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Wednesday, November 12, 2008
Wednesday, October 1, 2008
The Basics of Commodity Trading
You know, the more I have pondered over the type of things I wanted to write about with this blog, the more I realized that what is generally lacking in this arena is just the basics of commodity trading. The world of futures trading seems to be a mystery to most, or something that only an elite few people really know or understand how to do with any kind of true proficiency. It’s a sealed book to most people who are just starting out, and it’s almost like you have to have some kind of educational background in the financial sector to really “qualify”, so to speak, to trade commodities, or any other derivatives type of financial instrument. The funny thing is, the more you get into it and actually begin trading commodities, the more you realize that it’s really not as sophisticated as those on the inside would have you believe. Yes, there is an element in the world of futures trading that thrives on appearing “exclusive”, but at the end of the day, all it boils down to is that you place a trade, you wait for it to do something that hopefully makes you money, and then you close the trade out. End of story. It’s really no more complicated than that. There are a lot of futures analysts and commodity trading analysts, and there are those who specialize in forecasting certain markets such as the meats, grains, etc. based on fundamental data, and the list of pundits and talking heads goes on and on. Still, at the end of the day, you place a trade, you either make money or lose money, and then you get out of the trade. It is that simple.
So what are some basics of commodities in general? I have already explained what types of commodities are traded on the open market. The cool thing about trading commodities is that it is a survival industry; it’s not like a penny stock that can come and go; you’re dealing with raw goods that pretty much everyone on the planet uses or has need of in one way or another. Think about it: Wheat ain’t going nowhere. Gold isn’t going anywhere (better grammar on this one). Corn ain’t going nowhere. Cotton ain’t going nowhere. People will be drinking orange juice, no matter how bad the economy gets. They’ll be eating wheat, rice, corn, etc., no matter which direction interest rates go. So again, it is a survival industry. And the type of price patterns and trends that happen in the commodity markets are definitely evident and predictable over time. Once you’ve been trading long enough, you begin to develop a “feel” for each of the different markets, and how they generally behave. You can look at a commodity’s daily price and tell whether or not it’s high or low, based on your understanding of the price history of that particular commodity. I highly encourage every trader to study historical price charts, and notice the general range in which most commodity prices have traded over time. Of course, most of this has been completely skewed by the recent spike in almost every commodity across the board. Those of us who have been trading for years now (I’m seven years into it myself) can attest that there hasn’t been anything in the past that is quite like the way the markets are behaving right now. Of course, there also hasn’t been the exorbitant amount of speculation in the past like there is now. The futures markets, for lack of a better term, are way more “popular” now than they have ever been in the past. This has caused the large institutional investors (banks, insurance companies, etc.) to move more into the realm of commodities, and due to the sheer size of their trading capital, they can pretty much move markets in whatever direction they please. If you need an example, look at the way crude oil futures have been behaving for the past year or so. I’ve never seen anything like it in my seven years of trading. I remember when I first started trading, not too long after 9/11, that crude was only $13.00 a barrel. Can you even believe that??? It was almost inconceivable that in only a few short years, crude would break every record known to man and zip into the $100.00-plus-per-barrel range. When it first started hitting, I knew immediately that speculation had truly begun to run rampant, and that there was no way that this type of wild price behavior could be tied to any real fundamental data. For the most part, fundamentals are crap anyway. They’re almost always a day late and a dollar short, as far as helping to determine which direction the market may move. This is where we get the axiom “Buy the rumor, sell the fact” from. It pays to study charts, and to understand that all of these commodities move in somewhat predictable patterns (for the most part, anyway). Anyone who thinks that they can just waltz into commodity futures trading without doing their due diligence will soon smart for it. There are a whole host of factors to consider when entering into the arena of commodity trading, most of which have to do with internal issues, not external ones. The market forces will be the market forces, and there are so many nuances to each market that it’s very difficult to nail down one specific “culprit” that causes futures prices to rise or fall. Rest assured, however, that the commodity charts reveal all. If I could name one cornerstone to being a successful futures trader, that would be it…the chart is king. Price action rules. There is no better indicator of what’s really going on in a given commodity market than the price chart. It’s only by studying the past that we can get an insight into the future. Remember the famous adage—“Those who don’t know their past are doomed to repeat it”. This holds true in the futures markets as well. So many booms and busts have happened in the past—think of the Hunt brothers Silver debacle, the recent runaway crude oil market (which, by the way, is driven by about 90% speculative forces), the fairly recent runaway metals markets (gold, silver, copper, etc.), and you’ll notice that human emotion, greed, fear, avarice, and flat-out mania control the markets more than anything else. Think of the great trader Jesse Livermore—he capitalized on the emotional mania of the 1929 Wall Street stock market crash, and subsequently made over $100 million dollars shorting the market. So while some people were jumping to their death from tall buildings on Wall Street, and while the prices of stocks all over were plummeting at lightning speed, Livermore’s net worth was rapidly increasing. It’s all about perspective.
Okay, I have gotten off on a serious tangent again…this post is already very lengthy, so I’m going to sign off for the time being. Just keep in mind that the charts should be the final authority in your trading decisions. Price action is absolutely king. With just these two commodity trading basics in mind, you’re already starting off on the right path.
