a credit of 4 cents or $200. Receiving this credit is very important when doing the ratio spread, and beneficial for the following reasons: 1. Firstly, if the market goes up as we expect in this example, we will receive a profit of $50 for every penny soybeans move over $9 at expiration (up to $12) for a maximum profit potential of $15, Unlike a normal option purchase, there is no cost for your initial option purchase because it was paid for by the sale of the $12 calls. 3. In making this trade, we are also taking advantage of premium disparity in option premiums between strike prices. We find in most markets, particularly in grains and metals, that options that are closer-to-the-money have lower volatility (premium cost) than farther out-of-the-money options. These out-of-the-money options have no intrinsic value because they have only what is known as "time value premium" This is a specific amount people will pay for an option because it has a chance of becoming valuable some time in the future. We find that this time value premium decreases the farther out-of-the-money; however, there seems to be more demand by smaller traders to purchase "cheap" options. This can greatly increase the time value of these out-of-the-money options to a point where Copyright Virtual Trading University 108

109 they, at times, are much more expensive than one might expect. Because the options are so far out-of-the-money, it is very unlikely that the options will go into-the-money, yet the premiums do not reflect this lack of probability. Thus, they are relative to the probability of profit, much more expensive than the close-to-the-money options. By using the ratio spread we can take advantage of this disparity in premium since it allows us to purchase the most reasonably priced close-to-the-money option and sell the relatively more expensive options that are farther out-of-the-money. 4. The farther out-of-the-money options we sell will also lose there time value faster as they approach expiration. Time value decreases for both an option at-the-money and out-of-the-money as it approaches expiration. This decline in time value is much more dramatic for the out-of-the-money option. 5. Finally, one of the biggest benefits of the ratio spread is the fact that, if the market does not move as expected, as long as we gain a credit when the spread is initiated, we will not have a loss. In my soybean sample above, let's assume that soybeans are plentiful and the price of soybeans drops to $4. In that case, the options we purchased and sold will all be worthless at expiration. At that time, the net difference to our account from taking this position will be the 4 cent net premium we collected when we initiated this position; therefore, our account will increase by $200, even though the market moved against us. There is only one situation where this position can run into trouble, and that is, if the futures price exceeds the strike price of the options sold. To help control the potential for large losses under these conditions, we follow a rule that requires us to close out our ratio spread if the futures price exceeds the strike price of our short options. The best time to initiate a ratio spread is when the market has made a quick straight up move. This is because this type of action normally increases the demand for out-of-themoney "cheap" options for the reasons mentioned above. This also seems to be when there is great disparity in premiums between the close-to-the-money and out-of-themoney options, providing the best opportunity for the ratio spread. I feel that the benefits of the ratio spread far outweigh the single problem area, that of the market rising to quickly, to soon. Also, these problems are easily handled by our contingency plan and the rules I described above. The ability to initiate a spread that can be profitable over a wide range of prices and market conditions allows us to have both financial and emotional security in the markets. The reason for giving the Ratio Spread lesson today is because the U.S. grain growing season is about to get underway, and there is no better time to consider the ratio spread. Every growing season has surprises in weather conditions that cause volatility extremes making out-of-the-money way over valued. This generally occurs from April into July creating the perfect atmosphere to gain a credit when the trade is initiated. Copyright Virtual Trading University 109

110 In the following chart example you can see that price spikes almost always occur during this time: Notice how prices drop just after the late spring and summer price highs. Initiating the ratio spread just prior to these times gives you the edge because those out-of-the-money options sold will lose value very quickly. Within the next three months we'll be entering the ratio spreads in the grains and soybean complex to take advantage of the high Implied Option Volatility to gain a credit thus eliminating the risk of loss. The Ratio Option Spread you learned here today and the Free Trade Option Position are two positions that eliminate losses. Beginners and not yet successful traders should consider these two strategies that create stress free trades which in turn creates a more relaxed trader. Happy Trading, Archie Copyright Virtual Trading University 110

111 INDEX Copyright Virtual Trading University 111

112 INDEX 07/12/2007 Seasonal Trading CLICK HERE for a Video of this lesson Many markets have seasonal price trends that they follow through out the year. Knowing these price patterns opens up new trading opportunities. In this lesson we are going to look at the monthly chart of September soybeans and corn. Many futures contracts are based on annually produced commodities: soybeans, corn, wheat, cotton, cattle, hogs and a few others. An annually produced commodity tends to have supply available at harvest while demand is variable and spread out through the year. These type of commodities have predictable price patterns: Prices tend to be strongest when future supply is uncertain like during early stages of production or planting. Prices tend towards weakness when future supply is certain like after crop pollination and just before harvest. Take a look at the Soybean monthly chart. Notice the dates where seasonal lows and highs generally occur. Notice the 7/90 high on the lower left of the chart. Generally, from May to August is the seasonal high as crops have completed the flowering stage and the USDA and private crop forecasters have a pretty good idea of how much will be harvested. So the unknown becomes known and prices retreat to harvest lows generally from September to October. You can see that this seasonal pattern has been fairly reliable throughout the years. So what does this mean and how can you profit from it? In the September - October time frame I like purchasing Call options with expiration dates in July and November of the next year. When the market is trading at a low price option premiums are undervalued making call option purchases a great strategy. These options have expiration dates up to one-year away. This positions a trader to take advantage of a seasonal uptrend that almost always occurs where option premiums explode in value. Copyright Virtual Trading University 112

113 Low cost low risk option purchases are much better than going long (buying) a futures contract because options give you staying power to avoid being stopped out prematurely because of wide daily price fluctuations. Take a look at the monthly chart of September corn: As you can see, the corn market trades right along with soybeans simply because they are grown at the same time. The supply side fundamentals may be different but that same volatile seasonal pattern persists. Copyright Virtual Trading University 113

114 Copyright Virtual Trading University 114

115 You can make a lot of money with very little risk by following the growing cycle in corn, wheat, soybeans, soybean meal, and soybean oil with options. In fact, I have a large number of course members who trade these five markets exclusively and do very well. The benefits of trading options is the fact that your trade entry and exit timing can be off a great deal and, if you purchase options with a strike price closest to the current underlying futures contract your profit potential is much greater than it would be if you purchased out-of-the-money options. So next time rather than being confused about a current price rally or decline pull up a monthly chart to see where prices are in relation to the seasonal price pattern. I don't buy or sell on certain dates but knowing the general time frame of seasonal highs and lows gives me a significant advantage over others. If you found this lesson beneficial, consider getting my full course and trade alerts. You'll find many more option and futures trading strategies. And, I'll guide you every step of the way to insure your success! Trade Well, Copyright Virtual Trading University 115

116 Archie Johnson INDEX Copyright Virtual Trading University 116

117 INDEX 04/03/2007 Soybeans - Bullish USDA Report Greetings Traders, welcome to this week's trading lesson! Many have asked me to explain the March 31, USDA grain planting intentions report and why it's important, and if the intentions are set in stone. All traders eyes were on the March 31, USDA grain planting intentions report last week. The report is a survey conducted by the United States Department of Agriculture (USDA). The USDA polls all major farmers to get their planting intentions for the upcoming growing season. It's an important report but, it is only the farmer s intentions and not necessarily what will actually be planted. The weather and field conditions will be the final judge of what's planted and how much. The price tug of war prior to the report was between corn and soybeans. The farmer's goal is to plant a larger amount of the particular crop that they feel will make them the most money at harvest. So the two markets battle for acres prior to the report. This was evident as the corn fundamentals of lower supplies and higher demand were quite opposite of the high supplies and lower demand of soybeans, yet soybean prices stayed high in order to bid acres away from corn. Weather is the wild card as to how much of which crop will be planted. Reason being, corn has to be planted earlier than soybeans because the critical flowering stage for corn cannot extend into the dryer hotter summer months. Soybeans can be planted later than corn because the pod setting stage for soybeans extends well into summer and the plant is not as vulnerable to dryness and heat stress as is corn. So, the final judge is the weather. If fields are too wet farmers cannot get in to plant corn early so they end up devoting more acreage to soybeans. With that being said, now that the farmer's intentions are known, traders will now watch the weather and demand closely. Any delays in planting, or hot dry weather developments, or sharp increases in demand will cause these two markets skyrocket. The seasonal chart for August soybeans below shows us that the summer growing season from April through July is a very volatile period. There is almost always a weather scare to shoot prices higher during the critical flowering stages. Copyright Virtual Trading University 117

118 But look what historically happens after weather concerns are over from July into September. The price drops significantly into what traders call "harvest lows". This is because once the crops are finished flowering in June and July the USDA can estimate the final crop size at harvest. Knowing this information is one of the most powerful and profitable seasonal price information a trader can have. In fact, I know many who trade this seasonal pattern exclusively throughout the year and do very well. Farmers responded to the high demand and low supply of the corn market for this season by intending to plant million acres of corn this season as compared with the average trade estimate of million acres (range ) and million acres planted last year. That's a large number but will be needed to keep up with expanded ethanol production. Copyright Virtual Trading University 118

119 For Soybeans, the USDA indicated that producers plan to plant million acres for the 2007 crop as compared with the average trade estimate of million acres (range ) and million acres planted last year. If US producers plant 67.1 million acres and yield comes in near 42 bushels/acre (assuming usage near billion bushels), ending stocks would come in near 218 million bushels as compared with 449 million last year and 256 million bushels three years ago. This is a very low bullish ending soybean stocks number for the 2007 growing season. And, even though the corn numbers are high, demand for ethanol will consume the majority of it. In short, there is no room for errors for this season for those numbers to be realized. This year is setting up to be one heck of a trading season for these two markets! We are suggesting new low-risk option and futures trades for both December corn and August and November soybeans. In fact, we may see soybeans trade equal to or surpass the (6/2004) highs indicated on the seasonal chart. Beginners who traded August soybeans back in 2004 with us saw profits of $25,000 as prices climbed from April into July and about the same amount as prices fell from July into September with simple low-risk option purchases. I'm referring to that year because the setup is much the same for 2007! Don't miss this trading opportunity! A small trading account can explode in this type environment! Happy Trading, Archie INDEX Copyright Virtual Trading University 119

120 INDEX 07/12/2007 Stock Market Update Which way for stocks? The financials took a big hit this past week with the two hedge-fund meltdown at Bear Stearns and the financials are the largest percentage component of the SP-500. For that reason it is not surprising to see the SP-500 hovering on the verge of going confirmed bearish. A break below the 1490 level to the downside is a clear sign that the bears have control. The problem is the well publicized hedge fund implosion at Bear Stearns (BSC) is not an isolated incident. There is a dark cloud hanging over Wall Street right now and that is the uncertainty of how far this sub-prime meltdown will go in derailing the big financial power-houses like Merrill Lynch, Goldman Sachs, HSBC, General Motors Credit (GMAC), Fannie Mae, Freddie Mac and a host of others. One thing is certain; we haven t seen the end of this very serious problem by a long shot. In fact the recent Bear Stearns confessions are just the beginning. August is now just a month away and $400 billion in sub-prime debt will begin to reset next month to current interest rates. With sub-prime delinquencies already at 13.77% there is still a lot of uncertainty ahead for mortgage companies and consumers and the hedge funds that hold so much of this rapidly defaulting debt. From the sales peak of 2005, existing home sales are now down 16.9% and new home sales are down 29.4% and these new lending standards will accelerate that trend. Plus for the first time since data was collected in 1968, home prices have declined nationally for nearly a year. The sub-prime mortgage issue is bad and will likely get worse, but as a whole the economy seems to be doing fine. However, the third quarter is historically the worst for stocks so it's likely we'll see a slump from August through September. However we traditionally see a mid-summer rally beginning about the second week in July and this year I would take advantage of any rally to short this market because August is likely to be tough for the bulls. Another problem looming overhead is the fact that crude oil prices just surpassed $70 a barrel which was critical resistance and if a hurricane develops and threatens the gulf region we can expect much higher prices. The big problem with higher oil prices is the increased cost gets passed on to everything that consumes energy to produce, particularly food. With inflation creeping higher the Fed s hands are tied on any interest Copyright Virtual Trading University 120

121 rate reduction so expect real estate sales and the lending industry to continue to pressure the market. The market has held up remarkably well in light of these issues, but I doubt it will last. Traders always fear the unknown and one piece of bad news can really change market sentiment. The charts always give us our best clue for what's to come so let's look at the S&P and the DOW: The picture in the charts is hinting of a top in both the S&P and the DOW. The S&P is showing a top formation and a retest of the up trend line failed and prices retreated to 1490 support. The line in the sand is the 1490 support level and a break below that would likely result in a larger price correction even below the 50% retracement level. Copyright Virtual Trading University 121

122 Mid July often results in a slight rally due to some positive earning results, but I would use that as a selling opportunity. There just doesn't seem to be enough positive to overshadow the problems looming overhead. The S&P monthly chart below shows the market very near the 1999 highs which will likely remain the highs for now. The DOW chart has a double top in place and a trend line retest is currently in progress. A trade back above the up trend line would likely result in a retest of the recent highs and possibly develop a triple top. However, if the trend line retest fails and prices move below support, it will open the door for a trade down to the 50% retracement level at Copyright Virtual Trading University 122

123 So what does all this mean and how do you take advantage of it. The charts are hinting of a change in trend as the volatility and wide daily price ranges pick up. I would certainly lighten up on long positions and place new short positions with a closing price below support levels. Option traders have the best opportunities with limited risk because put option values explode during market down turns. So using put purchases and put option spreads offer great rewards. Ratio option spreads work very well if prices make another attempt and fail to climb above the recent highs. The market fundamentals and the charts are both informing us to be on the defensive as far as being long stocks right now. I'm not a doom and gloom trader who expects stocks to plummet into never never land, but a possible price correction seems to be on the Copyright Virtual Trading University 123

124 horizon. I look for July through September to be the most critical time for the stock market, so be prepared. Commodity markets affected by a down turn in stocks is the flight to quality markets where stock market traders move money into as a safe haven from stocks like gold, and U.S. Treasuries. We are already long both of these markets as chart patterns have already given us buy signals. And, of course, crude oil is a wild card and we are already long the December crude oil options. In short, don't be like the herd and be caught uninformed asking yourself what happened. Instead, be informed and prosper during this most fabulous trading time that's come along in decades. Informing course members with market developments and how to profit from them is what we have been doing online for almost ten years now. We serve members in over twenty-six countries and we would like to serve you. If you found this lesson beneficial, consider getting my full course and trade alerts. You'll find many more option and futures trading strategies. And, I'll guide you every step of the way to insure your success! Trade Well, Archie Johnson INDEX Copyright Virtual Trading University 124

125 INDEX Predicting Market Highs and Lows Predicting market highs and lows with accuracy is the most desired trading strategy of any trader. Think about it, if you could pick the highs and lows of any market you would be very rich because you would have a sure winner every time you placed a trade. Of course, it's impossible to do that with accuracy but what I want to show you in today's lesson is a method I use that predicts market highs and lows about fifty percent of the time. It's called the "projected 50% level". This method is extensively covered in my course but I wanted to show it to you here so you can track this particular market to see if it works in this case. Traders who try to predict market highs and lows and base their trades on that are usually not successful. There are many much better ways to trade that get you into and out of trades with much better accuracy like chart patterns and trend lines. But there are some things we know about a market's 50% retracement level that make what I'm about to show you creditable. Markets generally retrace 50% of their last major price move and the 50% level generally occurs around strong support or resistance. Look at the September S&P 500 chart and I'll show you the strategy: Copyright Virtual Trading University 125

126 The S&P broke out to new highs this week by moving past the recent highs which could have been a top formation. But notice the strong support level at about Now look at the next chart: Copyright Virtual Trading University 126

127 The 50% level generally, but not always, occurs near strong support and resistance. In this particular market you can see strong support near dating back to Feb This support level would be my projected 50% retracement level target because it is the strongest most solid support on this chart. What I do here is take the low ( ) of the last major price move and measure up to that solid support then project that same point difference higher which predicts a price move up to Since the market has already traded above the May highs which keeps the up trend in tact, could possibly be a final high before a large correction. Copyright Virtual Trading University 127

128 Is there anything else we can consider that may lend support to our prediction? Let's look at a monthly chart of the September S&P: Each bar on the monthly chart represents one month of trading activity, but notice the all time 1999 high of You can see that the current price is very near that all time high. I would expect a possible price reversal, or at the very least, a price consolidation. The monthly chart lends some support to our projected high of on the daily chart. So how do you use this analysis in your trading? Considering that stock market prices historically decline in late summer early fall I would not consider buying into the market now. However, if you were already in this market on the long side I would be ready to take profits near those highs. Copyright Virtual Trading University 128

129 Also, since prices historically drop in that general time frame, I would consider a short trade when prices near those highs. Put options generally explode in value during price declines in the S&P so single put option purchases, put option spreads, and ratio spreads work really well. So consider the projected 50% level rule the next time you are in doubt about future price direction. It can greatly multiply your profits. Am I predicting a market high near ? Ok, I'll go out on a limb and say yes. So follow this market to see if I'm right! If you found this lesson beneficial, consider getting my full course and trade alerts. You'll find many more option and futures trading strategies. And, I'll guide you every step of the way to insure your success! Trade Well, Archie Johnson INDEX Copyright Virtual Trading University 129

130 INDEX 04/17/2007 Trade with the Trend CLICK HERE for a Video of this lesson Greetings Traders, welcome to this week's trading lesson! Trading trend changes is one of the simplest and most profitable forms of trading for any market. A perfect example is the trade in the Canadian Dollar that I recommended in my course member's trade alert earlier this month. The Canadian Dollar had been in a down trend for over a year. But things began to change as prices traded above the red down trend line in the latter part of March. Anytime a long-term trend line is broken it predicts a move in the opposite direction. Many annalists will tell you that you do not have to get in a new developing trend early to make money. While that is true, the best opportunities and the lions share of profits are made by those who identify and get into a trend change trade early. Generally, volatility is low and option premiums are still undervalued at the beginning of new trends as apposed to entering already developed trends. Most traders don't do their home work and end up wanting in a market only after the "buzz" of the new trend change hits the streets. Of course, by then option premiums are on the rise and volatility has already increased making low-risk trading opportunities a thing of the past. It's really very easy to confirm a new trend change early by simply watching your chart. Generally, after prices trade above a down trend line they pause and retest the breakout area before continuing on in the direction of the new trend. In the case of the Canadian Dollar, prices paused creating a small bullish flag pennant which predicts a continued move higher confirming the new up trend. When, and if, prices break up and out of the flag you buy (go long) a futures contract or purchase a call option because you are expecting prices to continue to rise. Maximizing profits by adding additional futures contracts and free trading the option you purchased is just as easy but for this lesson we're concerned with getting into new trends early. Take a look at the July Coffee chart below. Copyright Virtual Trading University 130

131 JULY COFFEE: Copyright Virtual Trading University 131

132 The July Coffee chart currently looks a lot like the Canadian Dollar chart did in mid- March when the breakout above the down trend line occurred. Does that mean that we can expect the same move in July Coffee as in the Canadian Dollar? Of course not! Despite what some gurus may tell you, no one knows where the price of coffee will be one-month from now. The signs of a trend change are present in coffee but we need more confirmation before buying a futures contract or option. Your signal to buy is when, and if, the current price retests the down trend line and moves higher again. Getting into new trends early is as easy as drawing the correct trend line then waiting for the trend line to be broken before suspecting a new trend change. This gives you an edge over most traders because the unlearned don't know any better. They trade what they think or hear rather than what they see on the charts. Copyright Virtual Trading University 132

133 With just a little practice, you'll be spotting these opportunities and creating trades that have a very high probability of profit simply by trading what you see. So the next time your broker or your favorite market annalist suggests a trade for you, take a look at the charts first to see where the market is currently trading. If it's in the early stages of a trend change, you have a good conviction that prices will continue on in the new direction. On the other hand, if the new trend is in full swing and you missed the early entry, be very cautious because prices may reverse at anytime. A good rule of thumb for entering trades in a fully developed trend is to wait for prices to pullback to the trend line before entering new positions. Trading what you see on the charts and not what you think or hear from brokers or anyone else is by far the most rewarding and profitable form of trading there is. After one day inside my course you'll know at a glance which of the 34 commodity markets presents you with the highest probability of profit trades all without listening to anyone's advice. Keep your eye on coffee or let me do it for you in the VTU Chart Watch Trade Alerts. I'll show you step by step how to trade this market and many more by trading what you see and not what you think or hear. Trading is very easy "if" you let the chart price action tell you what to do rather than someone else. Happy Trading, Archie INDEX Copyright Virtual Trading University 133

134 INDEX 05/15/2007 Stair-Step Trailing Stops CLICK HERE for a Video of this lesson In today s chart lesson I'm going to show you my "stair-step trailing stop loss method" to maximize trading profits when trading chart formations that have predetermined profit targets. The first cardinal rule of successful trading is to minimize losses on losing trades and maximize profits on winning trades. Using the stair-step trailing stop method is letting the market itself tell you when to take profits rather than strictly using a predetermined profit stop assigned to many of the thirty-two chart patterns like the Symmetrical Triangle in the chart. Another advantage of using trailing stops is the fact that you are more relaxed as a trader knowing the market must tell you when to exit rather than you sweating and guessing every price tic movement. Take a look at the chart below: Copyright Virtual Trading University 134

135 The Symmetrical Triangle (SYT) is one of the known chart patterns that does have a predetermined profit objective. You simply measure the distance of the back of the formation and project that distance amount from where prices break out of the formation. The SYT is about seventy percent accurate in reaching this profit objective. Had you used this method in the SYT on the above chart, your profit objective would have been met the same day. This particular trade was also a prime candidate for using my stair-step trailing stop. Reasons being, markets generally trade higher after breaking out of a triangle and, such a strong one day breakout generally leads to higher prices. So everything was pointing to more profits above my predetermined profit objective of First, had you used the predetermined profit objective, you made a successful trade and that is what you wish to achieve. And we really didn't gain much more from this particular trade by using the trailing stop but it's a good example of how it works. Copyright Virtual Trading University 135

136 The next daily low price after prices broke up and out of the triangle is where you start the stair-step trailing stop. If the next daily low price is not lower (which it isn't in an up trending market) you move your stop up to that low price. You continue doing this until the a daily low is below the previous day's low stopping you out. As I mentioned, we didn't gain that much in this example using this type stop, but I have seen many times where two or three times more profits were made over the predetermined stops. So, the next time when your profit objective has been met, consider using the stair-step trailing stop if your analysis suggests that there maybe more profits in the trade. Also, consider getting my course for more methods of using trailing stops and using options as stops for futures contracts to maximize profits. I hope you found today's lesson beneficial to your success! Trade Well, Archie INDEX Copyright Virtual Trading University 136

137 INDEX 06/12/2007 Support/Resistance Trailing Stops Today's chart lesson shows you how to use chart support and resistance for moving your profit stops to lock in more profits. You may remember last month's lesson for using daily trailing stops which maximizes profits after an initial profit objective is very near or has been met. The number one goal of every trader is to make as much money as possible from every trade. But the greatest problem trader's face is just how to go about it. Granted, it's not a bad problem to have, but a problem none the less. Think about it. Your stop loss order to take you out of a trade when things go wrong is predetermined before you ever enter the trade. You use the stop out rules for your chart pattern trades, or a money management stop based on your account size. But what about profits? Fortunately, many of the chart patterns we trade have predetermined profit objectives. Meaning, that the chart pattern has been proven to move a predetermined distance a certain percent of the time. This gives the trader something to shoot for. However, a profit objective doesn't necessarily mean that prices will reach that price target, or that prices will not exceed the price, it just gives you a bench mark to follow. Then there are those chart patterns such as the bottom formation on the lower left side of chart below. It doesn't have a predetermined profit objective. [please continue below the chart] Copyright Virtual Trading University 137

138 The bottom chart formation is a reliable chart pattern meaning that when found at one-year market lows it has historically led to a change of trend and higher prices 70% of the time. The rules for trading the formation are to go long (buy) when prices trade above the #2 point. You place your stop out order to take you out of the trade below the #3 or #1 point. Ok, we did that and our order was confirmed when prices traded above the #2 point. Now what? Your trade is in profits so what do you do? 1.Do you get nervous, 2. call your broker for market direction opinions, 3. or ask opinions on trading message boards? I named those three because probably close to 80% all of traders do all three. Why? It's a lack of confidence and education in their trading style. I use charts because they paint a picture of reality and I have the confidence in trading just what I see rather than what I think or hear. So what is the above June Gasoline chart telling us? First, our trade was confirmed and we are in profits. The first goal is to move your stop loss order up to a breakeven point Copyright Virtual Trading University 138

139 for the trade. That would be right at the #2 point where you entered. But hold on a second. You don't want to move your stop up too soon because the daily price fluctuations may stop you out! See point (A) which is the high of the first price consolidation period. That is your bench mark to tell you if the up trend is continuing or signaling a price reversal. When prices trade above point (A) you assume that the up trend has resumed so you move your original stop out order up to the #2 point. This would give you a breakeven trade if prices reverse. Now you look for a point (B) high to form and when "if" prices trade above (B) you move your profit stop up to the next support level. What you are doing is moving your stop up keeping it just below the previous support level and the up trend line. This puts you far enough behind current prices so you are not stopped out from daily price moves. You continue following the market up moving your stops up just under previous support until prices reverse and profit stop you out. It's really quite simple, you just phone your broker or change your stops through your computer if you're trading electronically each time a new support area forms. It doesn't matter what you think, or what anyone else thinks for that matter, because you are letting the market (chart) tell you what to do. I guarantee you when you see the true light in letting the market's price action tell you what to do, you'll never trade any other way! That's why I teach mastering the charts as the secret to successful trading. Mastering the charts is nothing more than learning a few simple chart patterns and applying time tested rules for trading them. Then, you become confident in your trading method and could care less what other's, including myself, tell you. You know you've done your best, and you also know that the market is the final judge as to how much money you make. By maximizing your profits you profited on almost 90% of that 90 day price move that resulted in over $22,000 in profits per contract or option purchase. This profit stop method can be used whether trading futures contracts or options...it works great for both. In fact, many traders starting with a small trading account of under $5,000 probably cannot trade a futures contract on gasoline due to the high margin requirements. However, you could have made almost as much money by purchasing an option for about $600. Now that's leverage and how the small account trader can participate in markets he/she could have not otherwise traded. My message for you today is to focus more on your charts and learn to master them. You've heard the saying that "mastering one thing that makes money and doing it over and over again is how fortunes are made". It's true! And once you master your charts, and it's not difficult, you can apply it to 34 active commodity markets and do it over and over again. Copyright Virtual Trading University 139

