Have you ever been a hobby newbie and been awed by the top people you first meet? Then after a while you realized they really aren't as smart as you first thought. Later you surpass them and finally realize they hindered your learning rather than helped it. Watch for this pattern in any endeavor you enter. With a little luck and investigation, you just might run into a great mentor right from the start!
I remember a time back in 1981 when I was still trading commodity futures with Max at Merrill. There were no options on futures then. At that point I had stopped day-trading and just did my own longer-term overnight positions. I called all the shots. Max even cut my futures commissions down to $60 plus fees. At the time I was using the Gann charts, cycles and OBV. (on balance volume) Everything was hand charted and calculated. It's interesting how this gives you a better feel verses computer generated charts.
Anyway, the British Pound futures contract was near five-year highs around 246.00 or so. It was forming a double top on the weekly chart. I kept my own version of monthly and weekly futures cycles on the chart. It was a simple method. I just used a pair of dividers and estimated the length of the dominant ones from the past. I marked their high and low points and then projected the next high and low into the future. I followed about four major cycles for British Pound futures.
One day in January I noticed that all four cycles were close to lining up at a high price area - a cluster. This was a rare timing event. The OBV (on-balance-volume) was running away on the downside suggesting big distribution. These things don’t always work, but when they line up, I consider it a high probability futures trade worth taking. If you’re wrong, you get stopped out and move on. I called Max and sold one BP futures contract short.
For a day, nothing happened. I decided to stop in and see Max for a friendly visit. When I got there, I could hear the familiar raspy sound of his little news commodity ticker machine spewing out information on a tight paper roll. Probably, no one would ever read it. Those of you who traded commodity futures 25 years ago probably know the sound I’m talking about. I just smiled, remembering how that was my universe of commodity trading ideas only a year ago.
Max started talking excitedly about cattle futures. He said, “we’re making nothing but money in cattle, lately.” It’s funny how I remember that after all these years. I asked him to show me the method he'd been using to give trading signals. He used to say, “I’ve got a buy signal today in beans,” or whatever. He showed me a small black book with a list of commodities. Each commodity future contract had a row of black or red numbers next to it. He said the numbers were the 10-day moving average he got each day from the Merrill commodity research office in New York.
He said that after all these years as a commodity broker (since 1962) it’s come down to this – a simple 10-day moving average. When the daily closing price crossed above the average, it was a buy signal and blue pencil. When price crossed below, it was a sell signal and red pencil. My mouth dropped. And all this time I thought he had a complex futures system that gave, sophisticated “buy and sell signals,” And now I learn the man behind the curtain was using a simple 10-day closing moving average?
After that day, I never took another of Max’s futures trades. I did them all myself. Whenever he said he had a “buy signal,” I would reply, “You mean price just crossed the 10-day moving average?” I would then snicker. By the way, Max is the one who gave me the original Trident commodity trading book to read. So he obviously was exposed to more complex stuff. He just decided to simply his life, I guess. Max was a likable guy. I learned a lot from him about dealing with people. I’m glad he was my first real broker rather than the Boston Commodity Broker from Hell. That would have been a disaster.
Back to the story. Here I was in his office and short one British Pound futures contract. It was a good-sized contract and if wrong, I could get whacked badly. I think limit-down at the time was $3,000. I asked him how it was doing and he said it was up strong, like a couple of full points. This meant I was down about $1200. I had more nerve in those days and was sure I was right. Like a gunslinger I said, “Great! Sell me another one at the market!”
For the first time I saw how Max operated. He hurriedly wrote out a futures ticket, stamped it and then trotted all the way over to the other side of the office to the order clerk. The clerk grabbed it and typed the info into some kind of a keyboard terminal. In all, it took a good two minutes to send off. In those days, I guess that was the state-of-the-art for commodity retail customers. Max returned just as the British Pound market was about to close. We barely made it in. I went home wondering why the heck I added to a losing position. The next day was a shocker...
Part Two of Two - 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.
Thomas Cathey - 27-year trading veteran, money manager and CEO of Thomas Capital Management, LLC. Get FREE, the complete 44+ lesson, "Thomas Commodity Trading Course" by visiting: http://www.thomascapitalmanagement.com/commodity/welcome.htm It's a brand new "street-wise" trading e-course. Get an edge trading futures, day trading e-mini's and selling options. Main site: http://www.ThomasCapitalManagement.com