So what are some basics of commodities in general? I have already explained what types of commodities are traded on the open market. The cool thing about trading commodities is that it is a survival industry; it’s not like a penny stock that can come and go; you’re dealing with raw goods that pretty much everyone on the planet uses or has need of in one way or another. Think about it: Wheat ain’t going nowhere. Gold isn’t going anywhere (better grammar on this one). Corn ain’t going nowhere. Cotton ain’t going nowhere. People will be drinking orange juice, no matter how bad the economy gets. They’ll be eating wheat, rice, corn, etc., no matter which direction interest rates go. So again, it is a survival industry. And the type of price patterns and trends that happen in the commodity markets are definitely evident and predictable over time. Once you’ve been trading long enough, you begin to develop a “feel” for each of the different markets, and how they generally behave. You can look at a commodity’s daily price and tell whether or not it’s high or low, based on your understanding of the price history of that particular commodity. I highly encourage every trader to study historical price charts, and notice the general range in which most commodity prices have traded over time. Of course, most of this has been completely skewed by the recent spike in almost every commodity across the board. Those of us who have been trading for years now (I’m seven years into it myself) can attest that there hasn’t been anything in the past that is quite like the way the markets are behaving right now. Of course, there also hasn’t been the exorbitant amount of speculation in the past like there is now. The futures markets, for lack of a better term, are way more “popular” now than they have ever been in the past. This has caused the large institutional investors (banks, insurance companies, etc.) to move more into the realm of commodities, and due to the sheer size of their trading capital, they can pretty much move markets in whatever direction they please. If you need an example, look at the way crude oil futures have been behaving for the past year or so. I’ve never seen anything like it in my seven years of trading. I remember when I first started trading, not too long after 9/11, that crude was only $13.00 a barrel. Can you even believe that??? It was almost inconceivable that in only a few short years, crude would break every record known to man and zip into the $100.00-plus-per-barrel range. When it first started hitting, I knew immediately that speculation had truly begun to run rampant, and that there was no way that this type of wild price behavior could be tied to any real fundamental data. For the most part, fundamentals are crap anyway. They’re almost always a day late and a dollar short, as far as helping to determine which direction the market may move. This is where we get the axiom “Buy the rumor, sell the fact” from. It pays to study charts, and to understand that all of these commodities move in somewhat predictable patterns (for the most part, anyway). Anyone who thinks that they can just waltz into commodity futures trading without doing their due diligence will soon smart for it. There are a whole host of factors to consider when entering into the arena of commodity trading, most of which have to do with internal issues, not external ones. The market forces will be the market forces, and there are so many nuances to each market that it’s very difficult to nail down one specific “culprit” that causes futures prices to rise or fall. Rest assured, however, that the commodity charts reveal all. If I could name one cornerstone to being a successful futures trader, that would be it…the chart is king. Price action rules. There is no better indicator of what’s really going on in a given commodity market than the price chart. It’s only by studying the past that we can get an insight into the future. Remember the famous adage—“Those who don’t know their past are doomed to repeat it”. This holds true in the futures markets as well. So many booms and busts have happened in the past—think of the Hunt brothers Silver debacle, the recent runaway crude oil market (which, by the way, is driven by about 90% speculative forces), the fairly recent runaway metals markets (gold, silver, copper, etc.), and you’ll notice that human emotion, greed, fear, avarice, and flat-out mania control the markets more than anything else. Think of the great trader Jesse Livermore—he capitalized on the emotional mania of the 1929 Wall Street stock market crash, and subsequently made over $100 million dollars shorting the market. So while some people were jumping to their death from tall buildings on Wall Street, and while the prices of stocks all over were plummeting at lightning speed, Livermore’s net worth was rapidly increasing. It’s all about perspective.
Okay, I have gotten off on a serious tangent again…this post is already very lengthy, so I’m going to sign off for the time being. Just keep in mind that the charts should be the final authority in your trading decisions. Price action is absolutely king. With just these two commodity trading basics in mind, you’re already starting off on the right path.
Tuesday, August 26, 2008
Commodity Trading Basics: Going Long vs. Going Short
Rule number one in trading commodity futures: You have to realize that trading is a zero-sum game. For every winner, there is a loser. Think about it: You’re on one side of the trade, and if it’s going well, you’re making money. At the same time, the person who is opposite your trade (they’re short if you’re long or they’re long if you’re short) is losing money as fast as you’re making it. Although this sounds harsh and pretty cut-and-dry, it is what it is. If you have any feelings of guilt or remorse about the fact that while you’re making money there is someone else simultaneously losing money, you might want to consider another field of endeavor besides commodity futures trading. There are exceptions to this, however, such as when people are trading spreads and so forth (a whole other topic to get into), so there are times when it’s simply considered part of the expense of trading. For instance, if I wanted to enter the Copper market and go long, I might buy a put option with a strike price that’s at or near my entry price, and use it as a hedge just in case the market moves against me early on. Let’s say that the market completely takes off, and my put option expires completely worthless…not a problem, I’m making money due to the long futures contract, and the put option was there for “insurance purposes” anyway; any losses sustained from the put option will (hopefully) be offset by the gains in the futures contract. Well, the guy that wrote the put (the person who is opposite my position) will be happy, because he was able to collect the full premium that I paid for that option, being that it expired worthless, and I’m happy too, because I have just racked up some serious profits on the long side of Copper. We both win. So, in cases like this, the “zero-sum” rule is somewhat subjective. As far as my futures contract goes, however, yes indeed, there is someone losing money while I’m making money. At the end of the day, that’s just the nature of the beast.
