You can often tell the trading sophistication of someone by their market bias. If they are always looking at the long side, in other words, always wanting to buy, they are probably new to the game. There's many stock traders who don't know what "selling short" means. Read on to see why you need to sell short to prosper, especially when trading commodity futures and for writing options.
It’s true that most of the public love to buy and be bullish. It's in our nature. We remember the last major up-move and think it will soon happen again. The best trading attitude is to be neither bullish nor bearish on the overall general commodity market. Let each commodity stand on its own individual merits! You should be flexible enough to be bullish on gold and bearish on silver at the same time. Or be bullish on wheat and bearish on soybeans if that's the forecast. Or be bullish on heating oil and bearish on natural gas.
Yes, most of the time these particular commodity markets move together, but the true test of a flexible, clear-headed trader is to be able to split up closely related futures markets. Look to have SOME short positions in your account mix. The idea is when you go long three great-looking markets, try hard to find at least one market to short. Look for the weakest commodity to short on a rally.
Remember to always sell on rallies and buy on dips. The futures market usually gives you many chances to get on board when a move is in its early stages. Once the move progresses, the corrections are usually brief and shallow and difficult to enter without high risk.
Going short is the mark of a commodity professional. Futures markets generally fall twice as fast as they rally. I believe this is because it takes time for the crowd to get confident and trust a rally enough to buy. But fear can be almost instantaneous, generating crashes. The one difference between commodities and stock buying panics is the shortage factor. Many times a commodity market experiencing a perceived shortage will form a fast spike top. This is more rare in stocks where shortages usually do not occur. A short covering buying panic can occur in both markets, however.
Don't let fear keep you from shorting an over-priced commodity. The idea that a commodity price can go to infinity is the common excuse not to short. But holding on through more than a 2-3% adverse price move is not a good idea anyway, never mind holding through an adverse upside spike. You should have taken your small loss way before infinity! The bottom line is, "be as willing to go short as go long."
Good Trading!
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.