140 Don't spend your hard earned money on computer trading systems that are no better than you are at selecting trades. Just about all of them use charts so save yourself the money and master the charts yourself with my course and mentoring. If you found this lesson beneficial, consider getting my full course and trade alerts. You'll find many more option and futures trading strategies. And, I'll guide you every step of the way to insure your success! Trade Well, Archie INDEX Copyright Virtual Trading University 140

141 INDEX 11/28/2007 Confirming Chart Patterns: Greetings, and welcome to this week's chart lesson. Chart traders truly get excited when they find several chart patterns in a single location with all pointing to prices breaking out in the same direction. It's about as close to a "Can't Miss" trade as you can get! As I am putting together a 2007 chart pattern trade recap where I recap some of the most rewarding chart pattern trades for the year, I couldn't help but showing you a sneak peek at one of the most memorable patterns for the year. In fact, if there was a 'chart pattern of the year award' this one would be at the top of the list! The great thing about these patterns is the fact that they basically occurred in three different markets at the same time. They were heating oil, crude oil, and unleaded gasoline. Take a look at the following charts: Copyright Virtual Trading University 141

142 The energy markets were in a down trend during January 2007 and as far as we knew the down trend would continue. However, a bottom formation developed, and a small descending triangle developed, all right at the down trend line. That is three chart patterns all predicting that prices will breakout higher. All the entry price points were the same for all three patterns making this a very high confidence trade. Call option premiums were low and the risk of being stopped out of futures trades was low. Even though the chart shows profits on a per contract or option basis, there were many opportunities for adding additional positions so you can at least triple your profits from those shown. And free trade option opportunities were plentiful. In short, a lot of traders can retire from profits made in these three markets this year! The first signal to go long (buy) was given when prices traded above the #2 point of the bottom. Of course, this also would break prices up and out of the triangle and above the down trend line. You take profits when prices trade below your new up trend line as you can see For all we knew the up trend may have been over. Copyright Virtual Trading University 142

143 Wait until the price corrects back and starts another up trend at point B. Buy again when prices trade above the market's previous high of at point C. Take a look at December Crude Oil: Wow, just apply the same techniques for crude as for heating oil! And, if I had included the unleaded gas chart you could have done the same as well. Although all chart patterns get our heart pumping, several chart patterns found in one location confirming the same break out direction...is a chart traders dream come true because it almost guarantees a profit! Was this chart pattern 'one in a million?' Nope, and when I post our 2007 year in review you'll see more. Copyright Virtual Trading University 143

144 The question is: "will you profit from chart patterns in 2008, or will you be reading about them next December?" If you found this lesson beneficial, consider getting my full course and trade alerts. You'll find many more option and futures trading strategies. And, I'll guide you every step of the way to insure your success! Trade Well, Archie Johnson INDEX Copyright Virtual Trading University 144

145 INDEX 02/07/05 Narrow Sideways Channels CLICK HERE for a Video of this lesson This week's chart lesson shows the power and leverage of the "Narrow Sideways Chart Pattern (NSC)". This formation is the 'granddaddy' of the 32 patterns we traders search for. Why? Because in all my years of researching the markets, I've never seen a Narrow Sideways Channel that didn't lead to an explosive break out. at some point in time. That's right...every single one has led to an explosive breakout at some point in time. But that raises some questions like "when is a channel a channel" and "how to do I trade it"? I am going to answer those questions and I sincerely hope that by the end of this lesson you'll see and be able to put this powerful trading strategy to work for you in your own trading account! The Narrow Sideways Channel is nothing more than a period of time where the lows and highs on a bar chart can be bracketed with two straight lines. However, in my experience, the longer the channel the stronger the breakout will be. So, I like to see three to six months and even longer before getting really excited about trading it. Now that we have the formal definition of a NSC out of the way, I'm going to show you what's really going on in the markets, and why it's equally as important to view the markets in a physiological manor as it is defining chart patterns. Once you understand what's behind the development of such chart patterns, you begin to see that prices are where they are for a reason. Take any of the NSCs on the charts below and you'll see a normal market. There's nothing more going on than the normal day to day buying and selling by traders. However, the longer this normal heart beat of the market goes on, the more 'asleep' traders who are trading it become. You'll begin to see many trading days where the open, high, low, and closing price of the day are very near the same. Option sellers are selling options very near to the current futures price for near nothing. You can pick up options for a few hundred bucks with up to 18 months before they expire! But then something comes along like a war, drought, or just about anything else you can think of that wakes traders up. This is the break out price area where prices break through either the lower portion of the channel or the upper portion. And, this is important to know, the longer the channel, the stronger the breakout will ultimately be! It's like coiling a spring, the more you twist it, and the stronger the release will be. Copyright Virtual Trading University 145

146 Boy, this is really rocket science stuff isn't it? If you have access to free charts a pencil and straight edge and a minimum size trading account (many have no minimum size for trading options) you are on your way to more profits faster than you may think. Let's take a closer look at the following charts: Gold prices had been in a NSC for about eight months (not all shown on the chart). The normal up and down waves of buying and selling had traders almost lulled asleep. You can see many days where the open, high, low, and closing price of the day are very near the same. Option prices had dropped in value creating great buying opportunities. But, it's very important to wait for prices to break out of the channel before entering trades. We could have purchased low-cost options with almost a year until they expire. However, since the NSC can last for many months, and even a year or longer, we want to see a confirmation that things are changing before we enter trades. We received that confirmation in mid-september when prices broke through the upper portion of our channel. Option values were still undervalued costing in the $350 to $600 for options with strike prices closest to the current futures price. Your goal should be to Copyright Virtual Trading University 146

147 purchase an option strike price closest to the current futures price because the underlying futures price need only move a little in your favor to make your option profitable. One of the biggest mistakes that unlearned option traders make is purchasing options that are way out-of-the-money meaning the futures price must rise sharply before reaching the option's strike price. True, since these options are way out-of-the-money they are even cheaper than the at-the-money options, but they have far less of a chance of ever becoming profitable. It's always best to purchase options that are no further outof-the-money than three strike prices. In this example the April gold futures price was about when prices broke through the upper portion of the channel. Option strike prices in gold are in multiples of fivedollars. In other words, the closest strike price option would be the 475, 480, 485, 490, and so on. The trade I recommended for course members was to purchase the April gold 480 call option for $ At the time this option had seven months until expiration and was only one strike price away from the futures price. As of this writing, the April Gold 480 call option is worth $9, By the way, this web site link is a great resource for getting option prices because they give you the dollar amount that the option is worth. Often times a market will give you a second chance to enter or add more options if prices retest a breakout area. You can see this happened in early November. Let's look at another example: Copyright Virtual Trading University 147

148 The same setup occurred in July 2004 soybeans in We purchased the July 2004 soybeans 6.00 dollar call options for about $350. when prices broke through the upper portion of our NSC. This option had almost ten-months before expiration and was one strike price away from the money. These options profited nearly $20,000 in seven months. That's just for one option! What if you had purchased two or three, that would be around $1, total cost and your profits would then amount to about $60,000.00! Remember what I said at the beginning of this lesson, "I've NEVER seen a NSC of three to five months or more in duration that didn't lead to an explosive breakout!" Let's look at another: Copyright Virtual Trading University 148

149 Wow...remember when crude oil was under $20 bucks a barrel, or.080 cents for a gallon of unleaded gas? I didn't select these two charts to show you how much crude oil and unleaded gas has gone up since 1991, I wanted to show you what was going on before the big move started. Oil prices had reached a higher plateau in the late eighties and had leveled off into a 12- month NSC (not all chart data shown). At-the-money options, both puts and calls, were trading at near nothing compared to the thousands they cost today. And a futures contract margin to trade a single contract was still under $3,000 not like the $20,000 required today. The point I wanted to make is the fact that this all started from a Narrow Sideways Channel. Now, there have been three more NSC at higher price plateaus since these and you could still be trading them from 1990 until now using my Free Trade Option Strategy with no additional risk over the cost of the very first option you purchased. Do you see what happened when oil traders got their wake up call? A $16,000 price move in less than three-months for a $400 investment is more of a return than any other legal business venture that I've ever come across! Copyright Virtual Trading University 149

150 Let's recap this so you'll know exactly how to take advantage of this situation in the future: First, get some charts. You can get free ones from around the Internet that you can printout, or you can download a free evaluation of Track N' Trade Pro. It's the software I use and it comes with older charts for you to test all the features. You'll find NSC everywhere! Second, if you don't already have a trading account setup with a brokerage firm, you'll have to do that. Remember, some firms like Orion Futures Group require no minimum amount to open an account exclusively for trading options. Basically, as long as you have enough in your account to pay for the option and commissions and exchange fees, you're good to go. And, if you look for the type of low-risk Option Strategies to trade like the NSC I've shown you today, you can be successful and build a small account of $1,000 - $2,000 to over $20,000 quicker than you may think. Third, start bracketing these channels! Make sure your connecting two lines reflect the highs and lows of the channel range. Then when prices near the upper or lower portions of the channel, start pricing options no further out than three strike prices above the Copyright Virtual Trading University 150

151 upper or below the lower bracket line of the channel. You also want to purchase options with a minimum of six-months until they expire to give your trade enough time to work for you. Only place your order to purchase when the futures price breaks through the brackets. I use a risk stop by risking one-half the option premium that I paid up front as my stop out point. This tells me I'm wrong and I want out. Your first profit objective is to double what you paid for the option. At that point consider my Free Trade Strategy if you feel prices will continue in your favor. That's it...that's all you have to do! And guess what, if you use my free trade option strategy, you can add positions just like you would adding futures contracts with no additional risks over the cost of the first option you purchased! Can you imagine, not having to sweat over every price tic of the market like you do when trading futures contracts but still be able to make unlimited profits as in futures trading! I realize that many of you reading this lesson are bound to be saying that anything where you're told that you can make 3 to 5000% return on investment in such a short time is simply just too good to be true. I don't blame you either because there are literally hundreds of courses and software programs out there costing in the thousands that can't produce no where near these percentage numbers I'm claiming you can make with a free charts, pencil and a ruler. Or if you're real lazy, TRACK N' Trade software for a couple of hundred bucks will do all the work for you! That's why I felt it necessary to pull out my Top Gun trading strategy from my course and give it to you for free. I want you to see first hand that my claims of profit potential are real! Take the strategy, use it, or test it free by paper trading and see for yourself! When you see I'm serious about this, you'll want to come back and get my course and learn how to trade the thirty-one other chart patterns that promise to provide you with low-risk trading opportunities every day if you want to trade that much. Your next question is probably "how often does the NSC channel occur and are you watching any now?" Generally, one or two develop each year. We had NSC in gold, sugar, copper, and cattle last year which gold is still in progress. Currently, there are no NSC that we're tracking but I expect that crude and unleaded will start forming one when prices settle in a new trading range later this year. The foreign currency markets are also beginning to move more sideways. So keep an eye on those. There you have it; my most rewarding option strategy. Granted, these type opportunities don't come along everyday, but when they do, you can really jump start your trading accounts if you know how to take advantage of the opportunity. If you have any questions at all about any of the chart lessons, or any other questions, please feel free to write me at: Us, or chat with me live if I'm online via our chat button at the top of this page and I'll be more than happy to help you. Happy Trades, Archie Copyright Virtual Trading University 151

152 INDEX Greetings Trader Friends! FREE Trade Option Strategy Thank you very much for taking the time to stop in and take a look at this simple yet most powerful option trading strategy called the FREE TRADE. If you have never used the free trade option strategy, or if you have pyramided futures contracts, I think you will find this strategy very enlightening and a beneficial tool to add to your trader's tool box. If you are new to trading, or have never traded options before, I'll show you step-by-step how to trade this strategy plus five more equally as powerful in my LOW-RISK OPTION TRADING COURSE. The goal of every trader is to minimize losses and maximize gains on every trade they place. Unfortunately, it's a known fact that most traders are wrong about a commodity's or stock's price moves more than they are right. In fact, an industry wide saying is that you can consider yourself a profitable, successful trader if you can call a market's direction correctly only 50% (fifty percent) of the time. So it's pretty simple to see, using the 50% average, your winning trades should at least be double the amount in profit over the amount you lose on the losers. So controlling losses is by far the most important step towards successful trading. It's even more important for beginners and not yet successful traders with small trading accounts. Futures contract traders have difficulty controlling risk of loss due to slippage which is the point difference between your stop order and your actual fill price, and daily limit price moves where a commodity is locked up or down it's daily price limit. The last one could get ugly if the market opened limit down for three or four days in a row and you were long! Although daily limit price moves are not the norm, they do occur therefore your trading account is subjected to unlimited risk of loss! Futures contract traders also have problems maximizing profits. Assuming a futures contract trade moves in your favor, you must pyramid contracts as profits allow maximizing profits. You risk more account margin to purchase more contracts as you make profits. This creates an inverted pyramid where profits can erode very quickly. Option traders, on the other hand, can completely eliminate the three problem areas of trading futures contracts mentioned above because you can never lose more than you pay in premium for an option, and daily limit price moves have no effect. You can trade a trending market with options using the free trading method I teach which has far less risk than pyramiding futures contracts. In fact, the risk is completely defined to the cost of the initial option purchase; you cannot lose any more than that! But don't get me wrong, there are also risks when trading options! You could lose the entire amount of premium you paid for an option if the market doesn't move as you expect by the allotted amount of time given (option expiration date), and if you don't employ wise money management principles of cutting losses short. Also, the 'unlimited risk' factor associated with selling uncovered (naked) option premium can subject your Copyright Virtual Trading University 152

153 trading account to unlimited losses if you do not cover your position as I show you how in my course. My strategies I teach in the LOW-RISK OPTION TRADING COURSE are never subject to more losses than defined up front in the total trade costs and risk rules for each strategy. Enough facts about trading futures and options, let's take a look at the free trade strategy below in detail. THE FREE TRADE OPTION STRATEGY consists of purchasing an undervalued option in a market that we feel is ready to make a substantial price move, and later selling an overvalued option when and 'if' prices move as we expect. Then repeat the process if the trend continues. Benefits include: No futures margin required, cannot lose more than the initial cost, being able to participate in a trending market with no additional risk, once the free trade has been completed there is NO risk of loss period. Negatives include: Must pay a premium up front for the initial option purchase. Profits are limited to the point difference between the option purchased strike price and the option sold strike price. Market must move as you expect or you cannot complete the free trade. Copyright Virtual Trading University 153

154 I used October 2005 sugar as the example in this discussion because it is a current paper trade in progress as of 10/12/04 from my Option Alert service include with the LOW-RISK OPTION TRADING COURSE Taking a look at the chart above you can see the sideways price channel at point "A". We use chart patterns and trend line changes as signals to enter option trades. The only other indicator we use is the two-year volatility ranking to tell us which markets are undervalued and which are overvalued, and we get this information free at The sideways chart pattern is one of the most powerful and reliable patterns to trade. It consists of weeks, months to sometime even years of daily prices that trade in a tight sideways range. The daily open, high, low, and closing prices are close to the same making trading in the sugar pit a very dull job for floor traders. Option Implied volatility has dropped below two-year lows on our scale because no one Copyright Virtual Trading University 154

155 is interested in buying or selling this market. This results in some very reasonable option premiums with often a year or more until expiration. We had been following this sideways channel since May of Yes, it was a long channel, but we wait for prices to break through the channel before placing a trade. This did occur on March 22, 2004 at point "A". We waited for prices to pullback to retest the breakout price area before placing trades because this could have been a false breakout. The retest was confirmed on March 30, 2004 and we issued the order to purchase the October 2005 Sugar 750 call option strike price for $450 with nearly eighteen-months to expiration. About one-month later we were able to complete the free trade by selling the now more overvalued October 2005 sugar call option with an 8.50 strike price for $470. This covers our cost for the 7.50 call we initially purchased. There is 100 points between the two strike prices and each point in sugar is $ This translates to a maximum profit potential of $1, if October futures is trading at or above 8.50 at option expiration. So what we have created is a trade that has ZERO risk of loss and has a $1, profit potential. Pretty good odds, I'd say. Ok, I'm not trying to sugar coat the risk here, because it's obvious that there is a $450 + commission and fees up front risk until the free trade can be completed. This amount is a common risk amount when trading futures contracts so you may be comfortable with that. If not, risking one half the cost of the trade is a good rule to follow. And you can close out any completed free trade, option purchased or sold at anytime you wish! You simply place an "at-the-market" or "Limit Order (your price) to sell the 7.50 and Purchase back the 8.50 you sold. If you are in a hurry to exit a position, use a market order because a limit order may not be filled while a market order must be filled at some price. You can expect some slippage using a market order. It's also VERY IMPORTANT that your broker understands that you are closing out a position rather than issuing a new order, so make sure your order goes on an "OPTION TO CLOSE TICKET". What next after the first free trade has been completed? Price action within market trends always rally then pull back to the long-term trend line. Our goal of free trading a trending market with options is to enter (purchase an option) when prices pullback to the trend line because they become more valued during a pullback as the implied volatility drops. We sell option premium to complete free trades as the underlying futures price rebounds higher. This increases the demand (implied volatility) for out-of-the-money options we sell giving us the maximum distance between the two strike prices which increases the profit potential while still covering the trade costs. On 05/25/04 we purchased the October 2005 Sugar 9.00 call option for $450. Now we will be looking to complete another free trade soon if prices continue higher. However, after rallying for nearly five months, this market is subject to a large price pullback if long traders decide to exit. So, what do you do when everything goes wrong and prices drop out of site maybe even below the 7.50 call we first purchased? Well, you could do nothing. You do not have any risk in the trade at all! But we didn't put this trade on to breakeven. We have been in this market since March of 2004, and it would be senseless to sit by and watch profits Copyright Virtual Trading University 155

156 dwindle away! Read those chart comments again. Those are the same comments my members saw telling exactly what to do up there as prices were forming the ascending triangle. If prices had broken out to the downside of the triangle and below the up trend line, we would sell the 9.00 call we just purchased for a small loss. If prices continued down below the 8.50 sold call option of the first free trade, we would liquidate it. No, we wouldn't make as much because maximum profits are determined at option expiration, but when the market signals a trend change on the futures chart, we don't hesitate in jumping ship! However, the market rallied as we expected and now we are looking to sell the October 2005 sugar call for between $450 and $500. But we'll just have to see about that. It's currently, as of Friday October 08, 2004, trading at $404. We will let the charts tell us what to do. When completing a free trade your goal is to sell the highest strike price possible because ultimately your profit is the difference between the two strike prices. We do not like to sell an option to complete a free trade until we see signs that a current rally or price decline is ending. We didn't see that until 07/25/04 (see chart) so we can now sell a much higher strike price. We sold the October call option for $550 to complete our second free trade. You simply continue to follow the market, buy when prices retest the trend line and sell on rallies. The free trade option strategy is by far the most stress free trading strategy you'll ever use. It takes advantage of purchasing options when the implied volatility is low and selling the most overvalued options when prices move in your favor. In my LOW-RISK OPTION TRADING COURSE you'll find three more powerful option strategies like the Call and put Option Spread, Ratio Spread, and the In-the-Money Debit Spread. Each strategy is designed to take advantage of any given market trading opportunity. For instance, the In-the-Money Debit Spread is a low-risk option position that accomplishes the same goal as trading a futures contract without the unlimited risk factor! This is a perfect strategy to consider every time you plan to go long or short a futures contract! Don't trade another futures contract or option until you read this strategy! How about the Ratio Option Spread Strategy. Would you consider a trading opportunity that GUARANTEES that you make a profit regardless of where the futures price trades? It's a very simple strategy used at the most opportune times that you'll easily learn. This strategy is stress free trading at its best! Also, the Call or Put Option Spread is a very popular option strategy that we use to lower the risk when entering a price move that has already begun. You will learn how to use each of these option strategies In the LOW-RISK OPTION TRADING COURSE. Each strategy is explained in detail using current clear chart examples of each trade example. Copyright Virtual Trading University 156

157 Did you know that many markets have very reliable seasonal price patterns? I'll show you these patterns on charts and explain exactly how to trade the market with options to control risk and maximize profits. In fact, many of my course members trade seasonal patterns throughout the year exclusively and do very well. Course members have logged a great deal of profits this year trading seasonal patterns in July corn, July soybeans, March 05 corn and soybeans, December live cattle, January feeder cattle, and December lean hogs. Each of these seasonal price patterns and option trade suggestions are reported to my course members each week in my Low Risk Option Course, Option Alerts Service. We scan the markets every trading day to spot opportunities to employ the option strategies you learn from the course. Thank you very much for reading the free trade strategy. Please remember that this trade has been in progress since last March, so it is not a market to enter now. However, we are watching several other developing free trade opportunities in other markets. God bless. Archie Johnson INDEX Copyright Virtual Trading University 157

158 INDEX 02/14/05 Fibonacci Retracements Greetings fellow traders, This week's chart lesson shows the incredible power of Fibonacci retracement level numbers. Fibonacci was a mathematician from the twelfth century who was, and still is, noted for his mathematical skills. You can click here for his biography. I'm not a mathematician, and much of his work is mind-boggling to me, but his simple retracement levels that we apply to charts are incredibly accurate. Track N' Trade Pro charting software integrates Fibonacci numbers into their software. They created the Fibonacci ruler which shows the 23.6%, 38.2%, 50%, 61.8%, and the 78.6% retracement levels. These five retacement levels are very important as they project turning points on our charts. However, the most important of all the retracement levels is the 50% level which is the topic of our discussion today. The theory behind the 50% retracement level is this: "Markets tend to retrace 50% of the last major price move during price corrections. You take the high price and the low price of the last major price move of any market and add those numbers together and divide by two to arrive at the 50% level". You don't need software for this, in fact, my How To Succeed Trading Commodities Course shows you how to determine all five retracement levels with a calculator. The 50% level becomes one of the most important tools a technical annalist can have. It's accuracy in predicting price reversals are undeniable. Why is it so undeniable? Is it the numbers themselves? Actually, it's much simpler than that. If you take one million traders you'll have over half that number who use charts for their trade analysis. And just about all of those use the 50% level as a point to go long or short, and for profit and stop out targets. So, in a sense, the 50% level becomes a self fulfilling prophecy. In other words, there are so many orders lying around the 50% level that it becomes a price area where we almost always see price reversals or price consolidations. Let's take a look at the charts below: Copyright Virtual Trading University 158

159 If you take the lowest price of the last major price move which is set in late August 05 and add it the highest price at the time which was set in December 05, you arrive at a total sum of Now divide that by two and you arrive at or as the 50% retracement level. Look what happened to orange juice prices as they neared the 50% level, they reversed to complete the price correction. Take a look at the cattle chart: Copyright Virtual Trading University 159

160 Wow, notice the reversal from the 50% level! Let's look at one more: Copyright Virtual Trading University 160

161 The same thing happened in Soybean meal, prices traded above the 50% level but couldn't hold above it. The great thing about Fibonacci analysis is that you do not need to be a mathematician as he was to use this incredible trading strategy. In fact, the very basics of what I m giving you today are all you need. If you will base your trading decisions around the 50% level your trading will improve...i guarantee it. If you will take some of our free charts and print them out and begin looking for the highs and lows of the last major price move, you'll find that just about every chart will give you some really good trading opportunities around the Fibonacci 50% retracement level. If you have any questions at all about any of the chart lessons, or any other questions, please feel free to write me at: Us, or chat with me live if I'm online via our chat button at the bottom of this page and I'll be more than happy to help you. Happy Trades, Archie Copyright Virtual Trading University 161

162 INDEX Greetings commodity traders, Learning all you can about the characteristics of any market you're considering trading is a must. You don't have to concern your self with every little detail, but you should know of any seasonal cycle price patterns, government reports, weather concerns and such that could affect the future price direction. So today I would like to dig into the cocoa market to tell you some of the interesting points about cocoa and about trading it. The cocoa market is favorable commodity to trade because it tends to stay in a well defined trend much longer than some of the other commodities; it also seems to historically trade in 3 to 5 year cycles. The cocoa market is a supply and demand driven market, and unlike sugar and others, it is not a necessity item in the food chain. It is important for traders to understand this commodity and what affects prices in order to successfully trade it. So, let's start with learning about the commodity itself, and where and how it is grown. Cocoa is the powder made from the crushed seeds of cacao trees. If you add other ingredients like cocoa mass, cocoa butter, sugar, milk, butter and vegetable fat then you can make chocolate. Cocoa trees mainly grow in the tropical rain forests of Brazil, but it is now also cultivated in West Africa and Indonesia. The cacao tree is very delicate and sensitive. It needs protection from wind and requires a fair amount of shade under most conditions. This is true especially in its first two to four years of growth. A newly planted cacao seedling is often sheltered by a different type of tree. It is normal to plant food crops for shade such as banana, plantain, coconuts or cocoyams. Rubber trees and forest trees are also used for shade. Once established, however, cacao trees can grow in full sun light provided there are fertile soil conditions and intensive husbandry. Cacao plantations (trees under cultivation), and estates, usually in valleys or coastal plains, must have evenly distributed rainfall and rich, well drained soil. The seeds or beans are the size of almonds. They are enclosed in a fruit rather like small cucumbers, called Pods. The Pods do not have stalks; they grow straight out of the trunk of the tree. The job of picking ripe cacao pods is not an easy one. The tree is so frail and its roots are so shallow that workmen cannot risk injuring it by climbing to reach the pods on the higher branches. Copyright Virtual Trading University 162

163 The planter sends his pickers, into the fields with long handled, mitten-shaped steel knives that can reach the highest pods and snip them without wounding the soft bark of the tree. Machetes are used for the pods growing within reach on the lower trunk. Before you can make anything with cocoa beans they must be fermented. Whole cocoa pods are stored in boxes or under leaves until the flesh begins to ferment. The beans are then dried in the sun and roasted until the shells fall away. The remains are called nibs. The nibs are then ground until the fat from them liquefies. The result is a dark liquid which is heat-treated, then cooled in moulds or rolled into bars. The key elements we need to pay close attention to in this market is the weather in the key growing areas, crop size and demand. Now demand is different in this market because cocoa is not a necessity item. So, the different countries economic situations will have an effect on cocoa prices. The only other thing that is beneficial to traders is the "cocoa grind" report. This report shows the amount of beans that were ground for their cocoa butter. Obviously, this report reflects the current demand situation. Also, at present there are military conflicts between Rebels and the African government over the cocoa shipments at the Ivory Coast. So these type situations can cause spikes in the price. The "cocoa grind" report is produced weekly and should be available at the Coffee, Sugar & Cocoa Exchange, Inc.(CSCE) I read the report from our news section in the students web site. Let's take a look at a couple of current charts of cocoa. The first is a weekly chart of cocoa, and you can see this market trends well and reacts to the 50% level as we would expect it to. Copyright Virtual Trading University 163