Speaking of the terms “long” and “short”, I guess it would be good for me to explain what they mean to anyone that is not fully familiar with commodity futures trading. Basically, when people say “I’m long Coffee”, or “I’m going long Oats”, they simply mean that they’re buying a futures contract on that particular commodity, in hopes of prices going higher. For example, you may buy a Corn contract and enter the market at 275.00, and then the market jumps in price to 310.00. You have made money in this scenario because you were “long Corn”. I know it seems like incorrect grammar to say it that way, but that’s how the lingo goes. “Long” is the most common trading position in most people’s minds, and for some reason (possibly conditioning from the media and so forth), it seems to be the only acceptable position. The reason why I say this is because we are commonly led to believe that when a market drops, it’s a bad thing. Let me tell you, if you are short in a market and the market drops, you are celebrating. “Going short” simply means that you are selling a futures contract in expectation of prices declining. One of the first questions people normally ask is this: “How can I sell something I don’t own?” Well, to be honest, I’m not sure I fully understand how going short works, but I sure have made some money shorting all kinds of markets. In short form, you are basically “borrowing” a futures contract from the brokerage, selling it at a set price, and then waiting for the value of the contract to drop so that you can turn right back around and buy that same contract back with the proceeds from the sale of the contract that was credited to your account when you entered the trade. Once you buy it back (which will close out your position), you pocket the difference in price between the time you sold it and the time that you bought it back (or, closed out the position). It’s funny because I know that this is totally not the best definition of going short, and if you’re still confused about it, I understand why, but that just goes to show you that you don’t even have to have a full grasp of the concept of going short in order to make money shorting the markets. Again, although the world of trading commodity futures is hairy and complex, if you keep it what I like to call “dumb country simple”, you’ll do much better than trying to over-analyze every nuance of the markets. The K.I.S.S. principle (Keep It Simple, Stupid) definitely applies here. As I said earlier, I’m still not exactly sure how it works, but I have made money many times going short. To keep things extremely simple, if you enter a market on the short side (i.e., if you “go short”), as long as the market is dropping in price, you’re doing great. If you don’t remember anything else when trading commodity futures, remember that. When you’re long and prices go up, you’re golden. When you’re short and prices go down, you’re golden. It really is that simple.
Speaking of the terms “long” and “short”, I guess it would be good for me to explain what they mean to anyone that is not fully familiar with commodity futures trading. Basically, when people say “I’m long Coffee”, or “I’m going long Oats”, they simply mean that they’re buying a futures contract on that particular commodity, in hopes of prices going higher. For example, you may buy a Corn contract and enter the market at 275.00, and then the market jumps in price to 310.00. You have made money in this scenario because you were “long Corn”. I know it seems like incorrect grammar to say it that way, but that’s how the lingo goes. “Long” is the most common trading position in most people’s minds, and for some reason (possibly conditioning from the media and so forth), it seems to be the only acceptable position. The reason why I say this is because we are commonly led to believe that when a market drops, it’s a bad thing. Let me tell you, if you are short in a market and the market drops, you are celebrating. “Going short” simply means that you are selling a futures contract in expectation of prices declining. One of the first questions people normally ask is this: “How can I sell something I don’t own?” Well, to be honest, I’m not sure I fully understand how going short works, but I sure have made some money shorting all kinds of markets. In short form, you are basically “borrowing” a futures contract from the brokerage, selling it at a set price, and then waiting for the value of the contract to drop so that you can turn right back around and buy that same contract back with the proceeds from the sale of the contract that was credited to your account when you entered the trade. Once you buy it back (which will close out your position), you pocket the difference in price between the time you sold it and the time that you bought it back (or, closed out the position). It’s funny because I know that this is totally not the best definition of going short, and if you’re still confused about it, I understand why, but that just goes to show you that you don’t even have to have a full grasp of the concept of going short in order to make money shorting the markets. Again, although the world of trading commodity futures is hairy and complex, if you keep it what I like to call “dumb country simple”, you’ll do much better than trying to over-analyze every nuance of the markets. The K.I.S.S. principle (Keep It Simple, Stupid) definitely applies here. As I said earlier, I’m still not exactly sure how it works, but I have made money many times going short. To keep things extremely simple, if you enter a market on the short side (i.e., if you “go short”), as long as the market is dropping in price, you’re doing great. If you don’t remember anything else when trading commodity futures, remember that. When you’re long and prices go up, you’re golden. When you’re short and prices go down, you’re golden. It really is that simple.
Tuesday, August 19, 2008
Commodity Trading Basics: Types of Orders (Part One)
I know it’s been a while since I’ve posted anything here at Commodity Trading Information, and I didn’t want anyone to think that I had fallen off the face of the earth…I have been VERY busy as of late, and one unfortunate “side casualty” has been the neglect of this blog as a result. The cool thing is that I have set aside some time today to post a little about some commodity trading basics, namely the types of orders that you can use to actually place a trade. Understanding the process of placing an order for a trade is a vital element that you have to have in place to be ready to handle the markets. Different orders apply to different situations and “market moods”, but as you gain experience in commodity trading, you’ll find that there are certain order types that you become comfortable using, and after a while you won’t even have to think about what type of order you’ll want to place anymore, it will basically be second nature to you after a while. Me personally, I know that I will always use limit orders, simply because they’re the most efficient order type to use when you’re concerned about conserving capital and not being too “loose” with your trade management. But before I get ahead of myself, let me run through the different order types for you so that you can get a good grasp on what they are and their functions:
Market orders are by far the most common type of order used in commodity futures trading, primarily because of what I call the “convenience factor”—with a market order, it’s very rare that you’ll have a hard time entering a trade, unless the market is extremely violent (i.e., limit moves, which we’ll have to cover in another post). When you place an order to enter a trade, and you are actually able to get into that market, it is known as having your order “filled”. This simply means that you find a seller that’s willing to sell you their futures contract at the price determined by the type of order placed. In the case of the market order, this price can vary greatly…but instead of talking in more abstract terms, let me give you an example. Let’s say you want to enter July Corn…which, now that I’m thinking about it, I need to do a post explaining the actual futures contract and why there are different months for each contract. As a matter of fact, there are a ton of things that are coming to mind now that I’m really thinking about it. I was hoping to really keep things in order and explain the basics of commodity trading in a step-by-step way, but honestly, I don’t see myself sticking to a strict sequential order. I’m pretty sure that at the end of it all, I will cover everything that needs to be covered, but I don’t expect it to be in a perfect chronological order or anything like that. So, hopefully all will be said that needs to be said when it’s all said & done. Anyway, back to the market order. Basically, a market order gives you the right to enter the market at the “going rate”…in other words, with a market order, you don’t have a specific price in mind, you’re just trying to get into the market as soon as possible. I like to call market orders the “impatient person’s order”, because it definitely will get you into the market usually in no time flat. The whole point of placing a market order is that you want immediate execution, you want to be in the market ASAP, and the price is secondary to just getting into the market. The deal with a market order, according to the official definition anyway, is that your order is filled at the “prevailing market price”, which is extremely subjective. What most people don’t realize when they’re placing market orders, ESPECIALLY in markets that are not extremely liquid (i.e., low open interest—yet another post topic), they’re likely to get pimped by unscrupulous floor traders. On days when there is a very wide trading range, for example a 10-cent trading range in Corn, your chance of getting filled at a decent price are greatly reduced when you place market orders. They’ll basically scalp your order to pocket some quick profit in a fast-moving market and then blame your crappy fill on that same “fast market”. Since you cannot designate a specified price that you want to enter/exit a trade when you use a market order, you’re subject to whatever the floor brokers think is the best price for you to enter/exit the market at. This can pose a real problem because of the obvious conflict of interest, especially when they have a chance to make a quick buck (or $500 bucks on a day with a wide trading range). I have placed market orders before (in my days of ignorance), and to my chagrin, I would see my fill price being the day’s high if I was long, or the day’s low if I was short. It leaves you with that sour feeling in your stomach, I’ll tell you that.
