Commodity Trading Blunders II, PART 2 - My Early Days As A Novice Trader
By: Thomas Cathey | Posted: 21st February 2007
If we are able to survive any new endeavor long enough, we sometimes discover what it takes to succeed. This certainly applies to commodity futures trading. Most of us cannot learn from others' mistakes. We need to commit errors ourselves to feel the pain. This seems the only way to learn our lessons. Read more about my first novice experiences and struggle to survive.
When I think back on the early futures trading misconceptions I had, I wonder how I made money at all. I got off easy. I think it was only because I hate to lose money. In fact, I still worry too much when the market goes against me. I cannot hang in there losing for long. But, it may be a blessing. This has kept me in the futures contracts and options game for a long time without a major loss. That’s the reason why today I prefer futures day-trading or buying long term options for overnight positions. I like to be able to control my risk as closely as possible.
I presently use a time cycle technique for market timing which I call, "The TimeLine." I use it for all position trading. Details can be found on my website. I will write an article on the subject in the future. The TimeLine also works well for writing far out-of-the-money commodity futures options.
For long-term position trading, buying options on futures can work well only if you can buy them cheaply and way out in time. It's much more difficult to buy them at a reasonable price once "the cat is out of the bag." This is when the futures contract market takes off and the option premiums have expanded greatly. In future articles I talk much about the dangers of buying options because of their inherent premium erosion. Look for them.
Let’s move forward to 1982-3. I had already said good-bye to Max, my Merrill commodity broker and opened an account with one of the first commodity discount firms in Chicago. I think I was paying about $30 round turn, plus fees. Not bad at the time. I was barely making a living off futures contract trading, but I hoped to get better. I moved to Colorado after buying an Airstream travel trailer in CT and decided to travel around the country while I traded. It was great. I roller skated at night meeting the young, pretty Denver women. During the day I studied my charts and put in an occasional trade.
At the time I considered myself as a position futures trader, holding trades for about a week or so on average. It was difficult for me to hold overnight positions, but I found I could, only because my analysis was decent. Anyway, I remember a time that upset me. I was always so careful with my orders and had a disciplined method. I always took futures trades that lined up perfectly or let them go. I had to. My life was over if I blew the commodity account out. I didn’t want to have to go back to "work" again.
In 1982 Bonds and T-Bill future contracts were crashing. Interest rates were near all-time highs for the century, never seen since. In the fray I shorted two futures contracts of June T-Bills. For the next week the profit grew to about $1500. I decided to get out and called the desk at night from the phone booth in the campsite trailer park. I talked with a newbie desk clerk. He sounded unsure of himself. I told him to buy two June T-Bill futures contracts at the market tomorrow to close. He then gave me an order number. I repeated my full order to be sure this novice had it right. He read it back and gave me a different number this time. I didn’t think much of it and said good-bye.
Well, you guessed it! I called back a day later to check the account balance. The clerk told me I was LONG two June T-Bill future contracts and the account was $1500 less than it should have been! It turned out the newbie had entered a double order and I ended being long two.
The market had continued down wiping out my previous gain. I liquidated them immediately. That’s rule number one - always correct mistakes immediately. I spent the next day arguing with their management and listening to tapes of myself. But it did no good. I ended up eating the whole $1500. What a let down.
I did it to myself and learned a valuable lesson. Here's a case where I wiped out more than a year of discount commission savings because the "broker" didn't know me or my habits. This mistake would have never occurred with a full service broker like Max. Be extra careful with your orders!
Part Three of Three - 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.
About the Author
Occupation: CEO and Money Manager
Thomas Cathey - 27-year trading veteran heads the managed futures division of Thomas Capital Management, LLC. View his TimeLine Trading market predictions and get his complete 44+ lesson, "Thomas Commodity Trading Course." http://www.thomascapitalmanagement.com/commodity/welcome.htm Main site: http://www.ThomasCapitalManagement.com
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.
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Tags: misconceptions, market timing, day trading, premiums, futures options, erosion, new endeavor, term options, futures contract, commodity futures, futures trading, buying options, futures contracts