Tag Archive | "Commodity"

Moving Averages And Their Uses In Commodity Trading

Moving Averages And Their Uses In Commodity Trading

A key component of technical analysis and perhaps one of the oldest indicators around, moving averages are time-tested and affective indicators. There are many types of moving averages with varying indicators, but the primary purpose of all types of moving averages remains the same. Their purpose is to reduce or remove noise from the daily price movements and attracted trends of stocks, commodities or any thing you can plot or chart.

Moving Averages: How Do We Use them?

Moving averages identify trends and trend reversals, give a measure of a commodities’ strength, and help you arrive at support and resistance levels. Essentially, moving averages are indicators with lag, which is to say that they do not identify new trends but are useful in trend following. One of the most useful ways in which you can use moving averages as buy or sell indicators, is to have three moving averages running at the same time on the same chart. The idea is to have a short, an intermediate and a longer term time frame. When the first two move upwards and cross above the longer term one, it indicates an uptrend and one can buy. The reverse happens if the first two move below the third moving average. In that case, you can sell, as the commodity is in a downtrend. A good example of this would be a 10, 20, and a 30 day period moving average, plotted on a commodity chart.

Moving averages are also used by traders to determine support and resistance of a commodity. When the commodity reaches a moving average and struggles to move above it, you might have found resistance. If a commodity stops falling at a key moving average, it can be deemed to have found support. A prime example of this is a 200 day moving average, which is used to calculate long-term trend directions, and to find support and resistance in them.

Types of Moving Averages

There are different types of moving averages. The simplest one is the simple moving average (SMA), which is calculated by taking the normal arithmetic mean of a specified set of numbers. The exponential moving average (EMA) is calculated by giving weightage to more recent data. The EMA is regarded to be a better moving average compared to the SMA. Both of these moving average variants become very useful when used for trend following with moving average crossovers. Indicators such as the moving average convergence divergence (MACD) and Bollinger bands use moving averages as key components. The MACD shows the price divergence of two moving averages, by subtracting a 26 period EMA from the 12 period EMA. A third 9 period EMA is used to give us buy or sell signals when it moves above or below this MACD. Bollinger bands, so named after their creator, use two standard deviations plotted away from a 21 period SMA.

Whichever way you look at it, one cannot deny that using moving averages by themselves may not make you a millionaire in a hurry, but are brilliantly useful in helping you follow trends and plan your commodity trading strategy.

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How To Select A Commodity Broker

How To Select A Commodity Broker

Commodity futures trading can produce enormous profits for you however it is also a very tricky business and only individuals with money that they can really afford to or risk losing should consider embarking in this type of market.

Commodity trading futures without a doubt is an attractive as well as high profit venture that those only with a high risk tolerance find it pleasing. Purchasing a future entails entering into an agreement to sell or purchase a commodity or product for a definite price or value at a time specified in the future.

When considering commodity trading futures, it is very important that you study and read extensively before you make any investment. After careful study, you must investigate carefully the commodity brokerage houses. Note that commodities are not traded directly on exchanges by individuals rather trading is done through firms and individuals who are rightfully registered with the Commodities Futures Trading Commission.

Cautiously read the disclosure information through that is made available by the brokerages you are looking at. Ask yourself these questions:

Do you want to electronically place orders or through a live broker?

Do you want to grant your commodity broker power of attorney then allow him carry out trading decisions?

Which types of markets would you like to trade and what is their scope and can you afford them?

How much dollars can you afford to waste or lose?

What expectations do you have from trading? Is it just for fun or to make profit or earn a living?

Asking and answering these basic questions not only make it easier for you determine whether trading commodity futures is appropriate for you, it permits you to choose a commodity broker based upon your needs as well.

The commodity broker

The markets generally are changing constantly and your commodity broker will stand by you for all the lows and highs of the market. As they constantly on the front-line, they are capable of advising you to your best position at any moment and will give you instant updates on topics and facts related to your investment.

They are in charge of other commodity contracts and these verify checks and calculate everything that they accomplish. You are protected completely because the commodity brokers generally has vested interest. Here are tips for selecting a commodity broker:

1. When contemplating on a broker, first take into account the brokerage; is it reputable? Check with the NFAs website because it acts to the same extent the Better Business Bureau for brokerage trading organizations in the U.S. markets; you can get in touch with so to discover if the brokerage has any record of black marks.

2. Pay keen attention that your commodity broker should be able to assist you to understand the usually complicated futures commodities trading world.

