The Trading Process

The Trading Process
Here are some typical steps in the process of making a commodity trade including the trader's decision-making process and the procedures involved in actually placing the trade.
In order to make decisions about when to trade commodity futures, you must have a source of price data. Many daily newspapers carry some commodity prices in their financial sections. The Wall Street Journal has comprehensive commodity price listings. Investor's Business Dailyhas both price tables and numerous price charts
All experienced commodity traders prefer to look at price activity on a chart rather than trying to interpret tables of numbers. In financial analysis, charts are indispensable for quickly grasping the essence of historical and recent price action.
The typical commodity chart depicts daily price action as a thin vertical bar which indicates the day's high and low by the top and bottom of the bar. The opening and closing prices are shown as tiny dots attached to the left and right side of the bar. A typical daily price chart can show up to six months of price action this way.
It is easy to change the bar's time frame from days to weeks or months and thus show from two to twenty years of historical price action in the same format. For short-term trading you can change the bar's time frame to hours or even minutes.
Looking at such bar charts enables a trader to see the recent trend of prices--whether up, down or sideways--in whatever time frame he chooses. Following the current trend of prices is a cornerstone of successful trading.
There are a number of ways to obtain the price charts a trader needs to analyze the markets. You can make your own using graph paper. This sounds rather primitive, but some experts recommend it as a good way to put yourself in close touch with price activity and monitor risk.
Another source of charts is the printed chart service. There are about half a dozen of these. They typically mail a booklet of numerous charts covering all the tradeable markets after the markets close on Friday. There is space on the charts to update them daily during the following week until next chart book arrives. These printed chart books normally have a number of indicators plotted along with the price action and contain a wealth of additional information.
For computer owners there are many software programs that create fancy charts on the computer screen. You can input the price data manually or, via telephone modem, download comprehensive data after the markets close for the day. Those with larger budgets can install a small satellite dish and watch price changes in all the markets nearly instantaneously as they occur. The software creates charts dynamically on the computer screen as each trade takes place on the exchanges. You can put many different charts on the screen and thus watch numerous markets all around the world in real time. The cost can range from a few hundred to $1,000 a month depending on the software and the number of exchanges you subscribe to.
It is easy to believe that computers can make a big difference in trading success. Vendors of expensive software will tell you that since other traders, who are your competition, have expensive computer setups, you need one too. This isn't really true.
Those who can't trade profitably without a computer probably won't be helped too much by using a computer. It may actually be detrimental by causing an increase in trading frequency. While a computer will not make a bad trader into good one, they are fun to use, and they do make a trader's life easier.
There are two primary analytic methods for deciding when to take a futures position: fundamental analysis and technical analysis. Fundamental analysis involves using economic data relating to supply and demand to forecast likely future price action. Technical analysis involves analyzing past price action of the market itself to forecast the likely future price action.
While there are differences of opinion about the relative merits of the two approaches, almost all successful traders emphasize technical analysis. There are a number of reasons for this. First and foremost is the difficulty of obtaining accurate fundamental data. While various governments and private companies publish statistics concerning crop sizes and demand levels, these numbers are gross estimates at best. With the current global marketplace, even if you could obtain accurate current information, it would still be impossible to predict future supply and demand with enough accuracy to make commodity trading decisions.
Technical analysts argue that since the most knowledgeable commercial participants are actively trading in the markets, the current price trend is the most accurate assessment of future supply and demand. If someone is correct that for fundamental reasons, prices will likely move up strongly in the future, the commercial participants who have the greatest knowledge and influence on the markets should certainly be moving the price upward right now. If price instead is moving down, a lot of very knowledgeable people must think price in the future will likely be down, not up.
For this reason, almost all successful speculators learn to follow price action and not try futilely to predict turning points in advance. They seek to trade in tune with the large participants who move the markets.
In his classic book, Technical Analysis of the Futures Markets, famous analyst John Murphy summarizes the rationale for technical analysis: "The technician believes that anything that can possibly affect the market price of a commodity futures contract--fundamental, political, psychological or otherwise--is actually reflected in the price of that commodity. It follows, therefore, that a study of price action is all that is required. By studying price charts and supporting technical indicators, the technician lets the market tell him which way it is most likely to go. The chartist knows there are reasons why markets go up and down. He just doesn't believe that knowing what those reasons are is necessary.