164 The "cocoa grind" report is produced weekly and should be available at the Coffee, Sugar & Cocoa Exchange, Inc.(CSCE) I read the report from our news section in the students web site. Let's take a look at a couple of current charts of cocoa. The first is a weekly chart of cocoa, and you can see this market trends well and reacts to the 50% level as we would expect it to. Copyright Virtual Trading University 164

165 Cocoa as most all other commodities tends to have a seasonal pattern, but it is very erratic. However, the market tends to trade higher during the US Holiday season from November through December. The main focus of traders however, should be the weather and demand forces behind prices. Cocoa also tends to trade in 5 to 6 year cycles. Again, this is also erratic, but it does give us a clue of when prices may change trends. Take a look at the monthly chart below. As traders we must use fundamental market information to determine why prices are where they are in order to make a wise trading decision. Copyright Virtual Trading University 165

166 For example, if a technical chart formation develops or a trend line is broken, we should evaluate the underlying fundamentals of the market before placing a trade. If the fundamentals (supply and demand) have not changed, you should view the chart pattern as a technical correction. Placing a trade in this type situation should be viewed as a short term trade by placing a trade when prices break out of the chart pattern and trail your stop close behind expecting the market to return to more normal levels soon. However, technical corrections are normally short in duration, they can be significant as we just witnessed in the cocoa market. Let's say the underlying market fundamentals have changed, and prices begin to reverse direction. In this example we should wait for the market to confirm the change by breaking out of its current pattern then place our order. However, in this situation we want to give our stop loss order as much room as possible. Remember, the market is trying to digest this new fundamental data and may make some adverse moves contrary to our analysis. In a bullish scenario we can watch the support and resistance levels on the daily chart and move our stops up to under each one as the market clears that level leaving plenty of room for the normal volatility. It's not that important to view and memorize every bit of fundamental data concerning a market, we only need a general idea of what is going on. For instance, in cocoa we should be aware of crop sizes, weather problems in key growing areas and if the "cocoa grind" is increasing or decreasing weekly. That's basically it. And most of this information can be found by just simply watching the market news stories, and asking your broker. In closing: Every market has its on story to tell, and this story reflects why prices are where they are. We as traders must evaluate that story and develop a trade around these circumstances, or sit on the side lines for a better opportunity. If you have any questions at all about any of the chart lessons, or any other questions, please feel free to write me at: Us, or chat with me live if I'm online via our chat button at the bottom of this page and I'll be more than happy to help you. Happy Trades, Archie INDEX Copyright Virtual Trading University 166

167 INDEX Gold Free Trade 02/28/06 Don't you just love it when a plan (strategy) comes together? Today's chart lesson shows just how powerful my free trade option strategy from the Low-risk Option Course really is. If you'll look at the chart below you can see that June 2006 gold prices were in a sideways channel. This channel was about 10 months long with prices stuck in a $35 range between 431 and 467. This trading range represents normal buying and selling waves...somewhat like waves in water. Buying at the lows and selling at the highs of the range. Options with strike prices just outside the channel (480 strike price) with 10 months until option expiration become extremely undervalued because no one's interested in buying them. They don't think the market's going anywhere. But what I'm about to tell you is the truth and something you can literally take to the bank! In my thirty years of analyzing charts "I've NEVER seen a sideways channel of at least four-months or longer in duration that DIDN'T lead to an explosive breakout and a large price move at some point in time". Now that's a bold statement, but I dare you to prove me wrong. If you don't have Track N' Trade Pro Charting Software (TNT) you should download a free copy. The free version comes with 20 to 30 years of back data for you to test. You'll find hundreds of these channels to look over. Copyright Virtual Trading University 167

168 Take a look at the next chart This channel finally gave up it's hold and prices began moving up just as I knew they would. Call options were comparably still dirt cheap in the $400 range. Take a look at the next chart for a play by play account of the free trade option strategy in action: Copyright Virtual Trading University 168

169 Copyright Virtual Trading University 169

170 Point A on the above chart is the point where prices broke free from the sideways chart pattern. That is our signal to purchase our first call option. On September 15, 2005 the near-the- money June 2006 Gold 480 call option was purchased for $ Prices only moved slightly higher then moved into a sideways pattern and eventually traded back lower to retest the breakout area of the upper sideways channel line at point B. This happens often and if prices do not trade back inside the sideways channel, we can assume the new trend higher is still intact. In fact, if point B holds and prices begin moving higher from point B, it's a good signal to purchase another call option. Do you see the three price bars at both point B and C? The ones at point B are three price bars with each daily low a little higher than the previous day's low. And at point C we see three price bars with each daily high being higher than the previous day's high. Using the connecting Three bar trend line method Once you connect these three price bars with a trend line you can project that line higher to form a possible new "inclining channel". Of course we didn't actually know for sure Copyright Virtual Trading University 170

171 that a new channel would hold up, but you can see that it did when prices reversed direction at points D-E-F-G. That shows you just how accurate my Three Bar Trend Line method is. For this example we'll just say we are long the one June call option for $ Prices moved higher from point B starting on November 04, The goal of the free trade is to sell a higher strike price option for the same price or more than you paid for the 480 call. This completes the free trade. On November 04, 2005 the 480 call was worth $490, still more than the $425 we paid for it. The goal of the free trade is to sell a call in the same expiration month as the one we purchased. But we don't want to sell a higher strike price just yet because we want prices to trade higher increasing the demand for options. You see, once prices break out of the original sideways channel, everyone wants to trade the market which inflates the option prices. Our new inclining channel lines come into play now. We use these lines to project price reversals from both the high and low of the channel. The opportune time to sell a higher strike price is when prices near the upper range of the inclining channel at point D because we expect prices to reverse. Now is when the real magic of the Free Trade starts. We paid $425 for the June call option on October 12, That's all we have at risk. On December 08, 2005 two days prior to the reversal at point D, the 480 call was worth a whapping $7,000.00! Wow, talk about inflating option premiums...so what to do now? We certainly could simply take profits by selling the 480 call for 15 times more than we purchased it for. I'd say that was a real nice return in less than three months. But our goal is to stay in the market as long as the new up trend holds to make even more. That's where the free trade comes into play. To complete a free trade we look to sell a higher strike price than the one we purchased. By doing this we completely remove all of our risk and our profit at option expiration is the point difference between the option purchased and the one we sell. But by using the inclining channel lines we are in a position to do much better than just a free trade. That's right, how would you like to have some profits NOW! Since call options are now extremely overvalued from all the unlearned traders wanting them, we can look to sell a far-out-of-the-money call option. On December 08, 2005 the June 600 call option was trading at $2500. We place an order to sell the June 2006, 600 call option for $2000 or better. Why $2000 instead of the current value of $2500? We know that a price reversal is coming soon and a lower price offering will assure us an instant fill on our order! Let's recap this trade so far. We purchased the 480 call for $425. We sold the 600 call for $2000. Our profit so far in this trade is about $1,500. Plus, we are still in the market and we can make the point difference between the two strike prices if gold prices continue higher. That's 120 points X $10 per point = $1, Don't get too excited just Copyright Virtual Trading University 171

172 yet and run off on vacation or something because we're going to spend some of that profit in just a moment. Now with the first free trade completed we have no risk in this trade what so ever. In fact, we profited $1500 bucks and can still make as much as $1200 more if prices continue higher. Now, what happened? Prices reversed from point D as we expected and begin trading lower to point E. Now if prices reverse from point E and head higher we know what to expect..right? Our channel is still intact so we look to start a new free trade by purchasing another strike price option. On December 22, 2005 the June 2006, 580 call option was trading at $ Option premiums declined as prices fell back to point E from point D. So we purchase the 580 call for $970 and wait for prices to retest the upper inclining channel line again before selling yet another higher strike price to complete yet another free trade. The next run higher really got option premiums blown out of proportion because all those greedy traders were ready to get in on this new bull market at any price! So on January 13, 2006 a few days before prices reach the upper line of the inclining channel we look to sell another higher strike price for a minimum price of $970. To complete our second free trade we sold the June 2006, 680 call option for $3250 which was about $500 less than it was actually trading at to insure our order gets filled before prices retreat from the upper channel line. Now we have our second free trade completed and have profits left over to purchase another call option when prices pullback. We continue buying when prices pullback as long as prices stay within the channel, and selling an option on rallies. This is how you trade a trending market with options and eliminate all the risk. Think about it, we have been working off of profits and not any additional out of pocket money other than the $425 to purchase the first option. Do you see how powerful yet incredibly simple this strategy is? And why I say that this is absolutely the best form of trading for the small trader! You are never at risk by selling the higher strike price option because the one you purchased will always be worth more than the one you sold because it is a lower strike price. Even if the buyer of that option decides to exercise his option. It rarely ever happens but it could. So what happens if they do exercise their option against you, you simply exercise the one you purchased and your profit is still the difference between the strike prices. The current margin requirement in gold to trade one-futures contract is about $2000. There are no margin requirements ever for this free trade option trading plan. The real beauty of the free trade strategy is the fact that you do not have any trader generated stress. In fact, once the free trade has been completed you can turn your attention to Copyright Virtual Trading University 172

173 other markets to look for other trading opportunities without the fear of worrying about every price tic the market makes. The Free Trade option strategy is one of four strategies that Low-Risk Option Course members learn from my course. All strategies are designed to be low-risk/high reward trading plans. If you have any questions at all about any of the chart lessons, or any other questions, please feel free to write me at: Us or chat with me live if I'm online via our chat button at the bottom of this page and I'll be more than happy to help you. Happy Trades Archie Johnson INDEX Copyright Virtual Trading University 173

174 INDEX Sugar Market Triangles We're going to take a close look at the sugar market this week. The recent price pullback has everyone wondering if the two-year bull market run in sugar is over. 03/21/06 It has certainly been wonderful for our low-risk option course members because we have been in five Free Low-Risk Option trades in sugar since this rally began in I completed a study called The Free Trade in October 2005 showing exactly how we traded this market. In fact we were still actively placing free trades up until January You might want to take a look at the previous Gold Market Free Trade study we did a few weeks ago as well, because I don't want you to overlook the power and leverage of this simple option strategy. It's really incredible, we only had $450 total risk in the sugar trade and when all was said and done, we had made a little over $14,000 and never had any more risk of loss other than the original $450! It's also the simplest option strategy for the beginner. Since January 2006 we have been waiting for this market to pullback to consider entering new free trades or maybe it's time for the bull to slow up a little. This market has rallied about cents per pound in twenty-four months. The fuel for the sugar bull market has been a fundamental supply and demand issue. The hurricane seasons destroyed much of the crops in the southern regions reducing the available supplies. And the rising costs of crude oil have sparked more demand for alternative fuels such as ethanol of which sugar and corn are major ingredients. The fundamentals haven't changed. The estimated 2006 sugar crop is only expected to barely out pace world demand, so we are still under a tight supply/demand situation that's not going to change anytime soon. The following chart is the July sugar weekly chart. It shows the entire bull run since the beginning. Copyright Virtual Trading University 174

175 An impressive and profitable rally to say the least. Let's take a closer look at the daily price action on the next chart. Copyright Virtual Trading University 175

176 A closer look at the daily price action shows a descending triangle forming. The Descending triangle is one of 32 price patterns I show course members how to spot and trade. The formation is generally traded by following the direction of the breakout. The descending triangle is generally thought to demonstrate a stronger bias toward predicting a break down and out of the triangle, particularly if the price has been down. However, if the trend has been up prices have a history of trading up and out of the triangle. So we don't know for sure which way prices are going to go from here. But let's look at another important factor. The 50% retracement level. We know that markets tend to retrace 50% of the last major price move during price corrections. And since we've only seen one small price consolidation during October 2005, it could be time for a 50% price correction. So we'll consider the consolidation period at as the beginning of the last major price move and the recent high of as the top. 50% of the last major price move comes in at cents. History has shown us that the 50% retracement level will likely provide strong price support stopping, or at a minimum stalling a price decline. The base of the descending triangle is just above the 50% Copyright Virtual Trading University 176

177 retracement level indicating to me that a price break out lower below the triangle may be short lived. We have to keep in mind that the underlying supply/demand fundamentals have not changed and should still support prices staying above the 50% level, however, a price decline to the 50% level cannot be ruled out. Conversely, if prices break up and out of the triangle, we can assume the up trend will resume and possibly be on the way to retesting the February highs. Also important is the seasonal tendencies for prices during this time of year. You can see in the indicator window on the chart above that prices have historically traded lower until late April into the May time period then a seasonal rally unfolds. But keep in mind, this is not a normal crop year so seasonal tendencies may not apply, but they are always worth noting. We still don't know if the bull run in sugar is over, do we? Of course not!...and if anyone tells you a definite answer to that question, I would be very skeptical of anything else they told me. One thing for sure, prices will trade outside the descending triangle soon, and may already have by the time you read this lesson. So how do we take advantage of this situation? It's so simple that many traders overlook it...they are so busy trying to predict which way prices are going to go that they can't see the forest for the trees. Only the market knows its future price direction. So before placing trades "We Let The Market Tell Us It's Direction" rather than trying to predict. it! This is one of the most important trading lessons you'll ever learn! Trying to predict price direction will drain your trading account and have you scratching your head in wonderment quicker than anything else. I've shown you every bit of information on the charts and fundamental info that you need to know. Supply situation is tight...demand is high There has not been a significant price pullback since the rally began Prices are currently just above the 50% retracement level. A price decline will meet strong resistance there. However, if prices decline through the 50% level, it would be your signal to sell expecting a more significant price decline. If prices break up and out of the triangle we can expect a rally to retest the shortterm up trend line and eventually the February highs. That would be your signal to buy. Reacting rather than predicting makes much more sense. And if you couple that with purchasing low-risk options you have a successful business plan that will increase a small trading account faster than you may think. It's really very simple if you know what to look for then just act upon it. Copyright Virtual Trading University 177

178 Keep your eye on this one and be ready to act! If you have any questions at all about any of the chart lessons, or any other questions, please feel free to write me at: Us or chat with me live if I'm online via our chat button at the bottom of this page and I'll be more than happy to help you. Happy Trades, Archie INDEX Copyright Virtual Trading University 178

179 INDEX 03/28/06 Soybean Meal Triangle We're going to look at the September Soybean Meal chart this week, but first I want to give a quick follow up from last week's sugar chart. Last week we didn't know which way sugar prices were headed, we just knew they were going to break out of the triangle. Of course, you can see that the break out was to the upside. If you traded the triangle your orders were filled on Friday. However, I want you cautious of the fact that we cannot consider that the up trend has resumed until the February highs of are taken out. Remember, this market has been in a two-year supply and demand driven rally without a significant price pullback. So, the market may be at a high enough price to start curbing demand. I think Ethanol demand will play an important roll in this market's future price direction. Watch prices as they near the highs for a possible reversal lower and if it occurs use that for your profit exit. If prices trade through and close above the highs use that as your signal to add on more trades. Copyright Virtual Trading University 179

180 September Soybean Meal prices broke out above a 2 1/2 month down trend today. That's a good sign that the market is about to move higher. In fact, it did move higher on two other occasions after retesting these lows. But what else could affect prices? On March 31, 2006 we have one of the most important government reports of the year due to be released. It is the 2006 planting intentions report where U.S. farmers reveal the commodity and amount of acres they are going to plant. Since reports of this type often contain surprises I suggest holding off on any trades until next week. I think today's price action was mostly traders banking profits ahead of Friday's report as well. We're just now entering the United States growing season and I've never seen one yet that didn't provide a lot of price volatility...it's always to hot, to wet, to dry somewhere. Copyright Virtual Trading University 180

181 I'm looking for an eventual price climb to near the 50% retracement level by July providing that the lows hold. Learning commodity futures and option trading is much like learning to drive. You can read every manual in existence, but you still cannot drive without getting behind the wheel. Trading is much the same way. You not only need the strategy manual, you also need someone to show you how to apply the strategies in real-time... Happy Trades, Archie INDEX Copyright Virtual Trading University 181

182 INDEX 04/11/06 Trend Line Retest The "Trend Line Retest" trading method is a method of trading chart pattern break outs and trend changes with futures contracts and/or options. I have been developing and profiting from this formation for about 20 years now. It's a really simple trading system that will help you enter new trades even if you miss the initial break out of a chart pattern or a trend change. It is also very reliable for keeping you out of losing trades by making the market confirm that indeed a breakout or trend change has occurred BEFORE you enter a trade. The method accomplishes the most important goal related to low-risk trading: It makes the market confirm its new breakout or trend change early. I know, you've heard that you don't have to get in at the beginning of a new trend to make money. No you don't, but, you'll make the most profits, and have far less risk if you do! Getting in a trade early is not saying that you should be trying to pick the exact high or low price in a market. That's foolish; no one can do that on a consistent basis. So the next best thing is to get in as early as possible AFTER a high or low has been confirmed. That's what the Trend Line Retest trading method does...and does so 50% to 70% of the time! It can be used as a stand alone futures contract trading strategy or with low-risk option strategies. In fact, I use it on every trade as I've pointed out in previous chart lessons. Let me show you one example: Copyright Virtual Trading University 182

183 The sideways channel, as I've pointed out in previous lessons, is the most powerful and most reliable chart pattern known. I've never seen a sideways channel with a minimum of four-months consolidation that DIDN'T lead to an explosive breakout at some point, and I've seen many of them in the past 30 years. There are three reasons why the low-risk trader should get into trades during the early stages of a new price trend. 1. The overall probability of profit is raised by 80% or more! 2. Very little to zero risk! 3. Option Implied Volatility is low making option premiums cheap! So getting into a new trend early can make the difference for the low-risk small trading account trader. If you are one of my Low-Risk Option Course Trade Alert members you already know that I search all markets for these channels and report them to you with specific trades to consider based on the course strategies. So there is not many excuses for not getting in early. Copyright Virtual Trading University 183

184 But let's say, for whatever reason, you did miss the first entry. Is there another opportunity to get in using low-risk as my goal? Many times there are. Notice the breakout area of the narrow sideways channel on the above chart. After a small rally, prices traded lower and retested the breakout zone. This retest gives you a second opportunity to enter trades, and it gives those who got in on the initial breakout the opportunity to add more positions. Generally, the retest comes within one trading week, but there are exceptions. It took about thirteen trading days for the corn market retest, and many times it's just one to three days. The trend line retest confirms the market's new direction. Had prices dropped back and stayed inside the channel, the new trend would have been voided. The method will work for you regardless of how you trade and the time frame you trade in. It's an excellent method for trading options or futures. In short, it's a powerful trading method you should know to reduce your risk and increase your bottom line profits. Learn the Trend Line Retest trading method. It will defiantly add more trading profits to your account. When you know what to look for and start making money, you find that this business is very rewarding. And after 28 years of full time trading, I m positively sure that there is no better trading method than Low-Risk Option Trading for the short funded beginner! Happy Trades, Archie INDEX Copyright Virtual Trading University 184

185 INDEX 04/25/06 WHY TRADE OPTIONS? The metal markets are one of the prime reasons we trade options rather than futures contracts. The current rally in gold, silver, and copper is fantastic. More money has been made in these markets in the past month than most people make in a year at their jobs. But there are major problems when trading gold and silver with open futures contracts. You see, there are NO daily price limits in silver and gold. A daily price limit is the maximum amount set by the exchanges that a market can trade in the course of a single trading day. For instance, in soybeans the daily price limit is.30 cents or $1,500. Trading stops for the day when that amount is reached, This helps protect small investors who could easily lose more than they can afford. A prime example of no daily price limits in silver and gold last week resulted in a $13, daily price move in silver and a $4, move in gold. Two-weeks of futures trading gains were wiped out in a single day! To add insult to injury, the exchange increased the margin amounts for futures traders to trade these two markets. In gold you'll now need about $6,000 in your account to trade one futures contract, and about $11,000 for silver. The exchanges can raise or lower margin requirements at will, and they do when these markets become increasingly volatile. So, the average futures trader with a $10,000 dollar trading account can't take advantage of these fantastic price moves with futures contracts. But a small account trader with a $2,500 trading account CAN with options! When you purchase an option you have the same benefits that a futures contract trader has. You can make unlimited gains point for point as the futures trader does. But one of the major benefits that options have over futures contracts is the fact that you CANNOT lose more than you paid for the option. If you pay $500 for an option plus $50 broker's commission and about $4.00 in exchange fees, you cannot lose more than that even if the market drops to zero! Another great benefit is the fact that there are NO margin requirements when trading options! So, let the exchanges raise margin requirements because it actually raises the cost of options and that's great for us! The large daily price ranges associated with markets without a daily price limit does reduce the worth of your option but prices generally rebound after a large daily decline and options give you the staying power to overcome these temporary price fluctuations whereas the futures contract trader was stopped out with probably more of a loss than they expected. Copyright Virtual Trading University 185

186 There are more advantages to trading options verses futures, but just these advantages show you that you can trade markets that you normally could not with futures. So why don't more inexperienced short funded traders trade options? It's simply a lack of education. Most traders think they need an option pricing model software, and other special knowledge that sounds terribly complicated. Nothing could be further from the truth! In fact, option trading is much simpler than trading futures contracts. While futures traders are sitting at home doctoring their ulcers from last Thursday's devastating price move, option traders are just getting warmed up. In fact, that large decline Thursday gave us opportunities to add to our positions because we feel that the rally in the metal markets is far from over. If you are one of the traders who feel that trading options is too difficult, you need to see my Low-Risk Option Course and Trade Alerts because you'll be astonished at just how simple and profitable it really is to trade options in any market! Even if you are a hardcore futures trader, you still need to know ways to incorporate options in your trading plan especially if you're trading markets without daily limits. I'll show you how to use options as protective stops on futures contracts to eliminate the unlimited loss fear associated with trading futures. As the metal markets continue their rally, the volatility will increase even more making very wide daily price ranges a constant reality. So, if you are happy with sitting on the sidelines not being able to take advantage of the massive trading profits now being made, that's your choice. But on the other hand, if you want some of these profits then consider trading options...you'll be happy you did. My course shows you how to take advantage of these massive profits and you don't need anything else. Our Low-Risk Option Course member's only private web site has everything you need including futures charts and option quotes. Take a look at the two charts to see the extreme volatility now present, and if you would like a piece of the pie consider the special offer for my course and trade alerts below and get started today! Copyright Virtual Trading University 186

187 Copyright Virtual Trading University 187

188 When you know what to look for and how to take advantage of the opportunity, you find that this business is very rewarding. And after 28 years of full time trading, I m positively sure that there is no better trading method than Low-Risk Option Trading for the short funded beginner! In my Low-Risk Option Course, Trade Alerts, and Trend Tracker Charts You'll not only receive the same option strategies that triple your money in no time flat, I'll show you exactly how it's done through my trade alerts and charts. You can practice trade all you want to build your confidence level without risking a single dime. I'll show how reacting rather than predicting makes much more sense and much more profits. And if you couple that with purchasing low-risk options like I'll show you'll have a successful business plan that will increase a small trading account faster than you may think. It's really very simple if you know what to look for then just act upon it. Happy Trades Archie INDEX Copyright Virtual Trading University 188

189 INDEX 07/18/06 Three Bar Trend Line In today's lesson I'm going to show you how to draw the correct trend lines on your charts. Trend lines are very important because they signal new trades and also tell us when to take profits. Many traders wait too long before entering trades. The lion's share of profits are already gone by the time they determine when a trend is a trend. Sure, you can make money by entering an already developed trend by buying when prices pullback, but by that time the low risk entries of purchasing cheap at-the-money options are long gone. The trend following method I'm about to show you is by far the best method of defining new trends early. In fact, when you've finished this lesson you will have the most incredible method for getting into trades long before most traders do. This method gives traders with small trading accounts of $2000 the opportunity to purchase those $100 to $400 options and see them gain in value of 300% to 800% in as little as 30 days! Many new and not yet successful traders seem to over complicate the trading process. Trading is really very simple if you adhere to a few simple rules. So please don't read over this lesson without absorbing the simplicity of the concept. The method of determining early trends that I use for trading both options and futures is called the "three bar trend line method (TBM)". I have found that the TBM is the most accurate for projecting the market's new trend many months out into the future. Take a look at the October 2004 sugar chart below: Copyright Virtual Trading University 189

190 The TBM is really very simple. When a suspected bottom or top has formed in any market you can draw and project a trend line when you can connect three daily price bar lows in the case of a suspected bottom and new up trend, and three daily price bar highs in the case of a suspected top and a new down trend. Taking a look at point "A" on the chart above you see that three bars had formed with each daily low being slightly higher than the previous day's low. Now, no one knew where prices were headed from here but they were just beginning to edge above the red down trend line. This hints of a change in trend and gives us a base to project prices into the future if prices do indeed trade above the red down trend line. Your trend line can be started by connecting the three daily lows. Now look at the next chart: Copyright Virtual Trading University 190

191 As you can see, a new trend did indeed develop and our trend line projection from point "A" was accurate. The market retraced to our projected trend line at point "B" and again at point "C". The TBM is very accurate and you can see that by following the trend line you were able to add positions when prices retested the trend line but didn't trade below it. Here's another example: Copyright Virtual Trading University 191

192 The August live cattle trade had basically the same setup as the sugar trade. The only difference being there was a five day gap between the first two bars and the third bar. Let's look at a suspected market top: Copyright Virtual Trading University 192

193 Here's another top: Copyright Virtual Trading University 193

194 As you can see trading using the TBM trend line method can be very rewarding. It's very important to get in new developing trends as early as possible because the volatility is still low giving us really great prices for options. Getting in trends early results in purchasing those cheap $100 to $400 dollar options that explode in value in a very short time. We've had recent trades that resulted in 300% to 800% profits in as little as 30 days! All because we drew the correct trend line and applied my simple option trading rules that you'll learn from my Low-Risk Option course and free Trade Alerts. Take care and we'll see you next week. Archie Johnson INDEX Copyright Virtual Trading University 194

