Commodity Options: A Safer Strategy in a Volatile Market

If there was some way to design a roller coaster based on a volatility graph of the average futures contract, you would have quite a thrill ride on your hands. For those who may not be fully aware, volatility is a measurement of how “herky-jerky” the markets are on a daily basis. When volatility is high, that means that price action is expected to be wild and loose, and when volatility is low, there will be a lull in price action. One thing is for sure—neither the wild periods nor the lulls last forever, which is the reason why volatility exists in the first place. Volatility is what gives you the opportunity to profit in the markets—if prices stayed stagnant all the time, there would be no way to make any money, because there would be no expectations of price movements, which means that there would be nobody betting on the price to move in a given direction, which in turn means no buying or selling of futures contracts.

But, as we all know, the entire futures market functions around what people THINK a particular commodity will be worth in the future. This prompts them to assume the risk of entering into a futures contract, which can be financially lethal if they not properly margined, or if they are overleveraged. If you’ve ever experienced the unpleasant “pit in your stomach” feeling of getting a margin call (and I have), you know how stressful it can be when you’re assuming more risk than you’re really comfortable with.

So, for that reason, I believe that options are a great alternative to futures contracts, as they are a way to still participate in the futures markets, but for a fraction of the overall risk. Options are basically contracts that give you the right, but not the obligation, to buy or sell a futures contract for a specified price (called the “strike price”) at a specified time in the future. The two basic types of options are call options and put options. Nerdom.net explains call options here; put options follow the same format, but basically act as a “mirror image” to call options.  There’s a WHOLE lot more to options trading than I care to get into right now, plus I’m  getting ready to eat dinner, so I’m  going to sign off for now. But I’ll leave you with this thought: Notice in my post title I said that commodity options are a safER strategy in volatile markets, but they are not completely risk-free—no investment is. Just don’t lose your head in these crazy markets.

Today's Gold and Silver Smash = Total Bullcrap

It’s hard to describe my disgust and disappointment at what the futures markets have become. I shared a little about this in my last post about price discovery, and now today seeing the absolute bloodbath in Gold and Silver, the fact that the futures markets are a rigged game is a reality that is simply too obvious to ignore. I really didn’t want to turn this blog into a “commentary” type of blog…I was trying to stick with just giving people information about trading commodities. The problem with this is that in the short four years that I have been writing on this blog, the markets have changed so drastically that I hardly even recognize them anymore, and I feel almost obligated to tell people about these changes. I can’t act like the markets are a relatively safe place to trade now. It totally sucks.

Like I said before, I don’t trade the futures markets anymore, and I don’t recommend that anyone else does either. This is not because there’s no money to be made…it’s just that the craziness of today’s markets makes it extremely difficult for the small speculator to gain any type of edge. Most of the big money will be made by big firms now…bullion banks, hedge funds and the like. The small speculator is getting his/her clock cleaned on a regular basis. You must have professional-level funding and professional-level access to live quotes, or be VERY close to the live market action to have any real feel for what the markets are doing. Today’s smash in Gold and Silver proves this all over again. It’s dangerous waters out there right now, folks.

There’s another matter that I am compelled to bring up, even though I could be classified as a “wingnut” for doing it. This precipitous drop in Gold and Silver is simply manipulation; nothing more, nothing less. There’s no way on God’s green earth that this was legitimate selling. Just look at the market action and let the price charts speak for themselves. There are extremely powerful and extremely well-funded inside interests pulling the strings in the Gold market right now. All you have to do is watch with open eyes. Forget about the bullcrap you’re hearing on the news about the reasons why Gold was sold off today. Less fears of inflation—bullcrap. Fed’s stimulus possibly coming to an end—bullcrap. Coming out of the “Great Recession”—bullcrap. These are extremely thin reasons, based in propaganda. The truth can be explained in one short blog post from King World News regarding the LBMA. A default was imminent. They simply can’t keep up with the demand for physical gold right now. The sad truth is that strong Gold equals weak Dollar, and powerful inside interests are doing everything under the sun to keep the appearance of the Dollar strong, as well as keep the appearance of the stock market strong. This so-called stellar stock market is the last bastion of our phony economy, and they’re going to promote it until the bitter end.