He should be knowledgeable enough to verify and validate the prices or value of the unfinished goods that does not easily come to most.

3. Your commodity broker must show expertise for his trade. A number of brokers specialize or concentrate in only one market but others deal with all types so they have a broader knowledge.

Some brokers can better relate to day-traders while others to position-traders. There are those who prefer doing spreads while others are geniuses at option trades. Ask what your broker main focus or specialize in?

4. Your commodity broker must be involved actively in all markets both in futures and commodity trading so he will be competent to give you an account on all sides of the markets goings-on.

5. Make certain your commodity broker knows what he is talking about and should be able to assist you in whatever type of trade you plan to do.

As a matter of fact, a reliable commodity broker will attempt and make an effort to discover what your objectives and trading are.

6. You should have good connection with your commodity broker. You should feel that he has your best interest.

Without the benefits of a commodity broker, essentially, you are required to dedicate a lot of your effort and time understanding everything involved in trading.

Of course, with a commodity broker, at all times you have an authority that you can consult with and can direct you as well as somebody who wants you to succeed sincerely as a commodity investor.

Keep in mind that trading futures commodity can be exciting, lucrative as well as can cause you much losses. For this reason, when considering trading futures commodity, beware.

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Commodity ETF

Article by Hector Stevens

If the govt keeps printing income, commodities will the place you will want to be to safeguard your self and your beloved types.A person superior instance is with oil, which has been rising in costs over the last three months. We are now starting to operate out of this reserve and there is evidence backing up these claims. That will preserve the oil costs significant for some time to come. No an individual on the deal with of the earth has discovered any oil fields and with this kind of a significant demand for this commodity the costs of oil will hold raising in cost.No market place, and no commodity at any time goes up in a directly line, but as a hedge towards inflation, commodities will be a pretty dependable haven for the coming a long time. When there was violent inflation back in the the 1970′s stocks had been not a good location to be, commodities have been.So owning stocks and bonds is really risky at the motion. Possessing commodities and real assets is a pretty clever transfer for now.If you want to involve commodities as component of your prolonged-expression portfolio expense, down below are the 5 typical procedures that guideline you on how to make investments in commodities.The 1st way to spend in commodities: Spot Buying and sellingCommodities trading can be executed on the spot by way of “spot trading” where by delivery can take position in a couple of enterprise days. Spot investing is not the main way in which commodities are nearly usually purchased in massive quantities, several customers would want to take the danger of accepting what ever the spot amount is at the time of acquire, and quickly delivery.The 2nd way to invest in commodities: Futures InvestingCommodity futures investing is the most favorite tactics of acquiring and marketing commodities. Rather, most commodities are traded on futures exchanges this kind of as NYMEX and CBOT. The selling prices of commodities are effectively and transparently found as a result of the participation of thousands of potential buyers and sellers.<u>Commodities futures trading have two mentalities:</u> A single may speculate by taking a place, possibly prolonged (invest in) or small (sell) for case in point, a crude oil futures agreement in the hope that the crude oil would rise or fall in cost respectively, and to be profited in the anticipated amount motion direction.OR, an investor might hedge to mitigate the chance of a normal position in the commodity. For example, a soybeans farmer can insure versus a very poor soybeans harvest by buying soybeans futures contracts. If the soybeans crop is considerably much less due to terrible weather conditions, the farmer would make up for that decline with a revenue in the soybeans futures agreement, due to the fact the over-all supply of the crop is small just about everywhere that experienced the exact disorders.In futures buying and selling, investors trade specifically in commodities futures and encounter higher level of chance not only simply because of the volatility of commodity price ranges. It also consists of sophisticated abilities, suitable buying and selling methodology, and committed time to observe the commodities marketplace that is dominated by huge commodity investing houses and fiscal institutions with specialist traders.

About the Author

Serving the commodity market for three a lot of years. Commodity ETF

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whereby the original author’s information and copyright must be included.

Serving the commodity market for three a lot of years. Commodity ETF

Use and distribution of this article is subject to our Publisher Guidelines
whereby the original author’s information and copyright must be included.

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Commodity Trading Systems – This Ones Free and Makes Big Gains!

Today many traders buy commodity trading systems and spent money on expensive software when really all they need is to do a bit of research on the net and build their own.

Here we will show you how to build your own commodity trading system that will help you pile up big gains, even if you have never traded before.

First things first!

