Saturday, September 1, 2007

Unique Commodity Trading Strategies

Surviving the rough times to be present for the big moves is the name of the game in commodity trading. With some skill we can even break even while the other participants are getting chopped to pieces. It requires giving up something to get something else. Learn how a few of the big hits can be avoided for a small price. Read about ways to participate in the long haul moves while still sleeping well at night. Remember when you were a kid playing dodge-ball? If you could avoid getting hit and let the others get picked off first, you could win. You needed an edge over the others to consistently win. Maybe you were faster or maybe you could dodge better. Pure luck worked sometimes, but over time luck got you hit as much as the others. You had to have an edge to come out on top consistently. The same goes for trading. There are many ways to take a hit while trading commodities. If you can develop an edge to protect you MOST of the time against the common hits that most traders take, you can survive while others drop out. It's worth identifying the most common problems and developing a strategy to protect yourself. To use any strategy means there is a cost to pay. There are no free lunches in the futures and option markets. Protection from disaster comes in the form of lower returns when you are right or more expenses in general. You are actually exchanging a home run for a single, double or triple. Or exchanging a big loss for a mild one. The end result is a smoother equity curve and a lower "risk of ruin" factor. The objective in commodity trading is a slowly rising equity curve with minimum draw-downs. I'd like to show you a few strategies I use that focus on these ideas. First of all, none of these strategies will make money over the long haul if you just use them randomly. There must be used in conjunction with a "high probability" trade and a direction you have in mind. A high probability trade means that you have found a pattern where the market usually has little movement in one direction, but a large move in the other. This is also called a "low risk" trade. Once you have a forecast, you need to find the right trading vehicles for the job. This is where many traders get lazy or stick to old habits. This generally leads to losses in the long run. To have an edge over the other market participants, you need to identify the best priced options and/or futures combination and strategy to do the job, right NOW! This is not as easy as it sounds. Each situation is different and always changing. What worked last time in a particular market may not work as well this time. There IS a correct choice and a wrong choice. Just buying a call option when you are bullish is the road to ruin through premium erosion. It takes about $4,000 a year to pay for the premium to support just ONE, three month option near the strike price. (an average) This is a tremendous cost. And just buying a futures contract opens you up to large risk if the market goes locked limit against you. This will happen very infrequently, but over time, probability will find a way to hit you with the "limit" dodge-ball. You should be protected at critical time windows. I will discuss how to make an educated choice of which vehicle to pick AND show you a way to insulate yourself against option premium erosion while waiting for a market move. I'll also show you how to hedge against the risk of adverse overnight futures contract moves.

posted by coolio @ 1:41 AM

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