Understanding “Trading Tips for the Day”

I have received numerous enquries on how to interpret my daily “Trading Tips for the Day“.  I admit I have been writing that section of my blog assuming that all my readers understand the jargon of the futures market, thus accidentally ignoring the newbie traders.  So here is a detailed explanation on how to use “Trading Tips for the Day” to make some money.

In the futures market, one can trade in both directions to make money.  That means no matter if the market is going up or coming down, as long as you have traded the correct direction, then you can still make money.  Normally one can only buy something first, then sell it a higher price later to make some profit. This concept applies to normal businesses of buying and selling merchandise, and also stocks in our stock market.  But in the futures market, you can also do the opposite first, i.e. sell first then buy back at a lower price to also make money.  This is the uniqueness of the futures market.

When you anticipate the market to go up, you should be ‘going long’.  Vice versa, when you anticipate the market to go down, you should be ‘going short’.  Going long means buying, going short means selling.  To make money, you either have to buy lower and sell higher, or sell higher and buy lower.

Buying futures contracts is not like buying stocks.  Futures contracts are traded in terms of number of lots, i.e. 1 lot, 2 lots, 5 lots, etc.  One needs to only deposit a certain amount of money (margin) into one’s account to start trading in futures, buying or selling the number of lots of futures contracts that they prefer or that is allowed by the amount of margin deposited.

When you want to go long, let’s say at 910 KLCI Futures Index points, and you have money to trade 1 lot, then you tell your broker “I want to long 1 lot at 910″.  If your anticipation of the market is correct and the price goes up to let’s say 918, on paper you are already making 8 points.  If you feel that 8 points (RM50 per point per contract) are enough then you tell your broker “I want to short 1 lot at 918″ to close your long position.

So, the above is the basic concept of futures and how to transact it to make money.  Following is an explanation of the “Support and Resistance” levels that appears on my Trading Tips for the Day.

My Trading Tips for the Day is essentially for Day Traders, i.e traders who closes their position by the end of the day.  The numbers you see in that section, which are called either Resistance or Support, are levels where one can go long or short.  Support level is a good level to go long as price is expected to be supported there, while resistance level is a suitable level to go short as price is expected not to break above that.

As the market is charged with emotions, when price starts to break an extreme level called the breakaway level, price will quite likely break the breakaway level and move away from it.

Let us take the Trading Tips for the Day on January 8, 2009 as an example and see if we could have made money from that.  “Resistance level to short is seen at 928 (S1) while support level to long at 915 (L1).  If market breaks above 934 (L2) one can attempt to trade breakaway by going long, and if market breaks below 909 (S2) one can attempt to short the market.” There are four trading decisions that can be made from the above, depending where the market price opens for the day.

1.  One can short at around 928 or (S1)

2.  long at 915 (L1)

3.  The other two trades that can be made from this is going long if price go above 934 or (L2)

4. going short if price breaks below 909. (S2)

On January 8, 2009 the price opened at 916.  In this case, we will take the signal of whichever level the price touches FIRST, i.e. if the price touches 915 first then we go long there, or if the price touches 928 we go short there.

The price  stayed at around 915 for quite a long time so it was fairly easy to long at 915 and waited til the price went up to 920 to short and close the position, making 5 points per contract.  Price came down to the lowest of 910 on that day, and thus didn’t trigger the breakaway short level of 909 mentioned in the Tip.

In the case that price opens between S1 and L1 or S2 and L2, we wait for the price to touch which ever level first, then take that particular signal when price breaks through that level, i.e. when price breaks through S1 first we go short while if price breaks through L1 we go long.

The last scenario is when price opens above L2 or below S2.  In this case if the price touches the S2 or L2 level, take the corresponding position, i.e if price touches S2 then go short and vice versa for long.

I hope the above explanation is sufficent to make you understand my Trading Tips for the Day section.  Please do not hesitate to contact me for more explanation if the above does not suffice.