Let’s look at the logic the commodity trading system is based on:

1. Catching the big long term trends and these only come a few times a year. These are the ones to focus on – not short term moves or day trading, this system is geared for profit not low odds trades in short term market noise.

2. This commodity trading system does not predict, it only acts on confirmation of the tend.

3. The system is simple. Traders think that the more complicated a system the better it is likely to perform, the exact opposite is however true.

4. This system uses the same trading methodology for ALL markets and is based on a psychological flaw most traders have and lose.

5. As this system is based on long term trends it should take no more than 30 minutes a day and will work off the closing price ONLY.

Putting it together

This commodity trading system is technically based, so let’s look at what we Need the package to contain. All we want is weekly and daily charts and two basic indictors Bollinger bands and stochastics.

A good package on the web is available at futuresource.com, but there are many others, don’t buy one! You don’t need to.

Trading rules

Trading rules are simple:

1. Look for important valid (several tests over long time span) resistance and support on the weekly chart and note the trend, then look for the same pattern on the daily charts.

2. Once you have found a market that fits the above criteria look for breaks of support or resistance. Don’try and predict wait for the move to get underway i.e you have confirmation (via the stochastic indicator) this is when the odds of the trend continuing are highest.

3. Check the stochastic indicator supports the move this VERY important.

4. Enter with at the money or in the money. Do not buy out eh money options and remember keep time on your side.

5. Don’t move stops to soon, get stop in below breakout point and move immediately to entry if the position moves your way. Wait for larger profits and cover the position with covered write position.

That’s it; If you are not familiar with all the terms check our other articles.

Why will this commodity system work?

It’s based on sound logic, breakouts are easy to understand and trade, most traders wait for market pullbacks and miss the major moves. This system gets you in on ALL the major moves and confirms strength before buying, to get the odds on your side.

Keep this fact in mind – Most major trends develop from market highs, that means you have to trade breakouts.

Most traders get stopped out by volatility, but this system assumes the trend will continue rather than reverse as it’s already in motion, so stops are kept wide. When the profit becomes big you can put in an insurance policy, in the form of a covered write option strategy.

Finally, options can be used but unlike the losing majority you won’t buy out the money options with little chance of success. You will keep time on your side and buy in at or near the money.

The other advantage of this system is it costs nothing and is easy to understand.

This means when you practice it, you will have confidence and be able to trade with Discipline, which is a key to trading success with a commodity trading system.

Don’t listen to traders who try and tell you trading commodity systems needs to be complicated, it does not. A simple commodity trading system like the above, traded with discipline is all you need.


On finance including investments and becoming a succesful trader succesful trading visit our website for articles features and downloads at:http://www.net-planet.org/index.html

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Gold and Silver Investment and Trading Tips – Commodity Market Forecasts for Stormy Days Ahead

Gold has been on a Super Major Bull Market Run for around 8 to 10 years now & due to the recent sharper as well as faster rises seen in Gold & Silver, it is now time to realize that too much of a good thing could be almost, a bit too good to last much longer. Gold has historically proven to make profit for investors when mainstream investing is at a standstill. The yellow metal proved its traditional role as the sole protector of wealth during the dramatic global wealth destruction witnessed in 2008. In times of economic panic, Gold is susceptible to wild speculations. The problems facing the world today are not going to disappear overnight. In this uncertain era of globalization and & an ever-increasing natural, as well as man-made calamities, it is imperative that we all be proactive in protecting our wealth & in securing a reasonably safe future for our families.

For all those Commodity Traders or Investors who have incurred severe losses in their earlier investments in Bullion, it is even more critical to take appropriate action now.

I agree there are some more rises expected in gold & silver, but do not get misled & trapped into a further larger loss triggered by unreasonably greedy expectations or baseless rumors currently doing rounds of very large rises for a prolonged period in these commodities. No investment is a sure thing at all times, and no single investment strategy is right for everyone always. Investing is necessary but profit booking & exiting at the right time is even more vital for great wealth building.

I also agree it is wise to include gold investments in every portfolio as a hedge against inflation and declining values in mainstream investments. Global demand for Gold is steadily increasing with the emergence of powerful new economies like China & the ever Gold-hungry India. Investors are converting more & more soft assets into Gold due to its stabilizing effect.

