More on Scale Trading . . .
You Can't Lose Trading Commodities
I feel more like a professional book-reviewer now than a trader/investor. The idea of my earlier article was to simply defend Robert Wiest's book titled "You Can't Lose Trading Commodities". If book is used correctly, the method is far from high-risk, and to suggest that you as editor of CTCN should read the book before commenting upon it's contents.
I forgot to mention the commodity trading system can be used to play the short side, but it does then become very high risk. Robert Wiest strongly advises you don't try it, I agree. While there are levels below which many commodities cannot realistically go (i.e., their cost), they can go up for years if demand continues to exceed supply, and would exhaust the equity of any trader. Soybeans at $5 would be very attractive to scale from the long side, because they simply can't drop very far. If anyone wants to be hyper-conservative and construct a 90% risk-free scale, the commodities price can't drop more than $5, can it? Set your scale for this if it makes you feel better. Most of your account equity will sit in Tbills forever, but you'll never go broke.
On the other hand, soybeans at $10 might look attractive from the short side, but why can't beans go to $20? They could go to $40. At the time I wrote this Copper looks vaguely attractive for scaling from the short side (it's historically high, all the bad production and high consumption news seems to be in the price, and it has bounced off its record high levels many times lately), but this would be extremely dangerous. If anyone wants to bet it won't go to 160, or even 180, he's a brave man. It probably won't, but it might. It could go higher still. Scaling from the short side is possible, but suicidal in my view.
There have been some very valid points raised. Clearly, many people trying this method run into trouble, or by now word would have got around that this was idiot-proof, and everyone would be doing it. It's not foolproof. Will not generate huge trader profits, and is often boring! Though it works, it can be very frustrating. I suspect that most of the people who fail, do so because they run out of patience. It is easily possible to spend a month with open positions in five commodities, all of which show paper losses, without opening or closing one trade, it does lack action. If you just want action, Las Vegas is much cheaper for the average trader than the futures markets.
If a trader succumbs to the temptation to play in too many futures markets at one time the margin calls will start coming one day, and the unfortunate commodity trader will have to liquidate all (or most) of his positions, probably in each case near to the bottom(s). Incidentally, I do find it hard to resist over-trading the trading system occasionally, and now try instead to get my "action" by betting just a few dollars a week on soccer. By the way, is gambling still illegal in some states in the USA?
Regarding working out whether something is cheap by historical standards, this is quite simple. The fundamentals are much harder to follow. The easiest solution I have come across to the first problem is in the book. (Sorry if I'm starting to sound like an advert. I stand to gain or lose nothing if you or ten thousand other people do or don't buy this book). Robert Wiest takes the high and low of the last ten years (or so), splits it into thirds, and only commences scales within the bottom third.
This is highly over-simplified, but readers get the idea. If you want to know all the details, you know where to look. Getting hold of, and more importantly interpreting, fundamental information, is much harder. I do most of my trading through a discount broker in the U.S.A. (blatantly ignoring Robert Wiest's advice). I put enough business through a full service brokerage in London to get the regular reports, numbers, storage details and so on. This info can help me decide the likely future direction of something based on supply and demand fundamentals.
I try hard to do this interpretation myself, for two reasons. Both important. First, if you listen to the advice of someone and just blindly take it. You not only learn no lessons if it goes wrong (you don't even learn anything if it goes right), but you are subjected to any bias in his opinion. For instance, if an analyst is very long crude oil, he will likely scrutinize a report for any piece of bullish information, while finding reasons to exclude, override or flatly deny anything bearish. Secondly, if you learn to do something like this method, you will have a skill that will make you money in the future, regardless of whether your latest guru dies, gets locked up, or simply starts misreading everything. Such ability, to me, is just priceless.
So, working out whether something is historically cheap is quite easy. The rest isn't so simple. I can't give you a mechanical way to do this analysis. I don't even know if there is one. Although far from elementary, fundamentals on crops are not so difficult to fathom out as currencies, since sentiment will override everything in these worldwide financial markets (didn't everyone say the yen was fundamentally overvalued at 97/98? I wonder what they thought when it hit 88 this week). For crops, you look at the current carry-over levels, estimates for the next crop, probable export and/or import levels, and so on. Don't rely on the weather in Iowa in June. That's guesswork, but of course you must remember it's a crucial factor.
If stocks are enormous the price will probably stay down whatever happens to the weather this year. There might be no rain, there might be 3-feet. If stocks are low and planting levels are low, the price will probably go up enough for a scale trader, even if the weather's perfect. If it isn't perfect, the price will soar up. On the other hand, if stocks are high, the next year's crop estimate is high and the price is at the top of its bottom third, go and find something else, because the likely direction is down, unless the weather is awful.
Unfortunately, it's not usually quite this simple. Again, if it were, everyone would do it. Read the book, you'll see that you don't need the price to go up a mile and stay up. You just need it to hop out of its bottom third for a brief period (probably a few minutes will suffice), and you're out of your scales, with profits, and can look for something else to buy (maybe the same thing, if the price drops back again).
For people who are willing to simply take the advice of Robert Wiest, he publishes a newsletter every couple of weeks or so which might help. I get this newsletter (along with many others) to help broaden my information base (and I like reading newsletters). I do not take any of his recommendations as gospel. I like to form my own opinions, and create my own scales. At the end of the day, the only person I trust is me. I don't trust some chap on the other side of the world to whom I have never spoken, despite how nice a man he seems to be (from the tone of the letters), and regardless of how grateful I am to him for writing his book.
Incidentally, his newsletter includes a guarantee account, which as I understand it promises a return of 25%. At some point in any one year period, or you get your money back. I don't follow this trade account, so I don't know how he's doing. I think I read somewhere, presumably in his letter or book, which he's always offered this guarantee, and has had to make refunds only once in many years of publication. I know he was hurt last year by some bad information on live hog slaughters, and has been forced to stack up 'umpteen' contracts with big paper losses, but he seems to cash in plenty of winners elsewhere.
We all know that the price of hogs will go up again eventually, don't we? Even if it perhaps drops a bit first, it will go up soon. No farmer in his right mind is currently increasing the number of pigs he has, while the low price of pork and bacon is presumably starting to move the consumption figures higher. Furthermore, I bet he's cashed several oscillation profits on the recent price moves up.
I have stated before, my reasons for wanting to trade off my own bat and can repeat them here. I know Robert Wiest is much older than I am (he was flying in the war), and I intend to scale trade long after he stops writing his trading newsletter.
I can recommend that anyone with patience, read this book. I think it will provide entertaining reading. Even if they later reject the ideas as too cumbersome, boring, frustrating or whatever. But I think many commodity traders would benefit from it, and I heartily recommend it. If they want to subscribe to his newsletter, that's up to them. I'm afraid I forget how much it costs, but it wasn't a huge sum. It will probably help commodity trading beginners, and certainly helped me to get started. I also maintain the trading goal which for most traders should be trading profitably and independently. I'll never attain the dizzy heights of $1,200 per day, but as a trader, I am a one in ten!
P.S. - We will soon be offering new trader products and new services for UK based financial futures markets traders, so please visit again.
Written by S.F. from Europe for CTCN