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Futures
Trading Outlook
for 2019
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Table of Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Part I: Lessons Learned from 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Geopolitics and the Futures Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4


The Power of Outliers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Advice from the Front Lines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Part II: Advice and Strategy for 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Fed Policy Is King . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13


Be Ready for Volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
It’s All about Hedging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Part III: Get Off on the Right Foot in 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Incorporating Futures and Options into Your Financial Plan . . . . . . . . . . . . . . . . . . . . . . 20

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Introduction

When engaged in active futures trading, it’s important to know where you’re
going and where you’ve been. No matter if you’re a producer hedging risk or
a speculator pursuing intraday profitability, keeping an eye toward the future
while learning from the past is an essential aspect of trader development.

To say that 2018 was a memorable year on the financial markets is a vast
understatement. A budding U.S.-China trade war, aggressive Fed monetary
policy, and nearly unprecedented volatility in equities were a few highlights
that raised the eyebrows of even the most seasoned market pros. So, what
lies in store for 2019? This is truly the billion dollar question—one that
market participants around the globe are mulling over.

As 2018 was drawing to a close, we asked our experienced brokerage team


at Daniels Trading about the valuable lessons learned from the past year and
their best strategies for 2019. The feedback was as diverse as the brokers
themselves, featuring a broad spectrum of trading philosophies and
action plans.

If you want to fix your car, you go to a mechanic. If you want to set the stage
for a great 2019 trading year, what better way than to pick the collective
brain of a group of futures industry experts? Let’s review the key lessons
learned in 2018 and then take a close look at what 2019 may hold from the
perspective of the top futures brokers in the markets today.

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Part I: Lessons Learned from 2018

In the financial world, 2018 was a historic year. From lagging soybean, gold,
and crude oil pricing to an unprecedented spike in the value of natural
gas, commodity futures put on a show for market participants. Not to be
outdone, the leading U.S. stock indices exhibited levels of volatility not seen
in years. Simply put, the action was intense with fortunes being won, lost,
and protected on a daily basis.

GEOPOLITICS AND THE FUTURES MARKETS


The year turned out to be a transitional period for U.S.-China trade relations.
Led by an aggressive foreign policy, the Trump administration shook up
international trade by slapping tariffs on $200 billion worth of Chinese
imports. The move was a game-changer, effectively kicking off a tit-for-tat
trade standoff, culminating with each side placing tariffs on a broad array of
goods. Economic output, as well as political affiliations and monetary policy,
were issues put under the microscope by those attempting to trade, produce,
or hedge risk in a rapidly evolving geopolitical environment.

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When it came to the markets, fallout from the U.S.-China trade war shook the
valuations of asset classes around the globe. Futures pros Craig Turner and
Tom Dosdall offered their sentiments on what it meant and may mean for
the future:

Turner: “Trading politics is more challenging than trading the


weather! Now that both parties [U.S. and China] are at the
negotiating table, I hope we don’t hear about tariffs for a long,
long time.”

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Dosdall: “Many analysts shrugged off China’s 25 percent soybean


tariffs early in the year, predicting China could not buy enough
soybeans from Brazil to fulfill demand. I believe this rationale was
misguided and could end up costing U.S. producers hard-fought
China market share in the long run.”

No doubt about it: the U.S.-China trade war sent shockwaves through the
financial community. A lagging soybean market was only one product of
the standoff, with others including depressed crude oil pricing and heavily
scrutinized U.S. Federal Reserve (Fed) policy. If nothing else, 2018 reminded
us that geopolitics can shift on a dime, and futures traders must remain
flexible to tackle challenges as they arise.

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THE POWER OF OUTLIERS


Just when you think you have the markets figured out, something happens
that defies logic. Over the course of 2018, several of these futures market
“outliers” came to the forefront, leaving traders shaking their heads and
wondering what’s next.

The first event worthy of note was the stock market volatility during February
and March. With the efforts to denuclearize the Korean peninsula and initial
U.S.-China trade war grumblings on the front burner, the DJIA and S&P 500
experienced massive selloffs, challenging the long-term “Trump Rally” in U.S.
equities. This scenario played out again in October, featuring levels in the
CBOE’s volatility index (VIX) not seen since 2015.