Now some people would argue that you’re being too “nit-picky” by using limit orders (probably the subject of the next post), and that you may miss out on getting filled by using limit orders instead of market orders, and then consequently missing a huge move because you were being “penny wise and pound foolish”, by missing an entry into a fast moving market due to using a limit order. But the bottom line is, I would rather take my chances and have a much more controllable trading process than being “at the mercy of the markets” as far as entry/exit price is concerned. So my advice to any newcomer to the markets: Use LIMIT orders, and not market orders. Once you gain a little more experience in learning when market orders are appropriate, it’s much better to be more conservative and controlled in your trading style, and this cannot be fully accomplished with using just market orders.
Wow…this post is long as crap! I’m signing off, but I hope that this discussion of market orders has helped you grasp these commodity trading basics just a little better.
Market orders are by far the most common type of order used in commodity futures trading, primarily because of what I call the “convenience factor”—with a market order, it’s very rare that you’ll have a hard time entering a trade, unless the market is extremely violent (i.e., limit moves, which we’ll have to cover in another post). When you place an order to enter a trade, and you are actually able to get into that market, it is known as having your order “filled”. This simply means that you find a seller that’s willing to sell you their futures contract at the price determined by the type of order placed. In the case of the market order, this price can vary greatly…but instead of talking in more abstract terms, let me give you an example. Let’s say you want to enter July Corn…which, now that I’m thinking about it, I need to do a post explaining the actual futures contract and why there are different months for each contract. As a matter of fact, there are a ton of things that are coming to mind now that I’m really thinking about it. I was hoping to really keep things in order and explain the basics of commodity trading in a step-by-step way, but honestly, I don’t see myself sticking to a strict sequential order. I’m pretty sure that at the end of it all, I will cover everything that needs to be covered, but I don’t expect it to be in a perfect chronological order or anything like that. So, hopefully all will be said that needs to be said when it’s all said & done. Anyway, back to the market order. Basically, a market order gives you the right to enter the market at the “going rate”…in other words, with a market order, you don’t have a specific price in mind, you’re just trying to get into the market as soon as possible. I like to call market orders the “impatient person’s order”, because it definitely will get you into the market usually in no time flat. The whole point of placing a market order is that you want immediate execution, you want to be in the market ASAP, and the price is secondary to just getting into the market. The deal with a market order, according to the official definition anyway, is that your order is filled at the “prevailing market price”, which is extremely subjective. What most people don’t realize when they’re placing market orders, ESPECIALLY in markets that are not extremely liquid (i.e., low open interest—yet another post topic), they’re likely to get pimped by unscrupulous floor traders. On days when there is a very wide trading range, for example a 10-cent trading range in Corn, your chance of getting filled at a decent price are greatly reduced when you place market orders. They’ll basically scalp your order to pocket some quick profit in a fast-moving market and then blame your crappy fill on that same “fast market”. Since you cannot designate a specified price that you want to enter/exit a trade when you use a market order, you’re subject to whatever the floor brokers think is the best price for you to enter/exit the market at. This can pose a real problem because of the obvious conflict of interest, especially when they have a chance to make a quick buck (or $500 bucks on a day with a wide trading range). I have placed market orders before (in my days of ignorance), and to my chagrin, I would see my fill price being the day’s high if I was long, or the day’s low if I was short. It leaves you with that sour feeling in your stomach, I’ll tell you that.
Now some people would argue that you’re being too “nit-picky” by using limit orders (probably the subject of the next post), and that you may miss out on getting filled by using limit orders instead of market orders, and then consequently missing a huge move because you were being “penny wise and pound foolish”, by missing an entry into a fast moving market due to using a limit order. But the bottom line is, I would rather take my chances and have a much more controllable trading process than being “at the mercy of the markets” as far as entry/exit price is concerned. So my advice to any newcomer to the markets: Use LIMIT orders, and not market orders. Once you gain a little more experience in learning when market orders are appropriate, it’s much better to be more conservative and controlled in your trading style, and this cannot be fully accomplished with using just market orders.
Wow…this post is long as crap! I’m signing off, but I hope that this discussion of market orders has helped you grasp these commodity trading basics just a little better.