195 INDEX 08/01/06 Greetings Traders, The Head and Shoulders Top Chart Formation In today's lesson we're going to take a closer look at one of the thirty-two chart patterns I teach in my course. It's the "Head & Shoulders Top (H&ST)" and it's known for being 80% reliable in calling market tops! Simply put, when you find this chart pattern at market highs, you have an 80% chance that prices will fall below the neckline support producing your entry point to sell the market. Just what is a H&ST and why does it form? In the most basic explanation, it's simply a painful rollover between traders who are bullish and those who are bearish. The left shoulder on the diagram below was a market top, then prices retreated due to increased selling pressure from bearish traders. The bullish traders who were already in the market, and those waiting to get in, saw the price decline as a buying opportunity. So now the bullish traders enter the market shooting prices to new contract highs forming the Head of the formation. Selling reentered the market again driving prices lower to form a neckline support area. By this time many of the bullish traders have jumped ship or switched their views, however, there is enough buying pressure left to make one more push higher to form the Right shoulder. Unfortunately for the bulls, there are not enough of them left to make another push higher so the sellers gain full control and prices trade below the neckline. To trade this formation we simply sit on the sidelines and wait for prices to trade below the neckline, then sell a futures contract and/or purchase options. As a general rule, measuring the distance from the top of the head to the neckline and projecting that amount from the neckline lower gives you your first profit objective. Copyright Virtual Trading University 195

196 Before we look at real chart examples of this formation, it's important for you to note that they come in all sizes and shapes so they don't always look like text book examples. That's why I include many real market chart examples here and in my course in order to help you find these patterns in the real world. The Live Cattle market is one of the easiest markets to trade. Influenced by producers, feedlots, slaughter houses, and short-term supply and demand from consumers. This combination presents a pretty reliable day cycle or seasonal pattern. Generally, you'll see a Double Top, a Head & Shoulders Top, or a Top formation every days. This particular chart had two H&ST on it within two day cycles. Notice, however, they certainly look a little out of shape compared to the text book example. You just have to remember to connect all your points (LS - H - RS and neckline support). Next: Copyright Virtual Trading University 196

197 Here's another Live Cattle Chart. There's that 90 - to -120 day cycle again! The H&ST could not have been traded with futures contracts because of the locked limit market conditions. In a locked limit market no trading takes place in the futures but the option trading pits are open and taking orders as they are not effected by limit moves. Just another reason for you to consider trading options. On that first limit down day you could have purchased a put option for $300 or $400 bucks and cashed it in Six days later for near $6, That's about 600% return on investment while futures contract traders were still sitting on the sidelines scratching their heads! However, I sure those bullish traders that made that last push higher to form the Right shoulder have my course to show them how to offset a losing futures position that's locked limit against them with options! Today's chart master lesson not only shows you how to trade the H&ST, you've also learned about the day market cycle in cattle. Now, this cycle is no secret among traders, but very few retail traders (you and I) use this information in their analysis. The very best way to become a chart master is to practice and try not to complicate matters. In short, if it looks like a H&ST then it likely is. The most useful lesson I've Copyright Virtual Trading University 197

198 learned in all my years of doing this is the fact that trading can be as difficult or as simple as you make it. Don't forget, when you're following the day cycle in cattle your chart patterns to look for are the Double Top, a Head & Shoulders Top, or a Top formation. Take care and we'll see you next week. Archie INDEX Copyright Virtual Trading University 198

199 INDEX Which Way for Gold 08/29/06 Gold has made a tremendous bull market run since the rally began in early 2002 (see weekly chart). Our Free Trade option strategy and option spreads have captured really great profits in gold and we're watching closely to determine "which way for gold". Looking at the weekly chart above for a longer-term perspective we can see that the long-term trend from 2001 is still up. However, when prices broke up and out of the last sideways channel at they started a sharp uptrend leading to the final high of Although this near vertical uptrend lasted for about a year, most last far less than that. You can also call this type price action a "blow off top" on the weekly chart. Copyright Virtual Trading University 199

200 That doesn't change the long-term up trend though, in fact, prices could still decline back to and the weekly trend will remain intact. Using the December gold weekly chart gives us a longer-term view of the weekly trend but, we need a closer look at day to day price action to spot possible trading opportunities: The December gold daily chart shows the market still in an up trend after prices plummeted from the high. However, prices did trade through the 50% retracement level at but have managed to settle back above it. The 50% retracement level is one of the most strongest areas of support or resistance you will find on charts! It is determined simply by adding the lowest price of the past twelve-months and the last highest price together then divide by two. Another interesting point is the development of a symmetrical triangle with a descending triangle inside it with the descending triangle's base line right on top of the 50% retracement level at One thing we can say for sure that the price level is Copyright Virtual Trading University 200

201 providing strong support making it difficult for the market to trade lower. Also, the oneyear up trend line is providing strong support at as well. Both the Symmetrical and Descending triangle formations are traded by going long or short when prices break through the upper or lower portion of the formation. Here are the formal definitions from my How to Succeed Trading Commodities course. Our last long option position in gold was traded from the last descending triangle that formed in February - March of As you can see, it led to a break up and out of the formation. This was a very simple and profitable position for us and we see no reason why the breakout from the current descending triangle will be any different. Here's what I see. If prices break up and out of the triangle expect a retest of the highs because there is no chart resistance from current levels to the highs. You can use options and/or futures but remember that there are no daily price limits for gold futures. If prices break through the lower portion of the triangle AND close below the up trend line, our trade would be to sell futures and/or purchase put options because that would signal, at the very least, a temporary change of trend. If that occurs, determine the 50% level from the base of the descending triangle to the one-year lows and use the secondary 50% level as your first profit target. Interestingly, the secondary 50% level is just below the base line support of the first descending triangle so I would make that the first target rather than the 50% level. This is really difficult stuff, isn't it? Anyone who can follow a few simple chart pattern trading rules and can draw lines on free charts from the Internet can do this! Mark my words, the descending triangle will be broken soon because prices are converging to the point of the triangle but, the question is: Will you be ready for it? Happy trading, Archie INDEX Copyright Virtual Trading University 201

202 INDEX 10/03/06 Crude Oil Greetings Traders, welcome to this week's chart lesson! I know everyone is happy to see lower prices at the pump, but you'll probably not find anyone happier than chart traders who acted on the top formation that developed in crude oil and unleaded gas during July and August. This was a classic top where you sell a contract or purchase put options when prices trade below the #2 point on the chart. We even got a second chance to enter for late comers and, a signal for early birds to add additional positions. Copyright Virtual Trading University 202

203 Profits were taken in both crude and unleaded gas when prices traded above our secondary short term trend line. This is one of several ways to take profits in a down trending market for traders building small trading accounts. But, you can see that prices are still below the long-term down trend line so we have to consider that the market is still in a long-term down trend and will remain so until prices close above the long-term down trend line signaling a change in trend. Traders that are strictly trading this trend for the long-term are still in the trade and should consider adding new short positions when, and if, prices trade below the recent lows of So, wait a second. Did those small account traders do the wrong thing by taking profits early? No, think about it. You just made a 150% return on margin for futures and even more for options in one month. Is that such a bad thing...i don't think so! A bird in the hand is better than two in the bush if you are building trading equity. Now you are in a much better real-money position to take advantage of new opportunities where you could not before. Copyright Virtual Trading University 203

204 Does that mean we are done trading crude and unleaded gas? Of course not, we're going to reenter this market short if prices make new lows below This would signal a move to first support at the December 2005 lows at 58.50, then possibly the May 2005 support low at However, we have to keep in mind that the market has shaved about 20 bucks a barrel off the top of the oil producing nation s profits. They don't like that and talk of cutting production is already floating around the trading pits. But the trend is down and we'll respect that for now. Where is oil prices headed from here? Demand drops off considerably after the U.S. Labor Day holiday so the current down trend has justification as demand weakens and supplies build. But OPEC (Organization of Petroleum Exporting Countries) is sore displeased with the current price decline. I think that OPEC was trying to leave output unchanged but the market called their bluff. If oil is below $60 a barrel they will most likely be forced to act. Well, if not to act to at least threaten to act and a threat just might be enough to get us through this time of seasonal oil demand weakness. OPEC has not had to show restraint in recent years but it is becoming increasingly clear that they are displeased with the recent price drop. And as bad as OPEC has been at stopping prices from rising they have been much more effective at stopping price collapses. Back in 2004 the last time that OPEC threatened to cut, they established a floor that hasn t been breached since. Will they have the same kind of success at $60 a barrel? The answer to that question may be determined by the strength of the economy. With some signs of slowing and the FED on hold, the break in price might be exactly what the doctor ordered for the economy. An OPEC cut might start taking supply off the market just as demand starts to rise. And then a few months down the road as demand rebounds prices will rise. No one knows for sure where crude oil prices are headed from here and, this is why trading chart patterns become so much easier than trying to figure out where prices are headed. Guessing and listening to other's advice is far more risky than simply trading what you see on the charts. You simply keep watching for chart patterns and trend changes to develop and then follow the simple rules for trading that particular chart pattern or trend change...what could be easier. For a strictly mechanical trading system that eliminates fear and greed and makes more trading profits than any other trading method, consider trading chart patterns and leave the 'guess work' to the 90% of those who fail consistently. Remember to trade what you see and not what you think or hear. It's a much more rewarding method of trading than anything else you have ever tried! Happy trading, Archie INDEX Copyright Virtual Trading University 204

205 INDEX 10/23/06 Greetings Traders, welcome to this week's chart lesson! Chart pattern traders all over the globe are patiently waiting for the "possible" Head & Shoulders Top (H&ST) chart formation at point "A" on the February Live Cattle chart below to be completed. However, prices must trade below neckline support at point "B" before the formation can be completed. This signifies a completed chart pattern and signals the trader to sell one futures contract or purchase a low-risk "put" option. We also have a "possible" Trend Line Retest in progress at point "D". The trend line retest trading method is my personal trading plan specifically for trading trend changes in any market. It's included with my course. Copyright Virtual Trading University 205

206 The H&ST chart formation is a very successful chart pattern in the sense that it is 80% reliable at foretelling future market tops. Trading a H&ST is easy as the rules state to sell one futures contract or purchase "put" options when, and "if", prices trade below the neckline at point "B". This support area is very strong dating back to May If prices do trade through the neckline at the formation is completed and you would be short the market expecting prices to continue lower. But how far lower is the question? The first profit objective for the H&ST is determined by measuring the distance from the top of the head to the neckline then, project that amount from the neckline lower. This would project a profit down to point "C" at That doesn't necessarily mean that prices will make it to That method of profit projecting historically has been proven successful, but you have to watch for possible market reversal chart formations that may be in the path. The only formation we see that could possibly stop the decline is the 50% retracement level at point "E". We have to be prepared when prices reach that area because markets can, and often do, reverse directions. However, the market price direction can do one of three things. Prices can reverse directions, they can pause for days, or they can trade right on through towards our first profit objective at One way to prepare your trade as prices are approaching the 50% level is to move your stops down to breakeven point or to lock in a small profit. This gives you protection if prices reverse. If prices do not reverse and trade on through the 50% level, move your stops down to the 50% level locking in more profits. Then set your sites towards the first profit objective. If prices trade through your profit objective at , consider using a stairstep trailing stop to maximize every dollar from this trade. Now, take a look the Trend Line Retest (TLR) at point "D". The TLR method is specially designed to trade trend changes with the goal of signaling trades after a major trend has changed. As you can see, the long-term up trend line crossed through the H&ST. The price decline from the top of the head to the low point of the right shoulder (89.500) is also the point we use to signify that the trend has indeed changed. The signal that a TLR has been completed and signals a trade is when prices trade below the low point of the H&ST. So what we have in February Live Cattle is two very reliable chart patterns predicting lower prices ahead. But, only if prices trade below ! No one knows for sure where cattle prices are headed from here and, this is why trading chart patterns become so much easier than trying to figure out where prices are headed. Guessing and listening to other's advice is far more risky than simply trading what you see on the charts. You simply keep watching for chart patterns and trend changes to develop and then follow the simple rules for trading that particular chart pattern or trend change...what Copyright Virtual Trading University 206

207 could be easier. For a strictly mechanical trading system that eliminates fear and greed and makes more trading profits than any other trading method, consider trading chart patterns and leave the 'guess work' to the 90% of those who fail consistently. Remember to trade what you see and not what you think or hear. It's a much more rewarding method of trading than anything else you have ever tried! Happy trading, Archie INDEX Copyright Virtual Trading University 207

208 INDEX Are All Sugar Contracts Created Equal? NO Trading opportunities abound in all 45 commodity markets, but 11 out of the 45 should be avoided due to a lack of liquidity (low volume and open interest) and outright manipulation (slippage) by commercial and exchange floor traders. I cover all 11 in the course, but I'm taking one for a chart lesson today to show you what to look for when you're considering a new market to trade. If you wanted to trade a futures contract or option in July Sugar you'll notice that there are two different Sugar contracts to trade. There is a Sugar #11 and a Sugar #14 contract. Which one do you trade? Or, does it matter? It certainly does matter and here's why: Sugar #11 is the "world sugar" contract and it is the one to trade because it takes into account all sugar grown over the world. Sugar #14 is a local US contract for local producers and commercial traders. Sugar #11 Chart: Copyright Virtual Trading University 208

209 The obvious difference between these two is the amount of "Open Interest". Open interest is simply the amount of contracts being traded in the market. Notice the difference in open interest printed in red on the lower right portion of each chart. You see a significant difference with the sugar #11 contract having much more open interest. One reason it's so important for the off floor trader (you and I) to trade only the most liquid markets with high open interest is the fact that there has to be both a buyer and seller to complete a futures contract. Obviously, the more buyers and sellers that are present the more likely your order gets filled. Slippage is a major factor in low open interest markets. Slippage is a term used in our industry and it simply means "the difference between your order price and your actual fill price". Slippage is not that much of an issue in busy markets because there are always buyers and sellers present so your orders are filled quickly. Sugar #14 Chart: Copyright Virtual Trading University 209

210 Learning to trade successfully includes avoiding markets with low volume and open interest. Focus your efforts in markets where the open interest is above 25,000. Good high volume markets include the U.S. 30 year bonds, corn, soybeans, wheat, cattle, lean hogs, sugar #11, cocoa, coffee, cotton, crude oil, unleaded gas, heating oil, gold, silver, copper, currencies. Avoid markets like, rough rice, oats, sugar #14, lumber, platinum, palladium, propane, canola, pork bellies, milk, and electricity. Avoiding these markets will make your trading experience much more pleasant. It's very simple to take advantage of the trading opportunities now present in high volume and open interest markets with low-risk option trading. And when you know what to look for and how to take advantage of the opportunity, you find that this business is very rewarding. And after 28 years of full time trading, I m positively sure that there is no better trading method than Low-Risk Option Trading for the short funded beginner! In my Low-Risk Option Course, Trade Alerts, and Trend Tracker Charts You'll not only receive the same option strategies that triple your money in no time flat, I'll show you Copyright Virtual Trading University 210

211 exactly how it's done through my trade alerts and charts. You can practice trade all you want to build your confidence level without risking a single dime. I'll show how reacting rather than predicting makes much more sense and much more profits. And if you couple that with purchasing low-risk options like I'll show you'll have a successful business plan that will increase a small trading account faster than you may think. It's really very simple if you know what to look for then just act upon it. Happy trading, Archie INDEX Copyright Virtual Trading University 211

212 INDEX Fundamental Analysis Is it Important? Fundamental analysis does have its place in commodity trading and technical analysts can benefit from fundamental research. Fundamental Analysis attempts to forecast the future value of a commodity by analyzing current and historical data. Analysts try to see if the commodities price is over or under valued and what that means to its future. Fundamental analysis consists of looking at the cost of production in relation to the commodities current price, and the world supply / demand situation. The cost of production is an important issue in many commodities, because the farmers or producers are not going to continue producing the commodity if the price drops below production costs. This was evident in the cocoa market in 2000 where producers were burning their harvest rather than selling it below production costs. The world supply and demand fundamentals are important as well. Naturally, if demand is out pacing the supply we can expect prices to rise. And vise-versa if supply is out pacing demand. Many traders trade strictly off of fundamental information. But this requires an extensive amount of work and research to design a trading strategy by. In my opinion, it takes away from the simplicity of commodity trading. However, as technical traders we can incorporate the overall fundamental analysis into our trading decisions easily. As an explanation, we don't need to know everything there is to know about a soybean plant to successfully trade soybean futures. However, we should know in what locations around the world the plant is grown, what the overall world supply situation is and what the import and export demand is. We also have to be aware of possible adverse weather events around the world like droughts and floods. The main source for this information is easily obtained from the United States Department of Agriculture (USDA), and market news sources. In the Virtual Trading University student s private web site you will find a link directly to the USDA reports calendar that tells you the date and times that these reports are released. There is also a link to commodity news web sites where you can gain information on trader's expectations for these reports and other news pertaining to the markets. Traders should take a cautious stance if they are trading in a market when a USDA report is scheduled for release. The reason being, the USDA numbers quite often do not match what the market traders are expecting, and prices can become very wild. For that reason I suggest closing out futures trades before these reports are released. Copyright Virtual Trading University 212

213 The December 1999, hog chart above is a prime example of what can happen when a report is released that is different than traders were expecting. This particular Hogs and Pigs USDA report indicated that there were many more hogs than traders were expecting. This high number came at a time when the summer demand was letting up and resulted in much lower prices. This market did trade limit down for four days before prices stabilized and if you had been long the market (expecting prices to rise) you would have been in trouble. Of course, if you were short (expecting prices to decline) you would have done well. My point is you had no idea what that report contained before it was released, and it's the unknowns of commodity trading that can wipe you out. If you're not sure about a commodity trade, the best thing to do is get out, or stay out. The first and most important goal for a small trading account trader should be money management and searching for strategies to slowly and systematically build his/her trading account. That s why my Low-Risk Option Course and alerts were created. After 28 years of full time trading, I m positively sure that there is no better trading method for short funded traders than trading low-risk option strategies! I show course members how to trade strategies that in most cases require no futures margin to risk, define the maximum risk BEFORE entering the trade, and some Copyright Virtual Trading University 213

214 strategies that GUARANTEE that you make a profit even if the futures price doesn t move as you expect. Happy Trading, Archie Johnson INDEX Copyright Virtual Trading University 214

215 INDEX TRAITS OF A SUCCESSFUL TRADER The quotes below strike me as being appropriate for all of us engaged in the endless quest of trading profits. I make it a point to review these statements on a regular basis as I am well aware of the fact that I am only as good or bad as my last trade. I accept the fact that I will never have it "made" as a trader. Each and every day is a new trading situation and I must be prepared with my trading plan. I must PLAN MY TRADE AND TRADE MY PLAN Courage... "The credit belongs to the man who is actually in the arena, who strives valiantly; who knows the great enthusiasms, the great devotions, and spends himself in a worthy cause; who at best, knows the triumph of high achievement; and who, at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who know neither victory nor defeat." - Theodore Roosevelt Persistence... "Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent." - Calvin Coolidge I already know that you have the "Courage" to become a successful trader or you wouldn't be reading this. Now, if you have the "Persistence" you'll be well on your way. Now all you need is a plan to get you where you want to be. Planning and risk management, I feel, are the keys that open the money vault for commodity option traders. The first and most important part of the plan for a small trading account trader should be money management and searching for strategies that slowly and systematically build up his/her trading account. The Low-Risk Option Course and alerts gives you a simple step-by-step plan to follow to get you there. When you what to do...and do it, you find that this business is very rewarding. And after 28 years of full time trading, I m positively sure that there is no better trading method for short funded traders than trading low-risk option strategies! I show course members how to trade strategies that in most cases require no futures margin to risk, define the maximum risk BEFORE entering the trade, and some Copyright Virtual Trading University 215

216 strategies that GUARANTEE that you make a profit even if the futures price doesn t move as you expect. Happy Trading, Archie Johnson INDEX Copyright Virtual Trading University 216

217 INDEX Is Paper Trading Futures & Options A Value or Not? Paper trade. It's not glamorous and it's not fun but it is probably the most important thing you can do to ensure your success in trading any commodity or financial instrument. While you are doing it you will think the opportunities are passing by that will never present themselves again. That is not true. Many traders fail because they get caught up in the excitement of broker recommendations, hot tips, or the latest, 'can't miss' trading strategy. You should test every strategy, including those presented in our course, to see if they will work for you. Remember, if you cannot turn a profit trading imaginary money in an imaginary account nothing magical is going to happen when you start using real money. Know your exit point before you get in. Always know how much you would be happy to get and how much you are willing to risk BEFORE you buy a contract. Sell or use trailing stops when that limit is reached. Ask anybody who ever held a contract too long and lost their money. They will tell you how 'they wish they had sold'. You can always convince yourself that tomorrow is turnaround day. Hundreds of thousands of people lose money trading because the turnaround never came for them. Plan your trades and work your plan. Cash flow is king. You will never go broke taking profit. Take a small profit over and over and over again. Better to take a little profit than to hold out trying to double your money again and again. Remember, double or nothing will eventually get you nothing. Always use a stop loss. To trade without a stop loss is like jumping out of a perfectly good airplane without a parachute. Never put in a MARKET BUY before the open. You will more than likely get filled at the high of the day. Enthusiasm is rampant at the open and everything costs more (as a rule) than it will an hour later. Never try to pick a top or a bottom. You don't have to get on board at the absolute top or the absolute bottom to make a profit. Better to confirm the trend by checking your charts. Remember, the trend is your friend. Honor your stop-loss. Never move your stop-loss to where you are risking more money. The only time you should move your stop-loss is to lock in profits or limit the amount you are risking due to a changing market. You had a reason for placing your stop-loss where you did initially. Don't change it on a whim. Emotion is your enemy. Logic is your friend. Never trade on emotion. There is no such thing as 'it has to go up', 'it can't go down'. The market does not care what you think, what you want or what you hope for. It is ruthless and makes its own rules. You should say this 50 times a day, 'past performance is not a guarantee of future results'. Copyright Virtual Trading University 217

218 Never buy on impulse. If you just heard the news, it is already to late. Plan your buys during non market hours. Once the bell rings your mind is clouded, emotion takes over. Plan your trades and execute your plan. When in doubt, stay out. A major benefit that Commodity futures and option trading has over other businesses is the fact that you can simulate trading without risking a dime. We call it "Paper Trading". You go through every detail of the trading process right down to placing a paper trade order with a broker. The only difference is you're training with 'monopoly money' and not real money. Paper Trading is what it's called when you trade the markets by making actual trading decisions based on current market activity but without actually investing real money. Some would argue that it doesn't teach a thing. I strongly disagree. However, it must be done properly to be of real value, and obviously it does not hold the emotional flavor or excitement that real money trades do. When real money is at stake, many people tend to react to situations in a totally different manner than while paper trading. Emotions can run wild. So yes, the real test and learning curve is experienced in the real risk arena, but paper trading plays a large role in teaching and applying sound strategy, techniques, principles, and proper wording of orders. It can also reveal weak areas in the novice traders individual style of trading. As mentioned above, real money being on the line creates an emotional content very unfamiliar to many people. That uncertain feeling of not knowing what will happen next, can have a huge impact on your decision making abilities. This one area is such, that in order to see long term success, total honesty with "yourself" must be applied. Wording the orders correctly. This is where it becomes confusing. While you paper trade on your own, you are not forced to think about wording the orders correctly. A broker demands this when trading for real, and so when after your paper trading successes have built your confidence up, you call the broker to place your first order and it's all mixed up and wrong - with your confidence factor now stripped from you feel somewhat intimidated and become vulnerable. You then proceed to ask the broker "Well what do you think I should do?" Wrong! Now you're getting into a situation where you are asking the broker what to do. NEVER listen to a broker unless it's regarding contract sizes, margins, point values, wording of orders or something of a technical nature. But never ask a broker to suggest a trade or strategy. The conclusion is learning to place your orders correctly, and never cheat at paper trading. I had a successful trader once tell me that he has never met an unsuccessful paper trader. Always learn from a losing trade, never move on until you find out exactly where you went wrong, and the proper steps to insure that it never happens again. When you know what to do...and do it, you find that this business is very rewarding. And after 28 years of full time trading, I m positively sure that there is no better trading method than Low-Risk Option Trading for the short funded beginner! I show course members how to trade strategies that in most cases require no futures margin to risk, define the maximum risk BEFORE entering the trade, and some Copyright Virtual Trading University 218

219 strategies that GUARANTEE that you make a profit even if the futures price doesn t move as you expect. Happy Trading, Archie Johnson INDEX Copyright Virtual Trading University 219

220 INDEX FOREX SCAMMERS There have been a lot of questions from our readers concerning trading the Forex currency markets for both broker trading and managed accounts. We will not be very popular among forex brokers and managed account providers for providing you with this information, but our concern is to inform you and not to see you get scammed. A forex scam is a confidence game played in the context of the foreign exchange market against fairly unsophisticated "retail speculators." The U.S. Commodity Futures Trading Commission (CFTC) which loosely regulates the foreign exchange market in the United States, has noted an increase in the number of these scams recently. Complaints cited by the CFTC since the beginning of 2004 revolve around managed accounts, false advertising, outright fraud, and manipulation. CNN quotes an official of the National Futures Association as saying "Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically." Between the U.S. Commodity Futures Trading Commission has prosecuted more than 80 cases involving the defrauding of more than 23,000 customers who lost $300 million mostly in managed accounts. CNN also quoted Godfried De Vidts, President of the Financial Markets Association, a European body, as saying "Banks have a duty to protect their customers and they should make sure customers understand what they are doing. Now if people go online, on non-bank portals, how is this control being done?" The highly technical nature of forex scams, the OTC nature of the market, and, the fact that foreign exchange trading is fairly unregulated, also makes exchange rate manipulation or price spiking easy for scammers to commence. Because of the technical factors mentioned above, the traders on the other side of the trade, or even regulatory authorities, will have an almost impossible task in proving that such manipulation has taken place. Partly because there is no central currency market, but rather a number of more or less interconnected marketplaces, provided by brokers and market makers. The disadvantages of retail speculators The foreign exchange market is a zero sum game in which there are many experienced well-capitalized professional traders (e.g. working for banks) who can devote their attentions full time to trading. An inexperienced retail trader will have a significant information disadvantage compared to these traders. Retail speculators are almost always undercapitalized, so are subject to the problem of Gambler's Ruin. In a fair game (one with no information advantages) between two players that continues until one trader goes bankrupt, the player with the lower amount of capital has a higher probability of going bankrupt first. According to the theory, any speculator who plays this strategy is effectively playing against the market as a whole which has nearly infinite capital and he will almost certainly go bankrupt. Any speculator Copyright Virtual Trading University 220