Most Forecasters & Commodity Analysts providing Commodity Trading Tips or Investment Advisory Services, now say gold will rebound from its recent biggest monthly plunge since Oct 2008 & reach a record by March because economic growth is stagnating & Europe’s debt crisis is unresolved. There is a loss of trust in the entire financial system & an urgent need for safe-haven investment is crucial. Commodity Futures Trading Commission data shows that Hedge funds & other speculators increased their bets on higher prices by 8.7% to 138,846 futures & options in the week ended Oct. 25. It was the biggest gain in almost 3 months. Gold also retreated in September as the Dollar Index, a measure against the currencies of six trading partners, jumped 6%, the most in almost 3 years. The 30-day correlation coefficient between gold & the index is now at -0.45, compared with 0.23 in March. A figure of -1 means the two move in opposite directions, & 1 means they move in lockstep.

However, I would now like to highlight a few points & also some of my forecasts which stand in stark contrast with almost every analyst & investment advisor globally as was also seen around the 2004-08 period. I have been extremely bullish on Gold right since 2004 & also accurately forecasted the rise of Gold from below $ 400 to $ 850. My next Gold Forecast announced on 1st January 2008 pointed out towards a further meteoric rise to 4 strong & large upper targets – $ 1072, $ 1450, $ 1927 & finally the upper target range of $ 2215 to $ 2296. I was ridiculed by many then for being overly bullish, but have been proven to be absolutely correct to the last dot till now. To many, a further rise above $ 850 to these levels above $ 2000 seemed too far-fetched & impossible to be achieved.

I would like to bring to your attention that, Gold has invariably seen a decline after having achieved each of these 4 targets till now. As of now also, a correction seems inevitable. Gold is still very bullish in the longer term & on a rebound from dips, a small hurdle of $ 2,080 will definitely be hit first with a further rise to the further final upper target range of $ 2215 to $ 2296 by 2012 as forecasted. I have been highly bullish when most were conservative & now the opposite seems to be true.

I may now seem highly conservative to many for my final upper target range of $ 2215 to $ 2296 by 2012, as most advisors are extra-ordinarily Bullish on Gold now after having witnessed the super zoom from $ 1450 to above $ 1910 in a very short span of time & some are now forecasting levels of above $ 3,000 to $ 5,000 in the immediate future. Most are expecting Gold to rise to $ 10,000 also.

Surprising and contrary to many, I forecasted in the 1st week of January 2011 & strongly feel that Gold and Silver inflows may increase by next year (2012), thereby reducing their demand. Huge corrections in these can be expected. Gold may finally end its long Bull-run of the past 8-10 years for sometime, giving a golden opportunity to very long-term investors. Silver will be the metal to watch out for first, from Jan 2012 onwards & I expect it to rise to higher levels of above $ 55 to around $ 64.

Emergency surgery (Bail outs) methods for immediate relief will prove to be the undoing for many governments. Spiraling debt through credit cards which would seem to keep on piling up on the now jobless, homeless and fate-fully, also may be hit by epidemics. Who all and how do we bail out then?

There will be new avenues for investing later on but for sometime, Cash may remain King. Investments in Gold will also be wise for the next Bull-run but, after a prolonged cooling period only.


Rajesh J. Shah’s is the Chairman of Moneyline Futures Consultants P. Ltd., which is an Investment & Trade Advisory Organization & offers trading ideas & tips for Trade in all Commodity & Equity Markets. We offer MCX Tips, Gold & Silver Tips, Commodity Trading tips & Advisory Services for Indian, U.S. and other Global Commodity Markets. Get Latest news on commodities, Market data & Live Commodity Rates. Commodity & Equity Market Research, Fundamental & Technical Analysis & Trading Strategy Development are the areas of our expertise. Our Forecasts & News updates cover gold, silver, Commodity Trading & a plethora of other factors affecting the precious metals markets. Moneyline offers valuable insights to both investors and traders globally, in Gold, Silver & other Commodities traded on the exchanges, on early info as to where they are headed directionally. We cover all factors which can influence the gold & silver market price action.

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NCDEX Commodity Market Basics and Its Benefits

Each and every market is based on on-line basis. Now India taught about the agri products that why the agri commodities are not traded by using on-line system. Than the idea for NCDEX comes for trading with the agri commodities on on-line basis.

Origin of the NCDEX Market:

NCDEX stand forNational Commodity and Derivative Exchange Ltd. It is an online commodity exchange. The NCDEX commodity exchange is based on India. It is located in Mumbai and has more than 390 centers throughout the India.