Saturday, July 12, 2008
Commodity Trading Basics: The Exchanges
In my previous post we covered some very general commodity trading basics primarily dealing with what types of commodities are available to be traded on the various commodity exchanges throughout the U.S. and some international markets. I had to laugh because I realized that I didn’t make any mention whatsoever of the actual exchanges themselves. For those who are just now warming up to the whole concept of futures trading and how it’s done (and where it’s done), the primary vehicle or entity that facilitates the buying and selling of futures contracts is the commodity exchange. In the U.S., there are several major commodity exchanges, and each one has its own set of commodities that are traded on a daily basis. The Chicago Board of Trade (CBOT) is where most of the major grains are traded such as corn, wheat, and soybeans. There is also an ancillary exchange in Chicago known as the Chicago Climate Exchange (CCE) where they trade—get this—greenhouse gas emission allowances, or carbon credits. Don’t ask me to explain that because I simply don’t know. Again, the more you read this blog and the more you become accustomed to my writing style, the more you’ll realize that I’m a very simple guy when it comes to trading futures, because after 7 years of being in the trading game and 7 years of observing, paper trading, and real-money trading the markets, I have learned that the simpler you keep this thing, the better. You don’t have to know every single detail as to how the commodity exchanges do what they do, you just have to know that when you buy, it’s bought, and when you sell, it’s sold. But, I digress…back to the exchanges. Another major commodity exchange is the New York Mercantile Exchange. This is where your metals (copper, silver, etc.) and energies (oil, natural gas, etc.) are sold. In my humble opinion, it’s also where the “scene of the crime” is right now, as far as why our gas prices are so high. Speculation has completely dominated the crude oil landscape, and the reason why oil prices are so high (and subsequently gas at the pump is so high) has nothing to do with supply and demand, but has everything to do with powerful inside interests that are basically pimping the markets (and the public) for their own benefit. This is another topic for another time but suffice it to say, there’s no such thing as “efficient markets” in the world of commodity trading; there are only those who are “in the know” and those who are not. There is only the weak money and the strong money. The weak money is basically the uninformed public, and the average speculator, who provide fantastic liquidity to the markets through their ignorance and willingness to jump into positions without any knowledge of what they are truly up against. If they were to simply study a price chart of the commodity that they want to trade, they would find out a little more about what type of move it’s making, and what type of trading action they need to take so that they won’t end up holding the “doo-doo” end of the stick, so to speak. But again, I will get to this a little later, as I have to finish my description of the commodity exchanges.
You also have the New York Board of Trade (NYBOT), which is where several of the foods/softs are traded, such as orange juice, coffee, sugar and cocoa, but in more recent years, they have added ethanol as a “trade-able” commodity as well. The NYBOT was featured in one of the most famous of 80’s movies, “Trading Places”, where a couple of the main characters were trying to single-handedly corner the orange juice market. Then there’s the International Monetary Market (IMM), where your currency futures (think U.S. Dollar, Japanese Yen, etc.) and interest rate futures (think Eurodollar and 1-Month Libor) are traded. The IMM is a subsidiary of the Chicago Mercantile Exchange (CME, also known as “The Merc”), where your meats (live cattle, pork bellies, etc.) are traded, as well as lumber, and your major equities as well (think S&P 500, NASDAQ 100, etc.). You also have the exchanges located in the Midwest, such as the Kansas City Board of Trade (KCBT) as well as the Minneapolis Grain Exchange (MGE), where the other types of wheat (hard red, spring, etc.) are traded. In summary, hopefully if I haven’t bored you to complete exhaustion by now, you will have gotten a better grasp on what types of commodity exchanges are out there. By no means have I listed every single one…I just don’t feel like doing that (LOL), but the ones I have mentioned are the most prominent ones, and the ones that I have personally traded through many times. These exchanges (most of them anyway) have very long histories, and many, many fortunes have been made and lost at these places. The markets are no place for the nervous trader, or the person who trades with what I call “scared money”, where you are obsessing over every tick and emotionally tied to every price movement. If this describes you, you are not ready for futures trading to any degree. The successful futures trader needs to have nerves of steel, and an emotional indifference to the market’s movements. I will cover this side of futures trading in more thorough detail in upcoming posts; it’s a huge subject, but in my mind the most important one to master for you to become a successful commodity trader, or stock trader, or any type of trader.
That’s gonna wrap it up for this installment of commodity trading basics. I encourage you to begin studying the price charts (especially historical price charts) of the different commodities to get a feel for their various price ranges and “personalities”, because each market does indeed have its own personality. We’ll tackle this later in a future episode of Commodity Trading Information—until then, keep on learning!
You also have the New York Board of Trade (NYBOT), which is where several of the foods/softs are traded, such as orange juice, coffee, sugar and cocoa, but in more recent years, they have added ethanol as a “trade-able” commodity as well. The NYBOT was featured in one of the most famous of 80’s movies, “Trading Places”, where a couple of the main characters were trying to single-handedly corner the orange juice market. Then there’s the International Monetary Market (IMM), where your currency futures (think U.S. Dollar, Japanese Yen, etc.) and interest rate futures (think Eurodollar and 1-Month Libor) are traded. The IMM is a subsidiary of the Chicago Mercantile Exchange (CME, also known as “The Merc”), where your meats (live cattle, pork bellies, etc.) are traded, as well as lumber, and your major equities as well (think S&P 500, NASDAQ 100, etc.). You also have the exchanges located in the Midwest, such as the Kansas City Board of Trade (KCBT) as well as the Minneapolis Grain Exchange (MGE), where the other types of wheat (hard red, spring, etc.) are traded. In summary, hopefully if I haven’t bored you to complete exhaustion by now, you will have gotten a better grasp on what types of commodity exchanges are out there. By no means have I listed every single one…I just don’t feel like doing that (LOL), but the ones I have mentioned are the most prominent ones, and the ones that I have personally traded through many times. These exchanges (most of them anyway) have very long histories, and many, many fortunes have been made and lost at these places. The markets are no place for the nervous trader, or the person who trades with what I call “scared money”, where you are obsessing over every tick and emotionally tied to every price movement. If this describes you, you are not ready for futures trading to any degree. The successful futures trader needs to have nerves of steel, and an emotional indifference to the market’s movements. I will cover this side of futures trading in more thorough detail in upcoming posts; it’s a huge subject, but in my mind the most important one to master for you to become a successful commodity trader, or stock trader, or any type of trader.
