This chapter is where you get into the big money, starting with interest – rate futures and taking stock of stock index futures. These markets, in addition to currency trading news, often set the tone for the trading day in all markets because they form a focal point or hub for the global financial system. Whats good about these markets is that theyre great places for you to get started in futures trading, so I provide you with tips for doing just that.

Thinking Like a Contrarian

Contrarians trade against the grain at key turning points when shifts in market sentiment become noticeable. A contrarian, for example, may start looking for reasons to sell when everyone else is bullish or may consider it a good time to buy when pessimism about the markets is so thick that you can cut it with a knife. In this section, I take you through the major aspects of contrarian thinking and explain how to know when to use it and how to make it part of your trading arsenal.

Picking apart popular sentiment surveys

Sentiment surveys are used to gauge when a particular market is at an extreme point with either too much bullishness or too much bearishness. Their major weakness is that theyre now so popular that their ability to truly mark major turning points is not as good as it was even in the late 1980s or early 1990s. Still, when used within the context of good technical and fundamental analysis, they can be useful. Two popular sentiment surveys affect the futures markets: Market Vane and Consensus, Inc.. Both offer sentiment data on items such as the following:Precious metals: Silver, gold, copper, and platinum

Financial instruments: Eurodollars, U.S. dollar, Treasury bills, and Treasury bonds

Currencies: The U.S. dollar, Euro FX, British pound, Deutschemark, Swiss franc, Canadian dollar, and Japanese yen

Agricultural products: Soybean products, meats, grains, other foods, and more

Stock indexes: The S&P 500 and NASDAQ – 100 stock indexes
Energy complex: Crude oil, natural gas, gasoline, and heating oil

Snapshots of both surveys for stocks, bonds, Eurodollars, and Euro currency are available weekly in Barrons magazine under the Market Laboratory section or at Barrons Online, www.barrons.com. What youll find when reading Barrons or another such publication are percentages of market sentiment, such as oil being 75 percent bulls, or bullish, which simply means that 75 percent of the opinions surveyed by the editors of Market Vane or Consensus are bullish on oil.

After you find out the market sentiment, you need to perform a bit of technical analysis. A high bullish reading in terms of sentiment, for example, should alert you to start looking for technical signs that a top is in place, checking whether key support levels or trend lines have been breached, or checking whether the market is struggling to make new highs.

Sentiment survey readings must be at extreme levels to be useful. Sentiments below 35 to 40 percent for any given category usually are considered bullish, for example, because few advisors are left to recommend selling. Even so, when using sentiment to help guide your decision – making, avoid trading on sentiment data alone, which can be too risky. Always check sentiment tendencies against technical and fundamental analyses, even though it may make you a little late in executing your entry or exit trades.