The History of Trading

The History of Trading
Although the first recorded instance of futures trading occurred with rice in 17th Century Japan, there is some evidence that there may also have been rice futures traded in China as long as 6,000 years ago.
Futures trading is a natural outgrowth of the problems of maintaining a year-round supply of seasonal products like agricultural crops. In Japan, merchants stored rice in warehouses for future use. In order to raise cash, warehouse holders sold receipts against the stored rice. These were known as "rice tickets." Eventually, such rice tickets became accepted as a kind of general commercial currency. Rules came into being to standardize the trading in rice tickets. These rules were similar to the current rules of American futures trading.
In the United States, futures trading started in the grain markets in the middleof the 19th Century. The Chicago Board of Trade was established in 1848. In the 1870s and 1880s the New York Coffee, Cotton and Produce Exchanges were born. Today there are ten commodity exchanges in the United States. The largest are the Chicago Board of Trade, The Chicago Mercantile Exchange, the New York Mercantile Exchange, the New York Commodity Exchange and the New York Coffee, Sugar and Cocoa Exchange.
Worldwide there are major futures trading exchanges in over twenty countries including Canada, England, France, Singapore, Japan, Australia and New Zealand. The products traded range from agricultural staples like Corn and Wheat to Red Beans and Rubber traded in Japan.
The biggest increase in futures trading activity occurred in the 1970s when futures on financial instruments started trading in Chicago. Foreign currencies such as the Swiss Franc and the Japanese Yen were first. Also popular were interest rate instruments such as United States Treasury Bonds and T-Bills. In the 1980s futures began trading on stock market indexes such as the S&P 500.
The various exchanges are constantly looking for new products on which to trade futures. Very few of the new markets they try survive and grow into viable trading vehicles. Some examples of less than successful markets attempted in recent years are Tiger Shrimp and Cheddar Cheese.
Futures trading is regulated by an agency of the Department of Agriculture called the Commodity Futures Trading Commission. It regulates the futures exchanges, brokerage firms, money managers and commodity advisors.

The Risks of Trading

The Risks of Trading
Before becoming too excited about the substantial returns possible from commodity trading, it is a good idea to take a long, sober look at the risks. Reward and risk are always related. It is unrealistic to expect to be able to earn above-average investment returns without taking above-average risks as well.
Most people are naturally risk averse. They don't like to take big risks, especially financial risks. Perhaps you can relate to the point of view of humorist Will Rogers: "I am not as concerned about the return on my money as I am about the return of my money."
Commodity trading has the reputation of being a highly risky endeavor. It is true that a high percentage of traders eventually lose money. Many people have lost substantial sums. There is a famous old line about the best way to make a small fortune trading commodities . . . start with a big one.
However, commodity trading's reputation as a highly risky activity is somewhat undeserved. Think of yourself walking into a gambling casino in Las Vegas or Atlantic City. You decide to play roulette. The table has a $5 minimum bet and a $5,000 limit, which happens to be your total bankroll. If you place a $5,000 bet on red, you should not be surprised if you immediately lost your $5,000. On the other hand, if you made only $5 bets, you could play for a long time and probably not lose very much at all.
Commodity trading is the same in the sense that the individual is the one who decides how he wants to operate. He can make large bets or small ones. One can trade commodities carefully and risk as little as $100 or $200 on a trade. You could trade a long time this way and only lose a few thousand dollars. However, most people are not that patient. The unfortunates who lose big are those who can't control themselves. They take big risks in an attempt to get rich quick. Another way to lose big is blindly to turn your money over to others to trade such as brokers or money managers.
One of my favorite quotes about trading comes from trading psychology expert Mark Douglas. As he points out, most of us are not as willing to take financial risks as we think: "Most people like to think of themselves as risk takers, but what they really want is a guaranteed outcome with some momentary suspense to make them feel as if the outcome had been in doubt. The momentary suspense adds the thrill factor necessary to keep our lives from getting too boring."
Anyone who is going to try speculation should be fully aware of and be comfortable with the risks involved. Managing the risks of trading is a very important part of any trader's success. Although the risks can be managed, they can never be eliminated. Remember that the high returns successful speculators can earn are available only because the speculator is being paid to take risk away from others.
When a commodity trader buys a futures contract, he will lose if the price declines. His risk is theoretically limited only by the price of the commodity going to zero. If he sells, he will lose if the price goes up. The risk is theoretically unlimited because there is no absolute ceiling on how high the price of the commodity can go.
In practice, however, the trader can offset his position when the trade is going against him to limit his loss. While a prudent trader always has a plan to limit his losses when trades don't work, it is not possible to guarantee a particular loss limit amount. As a practical matter, however, you can usually limit losses to within a few hundred dollars of an intended amount. Very often losses are within $100 of the amount you project. Only when very unusual things happen suddenly can losses balloon to thousands of dollars more than you expected.
A good example of this was what happened to many traders in stock index futures just before the Gulf War started in 1991. In The New Market Wizards by Jack Schwager, respected money manager Monroe Trout describes his ordeal: "January 9, 1991 was the day that Secretary of State James Baker met with the Iraqi ambassador in an effort to avert the Gulf War. At the time there was a reasonable degree of optimism going in to the meeting. Addressing the press after the meeting, Baker began his statement with the word 'Regrettably.' A wave of selling hit the stock and bond markets. I lost about $9,500,000, most of it in about ten seconds." Trout was holding 700 S&P futures contracts at the time.
One of the trading systems I was using during that period was a day trading system for the S&P. Although on most days that system didn't trade at all, it was unlucky enough to be in a long position that morning. I remember watching Baker's news conference and the S&P price action at the same time in my office. Even though I had a $500 stop-loss in the market, my system lost $5,500 per contract on that day's trade because the market's liquidity evaporated so rapidly.
The S&P stock index is the most expensive market to trade, and those with accounts less than $25,000 should probably not be trading it at all. Therefore, this once in-a-decade event would have cost about twenty percent or less of a reasonably capitalized account.
Other kinds of surprise situations that can cause unpredicted losses are freezes, floods, droughts, government currency interventions and crop reports. With attention and foresight a trader can sidestep these risky situations. The best way to control unpredictable risks is to trade conservatively so larger-than-expected losses are still only a small percentage of the total account.
Another thing to understand about risk in trading is that you cannot avoid losses by careful planning or brilliant strategy. Numerous losses are part of the process. In The Elements of Successful Trading, Robert Rotella puts it this way: "Trading is a business of making and losing money. Any trade, no matter how well thought out, has a chance of becoming a loser. Many people think the best traders don't lose any money and have only winning trades. This is absolutely not true. The best traders lose a lot of money, but they eventually make even more over time."
There is no point trading commodities if you cannot handle the psychological discomfort of making losing trades. While people tend to take losses personally as a sign of failure, good traders shrug them off. The best trading plans result in many losses. Because of the amount of randomness in market price action, such losses are inevitable.
If I haven't scared you away so far, let's take a closer look at what successful commodity trading is all about.