Gold was the primary target today. Silver was just collateral damage. Be wise enough to see what’s happening. There is coming a raging bull market in gold. Not trying to be a “perma-bull” or a “Gold bug”, just stating the obvious. This smash today was a mechanism by which the strong hands could switch sides from short to long. They will be there to ride the bull on the way up. I would suggest buying as much physical Gold and Silver as you possibly can right now, short of starving yourself. Listen to me now, believe me later.

Commodity Trading Basics (Part 2)

Commodity Trading Basics - Developing a Trader's Mentality

If I could put this post about commodity trading basics in some type of chronological order, it would actually follow an earlier post I made entitled “Futures Trading: Some Things You Should Know”. As I have stated before many times, and will continue to consider it one of my “trading mantras”, if you will, the simple fact of the matter is that to become a truly solid futures trader, you’re going to have to recognize what’s in your control and what’s out of your control. The markets, for the most part, unless you’re able to put on positions that hold dollar values in the trillions, are OUT of your control. You can’t do squat about what Lean Hogs does, what Coffee does, or what the S & P E-mini does today, next week, or any other time for that matter. The markets are so vast and so varied that sooner or later you finally realize that any position you put on, whether long or short, you’re at the markets’ mercy every second, and it’s a doggone miracle sometimes that you don’t just get blown out of the markets entirely by some cataclysmic move in prices. We have our stop-losses (and you should), and we have our fancy indicators, and we have the comforts of all of our technical analysis tools and software, and we have enough fundamental market data to circle the globe 10 times, but again I say, at the end of the day, the markets will have the final say-so. All of our research may have put us in a decent position to make an informed decision about whether or not to open a long or short position, or how many futures contracts we should trade, and a host of other things that go into planning a trade (by the way, you should ALWAYS have a trading plan), but once you place that order and enter the arena, be prepared for whatever it may throw your way.

Consider this true story: I was trading a silver option one time, and I was basing my decision to buy a put option (a topic we’ll have to get into in another post—please forgive me for “skipping ahead”, so to speak) on a particular chart pattern that I have personally seen work over and over again…it’s known as a flat-bottom triangle. Again, this is something that we’ll have to delve into over time, but basically, the way I trade is through examining commodity charts and then making my trading decisions based on commonly recurring chart patterns that are present in almost every market. At any rate, this particular chart pattern, known as the flat-bottom triangle, was a really good candidate for a trade, primarily because it presented itself in a downtrend. Nine times out of ten, once the prices break below the “base” of the triangle (the flat bottom), they will continue in that direction. So, being used to seeing these types of chart formations (and profiting from them), I placed a fatter-than-usual order for a Silver put option—I paid more for it than I would normally pay for an option, because I bought it closer to the money (another term we’ll have to get to at another time). Long story short, I was SO convinced that the chart pattern was going to work out, and that prices were going to go exactly where I envisioned they were going to go, that even when the external evidence presented something entirely to the contrary, I was so wrapped up in my own expectations of what I thought the market was GOING to do, that I completely missed what it was actually DOING. Consequently, I stayed in the trade way too long, mainly on the premise that it “just HAS to do” what I believed it was going to do. Well, the formation fell apart; it never broke below the support level like I thought it would (yet another topic for another time), and I ended up just watching the passage of time completely eat away at the value of that option, until I ended up closing the position with only about $100.00 left on an option that cost WAAAY more than that. Lesson learned: You can’t do that too many times and still survive in the markets. When you start realizing that the trade is simply NOT going your way—and the simple test is, “Are you losing money?”—you start realizing that all of your wishful thinking and grandiose predictions of what the market “HAS to do” simply aren’t going to stop the market from doing what IT wants to do. So again, if you want to get serious about becoming a proficient futures trader, and you want to master some true commodity trading basics, get a handle on this one fact: The markets are going to do what they’re going to do, and you’re going to have to learn how to be “fluid” enough in your trading style to cut your losses and let your winners run.

