Actual trading events where things went very wrong - and how to avoid them.


Over 27 years of commodity futures and options trading, I’ve seen a number of commodity traders implode. But it didn’t have to happen. The right knowledge and rules could have saved them. My own first year of commodity trading back in 1979 was rough and is documented in another series of articles called, “My Early Days as a Novice Trader – Trading Blunders I, I I, III and IV."

How little we know when we first start out! We think we can apply everyday business tactics to commodity futures trading. I've tried and found out how frustrating that can be. We think because we are good at some other endeavor it will carry over to commodity trading – wrong! In fact, thinking that way makes us even more stubborn and arrogant, setting us up for the big body slam. Let’s take a look at six commodity trading debacles. I’ll describe these real life trading stories that actually happened and then make suggestions on how these events may have been prevented. Some are funny and some are sad.


The Six Sure-Fire Ways to Fail Trading Commodities:

1) Get a scenario into your head of what MUST happen.

This one is a killer. How many times have I sat patiently listening to another commodity trader spilling his guts - frothing at the mouth about how bullish or bearish a market is? He's loaded up with as much as he can buy. It’s like he's trying to convince the world to get on board before it’s too late. I really believe these traders mean well and want to help their friends to make money too. It’s a guy-hero thing. After I hear the usual spiel, I think to myself, “man, this guy is dead.”

Usually there’s nothing I can do or say when they get like that. It’s sometimes because of a commodity newsletter they read, a book, a market guru, or something else that gets them going. If I ask about using stop loss orders just in case they're wrong, I usually get the response, “ Oh, the market won’t go that low because….(fill in the blank) but if it does, I’ll buy more!” Or, “If I use stops, THEY will just take my position away at the lows and rally it without me - I KNOW I'm right!” Interestingly, the majority of these people are bullish. They are rarely bearish, though there is a big camp of doom and gloomers who have been shorting the bull stock market for the last fifteen years or so. There will come a time when even they will be right.

Anyway, here's what happened. A personal friend of mine got nuts about the Y2K thing in the fall of 1999. He got hooked on what the commodity “gold bugs” were saying about gold. They warned it could skyrocket as the whole world’s computer infrastructure failed. You remember the scene, I’m sure. This guy would call me on the phone describing how much more of his retirement fund he just switched into gold. I kept suggesting he use stops, but he used my warnings to argue even stronger, thinking I wasn’t convinced enough. 

As a fitting epitaph, gold made its long-term decline to its $250-$275/oz major low between the 1997-2001 period! This action was absolutely opposite of the news. Yes, there was a rally before the Y2K January mark, but short lived as viewed on a major scale. My buddy sat through the whole decline, staying steadfastly bullish. 

Near the end of 1999, something happened that still makes me laugh today.  Back in those days there were a number of “pirate” radio stations on some of the dead areas in the international shortwave broadcast bands. One night my buddy fired up his big homemade radio transmitter and did a pirate radio talk show about Y2K and gold! He went on the air for several nights like an evangelist preacher insisting how gold MUST move up because of the turmoil to come in 2000! He was trying to save his commodity trade by preaching to the world on the shortwave! But the world wasn't listening.

Gold eventually took its toll on his retirement account. He later told me in 2001 he sold out at the lows and took a staggering loss. Of course, after the gold market shook out those Y2K scenario traders, it rallied for five years to highs not seen in a couple of decades.

SOLUTION: Got a commodity trading scenario? That’s OK – some scenarios turn out right. But use stops and be flexible enough to change your mind early in the game if your scenario doesn’t work out as planned. It’s as simple as that.

Part Two of Seven Parts - Next!


There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.



Tags: money, endeavor, hero, blunders, guts, right knowledge, novice trader, stop loss, commodity traders, options trading, business tactics, commodity trading, futures and options