Is Trading Futures Right For you?:
Whether you have the makings of a successful speculator in commodity
futures remains to be seen. No book or person can teach you this demanding skill. Nor can a book or person make the key decision to
trade or not to trade, for this decision must be made by you alone.
Most outsiders think that commodity futures trading is not for the
typical investor--whoever that may be.But as with so many popular impressions, this one is apt to be false. True, commodity futures trading is not for everyone. But there are many would-be speculators with the potential for success in the commodity markets who have held back because they just haven't been exposed to commodities or have
considered them too complicated to understand.
Apart from a knowledge of the mechanics of the market, however, the
requisites for trading success are not all that rigorous. Certainly, an adequate supply of risk capital is necessary. But money alone cannot ensure your success. There's a saying about the markets that one sure way to make a small fortune trading commodities is to start with a large one. And not a few well-financed traders have confirmed the truth of this statement. But your psychological makeup is perhaps the single most important factor in determining whether you will be successful at trading futures contracts.
Your attitude toward your risk, your ability to admit a mistake, your independence in making your own market judgments apart from the
crowd--will all have a vital impact upon your trading results.
The importance of your own psychological makeup cannot be overstated.
For this factor will decide whether you fall victim to one of the many pitfalls in the way of commodity futures traders. One of the
most devastating pitfalls, incidentally, is opinions. Everybody has
them, especially in commodity trading; and, to paraphrase Humphrey Neill, when everybody has the same opinion, everybody is likely to be
wrong. Let's consider an example of the speculator who has recklessly
lost money in futures trading. If he gets wind of your notion to trade commodities, is he going to tell you of his mistakes in the market? No,indeed. You are going to hear that making money in commodity futures is an impossibility. It can't be done. In a sense, he may be telling you the truth; it probably can't be done--by him. But what about you? Are your temperamental factors identical to his? Are you likely to make the same mistakes? How about your attitude toward risk? Your knowledge of the futures markets and your grasp of the strategies that will be disguised later will determine if you win or lose! All these factors may be different. So don't let someone else's lack of accomplishment stop you, if you feel up to the task. If you let yourself be swayed, you will only have yourself to blame. The easily discouraged don't belong in such a high-risk, high-gain game as futures trading anyway.
W. Somerset Maugham, the distinguished author, used to make it a
practice to discourage any would-be writers who came to him for advice about the writing profession. "I always try to discourage them," said Maugham, adding, "and if they are any good they
never listen to me."
The same could be said of good speculators. They don't rely upon someone else's judgment to tell them what to do. They know what they want. And they know how to get it. Futures trading is simply the vehicle they use to advance themselves along their chosen
avenue of success.
Your Goals
Before you decide one way or another about futures trading, you should
take a hard look at your personal goals. For unless you consider where you want to go, it may be hard deciding how to get there,
There are investments and speculations available for practically every
pocketbook and lifestyle. You have to look at the vast array of opportunities from savings accounts to securities, antiques to diamonds to decide which one will satisfy your needs. And when you look at the various investments competing for your discretionary dollars, you must be aware that each has its advantages and disadvantages in terms of safety and growth of principal and equity. Barring some unforeseen economic disaster, savings accounts
are reasonably safe places to keep funds, but how will your investment
fare in the light of continued inflation? Real estate tends to provide a good return on investment, but it is not as liquid as stocks.
Diamonds are presently fashionable, but will buyers be willing to pay
higher prices in five years? What about buying silver and gold bullion? Or storing your wealth in a harder currency than American dollars, such as Swiss Francs in a foreign bank account? These are just a handful of the considerations that a thinking investor or speculator must make. What's more, the typical middle-income investor will have an army of salesmen pitching him on everything from insurance to income property as the ideal way to guarantee
his future against the possibility, if not probability, of absolute ruin if he doesn't get out his checkbook and close the deal immediately.
Commodity brokers, of course, are no exception. Amid all the clamor, one sometimes does and sometimes doesn't make the right choice.
Commodity futures do offer one advantage (or disadvantage, depending
upon how you look at it) that makes them unique. And that is leverage. By trading contracts with margin requirements as low as 5
percent of the total value of the underlying commodities, the speculator avails himself of an asset worth twenty times the value of his capital. This means that $5,000 can control a commodity worth $100,000,whereas $50,000 will margin commodities worth $1 million. As a result of this incredible leverage, futures
trading represents one of the few ways in which yon can take a
relatively modest amount of money and turn it into a significant amount of money. This is the singular advantage of futures trading that distinguishes it from nearly any other type of investment. If this is one of your goals, then futures trading might be for you.
Your Attitude Toward Risk (This is the most important section)
Unless you are comfortable in taking risks, you are going to be
unsuccessful as a futures trader. For futures trading is the art of taking prudent risks in the pursuit of profit. Knowing how to take risks is a difficult process to master,however. Most people
are poor risk takers. They want a sure thing with a predictable outcome before they are willing to take a chance. Unfortunately, the two are mutually exclusive.Where there is no risk, there is no opportunity. Indeed, in the commodities markets, opportunity is
commensurate with risk. Seasoned traders know this, and they wouldn't
have it any other way. Cognizant of the risks involved, the experienced commodities speculator will proceed with caution. The inexperienced speculator, however, will wait until he has a "sure thing" and then proceed with abandon.