Now a days so many software are available for online trading with NCDEX commodities. It is the largest most recognized exchange of India. NCDEX is promoted by ICICI Bank Ltd., LIC, NSE and National Agricultural and Rural Development, Punjab National Bank, CRISIL Ltd., Canara bank and Indian Farmers Fertiliser Cooperative Ltd. They have promoted this exchange by subscribing to the equity shareshave joined the initial promoters as shareholders of the Exchange.

NCDEX generally traded with the agri commodities. Now a days 57 commodities are listed under this exchange that includes agri based commodities, bullion, energy, ferrous metals, plastic and non ferrous metals. NCDEX commodity is traded on the basis of spot price. NCDEX currently facilitates trading of thirty six agri commodities – Cashew, Castor Seed, Chana, Chilli, Coffee, Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil, Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Mild Steel Ingot, Mulberry Green Cocoons, Pepper, Rapeseed – Mustard Seed,Raw Jute, RBD Palmolein, Refined Soy Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Tur, Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow Red Maize & Yellow Soybean Meal.

How the online agri commodity be beneficial for traders:

These all are some basics about NCDEX exchange and the commodities that it includes. Now it is the topic to think that how the agri commodities that is valuated with the some quantity not with the value of money are good to trade on online basis. These all are vague because each and every aspect of online agri commodities is covered by NCDEX. These basic things for trading with the agri commodities is depend on the spot price and the order that is to be placed. NCDEX is providing such a nice platform for the agri commodities that includes technological efficiency and market friendly features that make the online agri commodity trading rich and provide good experience for the traders.

NCDEX is providing the world class commodity exchange platform where traders in the commodity market can participates for the wide spectrum of commodity derivatives and trade with full satisfaction because all the trading under this exchange is based on the rules that are defined previously. It is a public Ltd. company that provides trader best platform that is driven by best international curriculum.

Shweta Jain
e-Marketing Executive, CapitalVia Global Research Ltd.

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Commodity Trading Strategy – Critical Considerations

In creating or evaluating a commodity trading strategy, several key considerations must be taken into account and addressed, particularly before selecting a commodity trading plan or system. Several criteria must be met in order to satisfactorily achieve the objectives of the investor, and the strategy determines the system used. There are several specific considerations encompassed by the criteria, primarily to ensure that the system suits the trader’s personality and can be trades well. In order to achieve the optimum strategy and plan, this article examines these considerations and questions to be asked.

As part of creating a commodity trading strategy, an essential matter is the trader’s time available for trading. Right along with this is the desired involvement level in trading. The consideration of time doesn’t just mean how much time can be made for trading, but how much is desired and when. If a person has a full-time job, a spouse and kids, then it probably wouldn’t be suitable to pursue day trading.

Capital turnover time is another critical consideration. Turnover time is how long capital is tied up in a trade, or the time before it is available again for another trade. The longer term trades will have a greater capital turnover time and thus fewer opportunities can be seized during a given time period. Annual account ROI versus per-trade return is another aspect of capital turnover time. The lower the turnover time, the higher potential annual ROI, even with the same per-trade profit. The trade off is that shorter term trades require much more work and involvement than those with a greater turnover time. With regards to commodity trading strategy, it is a critical business decision to find the desired balance. The desired annual ROI is an overall determining factor. One may choose an aggressive or conservative approach depending on the objectives for income and wealth-building.

To ensure that the chosen commodity trading strategy and commodity trading plan suit the trader, they must work with the trader’s comfort zones. The system and rules should be such that the trader can follow them with reasonable ease . Emotions that flare up affect a trader’s decision making and can make sound trading difficult. Contributing to this problem is a strategy or system with aspects that are too far outside the comfort zones of the trader.

Certain attributes of a commodity trading strategy should be aligned with the comfort zones of the trader. A certain percentage of losing trades are inherent to any system, and a reasonable winning percentage is necessary so that the traders confidence can be maintained and not lost from too many losing trades. A tolerable maximum drawdown goes hand-in-hand here and for the same reason. A system should work under most market conditions and not be too limited. The financial goals must be attainable, so the commodity trading strategy and system must have a sufficient profit-potential – this is one of the most important facets.

One must have a well-reasoned commodity trading strategy in order to achieve a consistently profitable and reliable trading business. Once a system is chosen, it must be backtested, analyzed and measured so that the aspects are within the trader’s comfort zones and have a realistic potential to fulfill the profit objectives. Backtesting and review of the system metrics should be conducted prior to the decision to put any money at risk in the markets, so that the reasoning is confirmed without risk.

