The markets are getting back to normal too. Well, sort of. Some of the markets continue to be crazy and have to be traded with extreme care and caution. Cattle is one such market that comes to mind.

In the last four weeks we have seen this market make three limit days down and one limit day up! That’s crazy! The CME has responded in kind by hiking the margin for cattle up to $2700 per contract. That’s more than the margin on Soybeans, T-Bonds, Pork Bellies or Coffee, markets which are traditionally much riskier than Cattle.

In fact, looking at some of the recent margin requirements makes me think something’s screwy in the marketplace. For instance, margin on Orange Juice is only $700, yet this is a market that can turn around and slap your account silly in a heartbeat – just don’t ask me how I know that. ;-)

Sugar’s margin is still pretty reasonable, as is Cocoa; however Cotton is up to almost $2400 per contract. Of course this is due to the uncertainty overhanging the cotton market right now, but Cotton’s margin is higher than the margin on Pork Bellies!

Don’t get me wrong, I’m not recommending that you consider trading Pork Bellies (it can be an extremely volatile market), but it is interesting to note how risky the Exchange considers Cotton to be right now relative to other commodities.

As a result, some traders are looking at using mini-contracts (where available) to trade these higher margin markets. But before you do so make sure you check out this week’s Q&A as we address this particular subject.

Enjoy this week’s issue.

To access the PFGCA hotComm room, check out the tutorial linked at http://www.tradershelpingtraders.net/paltalk.html

If you would like to attend a future online class you first need to download HotComm to your computer. Go to http://www.hotcomm.com/ftppub/hclsetup.exe to download the free software. Make certain you select OPEN not save when prompted by your computer. Full illustrated instructions are at http://www.tradershelpingtraders.net/paltalk.html .

• Exchange: CME

• Contract Size: $1,000,000

• Point Value: $25

• FND 12/13/04

• LTD 12/13/04

• Options Expire 12/13/04

The Eurodollar didn’t do much for us last week as the market traded mostly within range. We continue to be on the lookout for a short term pullback which would allow us better entry.

This Week:

While the ED did break through the bottom of the channel last week, it has failed to close beyond the support level. Hopefully we will see prices continue down this week as we are looking for support at 9796, which also coincides closely with the 62% retracement line.

Entering long from 9796 we would risk the trade to support at 9790 before exiting. Risk is about $150 per contract. Upside target remains resistance at 9836 which would earn $1000 per contract.

If the market should break through the top of the channel and continue higher for at least a couple sessions next week, consider raising entry to support at 9800 with stop loss orders below 9796.

Trade Summary

• Long December Eurodollar from 9796
• Exit Order: 9790
• Risk Exposure: $150 per contract
• Profit Target: 9836
• Potential Profit: $1000 per contract
• RRR: 6 1/2:1
• Degree of Risk: Low to Moderate

Click here for the Market Minutes Audio Commentary on the Eurodollar

FEBRUARY GOLD

Gold gave us just a beautiful setup on Friday opening at 408.90. It then climbed in a very orderly fashion to 411.10 before failing allowing us in at 410.20. Gave me a bit of a scare as it rolled back up to 411.20 from where it began a nice hour and half long drift lower bottoming out at 405.70. I rolled the stop down twice along the way.

The last one I did as 4 consecutive 5 minute candles had lows of 405.70. The final roll was to 406.60 and I was stopped out at 406.70. We came all the way back to 409 before settling at 407.00. Pocketed $350.

I really wanted to stay in this one over the weekend but the RRR and odds once we reached below 406 was just too prohibitive. See new trades.

THIS WEEK:

The rest of Tom's Trades, all his educational section are available in the full version of the eZine.  Click here to Subscribe.

Tom's Option Plays, Erich's analysis, Market Minutes Audio, charts and mid week trade updates for the rest of the markets can be viewed in the full version of the Ezine. You will need a username and password to view this publication...
Click here to Subscribe.

Click here to Subscribe.

This week has some pretty good trades brewing as well; however the one that seems the most predictable to me at this time is the March Sugar trade.

• Entry:
• Exit:
• Risk Exposure:
• Profit Target:
• Potential profit:
• Risk/Reward Ratio:
• Degree of Risk:

Question:

Is it worthwhile for the newer, smaller trader to trade the mini contracts (corn, wheat, soybeans, gold, silver)? Or are you best sticking with the big ones? Can you make any money with the mini's?

Answer:

Nothing wrong with a mini contract in and of itself, but you may want to look at some of the particulars. What's the volume like? Many of the minis are pretty thin. Some, like the E-mini S&P or the mini Dow are very tradable with plenty of volume.

Also, consider the relationship between your expected move and what part of that move it takes to cover a commission. Commissions on mini contracts are generally the same price as a full sized contract.

Just as an example, let's say you pay $35/rt commission, all fees included. Now, let's say you're looking at trading a full sized corn contract. Your analysis says you can expect a $300 move, and for the sake of the example, let's say Corn indeed makes a $300 move for you. You've made $300 minus $35, or $265. Profit to cost ratio is about 7.5:1 Not too shabby.

Now, change to a mini contract. Instead of your Corn contract making you $300, you're now trading a mini contract, which is 1/5 the size. So instead of making $300, you've made $60. Profit to cost ratio is about 1.7:1

Yes, mini contracts can be traded. But a contract like Corn is not the place for the minis, in my opinion. It's like adding another hurdle for you to overcome, like there aren't enough already.

A market like the E-mini S&P is another animal altogether. The mini contract there brings trading into a range where a lot more traders can afford to trade. The margin on the full sized S&P contract is something on the order of about $20,000, way more than most traders out there have to trade. Volume is excellent and fills are fast. THAT'S the place for a mini contract, again, in my opinion.

There are a few markets that are not that high of margins for the full contracts. (Numbers from Refco, others may vary a bit...) Corn - $540, Sugar - $560, Bean Oil - $743, EuroDollar - $945, Wheat (CBOT) - $979

That being said, there are some people such as Tom Loge' who could probably help you to learn about some strategies such as the bull call spread or bear put spread that may offer the potential of some lower risk trades to help you build an account. I would truly think of that type of strategy before I'd head for the mini contracts in markets like Corn or Wheat, but again, just my opinion.

Thanks Brian. Great answer!

Erich

Questions:

1. If you thought we were going to continue to see higher prices in coffee but weren’t convinced that the current pullback was complete, how might you set up a trade to enter the trade with minimal risk?

[Hint: You’re entering in anticipation of support holding]

Answer: If you drew a line under the valleys on the RSI indicator you might have got the impression that the market was not ready to rally yet as the indicator was not near enough to “test” the line. This may have lead you to conclude that you could enter the market off/near support.

Where was the closest support line?

6800.

2. Would this be the best type of trade to use here? Why?

Answer: Yes, this would be the best type of trade to use here; because it is the one which best limits the risk exposure. See how the indicator was beginning to point up? Along with the dipping volume you may have concluded that the pullback was complete and higher prices would be the result.

Therefore you could have entered long above the 6995 resistance; however this would have not left you many options for stop loss placement. As you can see the market did rally above 6995 making a serious gap in the process, only to return to the support line.

Either way, you should have been safe.

3. Where would you expect prices to go to next?

Answer: Where’s the next significant resistance level? 7275 followed by 7400. There are actually a few hits at 7275 and you should consider exiting early or tightening stops as the market trades here.

If the market trades as high as 7400 I would consider it to have completed a rounded bottom formation and would exit with profits and begin looking for a short position.