This course is a broad overview and discussion of the salient subject areas that one will need to navigate to fully understand the commodity space.
Students will be introduced to what makes each of the commodity sectors tick from an international economic standpoint.
This course sets the record straight about what is a predictive indicator and what is a lagging indicator in the commodity markets.
This course investigates why certain traders become great and why others blow up. Be prepared to journal extensively and learn about your strengths and weaknesses.
I did a video back in May 2009 called that delineated what my thoughts were about Warren Buffett. As you’ll see in the video, I have much admiration for the man, but I’ve always believed that blind love for him and Value Investing can get you killed in the markets.
How’s that?
Say he has a 50% drawdown in the markets and his net worth drops to $20 billion. You, with your $2 MM investment, follow his investment stewardship by owning either his A or B shares, and get nailed for a 50% hit too.
Warren Buffett: loses 50% or $20 billion – no change in quality of life. There is no difference between $40 B and $20 B.
You: lose 50% or $1MM – massive hit to quality of life. Where’s the Value in that?
Nassim Taleb has a great take on all things random. I’ve read both his books and loved them. I have a friend named Fat Tony too. Taleb contends, like I did in May, that Buffett’s returns and performance may be due more to randomness and luck than skill, and that there is not enough data to say it is pure skill alone.
Taleb believes that there is much more evidence that his hero George Soros is more likely skillful than lucky.
Read MoreOne of the greatest advantages you have in being a prop trader is that you have the right to not participate and that is a powerful advantage to have over the rest of the marketplace. If you’re just starting out, read this carefully.
You’ll find this advantage especially beneficial when you are confused about what’s happening in the market. If you’re used to trading gold or crude and the experts are having a tough time figuring things out in those markets, don’t beat yourself up for being unsure. Sitting on your hands, so to speak, is a way of preserving capital and the greatest traders on the planet are great traders because they played the best defense.
All this chatter about Greece, PIIGS, Gold and Crude oil…no one has mentioned what happened in March Sugar #11 the past few trading sessions. It sold off 11.5% based on closing prices over three days last week. Not Gold, nor Crude, nor the S&P 500 had such moves.
Sugar #11 (click to enlarge)
You didn’t hear about the move in sugar because a $49 move in gold sounds so dramatic and devastating. Gold lost 5.8% over the same approximate time frame – about half the loss in March Sugar #11 in percentage terms. Professionals speak of percentage moves, not $$$ moves. Media take notice.
Even the pure system traders don’t have an advantage when things get very volatile. They are getting chopped up in these markets and they have mechanized rules for entering, exiting, and position sizing – long or short! Volatility is a duress in the market that does not favor one side of the market over the other: it’s equally brutal to your capital regardless of market bias.
But how you interface with the market as either a system trader or discretionary trader is irrelevant. If you’re thinking about being a system trader or are one currently, you can systematize a rule to go to cash and sit out when certain criteria are hit, such as an increase in volatility or when your defined up- or down trend has vanished. If you’re a discretionary trader, go take a yoga class.
Trading is not the activity of buying and selling (or shorting and covering). It’s the full process from idea germination to the end result of gains or losses. If you feel compelled to take action, you might be trading for the action itself.
If you are someone who is charged with making profits, and you don’t see a good trade, you don’t have to trade. I’ve never seen a shortage of ideas over long periods of time. You’re not going to miss anything. Yes it’s painful to miss profitable opportunities, but it’s also a good trader to know that when there is enormous uncertainty in the marketplace, the risks may outweigh the rewards by a large ratio. Sit on your hands.
Read MoreVictor Sperandeo and I were quoted in an article called The Copper Conundrum at Reuter’s HedgeWorld today. This is a premium news story.
Free two week subscription by signing up. I am not compensated for subscriptions. Neither is Victor.
Read More
Nasdaq Composite - They Don't Always Come Back (click to enlarge)
When your portfolio heat is too high, cut the risk and go to cash.
When world markets start to fall, investors sell indiscriminately. Fear takes over, and they just sell to get out and go to cash because the uncertainty in the markets has become unbearable. When the level of portfolio heat rises (what traders call the risk in their portfolios) cut your position sizes by a large margin or cut them out altogether.