Commodity Trading As An Investment Vehicle

Commodity Trading As An Investment Vehicle
There are many inherent advantages of commodity futures as an investment vehicle over other investment alternatives such as savings accounts, stocks, bonds, options, real estate and collectibles.
The primary attraction, of course, is the potential for large profits in a short period of time. The reason that futures trading can be so profitable isleverage.
For instance, if you had a $10,000 futures trading account, you could trade one S&P 500 stock index futures contract. If you were going to buy the equivalent amount of common stocks, you would currently need about $350,000, thirty-five times as much.
Let's say you decided that the stock market was going to go up. You could invest $350,000 and buy individual stocks equivalent to the S&P index, or you could buy one S&P futures contract. Buying a futures contract is the same as betting that the S&P index will go up.
If you had made your move on the first trading day of September, 1996 and held your position for two weeks, your common stock position would have been worth about $20,000 more than when you bought it, a gain of about six percent. Not bad for only two weeks. If you had taken the futures route, however, you would have made the same $20,000, which would have been a 200 percent gain on the $10,000 margin required in your futures trading account.
That is an actual example of the tremendous returns you can earn in a short period of time trading futures. Of course, you can lose money just as fast if you trade in the wrong direction. Suppose you had thought the stock market was about to go down and you had sold a futures contract instead of buying one. If you had valiantly held it for two weeks, you would have lost $20,000. That's a good example of why you must exit your trades quickly if they start to move against you.
Another advantage of futures trading is much lower relative commissions. Your commission on that $20,000 futures trading profit would have been only about $30 to $50. Commissions on individual stocks are typically as much as one percent for both buying and selling. That could have been $7,000 to buy and sell a basket of stocks worth $350,000.
While profits can be large in commodity trading, it is not easy to make consistently correct decisions about what and when to buy and sell.
Commodity speculation offers an important advantage over such illiquid vehicles as real estate and collectibles. The balance in your account is always available. If you maintain sufficient margin, you can even spend your current profit on a trade without closing out the position. With stocks, bonds and real estate, you can't spend your gains until you actually sell the investment.
As you will see, commodity trading is not particularly complicated. Unlike the stock market where there are over ten thousand potential stocks and mutual funds, there are only about forty viable futures markets to trade. Those markets cover the gamut of market sectors, however, so you can diversify throughout all important segments of the world economy.
In futures trading, it is as easy to sell (also referred to as going short) as it is to buy (also referred to as going long). By choosing correctly, you can make money whether prices go up or down. Therefore, trading a diversified portfolio of futures markets offers the opportunity to profit from any potential economic scenario. Regardless of whether we have inflation or deflation, boom or depression, hurricanes, droughts, famines or freezes, there is always the potential for profit trading commodities.
There are even tax advantages to making your money from futures trading. Regardless of the actual holding period, commodity profits are automatically taxed as sixty percent long-term capital gains and forty percent short-term capital gains. The current maximum capital gains rate is thirty-three percent, somewhat less than the maximum rate for ordinary income. To the extent that capital gains tax rates are reduced in the future, commodity traders will benefit. If a distinction is re-established so that taxes on long-term gains are lower than on short-term gains, commodity traders will benefit.