221 - particularly undercapitalized traders who do not have any informational advantages - should understand why his trading strategy is superior to the above strategy. The retail trader always pays the bid/ask spread which makes his odds of winning less than those of a fair game. Additional costs may include margin interest, or if a spot position is kept open for more than one day the trade must be "resettled" each day, each time costing the full bid/ask spread. According to the Wall Street Journal (Currency Markets Draw Speculation, Fraud July 26, 2005) "Even people running the trading shops warn clients against trying to time the market. 'If 15% of day traders are profitable,' says Drew Niv, chief executive of FXCM, 'I'd be surprised.' Additional disadvantages when dealing with scammers Forex scammers, posing as customer brokers, use the standard confidence game techniques perfected in bucket shops and boiler rooms. The spot currency trades placed by retail speculators are made directly with the trader's own "broker," that is, the broker takes the other side of the transaction. Thus, many of spot trades never enter the open market and are subject to reorders which are issued to protect the profit margin dealing desk brokers impute in their fixed spreads or to "hedge" unbalanced trades. When dealing with scammers, retail speculators suffer from at least 5 additional disadvantages: 1) They have no competitive prices to trade against, i.e. they must accept their broker's price or not trade. 2) The broker may show them actual prices from the forex market, but only with several minutes delay. Thus the broker has better information to trade on. 3) They are sometimes encouraged to over-leverage their trades, thus almost insuring that they will "receive a margin call" allowing the broker to close any open trade immediately, at the broker's price. 4) The brokers work as a team of several people as the forex market trades 24 hours a day. An individual trader will not be able to monitor his trades (and his broker's actions) for 24 hours a day. In some cases, the brokers may be aided by computer programs, which have near-instant reaction times and never make mistakes or take breaks. 5) They look to the brokers for training in the foreign exchange market and may actually buy their trading advice. The use of high leverage By offering high leverage, the broker may encourage traders to trade extremely large positions. This increases the trading volume cleared by the broker and increases his Copyright Virtual Trading University 221

222 profits, but increases the risk that the trader will receive a margin call. While professional currency dealers (banks, hedge funds) never use more than 10:1 leverage, retail clients are offered leverage up to 400:1. Often traders will have a profitable first trade (as manipulated by the broker) in order to increase his confidence in the broker and encourage the him to "invest" more money. Next, due to the use of too high leverage (often combined with rate spiking) the traders will receive a margin call, telling him that he must deposit more money or his trades will be closed out. The retail FX brokers will do anything to get the customer's money deposited with them, since eventually all this money becomes theirs. The use of stop loss orders Forex scammers will often encourage their clients to trade on margin and set stop loss orders, which allow the broker to close out the trade almost at will during busy markets at prices set by the broker. As the client's trade never makes it into the open market, the loss generated when a stop loss is triggered becomes the scammer's gain. Trade prices are easily skewed one way or the other, depending on the retail trader's position, which is known by the scammer. Traders can be encouraged to take risky positions just before major economic announcements. If all else fails, the broker can quote extreme prices (known as spiking) to trigger stop loss orders while the client is at work or asleep. In any case, all of the trader's money will be transferred to the scammer without any trade being made in the open market, and without any economic risk being created or destroyed. Don't Be Scammed---Take Control of your Own Trading! After all...no one cares more for your money than you do! Happy Trades Archie INDEX Copyright Virtual Trading University 222

223 INDEX Know your Market - Grains With the exception of the Wheat market, this study of corn will apply to most of the other grains and oilseeds, such as the Oats, Soybeans, Soybean meal & Soybean oil. Of course we will need to use long term charts to gain an understanding of how these markets have traded historically speaking, and we'll do so. But first it is important to note where these products are grown, and what effects the futures price before, during and after planting. WHERE ARE CORN & SOYBEANS GROWN? Corn & Beans are grown all over the United States and Canada. Most of it is grown in nine neighboring states in the American Midwest. We call this area the "corn belt." Those states are: Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Nebraska, Ohio, and South Dakota. Around the world, corn and Beans are grown in China, Europe, Argentina, Romania, South Africa, South America, Hungary and Thailand. There are many uses for the grains but the two most important are, human and animal consumption. The feed grains that feed our livestock are a combination of most of the grains put together. The growing season here in the US is from April to late fall, with the critical time period being late May into June when corn is in its pollination stage. However, the market volatility begins in March and April with the anticipation of getting the crops planted. Once the crop has been planted the attention of the market participants focus on the weather for the pollination process. After the pollination process is complete, normally June into July, the tension eases and the market contracts trade to their "harvest lows" normally in the August, September time frames. There is also another possible weather event the market has to look for just prior to harvest and that is the threat of frost, and this of course can effect prices. Once the crops are harvested, most of the grain markets will mount what we call a post harvest rally, which normally lasts to November and December. Another important note to make is, the crops on the other side of the world are just going into the ground as their growing season is opposite from the US. And yes, this scenario also adds to the market volatility here; are the other nations expecting a large harvest, or is the weather affecting their crops, ect. These factors will affect the demand for the US grains. One important item I failed to mention is, just prior to harvest the USDA and several private companies will be giving their crop size estimates, which in the past has caused a great deal of volatility in the markets. Copyright Virtual Trading University 223

224 After the post harvest relief rally has run its course, and the crops from the other side of the world are nearing harvest. The stage is then set for the US grain markets to head for their spring lows because of the added supply placed on the market, and this normally occurs during February, March. And then the entire process starts again. Now that we've looked at the growing cycle of the grains, let's take a look at the fundamental side (supply/demand). Market fundamentals play an important roll in determining a markets direction, and this year (1999) has so far proved to be no exception. So, what are the fundamentals of the grain markets, and how do we apply them to our trading decisions? It all boils down to (Supply & Demand). We as traders look for any discrepancies in this important ratio. Take "Supply" for instance: Pay special attention to the USDA crop reports and private company's crop estimates; are they projecting bumper crops, or maybe there is going to be a shortage? How much of the crops are left over from last year, etc.? Lets take a look at "Demand." Demand is always increasing due to the fact there are more people and animals in the world, however the crops from around the world are getting larger as well. To understand the demand for US crops, we have to look around the world and see how the crops and economies in other producing nations are faring. The best way to check the demand is from our export sales, and any developing weather patterns. It is not necessary to keep track of these each day, once or twice a week is sufficient to determine if there is a trend developing. Okay, I here your question; where in the world can I get all this information on supply & demand? Well, you have a very good source right here at VTU. The News and Weather link has a wealth of information. They cover USDA reports, and they tell you days in advance before they come out, and also trader s expectations of these reports. You may also write the different commodity exchanges to receive this and much more information free of charge. We as traders learn from past and current charts and underlying fundamentals to get a fair idea where a market may be headed at a particular time of the year. By looking at charts and listening to what the fundamentals are saying, we can plan a trading strategy accordingly. Let s take a look at a monthly July corn chart to see a little past history of the corn market. Copyright Virtual Trading University 224

225 Notice how volatile the month of June and July has been historically. This time of year is known as the "silly season" where weather forecasts and actual weather drives market prices. Weather events or the lack of can cause these markets to really get volatile during this time frame. That's one reason why a trader shouldn't place trades in these markets because of weather forecasts. Now, if a more serious weather event develops, you bet we'll trade off that information. Take this year (1999) as an example. Most everyone though the grains were about to finally bottom and move higher, mainly because they were trading at multi-year lows. I reported in the Trade Finder hotline that the fundamentals (supply/demand) did not support a move higher. The corn and bean crops are expected to be record breaking crops, and there is still a lot of supply left from last seasons crops. The demand for US crops is low due to the suffering economies around the world, and the fact that our own economy is putting pressure on grain prices as well. In fact, I expect the US government will step in at anytime to bale out the poor farmers. If anyone deserves the Rodney Dangerfield (can't get no respect) award, they should get it. In fact we have a few of America's finest (the farmer) right here at the university trying to supplement their income through trading and hedging their crops. Hang in there farmers, your day will come again, and it may be sooner than you think. Copyright Virtual Trading University 225

226 Most of the grain markets trade in tandem with the exception of CBOT wheat. Wheat's seasonal pattern tends to be just ahead of the other grain markets because it is planted sooner because of its tolerance to colder weather. Of course we plan our trades by the daily and weekly charts, but knowing these seasonal patterns can really add to ones knowledge of a particular market. However, just because the seasonal tendencies call for a rally or decline doesn't mean there will be one. As you can see from the charts above, the seasonal tendencies don't always hold true. Reason being, the fundamentals are not the same; things are different for that time period. We have to weigh all the facts when making trading decisions. In Conclusion To trade contracts in the grain and soy complex, you don t have to be an expert on the plant. But you should know where it is grown worldwide, crop size, export outlook, supply and demand factors, government loan programs, etc. similarly, you don t need to be an economist to trade in the financial markets. But again, you must be aware of all government reports, when they are due, and what is expected. In short, put your trust in the markets, and do not be afraid when they reach historic highs or lows. Markets are where they are for a reason. Evaluate that reason on its own merits, and except the inherit unpredictable qualities of speculation. Happy Trades, Copyright Virtual Trading University 226

227 Archie INDEX Know your Markets - Meats This paper will begin a general study of the meat markets. The markets include Feeder Cattle, Live Cattle, Lean Hogs and Pork Bellies. Even though these markets are considered the 'meats' each have their own characteristics, seasonal patterns, reactions to USDA reports, export expectations, and grain prices. We'll begin with the Feeder Cattle as they are the younger cattle placed in feed yards to be fattened for slaughter. Feed yards can handle cattle of all weights and types, ranging from 200 to 300 lb. calves up to 800 to 900 lb. yearlings. However, because packers prefer animals between 1,100 and 1,200 lbs., the most common weight of cattle on feed ranges from 500 to 700 lbs. The amount of time cattle spend in the feed yard depends on how much they weigh coming in, their rate of gain and mature size potential. Feed yards feed cattle to finish around 1,000 to 1,200 lbs., the weight that packers prefer. A 600 lb. steer that gains 3 lbs. per day will be on feed 167 days to reach 1,100 lbs., while a 750 lb. yearling will be on feed 133 days to reach 1,150 lbs. The feeders are fed a mixture of hay - corn silage - grain - vitamin A and B12 and, are given as much as they will eat. They are also checked for diseases, worms by a veterinarian. The producers of the Feeders are directly affected by the price of feed grains, demand for beef, and the availability of cattle that are on feed. With that in mind, we as traders should pay close attention to the USDA reports for cattle on feed, plus the price outlook and availability of feed grains. Also don't discount the other USDA reports for meats because often all the meat markets will react to a negative or positive report concerning only one market in particular. Live cattle are the cattle ready for slaughter after they have been in the feed yards. Packers give bids on cattle that are ready for slaughter. This is the point where the producers either make or lose money, and that is determined by the demand, feed grain prices, and availability of beef. As with all commodity markets, cattle in general have seasonal tendencies as well. If you'll notice on the chart below feeder and live cattle historically trade higher during December and January, also there are higher trades noted during the beginning of the spring and early summer due to demand picking up. Cattle in general also trade in cycles, and the most noted is a 7 to 10 year cycle. Copyright Virtual Trading University 227

228 As you can see there is not a lot of difference in the Feeder & Live cattle charts. I like the live cattle because it is a much more liquid market. The Feeder cattle market is more volatile because it has a lower volume and is affected by the price of feed grains. In order to trade feeder cattle successfully a trader must pay close attention to the USDA placement and Live Stock Slaughter reports. This report tells us how many feeder cattle Copyright Virtual Trading University 228

229 are in feed yards verses a year ago and what the slaughter rate is. If these numbers are increasing then the availability of cattle is increasing, or the demand is lower. Conversely, if these numbers are decreasing the opposite is true. Weather also has an effect on cattle causing stress if it is extremely hot or cold. Although this is normally a temporary effect, it can cause deaths and herd liquidations at extreme levels. The one most important rule for traders to follow trading these two markets is to trade in line with the overall trend. If the main trend line is violated on a closing basis, place a trade in that direction if the supply/demand fundamentals are supportive of the change. Picking tops and bottoms is very difficult in any market, especially the Feeder cattle because the market often violates chart patterns and support and resistance areas. Happy Trades, Archie INDEX Copyright Virtual Trading University 229

230 INDEX Soybean Oil The soybean oil market didn't give us any surprises up until July. The down trend from May to July is a classic example of following the trend and adding contracts, or free trading options that you purchased. However, from late July to September the market was very volatile due to weather events during the peak growing period. When the underlying market fundamentals of supply and demand are not driving prices in one direction or the other, the weather news can increase the trading volatility tremendously. This in turn creates problems for futures traders trading open futures contracts. Generally from about June to September I do not trade futures contracts in any of the grain or soybean markets without the protection of an at-the-money option, or the use of a well planed option strategy rather than futures contracts. Let's take a look at the trading opportunities on this chart. It is important to note that most of the soybean complex historically trades higher from December to March - May, and then trades lower into early summer. The reason being, South America is one of the largest producers of soybeans and they plant their crops in Copyright Virtual Trading University 230

231 December and harvest them from March - April. The US market prices in uncertainty during this time frame, and US exports are normally high because of availability. If the South American crops are expected to be large, we can expect lower US prices when these crops are harvested and made available to importing countries, and the fact that the US crops are already planted. Of course, if something happens to the South American crops, like a drought or something during their growing season we can throw the historical price patterns out the window for that year. I'm not saying trade from the seasonal patterns; however, during a normal growing season it is fairly reliable. Take a look at point "A" on the chart. The price traded below the trend line for the first time in several months which was a good indication of lower prices ahead. If you had sold a futures contract, or purchased a put option at the breakout point you would have been in good shape. The and 62% retracement levels were actually carried over from the previous rally from December to May. That information is not on this chart but, as you can see it fits right into the decline from the highs to the lows of this first down trend on this chart. Notice the "Bear Flags" in this down trend; they are at each retracement level. These price areas are great places to add futures contracts or free trade the put options that you purchased, or to initiate new positions if you missed the initial breakout at point "A." However, we didn't know where prices were headed when they started going up, that area could have been the low for all we know. So it's important to wait until prices trade lower outside the flag before adding positions. Point "B" is where the market begins carrying a higher degree of risk. Remember, this is the height of the growing season here in the US when the crops are in their pollination stages, and the least bit of adverse weather can reduce the crop size. The problem is not so much the weather though, it's the weather forecasts. These forecasts can cause the markets to trade limit up one day, then if the forecast fails to materialize, or is a little late it may trade limit down the next. If you decided to go long (purchase) a contract at point "B" when the trend changed from down to up, you were most likely stopped out a few days later. Although the market eventually traded higher as you expected, the wide daily price ranges would be devastating to a small account. The wise decision is to either trade options, or sit on the sidelines and follow the trend until it changes at point "D." At point "C" we did spot a Symmetrical Triangle developing. The profit objective is determined by measuring the distance between the two longest points of the formation. Obviously, the market traded right up to the objective but, the trade did carry a high risk factor because of the volatility in the market at the time. At point "D" the crops were past the critical growing stage, and the harvest was expected to be large. This indicated a decline in prices ahead so, a sell order below the up trend line would have been a wise decision. As you can see the decline from point "D" was less volatile because the immediate weather fears had subsided. And point "E" was a good place to add to positions or initiate new ones when the 62% retracement level failed to generate more buying. It's easy to spot these trading opportunities on past charts, the challenge is applying what you learn from these studies to present charts as the formations, trendlines and retracement levels are developing. If you study and concentrate enough on past Copyright Virtual Trading University 231

232 examples, you'll find that determining the next possible market development becomes easier. Of course, the art of speculation is an ongoing learning process, and we should never feel that we have mastered it, because that's usually when the market teaches you costly lesson. Happy Trades Archie Johnson INDEX Copyright Virtual Trading University 232

233 INDEX Swiss Franc One of the major problems with trading the currencies with open futures contracts is the threat of overnight developments half way around the world. They don't occur that often, but the risk is there. Let's say for instance, you are long the Swiss Franc and, while you are sleeping the Swiss decide to devalue their currency. Of course this would be devastating to the Swiss Franc and the price would probably drop like a rock. Now, you are long the SF in the day session here in the US and there is no way you can exit your position until the day session opens. It would likely open much below your risk stop and you would be stopped out with a horrible loss. You have to remember that each point in the SF is $12.50, and it doesn't take many points to wipe out a small account. This probably would not happen because the Swiss economy is one of the strongest in the world. In fact, it is a parking place for investors that are pulling funds from other markets that are having problems. But again the risk is there. With that being said, I feel that a well planned option strategy would offer the lowest possible risk trading in most of the currencies, and we can use the same chart analysis as if we were entering a futures trade. Now, if you can catch the trend change early enough, a futures contract will do okay as long as you can afford to place the risk stop far enough back to avoid being stopped out during the daily price ranges. Copyright Virtual Trading University 233

234 On the chart we have the downtrend line on the left, which was a long term downtrend. Okay, at point "A" we noticed that a major downtrend line had been broken and a new uptrend started. As you can see, prices retested the trend line a few days after breaking out. After that retest, you would want to go long a futures contract or purchase an option. First, this market was trading at multi-year lows and the strategy described in the Common Sense Option Trading section of the new course explains this in more detail, so without being repetitive go there and apply the option strategy to this chart. For futures contract traders, if you had entered a buy order when the market broke out of the downtrend line, and placed a stop back just inside the previous downtrend line your trade would have went according to plan. However, if you had waited for more confirmation before entering a trade, as we often do, you may have been stopped out some where around point "B". Even though you were eventually correct in your market analysis, the wide daily price ranges would have stopped a small account out. It's important to note that after a market makes a new trend change, it often pauses for a period of time before deciding whether to move on, or retrace back inside the recent trend. A lot of futures traders wait on this pause before entering a trade and it would have paid off here for sure. If you caught the move up from Point "B" you could have rode this market all the way if you gave your stop plenty of room, and you could have afforded to do that after the sharp gains. You could have also added to your position when the market paused again Copyright Virtual Trading University 234

235 at the 50% level by placing a buy order just above the highest highs posted during that pause. The Head & Shoulders pattern indicated is not a text book example, which quite often they're not, but it shows a climaxing trend. Notice the top of the head is a spike up day that didn't find any follow through buying and closed much lower. This is a good indication of a climaxing trend. We knew then to exit our positions when prices traded below the trend line at point "C" In fact, the best thing to do here would be to place two orders, one to close out your long positions and another to sell the market at the same time because it just traded through the trend line which is also the neckline of the H&S top. You also could add to your positions at point "D" when prices tested the 50% level and failed to trade above the trend line. And finally, the market rebounded from the 62% retracement level and traded above the downtrend line at point "E" where you would be stopped out. Also, you could place the same type order at point "E" as you did at "C" and ride the trend back up. Happy Trades, Archie INDEX Copyright Virtual Trading University 235

236 INDEX Lean Hogs Whew! This week's Hog chart looked like a spider's web after I finished with it. I've traded the hog market from both a long term and short term perspective. The short term perspective is much more profitable because a $2.00 move in hogs is worth $ ($4 per point X 200 points). That distance is about two of the grid squares on the chart. So, you can see it doesn't take much of a move to be profitable or devastating. Hogs are also difficult to trade because it often violates support & resistance areas. Take a look at the first support line in the upper left hand corner of the chart. The market had been in a defined trading range for a couple of months. When prices broke through that support at point "A" you most likely would have shorted the market expecting lower prices. Well, you had a rude awakening for the next several days when the market tried to get back above the support line. This is a form of a false breakout, where the bullish traders are just not ready to throw in the towel just yet. However, if you will notice the distance from that support line to the highest price that hogs traded to during that consolidation period from Feb. to May was $2.00. And when the market broke through support at point "A" it moved $2.00 before reversing. Copyright Virtual Trading University 236

237 After the market broke through support it created an Ascending Triangle trying to get back through, when it finally did break through at point "B" it moved $1.90 before reversing, which is almost the tallest point of the Ascending triangle. You could have sold a contract when prices headed lower again below the top support line. However, after being fooled before it would have been wise to sell when prices traded below the low of the ascending triangle at point "C". Now this sell at point "C" carried a high degree of risk due to the fact that a very important "USDA - hogs and pigs report" was due to be released the next day. In the hog market these reports, as you can see often cause limit price moves which can be devastating, and then some to a small account. Even though the market was expecting a negative report, the USDA is often wrong. So, this market could have just as easily move limit up rather than down, so it's best to sit on the sidelines until the smoke clears. Of course, had you went ahead anyway with a short position you would have made about $6, per contract in 15 days if you had exited when the trend changed at point "D". Think about this though. What if the USDA report had been much more positive than expected? You could have lost at least $4, before you could exit the market. For those of you just starting out, let's talk about the limit move just a moment. As you can see, I have three of the four limit moves circled, and the other is just below the 62% retracement level. This is not an area on the chart where the printer ran out of ink. Limit moves are the daily limit that a commodity can move in either direction. This amount ($2.00 in the hogs) is set by the commodity exchange to protect traders. Think about this, the traders that are long the market are trying to get out or reverse to short trades, and everyone that isn't in the market is trying to initiate new short trades. In effect, there is no one trying to buy the market, well, maybe a few gamblers, so prices could fall to who knows where and result in devastating losses, so the daily limits are for your protection. When a market posts a limit move it means the open, high, low and closing price is the limit set by the exchange for that day. In other words, no trading takes place because of the floods of orders coming in, and the fact that there are no buyers for the market. On the chart you will see that three daily limit prices moves occurred before any trading took place. I know it is hard to argue with a profitable trade, but it is best to sit on the side lines before these reports come out...you could be caught on the wrong side of the move. The next trade at point "D" could be placed after the market reversed the trend from the "Bullish Key Reversal" and traded above the down trend line. The bullish key reversal is an important price bar because the market opens lower than the previous day's closing price and trades much lower, then it reverses and posts a high price that is higher than the closing price of the previous day, and closes near the highs of the day. Notice about 7 days after you placed a trade at point "D" the market gapped higher leaving an open gap. These gaps are normally filled at some point so it is important to leave your stop loss order just under the gap to give the market a chance to close the gap. And as you can see the market did close the gap before heading higher. Of course, you could have used a trailing stop here and made a lot of money when the market traded near the 62% retracement level. Copyright Virtual Trading University 237

238 The 62% level in this market proved to be a major barrier for prices for quite sometime. When prices reversed from the 62% level and broke through the uptrend line which is also an ascending triangle you could have sold a contract at point "E", then exit when the bullish reversal was noted. Then go long (buy) a contract at point "F" Then, take profits at point "G" when the market traded below the uptrend line you could have also sold a contract there as well. The 62% retracement level also became solid support for prices at points "H" & "J" where trades could have been placed when prices bounced back up from this level. Short term trading the hog market by watching the trend lines and support and resistance levels really pays off. It's best to stay out of the market when USDA reports are due out to be on the safe side. You can visit the main page in the "Traders' Lounge" and look under the USDA Reports calendar for the release dates for these reports. Happy trades Archie, INDEX Copyright Virtual Trading University 238

239 INDEX Chart Lesson Chart analysis for 12/01/00 Talk about frustration. This just happened to be one of those times when the (A-B-C) formation just didn't follow through as expected. One thing I've noticed when trading the tops and bottoms, is the further the market retraces from the #2 point to form the #3 point, the more reliable the formation is. And as you can see in this example, the retracement from the #2 point to the #3 point was very little. The frustrating part is the fact that prices rebounded from the #3 point just far enough past the #2 point to engage most everyone in a long futures contract past the #2 point, then head lower to form a new #1 point and stopping out most traders. Copyright Virtual Trading University 239

240 Technically speaking, the only thing on this chart that suggested that this formation might not follow through and trade higher was the fact that the #2 and #3 points had formed right on the long term downtrend line. Had the #3 point retested the #1 point low, I feel this would have been a stronger formation. Fundamentally, is a different story. The demand for soybean oil at this time of year is historically low. Soybean meal is historically the leader of the soybean complex due to high demand for livestock feeds during the winter months, and this year was no exception, and the ban for bone meal use in feeds further exaggerated this seasonal pattern. When soybeans are crushed you get both soybean meal and soybean oil. Well, if demand for oil is low, where does all the extra soybean oil go? It goes into storage. Now, we have a supply and demand situation, and we know that supply and demand is what drives prices in the first place. Historically, soybean oil does move up slightly with soybeans and meal. However, with the ban on bone meal, it has dramatically increased the demand for soybean meal, thus creating an exaggerated over supply of soybean oil. Another historical event among traders is the very reliable futures spread trade of buying soybean meal and selling soybean oil. This spread is very reliable at this time of year, and of course the ban of bone meal has further exaggerated this event. Most technical annalists cringe when you mention the word "fundamentals." But I've found that incorporating a certain amount of historical fundamental knowledge in my trading has been well worth the extra effort. My new book (hopefully to be released in early spring) will go a long way in proving this fact and will give technical traders an easy resource for looking up information that can greatly increase their knowledge of the markets they're trading. Happy Trades Archie INDEX Copyright Virtual Trading University 240

241 INDEX CRUDE OIL Below is the chart study for last week. As you can see there were many opportunities to enter and exit trades in this market. A. Point "A" is the down trend line that you would have been following looking for prices to break out above it creating a new trend and a place to enter a trade. The way I trade the breakout is, let the market close one time above or below the trend line before placing a trade. This helps confirm the trend change. B. Point "B" is the overall trend line of the market that has to be changed when new lows in the uptrend are made. C. Point "C" is where the market quickly move up to and consolidated creating a narrow sideways channel. It is normal for a market to consolidate for a time after a trend change. This also is a point to consider entering the market if you missed the begining of the new trend. It is also a good point to add another contract to your original position if the market trades above the area. D. The market rallied on through the 62% retracement level, then experienced a small price pullback when it reached the 50% retracement level. This was a normal Copyright Virtual Trading University 241

242 retracement in a bull market where traders like you and I took profits, and as soon as that was over prices resumed back on their upward track. Of course you didn't know these were the actual retracement levels at the time, but when prices bounced off of the lower trend line, the trend was still in force. Only when the lower trend line is violated do we have concern. E-F. The same thing happened at "E" & "F". All these price areas were good places to enter new trades. The reason why is the overall trend line "B" wasn't broken. When prices bounced off the trendline and headed higher was the time to buy again. G. This small formation we call a pennant. Normally, you can expect a break out to the upside if the trend is up at the time it is formed. The profit objective for a pennant is the tallest bar in the formation. And, as you can see the market reached that objective before reversing. The retracement levels can often be figured from the high and low of the last downtrend that we were following before this bull move started. Take a look at a current December crude chart, and you'll see that the recent decline in prices reversed at the 50% level. There you have it, entering a bull market during price pullbacks. You may have found more examples than I, or you may not have found as many. It really doesn't matter, you could give 100 traders the same chart and get about that many different examples back. The main points to remember are, wait until prices pullback to enter, and if the trend line is broken get out. Happy Trades, Archie INDEX Copyright Virtual Trading University 242