Conventional wisdom dictates that you be diversified, but when everything is going down and you’re not short, all diversification does for you is ensures that you only have a percentage of the worst loser.
Case in point: last week gold and copper got killed, the US dollar rallied, fears of financial collapse in Europe (the Euro), there was a worse-than-expected US unemployment number, there are fear about China, and the US stock markets fell and were very volatile and your portfolio probably showed it. In Europe, the debt levels of Greece, Portugal, and Spain are dominating the tape. All you need is one of them to fail or default for there to be a global sell off.
Which came first? How do you protect yourself (your capital)? The answer is “it’s hard to tell.” That’s why many traders enter what are called protective Stop Orders to buy or sell in advance of bad news hitting the ticker tape. Investors can do it too. If your portfolio is entirely long (you own things), the benefit of entering such orders is that you’ve picked an uncle point to go to cash well in advance of the market getting killed. If it begins to sell off due to any number of factors, you’ll be liquidated and your assets will be better preserved in cash until things cool down: you’ll be better able to read and digest the information with a clear head and cool demeanor by being in cash.
Market Timing Is A Good Thing
You don’t need another idea to invest in before you divest yourself of an investment in your portfolio. Risk management is just that – managing risk. It’s not holding on to some loser, researching another potential investment (from the same place that gave you the first loser), and trying to make a decision on when and how to make the switch.
When markets are in turmoil, many things that are not normally correlated become so. That means that the US dollar, gold, bonds, and the stock markets can all do against you at the same time and for longer periods of time than you can imagine they can. Therefore, cash is king – especially in this economy and real estate market.
The USD, gold, and the Euro are inversely related, so if the fear of Spain collapsing led to vigorous selling of Euros, then the USD could have easily rallied, tanking gold with it. Copper was taken out back and shot which could be related to the fears about China or floor creep from the Gold pits. Floor creep occurs when there is massive price moves up or down in one pit, and it “creeps” over to another pit on the floor.
If the US economy continues to falter, you’ll feel much better in 6-12 months by having been in cash during that time than having not been. You’ll have a higher account balance although it’s in cash, than 12 investments that become highly correlated.
Look at the charts below of the Dow Jones Industrial Average and the COMEX Gold and compare them to the Nasdaq 100 Composite above. (click to enlarge)
S&P 500 Index
COMEX April Gold
Your Emotions Affect Your Judgment About Money
Another very important aspect of doing this is you will take the emotion associated with the paralysis of watching the market on TV and not knowing what to do. You won’t go to bed crushed that you’ve lost a great percentage of your assets in the market and for realizing that diversification has done nothing for you to preserve your wealth or trading capital. Having more cash means you’ll have more choices. You can always get back into the market or any trade.
Read MoreOptions traders are always talking about Implied Volatility and Historical Volatility. I asked him to set the record straight on them given that he was the largest OTC market maker in options early in his career. People forget he truly knows the options business like not many other guys (or gals). He likens it to the P/E ratio in that in describes the past.
With respect to Risk Management, let’s just say Victor’s opinion is that PMs of 40 Act Companies are less than concerned with Portfolio heat…
Read MoreOne of PTJ’s strengths was that he had no emotional need to defend what he did 10 minutes ago.
The financial overhaul is just a speed bump, and a low one at that.
Budgets have to be reined in by cuts, not by raising taxes.
Podcast interview with Mebane Faber, author of The Ivy Portfolio and blogger at World Beta.
Does having financial broadcast media on during the day while you trade affect the number of transactions or types of trades a trader puts on?
Excessive leverage is at the heart of every meltdown.
July 20 2010
The world runs on individuals pursuing their separate interests.
May 16 2010
When really bullish news hits the tape and the market shrugs it off, you have a great low-risk short entry point.
May 11 2010
On one hand you have the “letter of the law” and on the other you have “the spirit of the law.” You better know which side your on. Goldman Sachs did not.
April 29 2010
Germany should not set the precedent of funding the PIIGS.
April 27 2010