“I wouldn’t even think of trading without it” is how many traders describe the Trading Performance Analyzer & Profit-Potential Calculator, a powerful tool for analyzing, measuring and tracking one’s trading commodity trading strategy and system.

Confirm yours before risking real money with any strategy or system. Get the Analyzer at http://insideouttrading.com/tpa/

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Managed Futures – How to Pick a Commodity Trading Advisor

Over the last seven years the money professionally managed in the commodity futures markets has more than quintupled! According to hedge fund tracking firm Barclays, assets under management rose from about 41 billion dollars in 2001 to more than 219 billion dollars today!

As worldwide demand for commodities continues to heat up and more investors (institutional and individual) start seeing commodities as a sensible investment vehicle, this trend is expected to continue. This growth has also raised the need for ways to select a commodity trading advisor. In this article, we will outline what we believe are some of the best tools, and methods available to the individual investor when choosing a managed futures product.

Let’s first define what managed futures are and what they are not. Managed futures are not stocks or ETF’s that just invest in commodities. Managed futures accounts are investments in which funds invest in mainly leveraged, future dated contracts for commodities or financial instruments. Commodities can include sectors such as food, energy, raw materials and financial instruments like interest rates and stock indices.

The leverage, risks and rewards can be (but are not always) substantially higher when investing in the futures markets vs. the stock market. The National Futures Association and the Commodity Futures Trading Commission regulate managed futures investments in the United States (unless the firm / fund have “exempt” status). Regulated firms hold a Commodity Trading Advisors (CTA’s) or Commodity Pool Operators (CPO’s) license, but keep in mind, just because a firm carries a license is in no way an endorsement of future performance. Futures trading can carry large potential risks and is not for everybody. Investors should be familiar with all the risks before investing.

Finding lists of potential managers to sort through is fairly easy if you know where to look. Firms such as Barclays Trading Group, Stark Research, Autumn Gold and Altegris Investments have databases of manager information available. AutumnGold summarizes a free (with registration) online database of over 450 programs. Also, the programs can be sorted by a wide range of parameters such as minimum account size, funds under management, and various performance measurements.

The only problem we see with the online databases is that it can become somewhat overwhelming to try and narrow down your choices to just a handful of managers. To help simplify the process, we would like to share what we think are some of best performance metrics.

Our first recommendation is to forget return! The least significant statistic often is a manager’s return. How can that be you ask? What matters is RISK ADJUSTED RETURN. Just because somebody bet the farm and got lucky does not mean it was a nifty idea. Sooner or later (most often sooner) the inevitable wipe out will occur with a manager betting too aggressively.

There are many traditional risk adjusted return measurements, the most popular of which being the Sharpe ratio. The Sharpe Ratio compares the return relative to the underlying volatility in the investment. Although we are in agreement with the Sharpe Ratio’s logic, we feel it has one serious flaw. The flaw is that the Sharpe Ratio only views past volatility and does not try and predict future volatility. As a result, we feel the Sharpe ratio does not give an adequate view of the potential risks involved in a program.

A good example of this comes from the world of the “option writers” (those who sell options). Since most options end up expiring worthless, it is not uncommon for managers that sell options to have excellent Sharpe Ratios. They can have smooth looking equity curves that have produced for many years, but just because an equity curve looks smooth and consistent does not mean it will stay that way. What happened is meaningless if you do not have the same results. Option sellers with longer term excellent track records tend to have quick, spectacular “blowups”. The problem, in our opinion, is that past volatility is not a reliable predictor of future volatility.

What is a reliable predictor you ask? In our opinion, one of the best volatility predictors is the “Margin to Equity Ratio” (MTE). The MTE tells you roughly how much of your investment would be used for margin purposes. This number will vary day-by-day for a given manager, but you can get the average range. If, for example, a managers MTE is 10%, this means that for every $ 100,000 you invest the manager uses about $ 10,000 of this for margin. Keep this in mind; the exchanges set margin based on their approximations of risk. The higher the exchange perceives the risk in a contract the higher the margin they set. We encourage you to think just like the exchanges and raise your expectations for potential risk as the MTE goes higher. If we go back to the example of the option writers with exceptional Sharpe ratios, you will also see that they often have high MTE ratios. We believe that these high MTE ratios were the tipoff that could have avoided many disastrous scenarios. Once again, just as the exchanges often raise margin requirements as their expectation of volatility rises, so too do we see the potential for volatility (risk) to be higher as the MTE rises.

