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The Six Sure-Fire Ways to Fail Trading Commodities, PART 6 |
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The Six Sure-Fire Ways to Fail Trading Commodities, PART 6Author: Thomas Cathey Article source: http://www.articlealley.com/. Used with author's permission.
Actual trading events where things went very wrong - and how to avoid them
The Six Sure-Fire Ways to Fail Trading Commodities:
6) Take Only 'Safe' Trades
A wise and successful trader once said, "we get paid for putting our hands in the fire." Never has one spoken such truth! How many times have I made a futures or options trade where I've felt comfortable and smug - but then lost. And many times I've been scared with a "shaky hand" trade and made money.
Back in the early 80's I had a good friend who liked to trade stock options. There were no commodity options back then. He hung around a stock brokerage firm office all day sitting by the stockbroker watching the quote machine. The broker was a fellow of about 65 years old or so. I'm still amazed that he let my buddy sit there all day, but the commissions and action he generated made it tolerable, I guess.
Anyway, my buddy had just received a $75,000 inheritance. He got the Joe Granville market letter and knew OBV and Joe's stuff cold. He was in there buying stock calls and trading like a mad man. He hated trading stocks because of the mark-to-market psychological pressure (delta of 1) and the lack of leverage. But out-of-the-money options made him feel "comfortable." He would always say, "I'm not worried, I've got plenty of TIME!"
Well, time has a tendency of slipping away. In three to four months of "comfortable" trading my buddy went through his whole $75,000 inheritance. He didn't like to stick his hands in the fire. The guys who did, the option sellers on the other side who were probably scared, took all his money as their reward. We MUST put our hands in the fire to justify our trading existence! They pay us to make other people feel comfortable. (the other people being the speculative losers or legit hedgers) That's why commodity futures contracts and options were invented - so others could lay their risk on us speculators and go about running their commodity related businesses unworried about prices.
As a funny side note... a year later my buddy met an older gentlemen who was bragging about how well he'd done selling call options over the last year. My buddy was also bragging of what a good trader he was. The older guy said he made a small fortune writing Bally call options all the way down. He then asked rhetorically, "who the hell was buying these things? They must have been stupid!" My buddy gagged and didn't let on that HE had been one on the buyers...
Part Seven of Seven Parts - 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.
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