That’s gonna wrap it up for this installment of commodity trading basics. I encourage you to begin studying the price charts (especially historical price charts) of the different commodities to get a feel for their various price ranges and “personalities”, because each market does indeed have its own personality. We’ll tackle this later in a future episode of Commodity Trading Information—until then, keep on learning!
Thursday, July 10, 2008
Commodity Trading Basics
I decided to start this blog as a way to explain some commodity trading basics to beginners or people who are not very familiar with trading commodities based on technical analysis and studying commodity price charts. For some reason, I feel more drawn to the beginner than anything else, mainly because I remember what it was like when I was first starting out, not knowing a clue but yet very eager to learn. I first learned about futures trading the same way many of you out there first learned about it, and that was through Ken Roberts. For those who may not know who he is, he basically created an educational package that teaches the basics of how to trade futures using price charts as your guide. There are thousands of people all over the world that came to understand the whole business of commodity trading through Ken Roberts’ course, so I can’t hate on him to any degree, although the more “official” futures trading analysts, commodity industry experts, and so forth don’t put much credence in his methods, because his techniques are very simple and geared towards the beginner. The funny thing is, I can honestly say that you don’t need to know much past the basics to make money in the futures markets anyway. The commodity markets are an unruly beast, and for some reason we as human beings love to make things more complicated than they are, thus making it even harder for us to make sense of something as involved as futures trading. The truth of the matter is, you can do just fine with a price chart and a basic understanding of support and resistance, as well as something known as the 50% retracement level, which I will cover in more detail in subsequent posts.
If someone asks me what markets I like to trade the best, I usually respond by saying whichever one has a chart that looks good. I seem to gravitate towards the grains for whatever reason…I have traded corn and wheat probably more than anything else. For those that are not yet fully familiar with the different instruments that are available to be traded, here’s a quick primer: You have the Grains, which are basically corn, wheat, soybeans, soybean meal, soybean oil, rice, canola, barley (a.k.a. Western Barley), and oats (which are still somewhat the “Wild Wild West” of the grains). There are also some categories of grains, such as different types of wheat (spring wheat, red wheat, etc.) and even some soybean variations traded on foreign markets. Then, you have the Metals, which are gold, silver, platinum, copper (also known as High Grade Copper), palladium (which I really don’t know who trades in that one), and aluminum. Then you have the Meats, which are comprised of pork bellies, lean hogs, live cattle, and feeder cattle. For some reason, I haven’t really touched the meats all that much. I have traded a couple of feeder cattle options, but that’s about it. Maybe I have a “vegetarian approach” to the markets (baaaad joke). Next up, there’s the Softs, which are basically goods that can’t be classified properly anywhere else, such as cotton, orange juice, lumber, cocoa, sugar (also known as Sugar # 11—don’t know what the # 11 stands for), and coffee. Then you have the Currencies, which I really don’t feel like listing all of them because there’s a bunch of them (how many countries are out there?), so I’ll give some of the main ones: U.S. Dollar, Swiss Franc, Canadian Dollar, British Pound, Japanese Yen, Mexican Peso, Euro FX, Brazilian Real, on and on, more than I feel like naming. Then, you have the Energies, which are crude oil (public enemy number one right now), heating oil, gasoline, natural gas, and ethanol. After that, there’s the Indices, which are basically derivatives pegged to some type of popular index, such as the S&P 500, the NASDAQ 100, the Russell 2000, the Dow Jones, and on & on. I have never really delved into the world of the Indices; I just like what I like, and that’s mostly the Grains, Metals and Softs. Last but not least you have the Financials, which includes the bond market—the largest market out there. If you think about it, that makes sense, because nothing known to man can be bigger than government debt. Also included in the Financials category is the Eurodollar, the 1-Month Libor (which stands for London Interbank Offer Rate), and other instruments that are normally tied to some type of interest rate. I don’t fool with these too much either, because I just have a slight case of paranoia about any market where one announcement from some suit at the Federal Reserve can send the entire market into a tailspin in short order. I guess, when I think about it, I like the more tangible and physical types of commodities, because for some reason they just make more “sense” to me and seem more “real” to me.
At any rate, I just realized how long this post is, and it’s time to sign off. We’ll dig into some more commodity trading basics in future posts, such as the different types of commodity exchanges and so forth. Until then…happy futures trading!
If someone asks me what markets I like to trade the best, I usually respond by saying whichever one has a chart that looks good. I seem to gravitate towards the grains for whatever reason…I have traded corn and wheat probably more than anything else. For those that are not yet fully familiar with the different instruments that are available to be traded, here’s a quick primer: You have the Grains, which are basically corn, wheat, soybeans, soybean meal, soybean oil, rice, canola, barley (a.k.a. Western Barley), and oats (which are still somewhat the “Wild Wild West” of the grains). There are also some categories of grains, such as different types of wheat (spring wheat, red wheat, etc.) and even some soybean variations traded on foreign markets. Then, you have the Metals, which are gold, silver, platinum, copper (also known as High Grade Copper), palladium (which I really don’t know who trades in that one), and aluminum. Then you have the Meats, which are comprised of pork bellies, lean hogs, live cattle, and feeder cattle. For some reason, I haven’t really touched the meats all that much. I have traded a couple of feeder cattle options, but that’s about it. Maybe I have a “vegetarian approach” to the markets (baaaad joke). Next up, there’s the Softs, which are basically goods that can’t be classified properly anywhere else, such as cotton, orange juice, lumber, cocoa, sugar (also known as Sugar # 11—don’t know what the # 11 stands for), and coffee. Then you have the Currencies, which I really don’t feel like listing all of them because there’s a bunch of them (how many countries are out there?), so I’ll give some of the main ones: U.S. Dollar, Swiss Franc, Canadian Dollar, British Pound, Japanese Yen, Mexican Peso, Euro FX, Brazilian Real, on and on, more than I feel like naming. Then, you have the Energies, which are crude oil (public enemy number one right now), heating oil, gasoline, natural gas, and ethanol. After that, there’s the Indices, which are basically derivatives pegged to some type of popular index, such as the S&P 500, the NASDAQ 100, the Russell 2000, the Dow Jones, and on & on. I have never really delved into the world of the Indices; I just like what I like, and that’s mostly the Grains, Metals and Softs. Last but not least you have the Financials, which includes the bond market—the largest market out there. If you think about it, that makes sense, because nothing known to man can be bigger than government debt. Also included in the Financials category is the Eurodollar, the 1-Month Libor (which stands for London Interbank Offer Rate), and other instruments that are normally tied to some type of interest rate. I don’t fool with these too much either, because I just have a slight case of paranoia about any market where one announcement from some suit at the Federal Reserve can send the entire market into a tailspin in short order. I guess, when I think about it, I like the more tangible and physical types of commodities, because for some reason they just make more “sense” to me and seem more “real” to me.