Another important use of the MTE comes down to pure math. If you have two managers that made a $ 30,000 return, yet one used $ 30,000 in margin to do it, and the other used $ 60,000 in margin to do it, then the results are different. Based on margin usage one manager’s return was twice as high as the others. This is essential to keep in mind, because often managers can appear to have similar performances, but when you dig down into their margin usage you see large differences.

What is an ideal MTE? In our opinion, we do not like to see margin to equity ratios much above 10%. This is on the low end of the spectrum for managed futures accounts and cuts out most managers. Although it is true that low MTE ratios are no guarantee of lower risk, we feel that, at the minimum, it is possibly a decent gauge of sound risk management. Once again, it is our belief that as the MTE rises so does the potential for risk. There is also a related risk measurement often referred to as “portfolio heat” that uses similar concepts.

In summary, what we suggest is that you compute returns not based on what the manager reported, but rather based on the return on margin (you should also compute the risk and drawdown the same way). This will level the playing field and allow you to compare apples-to-apples. We are also in favor of being on the conservative side of the MTE spectrum, for us that means that we would likely reject any manager with a ratio above 10%. Using this method can help you narrow down your list of choices to a manageable number rather quickly. After you have done this then, you can then look and compare all the other risk adjusted performance measures and further refine your selection. (At this risk of this article being too long we will save the other risk adjusted performance measurement discussions for future installments).

We want to caution once again that, in the end, no measure is a guarantee or assurance against risk or losses. Past performance is not always indicative of future results. Futures’ trading involves risks and is not for everybody. We are simply sharing with you what we feel is the best method by which to select a manager.

Mr. Dean Hoffman attended Pennsylvania State University where he studied computer science. In 1987 Mr. Hoffman initially began his career as a commodity broker and worked for several large futures commission merchants in Chicago. After many years as a broker, Mr. Hoffman formed his own trading firm at the Chicago Mercantile Exchange. Throughout this period Mr. Hoffman intensively researched and developed algorithmic trading systems. In 2001 Mr. Hoffman formed a financial software firm, Strategic Trading Systems, that markets algorithmic trading systems. This firm is a corporation that has been registered with the CFTC as a commodity trading advisor since February 2000, and Mr. Hoffman has been registered with the CFTC as its sole associated person since that date. In June 2004 Mr. Hoffman formed Hoffman Asset Management Inc. He became registered with the CFTC as an associated person of Hoffman Asset Management Inc. on August 4, 2004, and he became an NFA Associate on the same date. Mr. Hoffman is responsible for all trading decisions as well as the day-to-day operations of the Advisor.

Mr. Hoffman resides in Central Pennsylvania with his wife and three children.

Website: http://www.hoffmantrading.com

For a related article to this topic please visit the following URL: “The Small Futures Account Conundrum”

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Commodity Trading Blunders IV, PART 3 – My Early Days As A Novice Trader

Beginning traders, my best advice to you would be to avoid doing “comfortable” trades. I see it all the time. The futures contract is forming a bottom and traders want to short it. It feels better to go with the trend after it is a ”sure thing.” But we need to be scared when getting on board. Since all of us are basically similar mentally, what scares you in the futures market will probably scare me. To be different is the way to stay apart from the crowd mentality. My rule is to never buy in the middle of a range. I find trading indicators work poorly there, as well as having false starts.

The big commodity boys buy and sell at the extremes. You need to think like them. The futures market must be rock ‘n rolling to enter or you are doing a comfortable trade. This doesn’t mean to buy falling daggers. It means to get in after the spike at a double or triple bottom. You want to have time to see the signs that quality buying is taking place first. There is usually plenty of time to get in. If we simply wait a few price bars before pulling the trigger and then cutting our position in half from what it normally is, we would instantly become better futures traders.

OK, one more Max story. It was in the early days a few months after the Boston Commodity Broker From Hell called me. I was day-trading with Max. There was a big time commodity sugar analyst at Merrill that I could sometimes hear in the background. I can still remember his name and this was over 25 years ago. He was on a one-way squawk box barking to the commodity brokers all over the country. He was always blabbing about how bullish sugar futures was.