243 INDEX Silver Chart Well, there was a bit more opportunity on this chart than I first thought. There is no long term trend to trade from, it was mostly short term up and down action until the big day in September when gold and silver both jumped. The short term uptrend line at point "A" provided a good selling opportunity if you waited for the market to close once below the trend line. Had you not waited, you would have been filled a few days earlier, and may or may not have been stopped out depending where you placed your stop loss. Waiting for a close below the trend line would have been beneficial here, but not at point "C". Point "B" is actually a triangle formation, I know it isn't a text book example, but they are often not. You can see where the upper and lower trend line of the triangle (or pennant) converged to a point (apex) before prices broke out and moved higher. Waiting for one close out side the formation wouldn't have worked very well either because prices headed lower a day or two later to retest the breakout area of the triangle (pennant) Point "C" is a perfect example of a pennant. And again, waiting for a close outside the formation would have not worked. If you did enter at point "C" you should have been stopped out when the trend changed directions. It would have been nice to have bought another right there, but I don't know for sure if we would have caught that move up. The market did head back up when it tested the support area at 511, so a sharp eyed technical analyst may have caught that. If so they did well. You can see a quick Head & Shoulders pattern that developed at point "D" and when prices broke through the neckline they went straight down to the objective at point "E". Copyright Virtual Trading University 243

244 The objective is the distance from the top of the head to the neckline. And, waiting for a close below the neckline before entering the trade went fine here. Of course, point "F" is the most important formation on the chart, and it's not because prices moved way higher. Take a good look at that Descending Triangle because when found with a base line forming on an important support area like 511 the break out will normally be strong. It may go either way as well, just plan on it being strong. You could have waited for prices to close once outside before entering because the market paused at the bull flag at point "G". Point "H" is the exit area, but who knows where exactly. I would like to say 595 but you know that is unreasonable. Greed does get us all at times, and this may have been one of them. Think about it, silver and gold had just made the largest one day price move in about 20 years. Would you have wanted to get out of the market that day? We did learn something important about whether to enter a trade from the point of the break out, or wait for prices to close one time outside a formation first. If you look closely at the trend lines and chart patterns on this chart, and most others, you will see that long term trend lines are often broken through, then prices will trade back above them before reversing again. So, in these cases waiting for a confirmation of the change is best. Even the Head and Shoulders pattern does the same thing. It is a climaxing trend as well. These type formations and trends do not die easily. Now look at the pennants and triangles. They are called continuation patterns, now they may reverse a trend, but not very often. Not one of those broke through the trend lines, or retested the break out area. So the conclusion is to be very careful and wait for a confirmation of a major trend change, and trade the break out of the continuation patterns. Just place your orders to sell or buy a few points outside the trend lines of the formations. Keep in mind also that the longer it takes a market to break out of a continuation pattern the stronger the break out is likely to be. It's like coiling a spring, the more you coil it the stronger the release will be. Happy Trades, Archie INDEX Copyright Virtual Trading University 244

245 INDEX Chart lesson for 2/10/00 March 2000 Copper Copper can be a difficult market to trade at times. Take a look at the Head & Shoulders pattern on the left side of the chart. Even though you can't see it on this chart, the near perfect H&S pattern occurred at one year highs for this market. When the H&S pattern develops as a one year high in a market it is said to be about 70% accurate in calling a top after the price trades through the neckline of the formation. We trade the formation by selling one contract when prices trade through the neckline and our profit objective is the distance from the neckline to the top of the head. We then place a sell order just below the neckline at point "A" and wait for the price to trade through and engage our short contract price. Well, as you can see, the price did break through the neckline all right, but where was our order filled? As you can see there is a large gap from the last price bar of the H&S pattern and point "B". Our working order was filled near point "B" near the opening trade for that day, not at point "A". There were no trades at point "A" so, our order becomes a market order when the price traded below our desired entry point. We did get a less than desirable fill price on our short contract at point "B", but it looks like it's going to be a good trade anyway because prices traded lower the next day. But what do we know about price gaps on charts? The market will generally fill most price Copyright Virtual Trading University 245

246 gaps quickly. With that in mind, we should employ a trailing stop, or move our stop in closer from its original point to help take us out of the market if prices try and fill that large gap. We had our profit objective from the head to the neckline in place, but the price didn't quite reach our objective before reversing direction. Often times a market will actually fill a gap, and other times it will only attempt to then, continue on in its current direction. So you really don't know which it will be but, it is best to go ahead and protect at least some profits rather than risking a loss. I had much rather give up some POTENTIAL profits than have my account debited for a REAL loss. Now that we have hopefully squeaked by the H&S trade, let's look at that very large Non-Symmetrical triangle formation. These formations come in all sizes from a couple of weeks to a couple of years. In this case, prices were in fact trading in a range from the top of the H&S pattern and converging to a point. The longer these type formations take to develop, the stronger the impending breakout will generally be. It's like winding a spring...the more you twist it the stronger the force will be when it is released. First we could place two orders, one at point "C" to engage us if prices break up out of the triangle, and at point "D" if prices break out to the downside. Often times I wait for a market to close one time outside a chart formation before I enter an order to buy or sell a contract. However, obviously the breakout point "C" was the best choice here, but we didn't know that. Had we waited for a close outside the formation at point "E" we would not have done as well. Was there anything here that may have indicated to place a trade at point "C" or even at Point "D" if prices went South rather than North? Yes, see how prices reacted to the triangle lines. They only traded through them once or twice, and not on a closing basis. In other words, prices were retracing each time the trend line was touched. You could place an order a little ways out side the formation with a fair assumption that if prices reached that point momentum would carry them on in that desired direction. Either way this formation did make money. Happy trades, Archie INDEX Copyright Virtual Trading University 246

247 INDEX Chart Lesson Chart analysis for 02/18/00 The first thing to note on this chart is the trading period from June to October. It appears that the printer was running out of ink, or there was a lot of limit moves. The fact is no one was trading the March 2000 contract at that time. Everyone was trading the closer to expiration months like June, September and December So in effect the market was opening and closing at or very near the same price level for that day. As the June and September contracts expired, the March contract became more active. The main objective of this study is to show that even though we may eventually be right in our prediction of a market's direction, it doesn't always unfold as expected. The pennant formation is commonly known as a continuation pattern. This means that prices normally continue on with the current trend after the formation has developed and prices break out of the congestion area. However, prices will often move in the opposite direction as is the case here. So, the logical solution to effectively trade the pennant is to place two orders. Traders often place an order to purchase (go long) a futures contract just above the top pennant formation line, and place a sell order ( short) just below the lower formation line, and which ever order is filled the other is either cancelled or becomes your stop loss order. This effectively catches a price move in either direction when the breakout occurs. Copyright Virtual Trading University 247

248 The profit objective using this type formation is usually the distance between the formation lines at points "D" & "E". It is important to note that you should always be conservative with your profit objectives because the market price often turns just prior to reaching an exact measurement of these points, as was the case here. I have found that using a profit objective of about 70 to 75% of the distance is effective. However, the market may trade much more than the determined objective so in order to possibly gain more than the objective I start using a trailing stop at the 75% profit objective. The profit objective in this case was met in about two days, and this often happens when prices break out from a tight congestion area. This trade did meet the objective, and started back upwards to resume the overall up trend. You could have purchased (long) a futures contract when prices resumed the uptrend at point "C". Happy Trades, Archie INDEX Copyright Virtual Trading University 248

249 INDEX Chart Lesson Chart analysis for 02/11/00 I used the T-Bond chart to illustrate an important point of how markets generally react when they are at one year lows or highs. As you can see when the reversal occurs, and the downtrend line is broken, prices generally respond very quickly. Point "B" was in fact a one year low at that time and the market did respond. You could have either entered a long futures contract at point "E" and "F" and done well. We could have also used the modified "Free Trade" strategy from our course that teaches us how to take advantage of a market at a minimum of one year lows. The market has to meet certain criteria before the trade will work properly. Basically, we look for option strike prices one or two strikes out of the money from point that the price breaks through the downtrend line at points "E" and "F". The option must have low volatility which they often do when the price is near one year lows. Then, rather than take profits when our profit objective nears, we sell an option several strike prices above our profit objective. The volatility in the options will have increased by then and we can sell the option and generally receive a credit from the transaction. Getting in on the early stages of a reversal generally has a higher probability of profit because the one year lows are close by, and you have plenty of opportunities to add to Copyright Virtual Trading University 249

250 your original position as the market moves in your favor. This example also shows just how important it is to trade in relation to the market's trend. Thanks for reading, Archie INDEX Chart Lesson Chart analysis for 02/24/00 Trading in harmony with a trend has to be the easiest way to trade. You don't have to be in constant contact with the market during the day as you do in day trading and reversal trading. You can place your orders and go through the day with confidence that if the market does as you expect you'll do well, and if not you will be stopped out. Any study course or book that is worth its salt will teach about trading in harmony with the overall trend, and about support and resistance. In fact, support and resistance areas make up the chart patterns that we are familiar with. Also, support and resistance makes up the trend lines as seen in this study. Prices will trade down to an uptrend line then reverse directions because the trend line is acting as support. In a down trend prices will trade up to the down trend line and reverse because the trend line is acting as resistance. So, to become a successful chartist you must learn to spot the support and resistance areas, and draw proper trend lines. Copyright Virtual Trading University 250

251 The Euro Dollar chart is self explanatory by way of trading with the trend. But there are a couple of things that you should be aware of in the early stages of a trend change. Take a look at both "A" and "B" and notice what happened when the trend changed from up to down. At point "A" prices broke through the lower trend line and never looked back. Now take a look at point "B", you can see when prices traded below the trend line they quickly tried to trade back above the breakout area a couple of days later. This often happens, and if prices fail to get back above the trend line you have a very good chance that prices will head back down. At point "A" if you didn't have an order working to sell when prices traded below the trend line you would have missed a lot of profit, but the risk of the market price trading back up to retest the break out area was greater. As it turned out, point "B" was the low risk trade entry as well as the most profitable. The bear flags would have been excellent areas to add more contracts when the price couldn't trade above the down trend line. The bear flags are simply areas where short traders were taking some of their profits off the table thus allowing prices to increase. If you are more of an aggressive trader with a larger trading account, placing an order just below the uptrend line at point "A" would have worked fine (this time). But, conservative traders should wait for a little more confirmation as seen at point "B" before entering the market. If you will be less concerned about picking the turning point of the market, and concentrate on entering after more confirmation of the change your account will grow much faster. In short, if you are working with a small account you do not have the luxury of being wrong very much. So, look for anything that will give you a trading advantage. Happy Trading, Archie INDEX Copyright Virtual Trading University 251

252 INDEX Chart Lesson Chart analysis for 04/08/00 The General Electric Corp. (GE). is one of the old timer stocks, and it is a very stable long term investment, I mean we will always need light bulbs, right? Just kidding, GE is involved in, and owns many other companies related to just about everything you can think of, they even own CNBC the financial TV show. This is not a study of stocks verses commodities, because these two investment vehicles are totally different from one another. Commodity futures contracts are highly leveraged instruments, and the contracts have expiration dates. Stocks on the other hand are not highly leveraged, and they do not have an expiration date; you can hold a stock to dooms day if you like, unless the company goes bankrupt or something, then you can wallpaper your office with the shares that you are holding. However, stocks and commodities do have one thing in common; they both have reliable chart patterns that can be used for entry and exit points. Copyright Virtual Trading University 252

253 As you can see from this week's chart, stocks follow basically the same chart formations, trend lines, etc., as commodity futures contracts. And there's that important 50% retracement level where there is almost always some sort of price action taking place in that area. In my opinion, GE is a very good stock to own. However, It's always best to purchase shares on price pull backs rather than jumping in on rallies. The last rally on the chart from about $125 to $165 is $40.00 per share. Now, that doesn't sound like much of a profit to commodity futures traders where a. 040 CENT per contract price move in the grains would equal $2,000. However, the more shares of stock you own, or are selling makes that $40.00 move more significant. And it's not uncommon for investors to own 100-1,000 and even 10,000 shares of a particular stock. That's when using the charts to take profits and enter more shares becomes more significant. The GE stock has made investors some great returns in the past 5 years with a simple buy and hold strategy. However, those investors with 100 or more shares that used the charts for their signals probably made 10 times more than that. Happy Trades, Archie INDEX Copyright Virtual Trading University 253

254 INDEX Chart Lesson Chart analysis for 04/15/00 Lumber is one of the markets that I recommend staying away from, especially for new traders. It is a very thinly traded market (low volume & open interest) and it is mostly controlled by commercial traders. That's not saying that you can't make money trading this market. I'm saying that there are many other markets with much higher volume that will lower the risk for you. As you can see, the majority of the time Lumber is a good trending market and reacts to chart patterns well. However, the "gap" days left on the chart between one day and the next can give you problems on entering and exiting your trades, and you can almost be assured that your order will not be filled where you planned. Getting a good fill price either entering or exiting an option trade is even worse than futures. If you do get your desired price you can be assured that they filled it to benefit themselves rather than you. It's a manipulated market and you would be wise to stay out of it. Considering the slippage, the price would need to move a great deal in your favor before you could expect a decent profit from a trade. For instance: If you planned to enter the market from the Triangle Pattern when prices broke out at point "C" with a profit objective of the distance between points "A" to "B," you may have been actually filled Copyright Virtual Trading University 254

255 half way to your objective, and it's not uncommon to see that much slippage trading in a thinly traded market. The triangle did hold true and reversed right at the profit objective at point "D," but your limit order to exit may have been filled at who knows where? The Head & Shoulders pattern at the top *may* have allowed a little more room to profit because the market traded much below the profit objective. The distance between the head and the neckline is the profit objective, and prices went much lower than that. So, you would have possibly had less slippage. Another general note to make is pay attention to the Margin and Maintenance Margin requirements for all markets. Not to see if you have enough in your account to trade the market, but to get an idea how volatile the market is. It's around $3000/$2000 for lumber. The exchanges and individual brokerage firms set the margin requirements in relation to how volatile a market is, and they can change the margin requirements at any time. Just recently the exchanges raised the margin requirement on a contract of coffee from about 3000 to in one day. This was just after the sharp rally a few months ago. And when the volatility subsided they lowered it back to normal. The trading opportunities on the lumber chart look to have been profitable trades, but they were most likely not near as profitable as they appear due to the market liquidity and manipulation. Happy Trades, Archie INDEX Copyright Virtual Trading University 255

256 INDEX Chart Lesson Chart analysis for 0508/00 If you remember the last chart study on the Lumber market, we learned that it is a market to avoid trading in for several reasons. Rough Rice is another market to avoid even more so than lumber. When you looked at this week's chart did you notice the one important clue that warned you to stay away from trading in this market? If you looked at the number of open interest (circled in red on the lower right of the chart) you would have seen that this market is very illiquid, meaning that there are very few trading in this market. It is dominated by commercial traders, producers, and a few misguided, misinformed small speculators. The problem in trading illiquid markets is the fact that slippage ( the difference between your desired fill price and the price you actually get) is tremendous in illiquid markets. I've heard traders say that they have experienced as much as $500 slippage trading futures contracts in Rough Rice, and it's even worse in the option pits. Why is that? Since commercial traders dominate the market (control the contracts) they can write their on ticket so to speak. For instance, Let's say you wanted to go long a futures contract because the trend has changed from down to up. Well, the only reason the trend changed is because the commercial traders are moving the price in that direction. In other words, the majority of them are long already. Now that presents a problem for you. In order to purchase a futures contract (go long) someone has to agree Copyright Virtual Trading University 256

257 to sell (go short) the other side of your contract to make it complete. And if the majority of the commercials are long the market, who is going to assume the other side of your long position. Oh sure, there are already short traders at work in this market, and one will eventually assume the other side of yours. If you enter a market order you will be filled, but you're at the mercy of the commercials, and you can bet they are going to fill that order to benefit themselves, not you. If you place a Limit order you are almost guaranteed not to get a fill. Even if you do get in the market, getting out can be equally as hard. When you look at the chart you can see this market responds well to technical analysis. The trend lines change and chart patterns form signaling trading opportunities. However, it is not until you look inside via volume and open interest that you see the true colors, and realize that you are nothing more than a deer in the headlights if you try to trade it. My point is, why trade these illiquid markets when there are many more opportunities in liquid markets. You'll find a list of markets to avoid and why in the How to Succeed Trading Commodities course. Happy trades, Archie INDEX Copyright Virtual Trading University 257

258 INDEX Chart Lesson Chart analysis for 05/19/00 The object of this week's study is to show you a couple of interesting points. The first point is the small channel circled on the chart. I noted on page 23 - charts of the Common Sense Course that we can often determine price turning points by looking for price consolidation areas after a market has reversed from a previous up or down trend. Referring to the chart above, you can see that the small channel is the first price consolidation area after the market declined from point "A". Could this small channel predict where this market *may* consolidate, or turn and develop a new trend? Obviously it did, but consider this, If we were short this market and saw the small channel developing, we would be wondering if prices were going to turn and head higher, or break below the channel and head lower. Well, the price did in fact trade below the channel and continued lower. This was a perfect time to initiate new trades and/or add to existing positions. Now the question is how much lower is this thing going to go? Well, no one knew that for sure, but you could measure the distance between point "A" and the break out area of the channel, and add that figure to the lower line of the channel located at to project a low price or at least another consolidation area. This method doesn't work all the time and we're not top and bottom pickers so you can't use it to set profit objectives and things of that nature. But you can use it to alert you of *possible* turning points. Copyright Virtual Trading University 258

259 The market did change trends at point "C" and you could have either went long (purchased) a futures contract, or used the option strategy from page 46 - chart 29 in the Common Sense Course. The other interesting point is the Head & Shoulders pattern. The H&S pattern is more reliable when found at one year market highs. However, it can often be found within a trend around either the or 62% retracement levels. The profit objective is normally from the top of the head to the neckline. However, when you see a very wide daily price range creating the top of the head, you should drop back to the range bound congestion area prior to that daily price bar. In this case it would be all the way back to the top of the shoulders. This would give you a more realistic profit objective because the wide range day was exaggerated. Even by doing this, you can see that the market reversed just before the profit objective was met. The conclusion is to be extra cautious when trading H&S patterns when found within a trend. Take the time to look for channels or consolidation areas after a market rallies or declines, and you may find that you are looking at a future 50% retracement level. Also look further back in time to the previous rally or price decline because a past 50% retracement level often times is related to the current trend. Happy Trades, Archie INDEX Copyright Virtual Trading University 259

260 INDEX Chart Lesson Chart analysis for 06/12/00 Coffee is a volatile and difficult market to trade, and it is reflected in the margin requirements ($3,000 per contract). The exchanges set the margin requirements for a market based on the volatility of the price movement. So, the margin requirements are set for a reason, and when it is set high you know you're looking at a high volatility market. Most everyone remembers when coffee exploded to the upside in October 99 when a drought was effecting the main South American growing region. We were suggesting option spreads just prior to the breakout area at point "A" and many students reported profits of 3000 to $5,000 in just a couple of weeks. Options allow us more staying power without any margin requirements over futures contracts due to the volatility associated with coffee. Had you entered a long futures contract at point "A" you would have been able to stay in the market, but about half way through this large move up the exchange raised the margin requirement from $3,000 to $14,000 per contract overnight. At that point you would have to post another $8,000 with your brokerage firm just to stay in your position. Needless to say, considering the raised margin requirements and the very violent day to day trading activity, an open futures contract trade would have required several bottles of antacid tablets. Copyright Virtual Trading University 260

261 As always, trends do reverse directions at some point, and coffee was no exception. Rains finally fell in the main crop regions in December and the outlook for crop development and supplies were increasing. The market has made an orderly decent since late December with margin requirements back to normal, and that takes us to the current situation in coffee. It's interesting to note that the recent channel on the right side of the chart is following about the same path as the channel on the left side did almost a year ago, and with coffee warehouse stocks increasing steadily it wouldn't surprise me if coffee traded back to the 92 cent area. We are keeping a watch on this market because it can change directions very quickly. And although the fundamental analysis of higher warehouse stocks and good weather in South America is not very positive, we can technically expect coffee trade back to the 50% level at some point in time. Keep watching, and my suggestion would be to use at-the-money option spreads rather than futures to reduce the risk associated with this market. Happy Trades Archie INDEX Copyright Virtual Trading University 261

262 INDEX Chart Lesson Chart analysis for 07/03/00 I think it is safe to say that the Gold market is on most traders' minds considering the large price move we had late in 1999, and the one that seems to be at hand. I changed the chart to reflect the updated price and the volume to help us see a little a little more into this current breakout. When a breakout higher occurs from a downtrend we have to ask ourselves is this simply profit taking from the short sellers that have been selling into the recent downtrend, or are the fundamentals changing in this market, or is it a combination of the two? In a new developing trend a market will often pause after the breakout occurs. This usually means that profit taking from the previous trend is almost complete, and new traders are entering the market because they are afraid that they are going to miss out on a large gain (Greed). A quick look at the volume and open interest tells us a little more about this current breakout. In a profit taking rally the volume will increase but the open interest will decrease. This indicates that there is a high volume of transactions due to profit taking but there is not much new buying or selling entering the market. In this chart you can see that the volume started decreasing even as the market was rising. This indicates that the current rally is more profit taking than a new fundamental price Copyright Virtual Trading University 262

263 move. However, the price hasn't moved lower so the market is undecided in which direction to take. Another important note to make is the fact that the 50% retracement level is just overhead. We already know that markets tend to retrace 50% of their previous price move so, the price level is considered as strong resistance. If prices close above that price level it would likely bring in a lot of new buying. Learn to use volume and open interest to learn more about the current price action in a market. Happy Trades, Archie INDEX Copyright Virtual Trading University 263

264 INDEX Chart Lesson Chart analysis for 07/08/00 This week's chart study is a prime example of supply and demand. The entire crude oil market complex has been in a long term uptrend now for over a year due to cut backs in oil production resulting in tighter supplies here in the US and abroad. This type market situation gives the long term trader many opportunities to purchase futures contracts or options when the price retraces some of its recent gains on normal profit taking. We use the main trend line and retracement levels to time entries and take profits. At the time this market was selected for this study the ascending triangle at the top of the chart was indicating that prices may break through the top of the triangle and move higher because, Ascending Triangles are generally thought to demonstrate a stronger bias towards predicting a break up and out of the Triangle, particularly when the trend leading up to the formation has been up. However, chartist often place an order to sell if prices break below the formation simply because it could be a market top rather than a consolidation period of the current trend. I personally feel that prices would have traded higher above the formation but news came out that the oil cartel would increase production. Of course, they left themselves a loop hole by saying that they would increase production "if" the price of oil didn't come down. Well, just the news release was enough to bring prices down so, it's yet to be seen if production will actually increase or not. Copyright Virtual Trading University 264

265 This market is now in a transition period. If the oil Cartel nations do increase production, oil and gasoline prices will fall (thank goodness), and if they don't, look out for August crude oil to challenge $40 bucks a barrel. It's also important to note that long term bull or bear markets do not die easily so, a retest of the highs in all the products will likely occur. Look for the 50% retracement level in the August unleaded gas to provide strong support for now. Happy Trades Archie INDEX Copyright Virtual Trading University 265

266 INDEX Chart Lesson Chart analysis for 07/08/00 The DJIA is an index of 30 "blue-chip" US stocks. At 100 plus years, it is the oldest continuing US market index. It is called an "average" because it originally was computed by adding up stock prices and dividing by the number of stocks. (The very first average price of industrial stocks, on May 26, 1896, was ) The methodology remains the same today, but the divisor has been changed to preserve historical continuity. The DJIA is the best-known market indicator in the world, partly because it is old enough that many generations of investors have become accustomed to quoting it, and partly because the US stock market is the globe's biggest. The editors of The Wall Street Journal select the components of the industrial average. They take a broad view of what industrial means. In essence, it is almost any company that isn't in the transportation business or isn't a utility (because there also are Dow Jones Averages for those kinds of stocks). In choosing a new company for the DJIA, they look among substantial industrial companies with a history of successful growth and wide interest among investors. The components of the DJIA are not changed often. The Copyright Virtual Trading University 266

267 most frequent reason for changing a stock is that something is happening to one of the components, such as being acquired. Whenever one stock is changed, the rest are reviewed. As of November 1, 1999, these are the 30 stocks of the Dow Jones Industrial Average: Allied Signal Inc.; Aluminum Co. of America ; American Express Co.; AT&T Corp.; Boeing Co.; Caterpillar Inc.; Citigroup Inc.; Coca-Cola Co.; DuPont Co.; Eastman Kodak Co.; Exxon Corp.; General Electric Co.; General Motors Corp.; Hewlett-Packard Co.; The Home Depot, Inc.; Intel Corp.; International Business Machines Corp.; International Paper Co.; J.P. Morgan & Co.; Johnson & Johnson; McDonald's Corp.; Merck & Co.; Microsoft Corp.; Minnesota Mining & Manufacturing Co.; Philip Morris Cos.; Procter & Gamble Co.; SBC Communications Inc.; United Technologies Corp.; Wal-Mart Stores Inc.; and Walt Disney Co. Trading the Dow can be done by either actually owning the dow stocks, or trading the index as a futures contract. The current Margin requirements are $6,700 and maintenance margin is around $5,000. So, you need about $12,000 total in your account to trade one Dow futures contract. Notice at point "B" when prices traded above the downtrend line "A". Prices moved very far once the downtrend was broken. When trading the Dow futures it's important to note that it is one of the most liquid contracts to trade...traders around the globe trade it. The point is, everyone sees the same things on the charts, and when a change occurs in a trend or chart pattern it has a tremendous initial effect on prices and they tend to move on in that new direction. Take a look at the Head & Shoulders pattern. This pattern is most reliable when found at one year market highs, but it also is traded during retracements to the 50% retracement levels. In either event, it indicates to the trend is nearing a change. The neckline in this particular pattern could have been drawn either way and it would have been okay. The lower neckline was actually the beginning point for the left shoulder, but the upper neckline showed the most support for prices, so that's likely the best place. The profit objective is the distance from the top of the head to the neckline, and you can see that prices met either objective in one trading session. The large descending triangle from April to July is projecting a possible price move back to near the contract highs at about This is measured by adding the distance between the beginning points of the triangle formation and adding that figure to the breakout point. A late check of the current chart shows that prices have already broken out of the formation. Happy Trades, Archie Copyright Virtual Trading University 267

