Somewhat off topic- Is futures trading for you?
This may be valuable to those that are considering futures as a vehicle to trade. I found this recently and feel this may be of interest. If anyone knows the authoring source perhaps credit could be given. Much of this gets back to the personality make up of a trader and how one views and uses risk. In my view this really applies to all trading and speculation.
nextrade!
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 every-
thing 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. |