The impact on the E-mini DOW and E-mini S&P 500 futures products was
immediate and decisive. According to Andrew Pawielski, many traders
learned a tough lesson when equities volatility spiked toward the end
of 2018:

Pawielski: “Bad habits that were rewarded by the early-year bullish


stock trend really wiped traders out when we got some volatility.
The main habit was traders averaging losers on the longside―once
we started seeing strong bearish days toward the end of 2018, bulls
that averaged into their futures positions became overleveraged and
were wiped out.”

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Aside from the periodic turmoil in the equities indices products, natural gas
provided another textbook example of a futures market outlier. Beginning
in August 2018, Henry Hub natural gas posted three-month gains in the
neighborhood of 60 percent. During this time, price action featured extreme
daily ranges, with the trading session of November 14 posting a 13 percent
one-day gain. The action in the natural gas market was rare, considered by
many to be a “black swan” event. Veteran Daniels broker John Payne sums
up the situation:

Payne: “During each of my 11 years in the business, there has been


an event that causes price action so great I can do little but shake my
head in disbelief. This year it was the spike in natural gas that took
prices from the high 2s to almost 5 in a number of days. The options
markets traded with abandon, obliterating the range established
between 2014 and 2018. Those holding shorts lost four years’ worth
of premium sales in a week’s time. The lesson learned was a stark
reminder that: #1 anything can and will happen, and #2 long-term
short option strategies work until they don’t.”

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The “black swan” or “rogue wave” in the natural gas market had a profound
impact upon traders, brokers, and hedge funds worldwide. For those that did
not practice proper risk management, mid-November’s price action made
short work of account balances, both trading and retirement. A great deal
of these losses could have easily been avoided had positions been covered.
Insights from NFA Series 3 licensed broker Don Debartolo give an idea
of how:

Debartolo: “It’s better to take a smaller profit than hold out for full
potential in these types of positions. Also, always cover short options
―last fall’s natural gas market was a perfect example of naked
shorting going awry if that rule is not followed.”

Catastrophic losses were sustained by hedge funds involved in the naked


selling of natural gas options, a practice often compared to “picking up
pennies in front of a steamroller.” Burton Schlichter, drawing on two decades
of experience in the futures industry, sums up the carnage sustained by
naked shorts during fall 2018’s natural gas chaos:

Schlichter: “I get the same emails as you―steady monthly income,


the odds are stacked in your favor, time is your friend, easy entry,
limited margins. As long as the steamroller is far enough away, the
play is a winner. Well, recently the steamroller came to town―and it
wasn’t delivering pennies!”

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Spiking energy prices and wild swings in stock values can impact everything
from ag futures to demand for safe-haven assets. If there was a way to
predict these outliers before they occur, a trader could easily conquer the
markets. Though there’s no holy grail for spotting extreme price action ahead
of time, 25-year market veteran Scott Hoffman shares a takeaway from 2018
that sheds some light on the subject:

Hoffman: “One lesson really driven home last year was to identify
and anticipate breakout setups across all futures markets. Economic
and political developments have become more unpredictable, yet
they are often preceded by range and volatility contraction. Being
careful about taking trades into these setups allows traders to avoid
being blindsided by surprise moves and keys traders in on when to
capitalize on markets set up for a potentially explosive move.”

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ADVICE FROM THE FRONT LINES


Among the thousands of lessons learned by traders over the course of 2018,
the value of discipline certainly topped the list. Regardless of whether you’re
a crude oil scalper or a grain and oilseed producer, effectively managing the
emotional impact of futures trading has always been, and will always be, a
big part of achieving your goals in the marketplace.

The key takeaways for 2018 and the advice offered by our team of brokers
back this concept up 100 percent:

Brian Cullen: “Stop order placement can be one of the most difficult
things to do in trading. Traders have to be aware of both volatility
and how much a market can move in a given session. Trying to
pinpoint a level on a chart to put your protective stops can be more
hit-or-miss than targeting entry levels.”

Jake Swart: “The top lesson I learned in 2018 is to stick to your


trading/marketing plan. A structured plan is key to any successful
trader/marketer, and sticking to it is what separates those who have
success in the markets from those who do not.”

