More fortunes are made and lost more quickly in the commodities markets than anywhere else. It is a game of consequence where profits won by one player come straight out of the hand of another. The majority playing are set to lose. The stakes are high. But for those who know how to play well, rewards can be immense. Learn how to play the game, and how to play to win!
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Preface Why trade commodities?
In recent years, I've seen more market moves of significance take place in the commodity markets than anywhere else: moves which can literally make the differ-ence of a lifetime (for the better or the worse).
More fortunes are made and lost more quickly in these markets than any-where else. This is due to the leverage the commodity markets possess. Yet, with all the potential these markets have, few really make out well. Do you wonder why that is?Why this book?
I've been trading full time for over twenty years now. As head of a trading firm working with individuals and corporations alike, I've seen thousands of trades. I've seen fortunes won and lost. After a while you do learn a few things and it's my goal to share some of what I've learned with you. Hopefully, I can save you some of my grief and jump-start you on the road to success. Of course, I'm still learning, and still have a lot to learn, no doubt. Every day is a new challenge, and different from the last. Yet some of the same mistakes I've made are being made day in and day out by those who are on the losing side. I think you can be saved from making some of these same mistakes. This will be discussed in the pages to come.
Without trying to be all things to all people, I've written this book for both the novice and the seasoned trader. It is meant to be a primer and reference source for those of you who have not yet taken the plunge into the shark--infested commodity waters, but are seriously considering this. It is also designed to help those of you who are currently trading and want to do better. We'll start slowly, then build up to the grander concept of a master trading plan. Along the way I think I have some good stories to share with you.
What will it take to succeed? You'll need patience, guts, discipline and a vision. I cannot infuse these qualities into you. I can only tell you what to look for and what to watch out for. It will be up to you to act.For now, think of this as a game
Financial markets come in many colors, shapes, sizes and flavors. For now, think of commodity futures and options as a game: the highest stakes money game in the world. This is where fortunes are made and lost on a daily basis. Sure, there's a loftier purpose. Governments allow most of the traditional financial markets to operate for the purpose of capital formation. Futures markets are `3 allowed to operate as a vehicle of risk transference for commodity producers and .; users. However, this book is not a scholarly treatise. It is not about investing for your retirement. It's a guide. A guide to winning the game.A game with consequences
If you choose to play the game, be forewarned it can dramatically affect your lifestyle. For the better or for the worse. You see, commodity futures are a zero sum game. For every dollar won by one player, that same dollar is lost by another. Accurate statistics are not available, but it is generally agreed that the great majority of players lose the game. If that's the case, since this is zero sum, then the great minority are winning what this majority is losing. This is one of the reason why the stakes are so high. Fortunes are made in commodity futures and in many cases starting from a very small stake. Luck may play a part in the short run, but in the end those players who play better will triumph. This book is designed to help you play the game better.
For every buyer of a gold or copper contract, bond futures, cattle or Swiss francs, there is someone, unseen but out there, on the other side of the transac-tion. The buyer is known as the long. The seller as the short. At any point in time, except for the split second a new trade is initiated, someone is winning and someone is losing. The game can be painful at times. Price movements them-selves affect future price movements and it's all a function of who is being hurt and who is being helped. Shorts and longs act differently based on their emo-tions, and their emotions are affected by price. Your job, as a trader, will be to identify what happens next. People who are right will tend to do certain things on balance. People who are wrong will tend to act differently. Then there are subsets in each group who will not act like the majority. One thing is certain Markets are made up of people, and people tend generally to act the way they did in the past. With certain stimuli, they will act opposite as to how they generally acted. If you as a trader can predict what the pattern will be, the rewards will be substantial. We will discuss in this book various methods designed to dis-cern and predict these patterns. No method is foolproof, so the best we can attempt to do is put the odds in our favor. If we can do this, and you then approach this in a disciplined manner, success is assured. Sounds simple? If it was so simple most people wouldn't lose and the nature of the markets is to punish the majority. This book is designed to place you in the minority, because it is the minority who will reap the rewards.Why trade commodities now?