Commodity Futures Trading for Beginners : Introduction

Introduction
Many people have become very rich in the commodity markets. It is one of a few investment areas where an individual with limited capital can make extraordinary profits in a relatively short period of time. For example, Richard Dennis borrowed $1,600 and turned it into a $200 million fortune in about ten years.
Nevertheless, because most people lose money, commodity trading has a bad reputation as being too risky for the average individual. The truth is that commodity trading is only as risky as you want to make it.
Those who treat trading as a get-rich-quick scheme are likely to lose because they have to take big risks. If you act prudently, treat your trading like a business instead of a giant gambling casino and are willing to settle for a reasonable return, the risks are acceptable. The probability of success is excellent.
The process of trading commodities is also known as futures trading. Unlike other kinds of investments, such as stocks and bonds, when you trade futures, you do not actually buy anything or own anything. You are speculating on the future direction of the price in the commodity you are trading. This is like a bet on future price direction. The terms "buy" and "sell" merely indicate the direction you expect future prices will take.
If, for instance, you were speculating in corn, you would buy a futures contract if you thought the price would be going up in the future. You would sell a futures contract if you thought the price would go down. For every trade, there is always a buyer and a seller. Neither person has to own any corn to participate. He must only deposit sufficient capital with a brokerage firm to insure that he will be able to pay the losses if his trades lose money.
In addition to speculators, both the commodity's commercial producers and commercial consumers also participate. The principal economic purpose of the futures markets is for these commercial participants to eliminate their risk from changing prices.
On one side of a transaction may be a producer like a farmer. He has a field full of corn growing on his farm. It won't be ready for harvest for another three months. If he is worried about the price going down during that time, he can sell futures contracts equivalent to the size of his crop and deliver his corn to fulfill his obligation under the contract. Regardless of how the price of corn changes in the three months until his crop will be ready for delivery, he is guaranteed to be paid the current price.
On the other side of the transaction might be a producer such as a cereal manufacturer who needs to buy lots of corn. The manufacturer, such as Kellogg, may be concerned that in the next three months the price of corn will go up, and it will have to pay more than the current price. To protect against this, Kellogg can buy futures contracts at the current price. In three months Kellogg can fulfill its obligation under the contracts by taking delivery of the corn. This guarantees that regardless of how the price moves in the next three months, Kellogg will pay no more than the current price for its corn.
In addition to agricultural commodities, there are futures for financial instruments and intangibles such as currencies, bonds and stock market indexes. Each futures market has producers and consumers who need to hedge their risk from future price changes. The speculators, who do not actually deal in the physical commodities, are there to provide liquidity. This maintains an orderly market where price changes from one trade to the next are small.
Rather than taking delivery or making delivery, the speculator merely offsets his position at some time before the date set for future delivery. If price has moved in the right direction, he will profit. If not, he will lose.
In his book The Futures Game, Professor Richard Teweles explains the functions of the futures markets: "In addition to reducing the costs of production, marketing and processing, futures markets provide continuous, accurate, well-publicized price information and continuous liquid markets. Futures trading is [thus] beneficial to the public which ultimately consumes the goods traded in the futures markets. Without the speculator futures markets could not function."
Since speculators perform the valuable functions of providing liquidity and assuming the risk of price fluctuation, they can earn substantial returns. The potentially large profits are available precisely because there is also a risk of substantial loss.

T H E F O R E X R E P O R

Analyzing statistical, econometric, and behavioral trends in the foreign
exchange markets for insight into the optimal use of the FX Engines
automated trading platform.
The information contained in this report is represented without warranty
or any statement of its veracity.  The contents of this report are intended to
stimulate thinking on issues related to trading forex.  This report does not
suggest any particular action that could be utilized in live trading for profit
or loss.  
I can put it no better than Hoffer, who deferred to Montaigne:
“All I say is by way of discourse, and nothing by way of advice.  I should
not speak so boldly if it were my due to be believed.”