The difference in temperament between risk averters and risk takers is
significant. A risk averter, waiting for a sure thing, will allow a market to go up and up before he decides the market is indeed headed higher. He then finds himself buying at the top at the same time, of course, that the risk taker, a contrarian by nature,is selling short in the final rally. It isn't hard to see who wins in this situation.
Risk takers acknowledge the likelihood of failure, risk archers do not.
Risk takers plan for losses, even welcome them (assuming they are kept
to a minimum) and thus have the advantage over those with no margin for error. They know that you can lose many battles in the struggle
for profits and still win the speculative war. If their judgment is
proved wrong in the market and it frequently is they simply cut their losses and abandon their positions immediately. They don't agonize
over taking a loss and perhaps stay with a losing trade that could then grow truly significant. They accept reality as it is. Knowing they will be wrong more often than they are right, they play the commodity game as it was intended to be played with agility, shrewdness, and speed.
They thrive on the pace and competitiveness. And if they have a losing series of trades, they accept them. They also know how to
walk away from the markets for a while in order to refresh their mental outlook and return in a winner's frame of mind. They have an attitude toward risk that is not common among investors.
Risk Capital
Your attitude toward risk will be influenced by your attitude toward the money you use to trade with. To begin, you must have risk capital in order to trade successfully. Risk capital is not money you need to purchase necessities. It is not money you need to pay the mortgage. It is not money you need to pay for your child's education. It is money you can afford to lose. Your attitude toward the money you use to trade with will affect the way you trade. As we have already mentioned, if you wait for a "sure thing" to come along, you are
almost certain to lose.
Experienced speculators know the difference between risk capital and
money needed for everyday expenses. They never substitute the latter for the former.
Some have suggested that if you already have all the financial resources that a conservative-minded commodities speculator should have, you don't need the additional funds that futures trading could provide anyway. This is a good point. After all, if you have the
mortgage taken care of, if you have a conservatively managed stock and
bond portfolio,substantial savings, income property, tax shelters, and the rest, why trade commodities? It comes down to a question of values. These well-heeled speculators might very well enjoy futures trading. On the other hand, the not-so-well-heeled speculator might very well be willing to forgo some current consumption or degree of security he could achieve by, say, purchasing bonds in order to trade commodities. Your definition of risk capital, therefore, depends upon
your personal circumstances.
Discipline
Even speculator who hopes to succeed at the difficult art of trading
commodity futures must exert a rigorous discipline over all his trading activities. He must be judicious in selecting commodities to buy and sell, and he must not overtrade. He must be mindful of commission costs and losses and never risk more than a small portion of his total trading capital on a single position.
Ideally, he will have a trading plan that covers his money-management techniques, and he will stay with his plan until it becomes clear to him that another method of trading would be more desirable.
The disciplined trader has an edge on others in the markets because he
is immune to the emotionalism that characterizes the trading activities of his fellow speculators. He knows what he will risk by going into a trade, and he knows what his profit objective will be. Should the market then surprise him and perform more impressively than he had suspected, he will use a method of trailing stops to exit the market. But he will never move his stops to expose himself to greater risk once he decides on his predetermined level.
The disciplined trader knows that losses are inevitable. Because of this knowledge, he decides in advance how much adversity he will absorb before he calls it quits. He will use either actual or mental stop loss orders and be precise in placing his trading orders when he initially enters the market. He follows the market closely and keeps his charts and other technical indicators up to date. The disciplined trader may be quite independent in his judgment, hut his strongest commitment is to understanding the realities of a situation. He knows how to read the "footprints" of a market and ride with it--not against it. Above all, the trader who is successful weds his discipline to his intuitive thinking process. He knows that the
time-honored adage that you should "run away to fight another day" is
nowhere more applicable than in futures trading. He is strong yet pliable. He knows when to press and when to relent. And, like all
successful traders, he knows that his consistent, disciplined manner
will bring him profits over time.
Knowledge
There is no substitute for having a comprehensive knowledge of the
commodities you trade and the mechanics of the commodity game. Surprisingly, a great many speculators lose money because they don't
know what they are doing. A course like this one can go a long way in
supplying you with some of the information you need to trade commodities, but there much more that you can learn on your own.
If you trade an agricultural commodity, acquaint yourself with the
seasonal influences on price. Many commodities adhere to a rather rigid seasonal pattern, deviation only during of abnormal
supply-and-demand conditions. For instance, pork bellies have a decided seasonal tendency to rally in July and August. Pork belly traders acquainted with this tendency, which occurred eleven out of twelve times in recent years, will be a step ahead of those who are unaware of this seasonal pattern. Do you know when your commodity is harvested? The impact of various weather conditions on your crop?
Orange juice traders are always looking for an untimely hurricane or
sudden frost to send their market limit up. A lumber trader might be more interested in seeing the statistics on housing starts. A multitude of information is available for the speculator who wants to research his commodity. The important thing is to be knowledgeable in your area of specialization.
The Future
Today's commodities speculator is a new breed of investor. A few years
ago, he wouldn't have considered abandoning the stock market for such a risky venture as futures trading. But in these days of economic uncertainty, many former stock market investors are finding the
futures market more to their liking.
Together with the stock option markets, which, after all, are only
futures markets for stocks, the commodity futures exchanges have attracted a significant portion of the speculative participation that once flourished in the securities markets. Drawn by the leverage, opportunity for profits, and pace of the commodity game, the new speculator is rapidly adapting to the demands made by these competitive markets.
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