Commodity Trading for Beginners

One of the things I had planned to do when starting this blog was to teach commodity trading for beginners. I started realizing that there are so many people out there who are just like I was when I started trading—absolutely clueless (LOL). The type of knowledge required to trade commodities or futures is what (I guess) can be called “specialized knowledge”; in other words, it’s not knowledge that’s picked up just by living your life; you have to actively pursue the knowledge to even gain a basic understanding of the futures markets. Since most people haven’t studied for a Series 7 license or whatever, I thought it would be good to explain some of the basics of futures trading so that it can be easily understood to the novice. One of the things that I hope to achieve with this blog is to have something that I didn’t have when I started trading—a place to get knowledge about the futures markets fairly easy, instead of doing hours and hours of research on the Web to find out different nuances of the futures markets—it was much like looking for a needle in a haystack many times. Talk about frustrating…but really, through nothing more than trial and error (and a WHOLE LOT of reading on the Web) I gained a basic knowledge of the futures markets, opened my account with just $1,000, and haven’t looked back since.

One of the things I have learned through my experience in the markets is that many people have failed to grasp even the very basic parts of commodity trading, including the trading symbols. See, the futures market is much like the stock market, in that the instruments that are traded on the markets have symbols that represent what each particular futures contract is. The ticker symbols of the stock market are for the most part longer than the symbols for the futures markets, since there are far less instruments being traded on the futures markets than in the securities market, but the volume is MUCH larger in the commodities market than in the stock market, meaning, a whole lot more money changing hands. At any rate, as an example, the symbol for Corn is “C”, the symbol for Wheat is “W”, the symbol for Rice is “RR”, the symbol for Lean Hogs is “LH”, etc., etc…it’s actually too numerous to list here. Since I’m definitely not one to re-invent the wheel, I’m just going to refer you to Barchart’s list of commodity symbols at this link: http://www2.barchart.com/futures.asp. Basically, the symbols are what you’ll see when looking at commodity price quotes, and the usual format they follow is the futures symbol, then the contract month (explained below), then the contract year. For instance, if I was trading a December 2008 Corn contract, I would see this symbol on the futures quote list: CZ08. The “C” is the symbol for Corn, then the “Z” is the symbol for December (each month has its own letter symbol as well), then “08” is, of course, the contract year. Meaning, that contract is valid up until what they call the Last Trading Day (LTD) in December of 2008. At the point that the contract expires, if you haven’t yet offset (or exited) your position, you will be obligated to take delivery of 5,000 bushels of Corn (if you were long), or to sell 5,000 bushels of Corn to someone else (if you were short). Remember that a long futures contract is simply a contractual obligation to buy a set amount of a certain commodity at a fixed date in the future (hence the name), and a short futures contract is a contractual obligation to sell a set amount of a certain commodity at a fixed date in the future. The markets were actually created to help large commercial users of commodities (think General Mills for Corn & Wheat, think major electrical wiring companies for Copper, etc.) as well as farmers and other commodity users have an orderly place to do business and exchange goods. Think about it: If you were making some bread and you realized that you had run out of flour, you would simply go to the nearest grocery store and buy a bag of flour. But huge commercial producers such as Gold Medal Flour can’t operate with that same lack of planning, or they would soon be out of business. So they basically place an order for X number of bushels of wheat (to make the flour) through a commodity exchange by way of a futures contract. They may not want or need the wheat right now, but they will anticipate how much they need a few months down the line and place an order for FUTURE delivery of the wheat, by way of a futures contract. They will purchase the contract through a futures broker at the prevailing market price for wheat—let’s say that wheat is currently trading at $4.50 a bushel (the standard contract size for wheat is 5,000 bushels). Once they purchase the futures contract, they have done what’s known as “opened a position” in the Wheat market, which basically enables them to "lock in on" the current price of wheat, even though it can change for the better or for worse. The price of wheat futures will fluctuate on a daily basis, due to the fact that it is indeed based on FUTURE delivery, not wheat that you are carrying home the same day you purchased it. Since nobody knows the future, and several factors that affect wheat prices can come into play between the time the futures contract is purchased and the time that the contract is up for expiration (and delivery), the price of wheat futures will continue to be volatile. This is what creates opportunities in not only the Wheat market, but every other market as well. These price fluctuations that happen throughout the life of a futures contract can either put tons of money in your pocket or extract tons of money out of it.

I’m extremely sleepy right now (it’s really late here), so although I feel like I gave a somewhat half-baked explanation of the basics of futures trading, I will continue along these lines of explaining commodity trading for beginners…hopefully someone will learn something along the way.

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.

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.

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!

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!

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.

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.