W H A T I T M E A N

Take your medicine, one way or another – put in the time or lose the dime

THE BAD NEWS
Successful trading is hard work!  
Forex in particular paves the way for many traders to think they’ve found
the Land of Easy Money, but it is exactly the opposite.  Forex is the market
with the biggest rewards, but it is also the toughest market to crack.
Compounding the problem is the fact that there are not many well made,
honestly offered tools or services in the market to aid the average trader.
THE GOOD NEWS
FX Engines was designed to fill this void.  Our service is built to give the
average trader the same, if not more, sophistication than the tools at the
disposal of the traders at the world’s biggest banks.  
FX Engines allows traders to embark on the biggest learning experience of
their trading careers: extensive back testing.  Only through back testing
can you develop a sense of the magnitude small changes have on price
action.  Back testing hones the trader’s skill in determining market entry,
market exit, and position sizing.  And FX Engines has the most advanced
back testing tool available.

Once you’ve identified tradable engines FX Engines provides a way for you
to test them out live, matching what you see on a chart to test trades in real
time, automatically.  This hands-free trading style gives the trader access
to the trader’s most precious resource: discipline.  Our automated trading
system handles every aspect of trading, freeing you to spend moments of
clear and organized thought building systems, not managing emotion.
Once you’ve traded in test mode, you’re ready to go live.  FX Engines will
execute your trades through a dealer using the EXACT SAME system used
to back test and live test your engines.  Develop systems, build them, test
them, and trade them.  At FX Engines, it’s that simple, and it’s that
powerful.

INVESTOR SOPHISTICATION 10

Reading Market Wizards, by Jack D. Schwager for the first time, it’s
difficult not to notice that most, if not all, of the successful traders use
computerized systems.  These traders realize the importance of doing solid
research, system building, and testing in an environment without trading
stress.  And they realize the importance of implementing those systems in
a computerized environment.
Of course, working at Solomon Brothers or Fidelity has its perks, and these
traders all have access to massive IT budgets and staffs.  What about the
individual trader?  In recent years, a number of traders have sought to
automate their systems by hiring software developers.  Too often, the
trader didn’t know enough about software to make the system work
correctly.
In other attempts, software developers have tried to create automated
trading systems that could run on the trader’s computer.  These attempts
were also flawed, since the software engineer was not likely to have
sufficient trading knowledge.  Beyond that, software programs installed on
a home or office based computer are susceptible to power and bandwidth
outages, and a number of other serious deficiencies.
FX Engines was created to solve all of these problems.  Our service is an
automated trading platform with all of the sophistication of the
institutions, designed by a trader with software experience, implemented
by a group of software experts, and hosted in one of the world’s most
advanced, secure, redundant data centers.

FX Engines is designed to create sophisticated investors, which is another
way of saying: FX Engines helps traders succeed.  We invite you to visit us
at http://www.fxengines.com to check out our service with a 15 day free
trial, after which you may still use the basic service free of charge.  Live
trading will be available soon, so get started building and testing today.

A C T I O N

The sophisticated investor understands the six forces of forex.  They
operate with awareness of their environment, and that awareness informs
their trading plan.  To succeed in forex trading, you must become a
sophisticated investor.

Figure 8: The Trader’s Min

The trader goes through an enormous array of emotions and thoughts
during a trade.  Some are good, some are bad, but it is rare to find a trader
who consistently applies his plan.

Emotion, or lack of discipline, is the greatest enemy of every trader.  This
is so true that one could argue that discipline is a more precious trading
commodity than capital itself, since capital can only be sustained with
discipline.
This is not to say that the trader does not have value to bring – he does.  In
moments of clear, objective contemplation, many traders – even novices –
can be builders of excellent trading systems.  These systems can take
advantage of their understanding of the forces of forex and test out
incredibly.  Once live, however, the system falls apart.  Why?
The simple reason is that emotion has no place in trading.  Emotion causes
the trader to act differently following large wins or losses.  Emotion causes
the trader to act irrationally when large moves occur.  Emotion causes the
trader to apply his trading system inconsistently.  
If you took a survey of successful traders you would find many similarities.
The traders would understand and apply all of the forces of forex.  They
would usually trade incredibly simple trading systems. They would trade
using conservative, well thought out money management philosophies,
and they would trade with absolute consistency.
For the institutional investor, absolute consistency is not a problem, since
they have an array of personnel and resources at their disposal.  For
individual investors, there are three groups.  Those who trade without
consistency, those who trade with manual consistency, and those who
trade with automated consistency.  The novice, of course, is the trader who
thrashes from trade to trade.  The individual investor who uses consistent
discipline or automation as the foundation of his trading activity
maximizes his level of sophistication.