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The Six Sure-Fire Ways to Fail Trading Commodities, PART 7 |
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The Six Sure-Fire Ways to Fail Trading Commodities, PART 7Author: 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:
Just one more story about taking comfortable trades...
Later on stock market guru Joe Granville called the top of the stock market on January 21, 1981. I still remember it to this day. My buddy raised some new money for stock option speculation, but this time he got ME involved. I had just made my fast $5,000 score in the British Pound by shorting futures contracts. You can read about it in one of my free course lessons entitled, "My Early Days As a Novice Trader - Trading Blunders." It's funny reading, really.
Anyway, I was on a roll and figured if I could do well in futures speculation, stock options would be a piece of cake. They're pussycats compared to futures contracts. My buddy enticed me to load up my full $5K profit into stock option puts. After Granville made his historic top night call, the next morning we ran into the market paying top dollar for puts of many different stocks. The Dow had opened down about 20 points or so.
Back in 1981 the Dow was at about 1000, so twenty points was considered a huge gap down. The market makers were selling us these put options with shaky hands. They didn't know if the market would tank farther. But my trading buddy and I were smug and comfortable!
I remember going out to lunch with him and laughing about how much money we were going to make in this stock market crash. We could not understand how anyone would be stupid enough to take the other side of our trade. If I was smart back then, and I wasn't, I would have thought to myself, "man, this guy is dead!" (me) HA!
Well, you guessed it. The stock market then spent the next eight weeks slowly rallying back to the old top. Our high priced put options eroded quickly. Being a more nimble futures trader, I liquidated everything within the first week and lost about $2K. My buddy held on and his option premiums eroded - down with the ship.
Later, after these two-month options expired, the Dow finally reversed down and eventually became the great bear market of 1981-82. It made a historic low at around 770. My point is we took on a comfortable position while the opposite side stuck their hands in the fire. To add insult to injury, even though we were right about the long-term move, we lost money.
All people are much the same in make-up and are fearful of the same things. If we are holding a position while watching a quote machine or chart, you can bet a high percentage of us feel the same pressure or elation. So when you feel scared, you can be sure others holding a similar position feel it too. To be successful you need to be able to take the opposite side with courage at the opportune points.
No one knows for sure where these turning points will be, but you can be sure that a futures bottom is more likely to come out nearer a selling panic than a buying panic! There is even a time for averaging in. I know of several successful commodity futures and options traders who do well averaging in a loss. They are a rare breed that can take the pressure. The trick is having the discipline to stop averaging and take the big loss when the futures market keeps going against you. There must be a time to spit ?em out or they will eventually carry you out feet first.
I would define a "safe trade" as one where you buy in the middle of a range or even during a breakout. Now I realize that breakout futures trading works at times. In fact EVERY kind of method will work sometime if given enough data samples. But over time, you will find the safe trades will eat you up through expenses.
Buying dips and selling rallies can pay for a lot of overhead and mistakes. I have a saying that goes, "the futures market ALWAYS gives you another chance to get in." I say always a chance to GET IN. But when you are wrong, it will not always give you a second chance to get OUT. This is a joke, of course, but it does have some truth. You see, being emotional creatures, we tend to feel panic and react quicker than when there is optimism and confidence. So, we all have a tendency to want to exit faster in adversity. We seldom find ourselves panicking to get into a new trade.
Another rule I have is when a futures trade goes bad, not to sell out into a panic, but wait for the bounce. The contract may even bounce close to break-even if you are lucky. It takes discipline to hold onto the loss, but even MORE discipline to get out once the futures market turns in your favor. Look to get out near even with a bad trade, NOT to make a profit. Over time, it will pay off not to panic. All these things are forms of putting your hands in the fire. Feeling uncomfortable is usually the sign of a good trade.
SOLUTION:
The moral here is to always monitor yourself. If you feel comfortable and smug about a futures contract or option trade, something is probably wrong. If you feel scared, you are probably looking at a good trade. Nothing is perfect, but it usually pays to trust your intuition in these cases.
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.
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