Actual trading events where things went very wrong - and how to avoid them
The Six Sure-Fire Ways to Fail Trading Commodities:
4) This Is a New Era in Commodities (This Is It-itis)
This is it! It’s DIFFERENT THIS TIME! Don’t you get it? The rules have changed! There’s never going to be enough to supply the commodity market. XXX is now a big contender. ZZZ is having shortage and strike problems. The weather has changed for good because of global warming. The Fed CAN’T possibly raise rates any more or else there will be a recession! The President HAS to drop rates for the election. Soybeans will never rally big again because Brazil supplies the world now…. On and on.
But you know what? Fast-forward into the future after you hear this kind of talk. You'll see the commodity market often does just the opposite. It finds a way to swing everything back the other way. Commodity producers are smart people. They will find a way to supply the market over time and eventually produce a glut. And when the glut occurs, they will overreact and pull the plug until a new commodity shortage cycles again.
When we are in the middle of it all and experiencing everything in slow motion, we cannot believe conditions will change back – but they always do. Dyed-in-the-wool doom and gloomers are doomed to failure. And so are perpetual optimists. You will always have the swing of the pendulum. Being flexible and open minded is a rare quality to have in commodity futures contract and options trading. That’s why there are so few super stars in any profession. All cylinders must be running correctly. Most commodity traders have one flaw that gets them.
Recently, we’ve gone through a big commodity market rally. Gold, Oil, Copper, Silver, Sugar, etc ran up tremendously. I remember at the top hearing commodity brokers buying options “just in case." Just in case of what? Just in case it keeps going higher - as a hedge. Buying expensive out-of the-money options on futures as a hedge? Good luck. Especially when the option premiums are already grossly inflated after a run up. As usual, six months later the futures market has surprised everyone and come back way below the most pessimistic support forecasts.
My point is if you go back and look at commodity futures charts going back 30-40 years, you will see what an average move looks like. An “average” move? Yes, it pays to trade for an average move. Those rare extreme moves that occur once a decade can keep commodity traders chasing them all the time. Remember the pecking pigeons and the non-contingent reinforcement experiment in psychology class? The more random the reward, the more they will peck.
Remember all the gold and silver bulls for two decades after the historic commodity run-up in 1980? It took twenty years to cool them down. It's really a wash. If you DID profit from a "big" move, it probably cost you as much money in losses beforehand to hold out until the big move finally came.
SOLUTION: Don’t let past memories of big commodity market moves taint your expectations. Trade for an average move. Get in, get out and then say, “thank you." Let the others ride the rare, high-risk bucking bronco.
Part Five 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.