268 INDEX Chart Lesson Chart analysis for 07/31/00 This week's chart study of the Swiss Franc currency revealed a few interesting points that may lead to future price speculation. We'll look at all possibilities, but first a a few words concerning the Swiss economy. The Swiss economy is one of the most stable economies in the world. In fact, the Swiss Franc is often referred to among world investors as a "safe haven" to park their investments when problems arise in other economies around the world. Also worth noting is the fact that when trends develop in the majority of the foreign currencies they can often last for several years. Reason being, when economic problems arise it takes a considerable amount of time to reverse the trend. This is important to know when trading the currencies in order to stay with the overall trend. As you can see the SF has been in a downtrend since 1998 and has offered abundant rewards for the trend follower trader. At point "A" we found an ascending triangle formation and when found in a down trending market it often leads to a breakout to the downside in the direction of the current trend. However, notice the two price bars circled above the formation. This is known as a false breakout, and often catches traders off guard. Of course, as smart traders we had a good conviction of where prices were headed because the trend was down and we're trend lovers not fighters. In short, we would have never placed a trade in a down Copyright Virtual Trading University 268

269 trending market on a simple breakout in the wrong direction against the trend. We would need more conformation than that. At point "B" the downtrend line was broken and a change of trend appears to be developing. Well, if you purchased the futures or options at the breakout your profits would have been limited because this market is still undecided. However, one point in the SF is $12.50 so even a very small price move can be pretty substantial. That resistance line drawn at point "C" is a significant price area. Could the current consolidation period be a developing Inverted Head & Shoulders formation? It sure could be, and it's not as noticeable on the daily chart as it is on the weekly. The point of this study is to encourage you to research the weekly and monthly charts of the market you are considering. There's no way of knowing the direction the SF will take. Technically speaking, the weekly chart shows that the overall trend is still down, but the short term downtrend line has been broken. The possible neckline will determine a short term direction for prices, and the next resistance level near 6422 on the weekly chart will determine if the long term has changed because that's where the long term trend line intersects with resistance. Happy Trades, Archie INDEX Copyright Virtual Trading University 269

270 INDEX Chart Lesson Chart analysis for 08/07/00 As a chart analyst I make my trade entry and exit decisions from the daily chart, however, I look to the weekly and monthly charts as well to help spot retracement levels and support and resistance levels that may effect current prices. Granted, the further back in time you go to find support and resistance on long term charts the less significant those areas are to current prices. One of the frequently asked questions is "why do these support and resistance areas cause prices to pause, correct, or accelerate when encountered?" Well, there are several reasons, but most importantly, we make them work. That does sound strange, but it's true. There are literally thousands of technical analysis traders out there reading these same type charts and we all see basically the same things. A technical analyst knows to place his sell orders or stop loss sell orders just below support levels, and place his buy orders or stop loss buy orders just above resistance. Often times these orders are all grouped together at a certain price support or resistance level, and when that price is touched it triggers numerous orders resulting in the commodity's price moving dramatically in that direction. Notice that I have the recent price pauses circled and labeled A-B-C- on the daily chart above. And, I also brought those same price areas over to the weekly and monthly charts. I've also added D-E to those charts which indicates possible areas for the next pause or price correction. Copyright Virtual Trading University 270

271 It's important to note that when strong fundamentals of increased demand and lower supplies is present such as we're seeing in sugar, price corrections or pauses can be for only a price bar or two on the charts. Basically, everyone is wanting in the bull market and they use the slightest price pull back to get in. The common indicators like Stochastics, MACD, Bollinger Bands, etc. become less reliable as a trading tool when these type conditions persist, because of the mad rush of unlearned traders jumping on board. This eventually leads to a large price correction when every one finally boards the train. It's sad, but most of a market's bullish sentiment comes at the end of a bull market price move. Common greed causes more traders to lose than any one factor. So, what did we find on the weekly and monthly charts? All three of the price corrections circled on the daily chart were forecasted from prior support and resistance areas on both the weekly and monthly charts. However, our study was to determine what's ahead for sugar, not what's happened in the past...that's easy to do. Points D-E give us the next area of concern. In fact, the current price of is now at the lower line of point "D". And the short price correction that we've seen in the past couple of days maybe all there is to it. However, is the upper area, and prices have yet to test it. Point "E" near looks like the next strong resistance area because more price bars tried and failed to trade above it. My guess is the cent price level, if reached, will be a major hurdle for sugar to cross. When the price on the daily chart is at contract highs and going further in that direction, use the weekly and monthly charts to gain a little more insight of where prices may be headed and, as long as the fundamentals haven't changed, enter in that direction when prices pull back to support. Happy Trades, Archie INDEX Copyright Virtual Trading University 271

272 INDEX Chart Lesson Chart analysis for 08/28/00 This week's study shows the importance of one of the oldest rules in technical chart analysis (the 50% retracement rule.) When gold broke above the down trend line in early June most everyone was wondering if this was another rally developing as in When a market trades above or below a trend line we have to ask ourself if this is a change of trend developing, or simply short covering (short traders taking profits) from deeply oversold conditions? We really couldn't tell which was the case here because prices quickly moved up to the 50% retracement level. We know that markets tend to retrace 50% of their recent trend due to short covering. But after that, prices can either move higher on through the 50% level or head lower again. So, the 50% level becomes the most important factor in reading the rally. Had the fundamentals changed, prices would have traded on through the 50% level and that would have signaled us to consider bullish trades. However, prices stalled out with three attempts to trade through the 50% level and left behind a Head & Shoulders formation. This type price action should have signaled that the current rally from the June downtrend line was nothing more than short covering, and with the up and down Copyright Virtual Trading University 272

273 price action around the 50% level we could see a tug of war going on between buyers and sellers, and the sellers finally won the battle when prices traded below the neckline of the H&S formation. The profit objective when trading the H&S is to measure the distance between the top of the head to the neckline. Then, use that measure as the profit objective. It's important to note that H&S top formations are more reliable when found at one year price highs. However, they are also reliable when found near a 50% retracement level. Regardless of its location, just remember that you're witnessing a tug of war between buyers and sellers and the eventual winner will be determined by either prices setting new highs above the head, or new lows below the neckline. Happy Trades, Archie INDEX Copyright Virtual Trading University 273

274 INDEX Chart Lesson Chart analysis for 09/22/00 Trading the silver market is not that easy for the short funded futures contract trader because of the wide daily price ranges with gap higher or lower opening days. This will often result in prices opening past your expected stop out point, and costing you more than you had planned. Then, there are times when prices are quiet with short daily price ranges, so trading futures is difficult. Looking at the daily chart, silver has been in a down trend since early this year. However, a clear support line at 500 had started developing in late March. This 500 support area eventually led to the development of a descending triangle with the daily price ranges getting smaller, and an eventual break out below long term support. The 500 price area clearly became major resistance once the price traded below it, and it was going to be very difficult for prices to get back above that area. As you can see at point "B", prices are having a difficult time getting back above that resistance. On the other hand, we can say that this market is forming a bottom with the "A" & "B" points in place. However, this market is still in a down trend, and we could see a failed bottom develop. Looking at the weekly chart, we see that prices are clearly at the bottom of the trading range and could possibly trade higher. Also, silver historically trades higher from October to Feb or March due to higher demand during the holidays. So, we have a fair argument for higher prices as well. Copyright Virtual Trading University 274

275 You could purchase a long futures contract if prices trade back above the "B" point if new lows are not posted first, but prices will likely be very volatile again if that occurs. You could also design an option strategy. Option Implied Volatility is currently low making at or near-the-money option purchases attractive. You would need to look to the March options to give the trade enough time to work. Since Implied Volatility is fairly low, look to purchase a near-the-money option and possibly look to free trade it by selling an out-of-the-money option if the market rallies and Implied Volatility increases. That's what this week's chart is telling us, and remember to use daily, weekly, and monthly charts in your analysis to gain an overall picture. Copyright Virtual Trading University 275

276 Happy Trades, Archie INDEX Copyright Virtual Trading University 276

277 INDEX Chart Lesson Chart analysis for 10/20/00 WHAT WOULD YOU DO? Most traders see chart patterns as a developing set of price bars that take generally a week and often months to develop. By looking at the overall picture of recent prices, traders often miss tell-tale signs of a reversal. Remember, in our course I told you that each price bar has a story to tell, and it's our job to determine best we can what that bar is saying. That final bar on the chart is a classic "key reversal". The key reversal has to meet certain qualifications to be considered a key reversal. First, the high of that day must be higher than the previous day's high. Second, the low must be lower than the previous day's low. This bar is also known as an "outside day" meaning the high and low were both outside the previous day's high and low. The way to trade this type formation is to sell a contract on a higher opening price the next day. Another solid piece of evidence that supported the reversal bar was the fact that the price was right on the 50% retracement level, and by now you already know how markets act around that area. Looking at the current chart, we see that prices have traded down and and filled the gap at about 278. We know that markets like to fill gaps sooner or later. Copyright Virtual Trading University 277

278 The point of this study was to drive home the fact that you should fully examine each price bar on the chart, and look for signs of a reversal. This will help you enter and exit trades more profitably. Happy Trades, Archie INDEX Copyright Virtual Trading University 278

279 INDEX Chart Lesson Chart analysis for 10/30/00 This week's study is very close to last week's study of wheat. The Gecko chart looks a little crowded from marking it up with two different trading opportunities, but it sure is easier to determine 50% levels, and dollar figures. You may want to take a look at the chart below to see the first trading opportunity. See the reversal bar at the top of the head, just above the 50% level? It is almost the same as the wheat chart last week. These reversal bars are most reliable when found near retracement levels, and other support and resistance areas. If you remember from last week's study we sold one contract on a higher opening price the following day. A higher opening simply means to sell one contract if the market opens higher than the previous day's low. The main reason we wait until the market Copyright Virtual Trading University 279

280 opens is to avoid a possible gap lower opening. This would not give us a very good fill price and we could quite possibly be stopped out if the price moved up after the gap lower opening. There is one important thing about this particular sell that should cause you some concern. A left shoulder of a possible head and shoulders formation had formed. This would suggest the possibility that prices could head lower to the neckline and reverse to form a right shoulder. Of course, now we can see that was indeed the case. However, there was no way to know that ahead of time. Take a piece of paper and cover all the daily price bars back to the reversal day, and you'll see what I mean. Let's talk about the H&S pattern now. Notice where I have the neckline support drawn. It's actually a little below the valleys of the H&S formation. Why is that? You have to back up to July and August to see that major support area and realize that current prices may very well test that area and find support and possibly move higher. And, as you can see that is exactly what happened. Always look back on a chart to define other areas of support and resistance, and include them in your calculations if you are considering buying or selling in that price area. The actual profit objective is the distance from the top of the head to the neckline, which in this case would project an objective down to about I placed it at about because that area looks like it may provide support. You could use a trailing stop as explained in our course around that area and let the market itself decide your exit.. Happy Trades Archie INDEX Copyright Virtual Trading University 280

281 INDEX Chart Lesson Chart analysis for 12/01/00 Talk about frustration. This just happened to be one of those times when the (A-B- C) formation just didn't follow through as expected. One thing I've noticed when trading the tops and bottoms, is the further the market retraces from the #2 point to form the #3 point, the more reliable the formation is. And as you can see in this example, the retracement from the #2 point to the #3 point was very little. The frustrating part is the fact that prices rebounded from the #3 point just far enough past the #2 point to engage most everyone in a long futures contract past the #2 point, then head lower to form a new #1 point and stopping out most traders. Technically speaking, the only thing on this chart that suggested that this formation might not follow through and trade higher was the fact that the #2 and #3 points had Copyright Virtual Trading University 281

282 formed right on the long term downtrend line. Had the #3 point retested the #1 point low, I feel this would have been a stronger formation. Fundamentally, is a different story. The demand for soybean oil at this time of year is historically low. Soybean meal is historically the leader of the soybean complex due to high demand for livestock feeds during the winter months, and this year was no exception, and the ban for bone meal use in feeds further exaggerated this seasonal pattern. When soybeans are crushed you get both soybean meal and soybean oil. Well, if demand for oil is low, where does all the extra soybean oil go? It goes into storage. Now, we have a supply and demand situation, and we know that supply and demand is what drives prices in the first place. Historically, soybean oil does move up slightly with soybeans and meal. However, with the ban on bone meal, it has dramatically increased the demand for soybean meal, thus creating an exaggerated over supply of soybean oil. Another historical event among traders is the very reliable futures spread trade of buying soybean meal and selling soybean oil. This spread is very reliable at this time of year, and of course the ban of bone meal has further exaggerated this event. Most technical annalists cringe when you mention the word "fundamentals." But I've found that incorporating a certain amount of historical fundamental knowledge in my trading has been well worth the extra effort. My new book (hopefully to be released in early spring) will go a long way in proving this fact and will give technical traders an easy resource for looking up information that can greatly increase their knowledge of the markets they're trading. Happy Trading, Archie INDEX Copyright Virtual Trading University 282

283 INDEX Chart Lesson Chart analysis for 01/24/01 In today's chart lesson I'm going to show you how to trade using both long and short term trend lines and retracement levels. You and I are considered as small traders and our goal is to position ourselves in long term trending markets because we generally need a substantial price move to realize large gains. Large traders like the "Commodity Funds and Commercial Traders" trade hundreds of contracts at a time, so a small price move is substantial in terms of profits and losses. Today's chart is cluttered with short term opportunities, and it shows that if you focus on just several markets rather than the 45 total, you can maximize the opportunities. As a guideline, I used the color feature in Gecko charts to color code what I'm explaining. The LIGHT BLUE is used only twice to show chart formations worth noting. The GREEN flags are price areas where contracts were purchased, and RED flags were Copyright Virtual Trading University 283

284 where contracts were sold. The YELLOW circles are possible profits from long contracts, and RED circles are for short contract profits. I'll start from the left side of the chart at the double bottom. Had you been trading the short side of the market by following trend line #1 from late June, you would have noticed the double bottom which indicates that prices were likely to trade higher once they move above the downtrend line #1. You'll notice a small several day consolidation period once prices trade above the trend line. This consolidation period occurs most of the time when a major trend change is developing. The first green flag from the left of the chart is the point where you would go long (purchase) a futures contract. What would be the profit objective? The profit objective would be a point just below the 50% retracement line. We know that markets often retrace 50% of their recent trend. And the 50% level from the high in June to the low in July is about In this particular trade the market did retrace right up to the 50% level before reversing, however, many times prices will not quite reach the 50% retracement before reversing, so it's best to select a point just below it or use a trailing stop as a profit objective. The red flag at is our profit stop out point for this example, but why couldn't we issue two sell orders here? We know that prices have a good chance of trading lower because they couldn't get above the 50% level. So, you could issue two orders to sell futures contracts at The first order will take you out of the long trade with profits, and the second order to sell would have you shorting the market expecting prices to move lower. You could place your stop loss at or just above the 50% level for about a 3- $400 risk. Remember, you're working from profits from the long futures trade. At this point you can draw trend line #2 from the highs in June to the reversal bar at the 50% level posted in early September, and as long as prices stay below that line the market is considered to be in a downtrend. To maximize the short trade you can draw a short term trend line and when prices close above it, you would exit the short futures contract, and you could also issue two contract purchases here as well with a stop loss on the second one just below lows in late October. Yes, that would be risky, but you are working with profits. The other light blue chart formation is called an "Island Reversal (IR)." The IR is several days of trading with gaps on each side. This is known as a reversal pattern and signals that prices have reversed. This pattern was not a welcome sign because we are now long a futures contract. However, remember the first trade where prices retested the trend line breakout before moving higher. This is what happened here as well. Our stop is below the lows so we would have still been in this trade. Prices did reverse again and trade higher. Our profit objective was placed again at the 50% retracement level, however, prices only reached as high as the 38% retracememnt. When prices couldn't sustain a close above the 38% line it indicated to me that this market was still in a long term downtrend. So, that is the point to exit the long trade. Still suspicious that prices may try and go to the 50% level I wouldn't have issued two sell orders here. I would have drawn a line just under that consolidation support area Copyright Virtual Trading University 284

285 and sell one contract if prices closed below the line. This in fact did happen, and you could still be short today. This study is not meant to tell you what I would have done, or what you should have done. It was put together completely by hindsight to show you how to follow trendlines and retracement levels for short term profits. The profit figures likely would have not been met in real-trading due to slippage and your timing to enter and exit. However, it is a fair assumption that near $10,000 per futures contract could have been made during this time frame. Many beginning traders often lose their focus by trying to follow too many markets at the same time. If you reach this point, take one or two markets and give them your complete attention. Learn everything you can about them, like seasonal price patterns, weather, volatile price moves, government reports that are important, etc. Then follow the price action on a daily basis. Just because a market isn't a grand bull market like crude oil there can be many short term trading opportunities. Happy Trades, Archie, INDEX Copyright Virtual Trading University 285

286 INDEX Cocoa For the past month cocoa has really been a good market to trade with both futures and option contracts. In November the market appeared to be forming a bottom, then in early December a final push lower posted the contract low and started the small bottom formation. The rule for trading the bottom formation is to go long (buy) a contract when prices trade above the #2 point. Obviously, in hindsight we can see that this would have been the thing to do. However, with the short term trend line crossing just above the #2 point, the wise thing to do would be to wait and see if prices traded above the short term trend line before going long. Remember, at that point we had no idea where prices were headed, and it was safe to assume that it may just be another false bottom as was seen from August to September. The picture was brighter when prices sustained a closing price above the short term trend line at the first green flag, and trades were considered at that time. However, the market was technically still in a long term down trend until it sustained a closing price above the long term down trend line at 875. As you can see, once prices traded above 875, the daily price ranges for the next several days were very wide. This was because traders were watching to see if the long term down trend line was going to be cleared. And when it was everyone wanted in the market because the true long term trend had changed from down to up. Copyright Virtual Trading University 286

287 The next hurdle to be cleared was the trading range channel which was resistance. However, current prices are now above the channel which classifies the upper portion of the channel as support for current prices. And finally, if prices can sustain a closing price above that support area at 1000, the next area of resistance is Where will cocoa prices be a week from now? Well, if you can tell me that, I have a large trading account that I would like for you to trade for us! Seriously, no one knows the answer to that, but either the current support area at 1000 will give way, or the overhead resistance area at 1125 will be cleared, that much I can tell you. It is important to note that when a major trend change occurs such as at the 875 price area, prices tend to retest that area. This may have already occurred on the fourth day after prices traded above the long term trend line. As an example of how to trade futures contracts on this price move, you could go long at the first green flag, then add another contract after prices traded above the long term down trend line at the second flag and place both stops just under the down trend line at about 860. This would lock in some profit from the first contract. Then, add another contract at the third flag and move all your stop orders up to about 975 which is just below the support area. And do the same at the fourth flag if prices can sustain a close above Happy Trades Archie INDEX Copyright Virtual Trading University 287

288 INDEX 07/25/06 Understanding Chart Support & Resistance Greetings Traders, CLICK HERE for a Video of this lesson Last week's Drawing Correct Trend Lines chart lesson is the beginning knowledge of becoming a chart master. This week's lesson will be the second step in that process. Chart support and resistance are very important areas on bar charts. We use these areas as points to enter trades, for stop loss points, and profit taking points. So, just by that, you can see how important they are! I'm going to give you the text book rules for defining support and resistance, then we'll look at some real-time chart examples to help you in the real world of trading. SUPPORT: is defined by a minimum of two daily price bars with equal or very near equal daily lows. However, the more daily bars you have with equal or near equal lows, the stronger the support area becomes. Support RESISTANCE: is defined by a minimum of two daily price bars with equal or very near equal daily highs. However, the more daily bars you have with equal or near equal highs, the stronger the resistance area becomes. Resistance It's easy enough to spot support and resistance on samples such as above, but the real test is spotting and reacting to them on charts. It's important to note that all chart patterns and trend lines start with support and resistance, so support & resistance is the basis of technical analysis. Let's look at some real-time examples: The September British Pound currency chart shows the support and resistance points for about a four month period. Notice the Sideways channel at point "A". See how Copyright Virtual Trading University 288

289 support and resistance is the very foundation of our most favorite chart patterns! Support defines the lower channel line and resistance forms the top channel line. Prices broke up and out of the channel and that would be your signal to buy a futures or option contract. Why?...Because when prices break through a resistance or support level they tend to move on in that same direction for a period of time. It's important to remember that because it's your best opportunity to enter a low-risk trade. Options are still priced under value and you place your stop loss of your futures contract just below the channel resistance areas. The reason you place your futures stop loss in that area is because "once prices break through a resistance level, that level becomes support if prices reverse". Take a look at point "B". Another small sideways support & resistance area formed. The same thing happened here as in the larger channel "A" so you would add another futures contract when prices traded above resistance. Place your stop loss just below the new support area which is old resistance. Plus, move your stop loss one the first futures contract to that point as well to protect profits. Copyright Virtual Trading University 289

290 Moving on up to point "C" you see another small support area. You can add another futures contract if prices trade above the second support bar high. Move all your stops on your open futures positions up to just below the support bar lows. By now everyone wants to get into the market because it's moving. The options are now becoming over valued which is good for the option you purchased back at point "A" and now we can sell a much higher strike price creating the Free Trade. There is no risk of loss after the free trade has been completed even if prices dropped back to the sideways channel at point "A"! Now things begin to change at point "D". Point "D" has formed a resistance level, and point "E" as support. The first thing you want to do is move all your futures stops up to just below the support bars because we simply did not know where prices would go from there. They could have traded on above the resistance area as they did at points "A" and "B", but they didn't. In fact, point "D" became the market's top. The market price finally gave up and traded below support at point "E". This triggered our stops on all futures contracts and you would have made near $15, in 22 trading days. What do we know about markets that have topped out? They generally retrace 50% of their recent gains. So, yes it's a good time to sell futures contracts and buy put options with the thought that prices will retrace. But we are out of the market now so we need to find a new entry point. It was clear that prices were headed lower because the next level of resistance was below the top at point "F" and a new support level at point "G". Remember, however, that markets may reverse at or near the 50% retracement level so our trading target should be the 50% level. You would sell one contract when prices trade below the support level at point "G" and sell another when prices trade below point "H" and your trading objective target is point "J". Not bad for one month's trading using support and resistance as signals for trade entries and exits. There are many more support and resistance trading strategies in our courses that show you how to trade futures, how to combine futures and options, and stand alone option strategies for low-risk trading. The very best way to become a chart master is to practice, and try not to complicate matters by using every indicator that comes along. The only indicator I use is Implied Volatility for options, and It is also great for predicting market tops up to two weeks in advance. If you do use indicators, select one or two that you're comfortable with and learn them inside and out. The most useful lesson I've learned in thirty years of doing this is the fact that trading can be as difficult or as simple as you make it. Take care and we'll see you next week Copyright Virtual Trading University 290

291 INDEX Markets to Avoid and Why New traders commonly make the mistake of trading in markets that are not suited for speculators (you and I). These markets are commonly called illiquid or thinly traded. This actually means that producers and suppliers of the particular commodity mainly trade these markets, and there are not very many speculators involved. The problem with trading these markets as a speculator is, there is very little open interest and volume. When there is very little open interest and volume, the floor traders can temporarily manipulate prices to move in their desired direction, which is usually against the speculator. The results are bad order fill prices, and our stop loss orders being hit more often. This short section of the course is designed to list these markets and give a brief explanation of the problems one may encounter by trading them. In short, it is best to look for more liquid markets that have a high volume and open interest. 1) BFP Milk: This market is to be avoided by speculators, because of low open interest, and the fact that only commercials and producers trade it. 2) No. 7 Cocoa: This market is also very illiquid and should be avoided. Trade the world cocoa market instead. 3) Canola: Very thinly traded with low open interest and volume. This market experiences wide daily price ranges and should be avoided, or use options. 4) Oats: Very thinly traded with low open interest and volume. This market experiences wide daily price ranges and should be avoided, or use options. 5) Rough Rice: Very thinly traded with low open interest and volume. This market experiences wide daily price ranges and should be avoided. 6) Electricity: This market is for producers and municipalities, and commercials. Avoid at all costs. 7) Propane Gas: Seasonal market, and should be traded by experience traders. This market also has low volume and open interest. 8) Sugar #14: This is a local sugar contract traded on the US production only. It is very thinly traded and should be avoided by all speculators. Trade the World Sugar #11 contract for the best opportunities. 9) Pork Bellies: This market has good open interest and volume, however, it is a high risk market because it is subject to limit moves, and wide daily price ranges. It s best to avoid this market until you are more experienced. 10) Natural Gas: Seasonal market, and should be traded by experience traders. This market also has low volume and open interest. Copyright Virtual Trading University 291

292 11) Lumber: Very volatile market, dominated by commercial traders. You will most likely experience bad order fill prices in this illiquid market. It s best to avoid it. 12) Coffee: Is a volatile market, It is best to trade options due to the often violent daily price ranges. 13) Cotton: Is a volatile market, It is best to trade options only due to the often violent daily price ranges. However, low risk futures trades do present themselves. Simply use your trading common sense when deciding whether a market is illiquid or not. If the open interest is below about 8,000, then let the opportunity pass. Why would you want to put yourself at risk by possibly not getting out of a trade at your desired price, or maybe worse yet, being caught on the wrong side of a limit move where you can t get out of a trade at all. There are simply much better opportunities almost daily in much more liquid markets. Copyright Virtual Trading University 292