At any rate, I just realized how long this post is, and it’s time to sign off. We’ll dig into some more commodity trading basics in future posts, such as the different types of commodity exchanges and so forth. Until then…happy futures trading!
Friday, July 4, 2008
Futures Trading: Some Things You Should Know
Some commodity trading basics: The markets are the markets. You can’t make them move, you can’t make them rise or fall, you can’t do anything but follow their flow. The sooner you learn this, the better off you’ll be, and the more money you’ll save yourself. Most investors, traders, and other market participants are simply guessing. They have their indicators, they have their moving averages, they have their commitment of traders reports, they have their Palmer Drought Index stats, they have their in-depth analysis, etc. but at the end of the day it’s still pretty much a 50/50 shot. You’ll find out quickly whether you were right or whether you were wrong, and that’s all there is to it. If you get in, and the position moves against you to the point where it’s damaging your account…hey, buddy, you were wrong. Swallow your pride, fold your hand, and move on. Live to trade another day. But those who think they can argue with the market, those who try to “make” the market do what they want it to do, those who hope & wish that their losing position will turn around, etc., they’re in for a rude awakening, and most of the time it doesn’t hit until their whole account is blown out and they're strapped with margin calls. The market doesn’t care if you’re long or short. The market doesn’t care if you trade corn, wheat, orange juice or the Eurodollar. The market doesn’t care if you trade one lot or one hundred thousand lots. The market doesn’t care if you make millions or lose millions. The market is truly not a respecter of persons.
I just keep thinking about the analogy of the commodity markets being like the ocean. The ocean is what it is. If you are a surfer who can brave the waves and ride them well, then more power to you. But if you are an unskilled surfer, hey, you might get your butt killed out there when the waves swallow you up. It isn’t the ocean’s fault; that’s just the nature of the beast. It took me a long, long, LOOONG time to finally come to terms with that where the market was concerned. I spent many a day trying to “make” the market move. I spent many a day hoping & wishing that my jacked-up position would somehow radically turn around. I spent many a trade just knowing that I was “right this time”, and that the market “has to do” this or that. Then I finally realized: At the end of the day, beyond all the fundamental analysis, beyond all the technical analysis, beyond all the supply and demand talk, beyond all the rate hike talk, beyond what the Fed is doing or what the ECB is doing, the bottom line is, once you enter your position, you’re either going to be right or you’re going to be wrong. And NOTHING is going to determine that but the market itself. So the best thing you can do is become adaptable to how the market treats your position. This is translated (in more familiar terms) into “cut your losses and let your winners ride”, which I have found to be one of the most difficult disciplines I have ever engaged in my whole life. Once you learn how to humble yourself, don’t fight the flow but go with the flow, and let the market determine what you’re going to do (instead of the other way around), you’ll become a much better trader (and person) for it. If there’s one thing I could say about my experience in trading commodities thus far, it is that trading is truly a process of self-discovery. Every weakness, every stupid compulsion, every emotional idiosyncrasy you have is exposed and dealt with through the trading process. Your very foundational ideas about money and your connection with money are dealt with through trading. Your attitude towards money (and the place that money holds in your life) will be revealed through trading. You’ll find out whether money is your servant or your master. You’ll find out why you make the dumb decisions that we all sometimes make. You’ll find out why you hate being wrong, and why that’s the one thing that will hold you back the most. You’ll find out just how much emotionalism can distort your common sense and good judgment. And it all comes through an avenue that I personally least expected it to come through, and that was futures trading. So if it’s possible to thank an entity, I thank the markets for teaching me the hard lessons about trading commodities. I also thank God that I didn’t get completely wiped out (and subsequently become homeless) from the extremely stupid mistakes I made early in my trading career. You want a true commodity trading education? Get in the game and let the markets teach you about yourself. You’ll be surprised at how much you can learn.
I just keep thinking about the analogy of the commodity markets being like the ocean. The ocean is what it is. If you are a surfer who can brave the waves and ride them well, then more power to you. But if you are an unskilled surfer, hey, you might get your butt killed out there when the waves swallow you up. It isn’t the ocean’s fault; that’s just the nature of the beast. It took me a long, long, LOOONG time to finally come to terms with that where the market was concerned. I spent many a day trying to “make” the market move. I spent many a day hoping & wishing that my jacked-up position would somehow radically turn around. I spent many a trade just knowing that I was “right this time”, and that the market “has to do” this or that. Then I finally realized: At the end of the day, beyond all the fundamental analysis, beyond all the technical analysis, beyond all the supply and demand talk, beyond all the rate hike talk, beyond what the Fed is doing or what the ECB is doing, the bottom line is, once you enter your position, you’re either going to be right or you’re going to be wrong. And NOTHING is going to determine that but the market itself. So the best thing you can do is become adaptable to how the market treats your position. This is translated (in more familiar terms) into “cut your losses and let your winners ride”, which I have found to be one of the most difficult disciplines I have ever engaged in my whole life. Once you learn how to humble yourself, don’t fight the flow but go with the flow, and let the market determine what you’re going to do (instead of the other way around), you’ll become a much better trader (and person) for it. If there’s one thing I could say about my experience in trading commodities thus far, it is that trading is truly a process of self-discovery. Every weakness, every stupid compulsion, every emotional idiosyncrasy you have is exposed and dealt with through the trading process. Your very foundational ideas about money and your connection with money are dealt with through trading. Your attitude towards money (and the place that money holds in your life) will be revealed through trading. You’ll find out whether money is your servant or your master. You’ll find out why you make the dumb decisions that we all sometimes make. You’ll find out why you hate being wrong, and why that’s the one thing that will hold you back the most. You’ll find out just how much emotionalism can distort your common sense and good judgment. And it all comes through an avenue that I personally least expected it to come through, and that was futures trading. So if it’s possible to thank an entity, I thank the markets for teaching me the hard lessons about trading commodities. I also thank God that I didn’t get completely wiped out (and subsequently become homeless) from the extremely stupid mistakes I made early in my trading career. You want a true commodity trading education? Get in the game and let the markets teach you about yourself. You’ll be surprised at how much you can learn.
