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.

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