293 INDEX My Commodities Trading Plan Trading Plan Basic Rules: 1. Cutting Losses 2. Running Profits 3. Trading Selectively System Parameters: 1. Aim of System a. Instrument Traded: Options Only b. Catching Trend Changes & Chart Pattern Breakouts in direction of basic trend c. Avoid Trading Ranges d. How much risk incurred: i. Starting Capital: $5,000 ii. Max. Capital Invested per trade: $500 (initial) iii. Expected Risk (i.e. stop loss): $250 (initial) iv. Risk to be reduced as trading capital increases. Target risk: 2% of trading capital. e. Targeted Success Ratio of Trading System to be traded: 70% - 80% 2. Definition of Trading Conditions a. System I Trading the 6 Month Trend Reversal i. System I Entry Trading the 6 month Trend Reversal 1. Define the trend on the 6 month chart using Trend Lines 2. Check Weekly Chart for Long Term Trend over 2 years (Optional?) 3. Catching the trend reversal on a break of the 6 month trend line with the following chart patterns: a bottom/top formation b. Head & Shoulders Reversal c. Double bottom/top formation 4. Confirm Strength of trend change using the following indicators: a. Stochastic Short Term momentum change (3 5 days) b. MACD Medium Term momentum change (21-30 days) c. AD Longer Term momentum change (3-5 months) 5. Underlying Fundamental Analysis (to be studied further) a. Supply/Demand situation if market is trading at extreme highs or lows b. Seasonal Trends c. COT ii. System I Exit Trade Management 1. Initial Stop: a. Below / Above the chart pattern used for the entry b. or 50% of option value, whichever is less 2. Trailing Stop: Copyright Virtual Trading University 293

294 a. If market bounces off the trend line in the direction of the 6 month trend, shift stop to below the trend line where the market has tested, using a contingent order to exit the option if the futures contract trades at that price. b. If market breaks through a Support / Resistance (S/R) level, and the level holds after the market has tested it, trail the contingent stop loss to a few ticks within that S/R level. c. Once market has moved 75% of the profit target, trail stops to the low of 2 bars ago (for calls, and vice versa for puts). Only shift the stops should the market make a higher high on the daily chart from the previous day. 3. Profit Target: a. 50% of last major move using the N Tool in TNT4. b. No GTC order used to exit at a profit target, in line with the Let Profits Run rule. b. System II Trading with the established trend i. System II Entry 1. Establish 6 month trend on the daily chart with trend line year Weekly Chart for longer term trend (optional) 3. Enter with the 6 month trend on a chart pattern breakout, or 4. If market has retraced, use previous S/R levels or fib retracement levels for potential areas of S/R. Enter with the 6 month trend on a chart pattern break-out, or successful test of that S/R level. 5. Underlying Fundamental Analysis (to be studied further) a. Seasonal Trends b. COT ii. System II Exit 1. Initial Stop: a. On other side of chart pattern breakout, in case of chart pattern failure, or b. 50% of option value, whichever is less 2. Trailing Stop: a. Once market has moved 50% of potential profits, shift stops to B/E using contingent orders to exit the option on the futures contract trading at the stop loss level. b. Once 75% of the profit target, trail stops aggressively using the low of 2 bars ago (for calls, and vice versa for puts). Stops are shifted only if market makes a new high on the daily chart compared to the previous days high (vice versa for puts). c. If market forms another consolidation pattern, shift stops to below that pattern in case of market reversal against the trade (vice versa for puts). d. Also shift stops to below support levels once the market has broken through, tested the support level, and the support level holds (vice versa for puts). 3. Profit Target: Copyright Virtual Trading University 294

295 3. Option Purchase and Exit Rules: a. Profit target based on chart pattern projection, but no GTC order to sell at profit target in line with the letting profits run rule. b. Just trail stops aggressively once 75% of profit target is achieved using 2 bars ago method. a. Buy Straight Calls/Puts provided IV is low, and within $500 maximum risk b. If not possible to buy straight calls/puts in low IV environment due to cost, purchase a Bull/Bear spread that costs $500 or less, with a minimum possible return of 200% ROI or better. c. If IV levels are medium, then purchase only spreads to reduce risk of volatility crush. d. Buy options with at least 90 days to expiry. e. Buy ATM or Near-The-Money options, no Far OTM options. f. Exit Rules for options: i. Exit ITM options minimum 1 week before options expiry ii. Exit still OTM options minimum 30 days before options expiry 4. Money Management Rules: a. Starting Capital: $5,000 b. Maximum Capital Invested per option trade: $500 c. Expected Risk per option trade (50%): $250 d. For every $1,000 increase in Cash Equity (not including open option positions), recalculate maximum capital invested per trade using 10% of cash equity. e. Once trading capital has reached $10,000 in cash equity (not including open option positions), maintain risk at $1,000 per option trade until cash equity reaches $20,000. From $20,000 onwards, use 5% increase in capital invested per trade, per $1,000 increase in cash equity. (See Table 1: Increase in Cash Equity) f. For every $1,000 decrease in cash equity, recalculate capital invested per trade as per Table 2: Decrease in cash equity Table 1: Increase in Cash Equity Cash Equity Capital Risked Expected Risk (i.e. Stop Loss) $5,000 $500 (10%) $250 $6,000 $600 (10%) $300 $7,000 $700 (10%) $350 $8,000 $800 (10%) $400 $9,000 $900 (10%) $450 $10,000 $1,000 (10%) $500 $11,000 $1,000 (Max.) $500 $1,000 increase Maintain at $1,000 Maintain at $500 $20,000 $1,000 (Max.) $500 Copyright Virtual Trading University 295

296 $21,000 $1,050 (5%) $525 $22,000 $1,100 (5%) $550 Follow as per $1,000 increase Max. 5% Total Risk Max. 50% Stop Loss Table 2: Decrease in Cash Equity Cash Equity Capital Risked Expected Risk (i.e. Stop Loss) $11,000 $1,000 (Max.) $500 $10,000 $1,000 (10%) $500 $9,000 $900 (10%) $450 $8,000 $800 (10%) $400 $7,000 $700 (10%) $350 $6,000 $600 (10%) $300 $5,000 $500 (10%) $250 $4,000 $500 (Min.) $250 $3,000 $500 (Min.) $250 Until not able to trade anymore Until not able to trade anymore Until not able to trade anymore INDEX ~ End ~ Copyright Virtual Trading University 296

297 INDEX Different Types of Orders The types of orders most commonly used are briefly described below. It is very important that you learn the different types of orders that you will be using when you place your trades. When you finish this term, I want you to have the confidence to phone your broker and place your orders correctly without any help. If you are familiar with the orders and how you want to use them, it will build your confidence also. The most commonly used orders are the "MARKET ORDER" the "LIMIT ORDER" the "OR BETTER" and the "DAY ORDER" but each one of them are unique in their own way. Print these out for your reference. THE MARKET ORDER The market order is the most frequently used order. In most instances it assures you of getting a position and eliminates "chasing" a market to get in or out of a position. The market order is executed at the best possible price obtainable at the time the order reaches the trading pit. Write the abbreviation MKT indicating it is a market order or you can underscore the order instructions to denote it is a market order. LIMIT ORDERS The limit order is an order to buy or sell at a designated price. Limit Orders to buy are placed below the market while limit orders to sell are placed above the market. Since the market may never get high enough or low enough to trigger a limit order, a customer may miss the market if he uses a limit order. Even though you may see the market touch your limit price several times, this does not guarantee or earn your customer a fill at that price. OR BETTER The OR BETTER is a commonly misunderstood order type. ONLY USE "OR BETTER" IF THE MARKET IS "OR BETTER" AT THE TIME OF ENTRY TO DISTINGUISH THE ORDER FROM A STOP. OB on an order does not cause the pit broker to work harder. It is always the broker's job to provide you with the best possible price. If an order is truly "or better," then this designation assures the broker that you have not left "stop" off the order. In many instances, unmarked "or better" orders are returned for clarification, potentially costing your customer valuable time in the pit, and possibly a fill. Orders that are not "or better" when entered only serve to use the pit broker's time upon receipt as he checks to see whether or not the order deserves a fill. Sometimes, using the "or better" designation before the opening is helpful in assuring the executing broker that your order is meant to filled. Copyright Virtual Trading University 297

298 MARKET IF TOUCHED (MIT) MITs are the opposite of stop orders. Buy MITs are placed below the market and Sell MITs are placed above the market. An MIT order is usually used to enter the market or initiate a trade. An MIT order is similar to a limit order in that a specific price is placed on the order. How- ever, an MIT order becomes a market order once the limit price is touched or passed through. An execution may be at, above, or below the originally specified price. An MIT order will not be executed if the market fails to touch the MIT specified price. STOP ORDER Stop orders can be used for three purposes: a. to minimize a loss on a long or short position, b. to protect a profit on an existing long or short position, or c. to initiate a new long or short position. A buy stop order is placed above the market and a sell stop order is placed below the market. Once the stop price is touched, the order is treated like a market order and will be filled at the best possible price. PLEASE NOTE: WHILE STOPS AND MITS ARE NORMALLY ELECTED ONLY WHEN THE SPECIFIC PRICE IS TOUCHED, THEY CAN BE ELECTED WHEN THE OPENING OF A MARKET IS SUCH THAT THE PRICE IS THROUGH THE STOP OR MIT LIMIT. IN THIS CASE, YOU CAN ROUTINELY EXPECT THE FILL TO BE MUCH WORSE THAN THE ORIGINAL STOP OR BETTER ON THE MIT. THIS APPLIES TO STOP ORDERS AND MIT ORDERS PLACED BEFORE THE OPENING OF TRADING. STOP LIMIT ORDERS A stop limit order lists two prices and is an attempt to gain more control over the price at which your stop is filled. The first part of the order is written like the above stop order. The second part of the order specifies a limit price. This indicates that once your stop is triggered, you do not wish to be filled beyond the limit price. Care should be taken when considering stop limit orders, especially when trying to exit a position, because of the possibility of not being filled even though the stop portion of the order is elected. There is no Stop Limit order without a second price. If your order cannot be filled by the floor broker immediately at the Stop price, it becomes a straight limit order at the stop price. STOP CLOSE ONLY (SCO) The stop price on a stop close only will only be triggered if the market touches or exceeds the stop during the period of time the exchange has designated as the close of trading (usually the last few seconds or minutes). MARKET ON OPENING Copyright Virtual Trading University 298

299 This is an order that you wish to be executed during the opening range of trading at the best possible price obtainable within the opening range. Not all exchanges recognize this type of order. One exchange which does is the Chicago Board of Trade. MARKET ON CLOSE (MOC) This is an order that will be filled during the period designated by the exchange as the close at whatever price is available. PLEASE NOTE: A FLOOR BROKER MAY RESERVE THE RIGHT TO REFUSE AN MOC ORDER UP TO FIFTEEN MINUTES BEFORE THE CLOSE DEPENDING UPON MARKET CONDITIONS. FILL OR KILL The fill or kill order is used by customers wishing an immediate fill, but at a specified price. The floor broker will bid or offer the order three times and return to you with either a fill or an unable, but it will not continue to work through- out the session. ONE CANCELS THE OTHER (OCO) This is a combination of two orders written on one order ticket. This instructs the floor personnel that once one side of the order is filled, the remaining side of the order should be cancelled. By placing both instructions on one order, rather than two separate tickets, you eliminate the possibility of a double fill. This order is not acceptable on all exchanges. SPREAD ORDER The customer wishes to take a simultaneous long and short position in an attempt to profit via the price differential or "spread" between two prices. A spread can be established between different months of the same commodity, between related commodities or between the same or related commodities traded on two different exchanges. A spread order can be entered at the market or you can designate that you wish to be filled when the price difference between the commodities reaches a certain point (or premium). For example: BUY 1 JUNE LIVE CATTLE, SELL 1 AUGUST LIVE CATTLE PLUS 100 TO THE AUGUST SELL SIDE. This means that you want to initiate or liquidate the spread when August Cattle is 100 points higher than June cattle. At this time, most exchanges do not report spread transactions. A spread broker has great leeway to ensure he can obtain prices required by limits. In most cases, he cannot be held to any price differentials which seem to appear on quotation equipment. Please make sure you understand how spread trades work! Copyright Virtual Trading University 299

300 OPEN ORDERS These orders are also known as Good till Canceled Orders and will remain valid until canceled. DISCRETION ORDERS (DRT) On some orders, it is possible to give the broker some discretion to fill the order as he sees fit. This leeway can be very broad or it can be narrowly defined. Remember that it is always in the brokers' best interest to fill an order at the best available price. DRT orders can be especially useful if you have made prior arrangements with the floor or the specific filling broker when you need assistance in executing a large order or in especially thin markets. OTHER As futures and options trading becomes more and more sophisticated, new strategies and techniques may arise. Certain option orders called "spreads" may not look much like traditional spreads. There may be two buys and no sells, the quantity may be a ratio, it may include futures and options on the same order, and many more. If you have any questions about an order, discuss your intentions with your broker or clerk before order placement. Different exchanges accept different orders. All of the orders which discussed here are not accepted by all exchanges. New contracts are constantly being introduced at the various exchanges, and, as foreign market places become more accessible, new exchanges and their contracts are also being added. For specific information regarding the contracts and types of orders accepted, please contact your broker or clerk. Any individual exchange may change the orders which it will accept without prior notice, and even a particular executing broker at a given exchange may refuse to accept certain types of orders at their sole discretion. PROCEDURES FOR ORDER PLACEMENT Several commodities are traded on more than one exchange. It is vital that you indicate the exchange on which you wish your order to be executed. For example Silver is traded on the Mid America Exchange, the New York COMEX Exchange, and the CBOT. If your order did not specify the exchange on which you wished the order to be executed, the clerk would most likely place the order at the COMEX because it is the primary market. Please identify the proper exchange to avoid errors. If you have any questions about the quality of the fill you received you may request that the broker obtain official time and sales. Time and Sales can only give an indication of the market. There are NO specific rules about how long it should take an order to be filled once it is elected other than for market on close or opening orders. Instead, most firms rely on ordinary custom and practice to determine when an order "should" be filled. Also, rules vary from exchange to exchange with regard to "uptick" rules following the election of a stop. Copyright Virtual Trading University 300

301 Under ordinary market conditions, market orders should be filled and reported in a timely fashion. If you have not received a reported fill from your broker in a reasonable amount of time you may place an order check. In the case of a "fast" market, it may take extra time for the order to be reported back to you. Refrain from placing order checks during these hectic periods. DO NOT KEEP PLACING ORDER CHECKS FOR THE SAME ORDER. If you wish to cancel an existing order, phone the broker and inform him or her that you wish to straight cancel an order and give your account number, the order number, and the commodity. The broker should repeat your instructions and cancel your order. If you wish to change part of an order you have already placed, you may do so by entering a cancel/replace order. Depending on firm policy, you may or may not receive a second order number from the order clerk for a cancel/replace. Certain parts of an order cannot be changed. This includes buy/sell, the commodity, the month, a strike price, and put/call. In some instances, your cancel or cancel/replace order will reach the pit too late to effect the change you desire. In this case you will be reported a fill for the original ticket as "TOO LATE TO CANCEL (TLTC)". If the order was a cancel/replace, then the new order is considered dead and does not work in the pit. GOOD TILL CANCELLED ORDERS Good till cancelled (GTC, OPEN) orders are generally held on file and considered being active unless cancelled by you. Upon expiration of the contract, the GTC order will be automatically cancelled. Some firms do not take open orders, or cancel them at the end of every week or every month. It is usually the customer's responsibility to verify what orders are working. OPTION ORDERS The exchanges will accept the same types of pricing instructions that they currently accept for futures orders. Because option orders require additional information, they must be read very carefully and in the appropriate order. NIGHT ORDERS / FOREIGN ORDERS With the advent of round-the-clock trading, it is now possible to trade in the cash market, on foreign exchanges, and through electronic trading sessions such as Globex, Access, and Project A. Check with your firm to determine what their procedures are for these non-traditional sessions. EFPs are synthetic contracts in the cash market which are exchanged for futures the next day. EFP stands for Exchange for Physicals. There are EFP markets in precious metals and currency markets. Market makers give a bid/offer spread between the price they are willing to pay and the price they are willing to sell. At certain times, this spread can be quite narrow and at others can be quite wide. Some market makers will take stops based on the bid, the offer, or the midpoint. Remember that the EFP market is not a regulated market and that there is no Time & Sales. Copyright Virtual Trading University 301

302 Over the intervening years, I have been dismayed at how little most speculators really know about order entry procedures. Surprisingly, that includes experienced professionals who ought to know better. You should be totally proficient in entering orders and receiving confirmations for two reasons: Incorrect or faulty order entry procedure can result in very costly errors. Brokerage firms invariably record all order conversations and, in the event of a disputed error, will play the tape back. If you made the error, you pay to fix or undo it. It's as simple as that. And, as the saying goes, ignorance of the law (or of the correct procedure) is no excuse. Besides, even if the order clerk commits the error - and he or she may be at fault - if you are sharp enough to catch it before it becomes expensive to fix, you'll have scored some points with the firm and made some valuable friends. Knowing correct entry procedures for all types of orders facilitates your trading and allows you the flexibility of a variety of tactical plays that are available to you but denied to traders who know just the basic "meat and potato" type of orders. Whatever the order, be sure to speak slowly and distinctly. Concentrate on your order and on what you are actually saying. Many errors have been made by people wanting to sell, for example, but being diverted and reading the word "buy" on another ticket on their desk and mistakenly entering it as a buy. Furthermore, it is imperative that the account executive or order clerk repeats the order back to you. There can be no exception to this! What if the order clerk takes your order and hangs up without repeating it? Call him right back and politely ask him to repeat the order. Incidentally, when he calls you back with your fill, you should also repeat it back to him. Here are the components that make up all orders: Buy or Sell The first stage of any order is to buy or sell. Always repeat this part of the order - "Buy 10 May soybeans at the market. "Buy it." It may sound superfluous and wordy, but it helps assure that the party at the other end clearly knows whether you want to buy or sell. Quantity Futures trades are specified in number of contracts with one exception: grains, where a contract may be 5,000 bu. (most U.S. exchanges) or 1,000 bu. (MidAmerica Commodity Exchange). An order for corn, oats, soybeans and wheat on U.S. markets is stated in thousands of bushels. At the Chicago Board of Trade, "5 corn" is one contract of corn "30 wheat" would refer to six contracts. Delivery Month Make clear which contract month you want to trade, such as "May corn," "July wheat" or "December cocoa." You will sometimes hear more euphemistic references such as "Labor Day" for September and "Christmas" for December, the theory being that it eliminates confusion in two similar-sounding months. In a quick order entry, September Copyright Virtual Trading University 302

303 and December copper may sound alike, but there's obviously no confusion between Labor Day and Christmas. Commodity This may seem pretty straightforward. To eliminate some of the confusion in sound between cotton and copper, you may hear them referred to as cotton thread and copper wire. One other point: when the commodity is actively traded on more than one exchange, you should specify the exchange. For example, when I enter a gold order, I always specify COMEX gold because I trade gold at New York's Commodity Exchange Inc. Price Price can have a number of variables. In its basic form, you specify at the market or a particular price. At the market or a market order is exactly what it sounds like: the broker fills your order at the best price he can as quickly as he can. You should not have any illusions about the floor broker watching the market and waiting around to get you a better fill. His job is to fill the order and get the report back to you as quickly and as accurately as possible. Under normal circumstances, he will buy at the "bid" or sell at the "offer." If you want to give the broker some discretion in the timing of filling your market order, you can enter it on a "not held" (or "take your time" or "disregard tape") basis. For example, your order could be entered as "Sell 50 March sugar at the market, not held." This type of designation is usually entered with larger orders where you may not necessarily want to buy at the bid or sell at the offer, especially if the market is thin. With such large orders it helps to talk with the broker beforehand (outside of trading hours preferably) so you both understand each other. With a limit order, you are not willing to buy at the bid or sell at the offer. Instead, you specify your price limits above which you will not buy or below which you will not sell. A limit order to buy will be priced below the current market; a limit order to sell will be priced above the market. It is not necessary to accompany a limit order with the designation "or better." All limit orders are understood to be or better - that is, the broker will always try to get a better price for you if he can. Stop Order The stop order, in its basic terms, is an order to buy if the price hits a specified level above the market and an order to sell if the price hits a specified level below the market. Let's say the trend in sugar is up, and you are long three contracts of March sugar from lower levels. The current price is 7.11 per lb., and you want to add to your long position only if the market can surpass the 7.20 level against which it has failed on several occasions. In that case, you might place the following order: "Buy two March sugar at 7.23 stop." If the market does rally through your stop point, it doesn't assure you of a stop at Strictly defined, a buy stop becomes an order to buy at the market if the price trades at or through your stop price or is bid at or through your stop price. The Copyright Virtual Trading University 303

304 point is: You do not need an actual trade to elect your stop. A bid at or above your stop price will elect your stop to make it a market order. Sell Stop Order A sell stop, on the other hand, is a resting order to sell below the market. It becomes a market order if the price trades at or below your stop price or if the market is offered at or below your stop. In volatile markets, especially if there is an accumulation of stops at or around a particular price, it's not unusual for stop orders to be filled beyond (at a worse price than) the specified stop price. Stop-Limit Order As an alternative to a straight stop order, you can enter a stop-limit order. (Check with your broker, some brokers or exchanges will not accept such orders.) Whereas a stop order becomes a market order if the stop is elected, a stop-limit order becomes a limit order if its stop is elected. This has both an advantage and a disadvantage. It insures that you do not get filled at worse than your limit price. On the other hand, you may miss being filled if the market moves beyond your limit before the floor broker can fill you. Fill or Kill (FOK) Order A fill or kill (FOK) order must be filled immediately when it gets to the floor. If the broker is unable to fill it immediately, it is canceled. He reports back to you that he was unable and the order is out. One cancels the other (OCO) involves two related orders; whichever order is filled first, the other is canceled. For example, if March sugar is trading at 7.11, you might say, "Buy two March sugar at 7.20 stop or sell two March sugar at 7.10 stop, one cancels the other." Market If Touched (MIT) Order Market if touched (MIT) is a limit order that becomes a market order if your MIT price is touched. For example, say May soybeans are trading at $5.49 per bu., and you want to go long if the price gets down to $5.42. You don't want to risk missing the market on a tick at $5.42 followed by an upward bounce. Your order would read, "Buy 10 May soybeans at 5.42, market if touched." Or Better Order You use or better in an order only when you are entering a limit-buy order above the market or a limit-sell order below the market. As an example, let's say you want to buy May soybeans in a strong rally. The last sale is $5.49, and you would be willing to pay as high as $5.51 but no higher. If your order reads, "Buy 30 May soybeans at 551," the normal way you would order a limit order, there is a good chance the order clerk or floor broker will question the order. They would likely come back to you with, "Your buy limit is.01 (or.02) above the market. Are you sure you didn't want to sell?" Then you are obliged to go into a long explanation that you know your buy limit is above the market because it was rallying, and you didn't want to miss the market - a tedious and timeconsuming delay. Instead, just enter your order as "Buy 30 May soybeans at 5.52 or better." That tells everyone involved that it is a buy order and that the above-market price is correct (and vice versa for an or better sell order). When done is a contingent order that says, in effect, "After you have filled this order, please enter the following order." For example, "Buy 10 May soybeans at 5.45; when done, enter an open stop at 5.35". A short form of Copyright Virtual Trading University 304

305 the same order would be, "Buy 10 May soybeans at 5.45, EOS 5.35", where the EOS stands for "enter open Stop". Another example is, "Sell 5 July wheat at the market, EDS all," where the EDS stands for "enter day stop." In this case, the broker (if he is willing to accept the order) is responsible for entering the buy stop. 10 above whatever price the order was filled. Time duration Unless you specify otherwise, all orders are understood to be day orders - that is, if an order has not been filled during that session, it expires. If you want an order to remain in force beyond the day of entry, you must specify this when you enter it. You can enter a good 'til canceled (open) order, which means just what it sounds like, it remains in force until it is either filled or canceled. Alternatively, your order can be good through a specified date, and you must specify the date. Examples are, "Buy 10 May corn at 1.86, good 'til canceled," or "Sell two March sugar at 7.60, good through Sept. 30." In all open or good through a specified date orders, you are responsible for canceling them when required, such as when you liquidate the position with another order and still have the previous order in force. Straddles A straddle order, also called a spread or switch, is quite a common order. The term refers to the simultaneous purchase and sale of two delivery months of the same commodity or delivery months of two different, but related commodities. There are three basic reasons for such orders: First, you are taking a speculative position based on an analysis that one "leg" of the straddle (your buy side) will advance relative to the other leg (your sell side). Second, you are in a position which may be coming toward delivery, and you want to "roll" it forward into a more distant futures contract. And the third, and regrettably a quite common straddle tactic, is to straddle a losing position rather than liquidating it. This is a distinctly bad idea. It just compounds your problem and adds to the loss. My advice on this is direct: Don't do it! When entering a straddle order, it's advisable to preface your conversation with, "I have a straddle order for you." You normally enter the buy side first, and you must specify it to be either a market or a limit order. Here are some examples: "Buy 10 May corn and sell 10 March corn, at the market"; "Buy 10 May corn and sell 10 March corn, may.04over, " or "Buy two May gold and sell two May silver on COMEX, at the market." Copyright Virtual Trading University 305

306 You can also use not held (take your time or disregard tape) orders when entering straddles, and the floor broker will work accordingly. One final suggestion when shifting a position forward: Unless you are an experienced operator, you are better off giving the switch to the broker as a switch and letting him fill it that way. This ensures that you don't miss a market by closing one leg and then missing the market on your new leg. Canceling orders You should be very precise whenever you cancel an order. You start by telling the broker whether you have a "straight cancel" or a "cancel and replace." The straight cancel is easy: "Cancel to buy 10 May corn at 1.86 open." If your broker uses order numbers, he will ask for the number, and you should immediately give it to him without having to fumble through a pile of papers looking for it. If on the other hand, you have a cancel and replace, you preface your order with, "I have a cancel and replace for you." And, if the order you are canceling is an open order, it will help the order clerk if you preface your order with, "I have a cancel and replace of an open order for you." Then you give him the order: "Buy 10 July wheat at the market, cancel to buy 10 at 2.71," or "Sell 5 May sugar at 6.95 stop open, cancel to sell 5 at 6.75 stop open. Errors What do you do if, despite your best precautions, you discover you are in an error on some order? You should immediately phone your broker or the order clerk and tell him about the error. You can sort the responsibility later. First, be sure you and the account executive or broker agree on what actually happened. Did you buy or sell, what quantity, what commodity and at what price. Then you can make a quick decision if you are willing to take the fill. For example, you may have wanted to buy March sugar, but they bought the same quantity of May. If it's a new position, you may be willing to take it; however, if you were covering a March short, then you need a fill in March and not May. Anyway, if you don't want the position, get out of it immediately. Don't sit back and try to "play" the error. You may get lucky and work out of it successfully. But, more than likely, you'll compound the error and end up with a big loss when you could have walked away with just a minor loss Copyright Virtual Trading University 306

307 INDEX Option Strategy Map Copyright Virtual Trading University 307