Thursday, June 26, 2008
Commodity Trading Information: The First Post!
Welcome to my first post on Commodity Trading Information! I know, I know, it sounds like such an exciting name for a blog, you can hardly contain yourself. The truth of the matter is, while this blog is definitely about trading commodities, it's also going to lean heavily towards being a journal of a sort, or an online "diary" of a sort (though I hate that word--sounds so cheesy), based on my own experience in the commodity markets. I am no stranger to the futures markets...I started actively trading them in November of 2001, and haven't looked back since. I have seen both triumph and tragedy in the markets (and in my own brokerage account), and I have learned quite a few lessons in the markets, enough to definitely earn my degree in the commodity trading school of hard knocks. I believe that the best way to learn is to simply "get in the game"--yes, you need to plan and prepare, but there comes a certain point in your futures trading career where you've done all the paper trading you can do, and it's time to move into the realm of trading with real money. Experience has also taught me that while you may knock it out of the park consistently when paper trading, you can ROYALLY screw things up when you get into trading commodities with real money, because your emotions are so tied to real money, it's hard to stay objective, yet objectivity is the very thing you need to succeed in the markets. You really need to be "Cool Hand Luke" in the commodity markets, or you just won't be able to last through the ups and downs of basic market volatility.
Many people shy away from futures trading because they believe it's too risky. To borrow a quote from Robert Kiyosaki's Rich Dad, "It's never the investment that's risky, but the investor is what's risky" (my paraphrase). I have found this to be true. There are thousands of people who literally just kill the markets on a consistent basis, and then there's a far greater number of people that just get slaughtered by the markets on a regular basis. One thing's for sure, the markets are the markets, and you cannot control what they do; all you can do is hopefully detect potential moves based on solid principles of technical analysis and price chart analysis, and then make your plan, execute your trade, and hope to God you're right when it's all said and done. But, the greater level is, and this is something I know I'm going to post about later, is when you no longer have to be "right" anymore to be successful; you just have to consistently stick to your trading plan, through extravagant gains as well as stomach-churning losses.
Stick around if you want to learn a couple of things about trading commodities; I'll warn you, I am not the most technical guy in the world...I don't get all wrapped up in the ridiculous amounts of fundamental data that's out there, such as drought indexes (or is it indices?), commitment of traders reports, blah blah blah...I mainly stick to the very basic, almost country-dumb methods of using reliable, well-documented, historically proven chart patterns, and placing my trades based on that information, and then not freakin' sweating it anymore beyond that. Now I don't know who all is out there, and who's going to read this blog, and if there's some fancy-mack-daddy futures analysts or whatever that might happen to stumble upon this blog...if they do, and they think that I'm just blowing a lot of smoke, let me say that I have used chart reading and technical analysis to directly pull profits from the commodity markets, and I know that this stuff works. I have also incurred many painful losses, all of which I consider to be tuition money in the "Commodity School of Hard Knocks". There's nothing like being in the game to teach you how to play the game.
So again, welcome to my blog...hopefully I will share some commodity trading information that will give you yet another perspective as you develop your own individual trading style.
Many people shy away from futures trading because they believe it's too risky. To borrow a quote from Robert Kiyosaki's Rich Dad, "It's never the investment that's risky, but the investor is what's risky" (my paraphrase). I have found this to be true. There are thousands of people who literally just kill the markets on a consistent basis, and then there's a far greater number of people that just get slaughtered by the markets on a regular basis. One thing's for sure, the markets are the markets, and you cannot control what they do; all you can do is hopefully detect potential moves based on solid principles of technical analysis and price chart analysis, and then make your plan, execute your trade, and hope to God you're right when it's all said and done. But, the greater level is, and this is something I know I'm going to post about later, is when you no longer have to be "right" anymore to be successful; you just have to consistently stick to your trading plan, through extravagant gains as well as stomach-churning losses.
Stick around if you want to learn a couple of things about trading commodities; I'll warn you, I am not the most technical guy in the world...I don't get all wrapped up in the ridiculous amounts of fundamental data that's out there, such as drought indexes (or is it indices?), commitment of traders reports, blah blah blah...I mainly stick to the very basic, almost country-dumb methods of using reliable, well-documented, historically proven chart patterns, and placing my trades based on that information, and then not freakin' sweating it anymore beyond that. Now I don't know who all is out there, and who's going to read this blog, and if there's some fancy-mack-daddy futures analysts or whatever that might happen to stumble upon this blog...if they do, and they think that I'm just blowing a lot of smoke, let me say that I have used chart reading and technical analysis to directly pull profits from the commodity markets, and I know that this stuff works. I have also incurred many painful losses, all of which I consider to be tuition money in the "Commodity School of Hard Knocks". There's nothing like being in the game to teach you how to play the game.
So again, welcome to my blog...hopefully I will share some commodity trading information that will give you yet another perspective as you develop your own individual trading style.
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