I entered this crazy business during the commodities boom of the late 1970s. The Hunt brothers were attempting to corner the silver market, the Carter administration couldn't get a grip on inflation, the currency markets were in turmoil, the Russians were invading Afghanistan, the world was running out of food due to a series of weather disasters, and the Iranians were holding American citizens hostage. Hard assets were in vogue. Paper assets were just that. During the decade of the 1970s, the CRB Index (basket of commodities) appreciated well over 100 per cent. The Dow Jones Index (basket of 'blue chip' US stocks) literally went nowhere for over ten years.
Now we are beginning a new millennium and paper assets are again in vogue. Many have had a spectacular run over the past twenty years, and some commodities have gone nowhere. Yet the pendulum looks as if it is starting to swing back the other way. Commodities, as an asset class, are starting to wake up due to selective global shortages and increasing demand. Here's an interesting (and frightening) fact: the world is adding to its population at the rate of a Mexico every year - over 80 million people. The Chinese population alone is 1.2 billion people. This is more than all the combined populations of North America, South America, Europe and Africa. Chinese grain demand will grow 30-50 percent over the next five years! In the early twenty-first century their projected copper demand will be 400,000 tons over and above their internal production. And this is just China. I think you'll be hearing more and more about commodities in the years to come. Those who can acquire the skills necessary to master this arcane area (skills quite different than traditional stocks and bond investing) will prosper to a degree the traditional investor can only dream about.
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Table of Contents:
Introduction: Do you have what it takes?
1. Basic training: a futures primer.
The futures contract. It's as easy to sell short as to buy long. Margin and leverage. Delivery months. Brokers and commissions. The players. Basis risk. A hedging example. The exchange 'open outcry' and the clearinghouse. The regulators and regulations. How to place an order.
2. Advanced futures.
Zero sum game. Money management. Contrary opinion theory. Spreads, straddles and switches. Normal or inverted? The 'Voice from the Tomb'.
3. A diabolical story.
4. An options primer.
Options. How options work. How are option prices determined? Should you exercise profitable options? Should you ever exercise an option? If selling options puts the odds in my favor, why not do it? Options—a prime hedging tool. Stock index options.
5. Advanced option strategies.
Buying options to protect futures. Writing options as a hedging strategy. Covered option writing. Option spreads. Ratios.
6. Eight winning option trading rules.
The rules. 1 Stay away from deep in the money options. 2 Stay away from deep out of the money options. 3 Trade slightly out of the money, at the money, or slightly in the money options. 4 There is a time for all seasons. 5 Covered call writing is a good strategy for what appears to be a bullish environment, and covered put writing is generally good for what looks like a bear. 6 In 'normal' markets, write straddles and strangles. 7 Look for opportunities to backspread. 8 Use options to hedge a profitable futures position.
7. How to analyze the markets fundamentally.
Fundamental analysis. Technical analysis. Which is the best way to go? Financial futures. Energy. Agriculturals. Metals.
8. How to analyze the markets technically.
Does technical analysis work? Charts. Classic chart patterns. Open interest. Oscillators. Point and figure charts. Japanese candlestick charts. Why technical analysis makes sense.
9. The most valuable technical tool (TMVTT).
Bottom pickers vs. trend followers. Moving averages. A moving average primer. Bottom line.
10. How to use TMVTT.
Step 1: Use the 30-day WMA to determine the longer term trend. Step 2: Use the 2-day WMA with the 9-day WMA (simultaneously) to generate buy and sell signals. Additional rules for maximum success /206.
11. A day trader's secrets.
Your nine essential day trader's rules. The trend reversal day trading system.
12. Your state of mind.
Motive. The six hurdles to successful trading. Money management. If you don't feel right, you won't trade right. Your advantage.
13. Twenty-five trading secrets of the pros.
14. “Jesse's Secret” : the most important lesson.
To make the big money you need to catch and exploit the big move. Jesse Livermore. Those who can be right and sit tight.
Appendix: World futures and options exchanges.
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