He was right. Sugar kept going up for days on end. Then came the day when he literally screamed at everyone to buy, saying the futures contract market was about to go limit up and to get clients in before it was too late. It sounded like he was losing it. Max asked me if I wanted to get in too, but I told him I was looking over my Trident program and it didn’t have a buy signal yet.

Later that day I called Max and sugar future contracts had instead reversed to go locked limit down! This was with expanded limits, so it must have been close to 100 points. Here was a mini-crash with blood running in the streets. Max was licking his wounds and was beating up the sugar guru for getting him into this fix. I must admit I smiled.

Suddenly in the background the sugar guru appeared again. He was STILL barking about how bullish sugar was! He was urging all commodity brokers to buy more at limit down. I told Max it was like a toy factory blowing up. All that was left was a broken, dysfunctional, talking doll staggering in a daze and stuck in a continuous loop about sugar. Max laughed pretty hard. I heard a click in the background and the doll stopped talking.

As a fitting epitaph, sugar futures contracts went limit down for another two days before stabilizing. Afterwards, the sugar guru sounded rather quiet for the rest of the bull move. Watch out for scenarios and gurus! Scenario trading often results in the biggest trading disasters in both commodities and stocks. I’ve witnessed many stubborn scenario traders implode. I have more articles coming soon on this subject.

Part Four of Four – 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.

Thomas Cathey directs the managed futures division of Thomas Capital Management, LLC. Get FREE, the complete 44+ lesson, “Thomas Commodity Trading Course” by visiting: [http://www.thomascapitalmanagement.com/commodity/welcome.htm] It’s brand new and fun reading… a “street-wise” trading e-course. Visit the main Thomas Capital Management trading website at: [http://www.ThomasCapitalManagement.com]

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Commodity Futures and Options Trading – How Efficient Is YOUR Trading? – PART 2

Let’s add up our trading expenses. For the E-mini, if we buy at the market, we give up ¼ point buying at the offer, and later, another ¼ point selling at the bid. This means we need to make ½ point on the trade just to break even. The futures contract commissions will vary depending on whether you trade discount or full-service. If you are a profitable trader and are able to watch the market during the day on your own, then a self-directed discount account is the way to go. But if you are not yet profitable, then you need the guidance of a good commodity futures broker or mentor.

What you save in discount commissions for the year can easily be wiped out in a few weeks of poor trading or human errors. Depending on your rate, commissions can add an additional 1/8 –1/4 point to each trade for the S&P futures contract. The bid and ask can be even wider for other less liquid futures markets. Commodity options can be very wide and illiquid in certain futures markets. This also applies to trading stocks.

In my opinion, day trading should be done either through a self-directed discount account by the client himself, or as a managed futures account by a CTA on behalf of the client. Fast executions are mandatory and almost impossible if a client needs to be called at the moment of every trade. The third alternative is to give the full-service commodity broker wide berth like, “I authorize you to buy two Dec E-mini’s for me between 9:30AM and 4:15PM today, at the market.” Once the broker makes the futures trade, he would call you with the report. You would then authorize him to liquidate it in the same manner.

So now that we’ve touched on the major “expenses” of commodity futures trading, lets look into specifics. Possibly the biggest drain on “swing efficiency” (what percentage of the perfect move you take out) is what is called slippage and skids. Once the decision is made to enter, this is how far the market moves before you get an execution. Sometimes it can be positive slippage where it helps to give you a better price. But much of the time it is negative slippage and eats away at your bottom line. Normal slippage is caused by time delays in the futures pit or other problems in the order chain.

Another form of slippage is what I call “trader slippage.” This can be the result of procrastination and not pulling the trigger right away. There’s also a common problem that plagues commodity brokers I call “client slippage.” For standard non-discretionary retail accounts, sometimes clients will drag their feet when approving a trade or are difficult to reach. This is more important when day trading futures or options, and not so for long-term positions. It all depends on what the market is doing. It all adds up to reduce your bottom line.

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.

Thomas Cathey directs the managed futures division of Thomas Capital Management, LLC. Get FREE, the complete 44+ lesson, “Thomas Commodity Trading Course” by visiting: [http://www.thomascapitalmanagement.com/commodity/welcome.htm] It’s brand new… a “street-wise” trading e-course. Get an edge trading futures, day trading e-mini’s and selling options and spreads. Also learn how “TimeLine Trading” and rare “Ninja trades” can improve your trading results. For more helpful trading info, visit the main Thomas Capital Management trading website at: [http://www.ThomasCapitalManagement.com]

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