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Jace Jarboe: “My top lesson for 2018 is to not get too greedy with one
specific trade. Instead of always trailing a stop on a profitable trade,
do the opposite and take profits. From there, waiting for the market
to reverse and looking for an opportunity to reenter at a better price
can be beneficial.”

Kirk Donsbach: “Being both a broker and client (producer), it’s very
apparent that the tops and bottoms of market cycles can be very
emotional, leading to hope-based decisions unfounded in reality. In
short, when everyone else is scared, be brave, and when everyone is
getting brave, it’s time to start worrying.”

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Part II: Top Strategies for 2019

Success in the futures markets depends on a wide range of factors, including


time, energy, and dedication. No matter your experience, every market
participant can benefit from market insights. If you’re looking to become a
better trader or a more effective producer, our team of market professionals
can provide expert advice on what 2019 may have in store for your portfolio.

Our list of top strategies for 2019 can help you approach the markets from a
position of strength throughout the coming year. From feeder cattle to crude
oil, check out some of the top ideas from those in the know at
Daniels Trading.

FED POLICY IS KING


2018 was a banner year for the Fed. An early-year change in leadership,
followed by four rate hikes, highlighted what is best described as a
“hyperactive” Fed calendar. So, what can we expect from the Fed in 2019,
and how can we profit from the action?

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There are certainly many ways to trade monetary policy, and our brokers
have more than their share of ideas for 2019. Here are two of the best from
John Payne and Drew Rathgeber:

Payne: “The U.S. economy is probably strong enough to handle


higher interest rates in a vacuum, but the lack of follow-through
(policy tightening) from Japan and Europe hurts the Fed’s ability to
hike more aggressively. My top strategy for 2019 will be to go with
long 30-year U.S. Treasury futures. I think we may see a long bond
push from 142 to the high 150s. Aggressive traders can implement
futures, but I think it’s easier to handle a long-term call option, given
the downside certainty they provide.”

Rathgeber: “I personally feel we probably won’t have substantial


inflation growth with the current cooling of the economy and
continued trade wars. According to the FOMC, GDP growth is to slow
in 2019 to 2.5 percent, which I agree with in the current business
environment. Also, I expect the number of interest rate hikes for
2019 to be in the neighborhood of two, as estimated by the CME
Group FedWatch Index, and possibly as little as one.”

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BE READY FOR VOLATILITY


The only thing that stays the same in the futures markets is change. When
preparing for the unknown, risk exposure and pricing volatility are premier
factors that traders and producers must thoroughly address. Whether you’re
bringing in the harvest or engaging the equities indices, volatility and risk can
become monsters if left unchecked.

Given the stock market volatility seen in 2018, it’s little wonder that the
financial community is expecting more of the same in 2019. With the idea of
a challenged U.S. economy and stock market in mind, Craig Turner outlines
one of his top strategies for 2019:

Turner: “Equity indices will most likely be choppy and range-bound


for 2019 as the market deals with slower growth. I like buying the
S&P futures for a long-term position and then buying a put option
for protection while the economy is a concern. Also, I like selling
covered calls after rallies. We will lift the puts after down days and
sell the calls after rallies.”

When it comes to directly managing risk, there’s more than one way to get
the job done. Typically, the most suitable alternative depends on your role as
a producer or speculator. However, using the functionality of options can be
a great way to keep your risk in check throughout 2019:

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Brian Cullen: “One of the most frustrating things that can happen to
a trader is to have your stop order get hit and THEN have the market
go back the direction you initially wanted and more. Using options in
lieu of stops can potentially eliminate these unfortunate events.”

Don Debartolo: “Writing options with long options (or futures)


in place to cover the position is my leading strategy for 2019. By
covering shorts, I am able to minimize the risks involved with the
aggressive trading strategy. In addition, margin requirements and
fluctuations are limited, optimizing execution. Ideally, strikes are
kept one standard deviation away from the underlying futures
contract, actively managing gamma risk (time decay). In this way, the
importance of avoiding black swan events is reinforced.”

Alec Torrey: “My top strategy for 2019 is to have clients use options
to lock in a price floor or ceiling. If you are able to lock in a floor for
your row crops, you at least have an idea of how bad things can get
and where your budgeting for next year will stand.”

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IT’S ALL ABOUT HEDGING


If you’re an ag market producer, then you understand the value of an air-
tight defensive hedge. Of course, the best way of locking in profits or limiting
risk often changes rapidly according to prevailing economic and market
conditions. It stands to reason that your hedging strategies must be flexible
to overcome challenges as they arise.

Check out a few of our team’s ideas on addressing producer-side risk


for 2019:

Tom Dosdall: “The 2018 trade war between the U.S. and China may
have reverberating consequences for 2019 agricultural markets, as
farmers react to the potential loss of Chinese soybean demand. Should
an increase in corn production lead to an oversupply at harvest 2019,
the current carry price offered by December 2019 futures may be in
jeopardy of falling lower. Therefore, I recommend corn farmers get
an early start on their hedging/marketing program, based on 10-20
percent expected production: Buy x1 December 2019 Corn $4.00 put
option for 25’0 cents and Sell x2 December 2019 Corn $4.50 call options
for 12’4 each. The cost to enter this trade is 0’0 (excluding transaction
fees), with an initial margin requirement of $698.”

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Jake Swart: “My top strategy of 2019 is to sell/hedge prices when


they are above the cost of production. These opportunities do not
come along often, but when they do present themselves, producers
need to be ready and hold themselves accountable for pulling
the trigger.”

Kirk Donsbach: “Probability aside, Chinese demand has the potential


to dramatically increase the demand for all U.S. protein, including
beef. It also has the potential to get bogged down in the politics of
foreign trade and produce no real results. Given that, profitability
should be aggressively hedged in a manner that does not cap
upside potential. Strategies include puts, synthetic puts, legging into
synthetic puts, stair-stepping into short futures, and others.”

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Part III: Getting Off on the Right Foot in 2019

When we polled our brokers on their lessons learned from 2018 and ideas
for 2019, several common themes began to emerge. The values of tenacity,
discipline, and stick-to-itiveness were among them. If you are searching for
key insights into the futures markets, these few nuggets from the industry
pros are a great place to begin:

Tony Kasathsko: “What is important is the discipline to stick with


your trading plan and remember that you want bigger winning
trades than losing trades and NOT to win all the time.”

Andrew Pawielski: “Always remember at the end of the day it’s not
the money you make, it’s the money you don’t lose. You are only as
good as your execution.”

Kirk Donsbach: “A structured plan is key to any successful trader/


marketer, and sticking to it is what separates those who have
success in the markets from those who do not.”

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Alec Torrey: “If you follow a trading program that sends out trade
recommendations, then you have to stick with it. You can’t pick
certain trades to use or get out of the market when you think it isn’t
headed the way you want.”

INCORPORATING FUTURES AND OPTIONS INTO YOUR


FINANCIAL PLAN
The first few months of a new year present a great time to reflect on your
performance the previous year and to identify goals for the immediate
future. As 2019 unfolds, the team at Daniels Trading stands ready to help you
strategize and achieve your financial objectives every step of the way.

Succeeding in the capital markets is made exponentially easier with the help
of experienced market veterans and strong educational resources. Daniels
Trading gives you both, featuring a robust educational suite, expert blog
posts/webinars, and a second-to-none group of seasoned brokers. For more
information on how futures and options can take your financial game plan
to the next level, schedule a free consultation with a market professional at
Daniels Trading today.

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Futures Trading, Elevated.


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Let’s take your trading to the next level.

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DISCLOSURES
This material is conveyed as a solicitation for entering into a derivatives transaction. This material has been prepared by a
Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation
for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in
CFTC rule 1.71. Daniels Trading, its principals, brokers, and employees may trade in derivatives for their own accounts or for
the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs.
long term strategies, technical vs. fundamental market analysis, and other factors), such trading may result in the initiation or
liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity
options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must
assume responsibility for the risks associated with such investments and for their results.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.
You should read the “risk disclosure” webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels
Trading is not affiliated with nor does it endorse any trading system, newsletter, or other similar service. Daniels Trading does
not guarantee or verify any performance claims made by such systems or service.

Daniels Trading, 100 S. Wacker Dr., St. 1225, Chicago, IL 60606 1.800.800.3840
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