Martin Kronicle

…When reached by phone, one liberal filmmaker said “They ARE doing God’s work,” sniffing between tears. “I think I am in love with these capitalists after all.”

You know you won’t see such a headline tomorrow so I wrote it. This is not a blog post about the horror that occurred this weekend in Japan as much as it is an indictment on the MSM and how much more American media could go to educate Americans in financial literacy. Of course, they are not concerned with anything but their ad rates.

If copper was up 10 cents, you can figure for yourselves what headline they’d make up to sell “papers.” I guess in the end, not even sensational headlines can help a sh*tty newspaper prop up their sh*tty stock.

Since the public will probably never see an unbiased media write about commodities and the roles of traders and investors, this would be a good time to explain to everyone one of the two functions of the commodity markets and the collective actions of its participants: price discovery.

Despite the horrific catastrophe in Japan that puts the human loss at about 2.5 to 3x that of 9/11, the copper market is open for business. It is telling everyone who cares that there is so much copper out there, that despite the sizable rebuild that Japan will need to undergo, prices are between 4 and 6 cents cheaper than from those of Friday’s close.

How valuable is information when you need it most?

Saudi Arabia is offering benefits to the middle (lower) class. Libya is cutting taxes. Do you think that the ruling party in either country is going to take a massive hit to their lifestyle (birthright)?

If you haven’t read Robert Baer’s article Fall of the House of Saud from The Atlantic back in May of 2003, you must.

Each new royal child born is afforded a giant stipend at the time of birth. Can you imagine the King saying that we have to stop having babies? Having children in Saudi Arabia is a good investment. How much of that extra income is actually needed to raise the newborn child? Probably not a lot. So with each newborn, the extra per capital allowance goes to the parents.

Do you think any of the royal family – the ruling class – will take a pay cut or forgive their stipend?

Enter Libya.

Libyan ministers have decided to cut taxes and where is the money going to come from? Are they going to produce more oil to sell?

Both Libya and Saudi Arabia will benefit from high oil prices. With all the “new” benefits that they are going to pay out, and the fact that they probably will not be willing to undergo a substantial lifestyle change, it’s easy to see that crude can go to $200 and not retreat for some time.

You are capable of controlling your whipsaws to some degree by monitoring you position size and adjusting it accordingly. This is true whether you run a computerized system or are a discretionary trader.

As volatility increases for the contracts you are long or short, you’re likely to see your equity get whipped around more. That can be trying on your nerves. If you don’t have a friendly, neighborhood Trading Tribe ™ to go visit in order to uncover what those nervous feelings are trying to teach you and where you may be feeling them in your body, you can read a little about them here.

If you are a systems trader, you are likely to be long several commodities listed in the chart. The “% Change ATR” column represents what has happened to the 20-Day ATR since February 1 through the 28th. If you are fully-loaded with cotton or crude oil, for example, you may find that your account equity is getting whipped especially due to either of these contracts. What to do?

Cut the position down to better keep a lid on your daily change in equity. You can do this by hand or you can program it to take effect once the ATR has increased by a specific percentage.

Did you say daily equity ? Yes, if you are going to approach an allocator, they will almost certainly ask to see your daily equity run. If it’s more that 0.50% you are considered very aggressive. It’s not bad, but it’s not likely to help you get an allocation. When I speak about his in the Mentoring Program, eyes start popping out of people’s heads. Allocators don’t need you to drive volatility: they can get that on their own without you and your fees. Low vol is an asset to an allocator as much as your alpha and small drawdowns.

If you are a discretionary trader, you are likely trading around core positions or swing trading. Seeing gigantic swings in your equity might be what trading is all about for you. Just keep in mind that if you see a one or a two-range day in the direction of your liking, you can absolutely see a two to four-range day against you. I have had them happen to me. Use your protective stops all you want, but when you wake up and the contract is off 2 big numbers, there’s not much you can do. Your first loss is your best loss at that point.

Regardless of your approach to risk management (what everyone else calls trading), the result and the shape of your equity curve that you garner can be controlled to some degree if you learn to “prune your hedges” and keep a position size on that if it goes against you, can’t kill you.

My trader mentoring program starts March 1.

[The Trader Mentoring Program starts March 1.]

So now that the trade is on, let’s see how the market moves in the respective contracts affect your trading equity. Here’s a chart of the spread through Wednesday’s close courtesy of FutureSource.com.

Short May Cotton
Long December Cotton

You can see how the May and December contracts traded on their own in the calendar strip above. One was up, the other was down. In this case, both moved in a favorable direction as far as the spread is concerned, but it doesn’t always work out that way…so don’t get your hopes up that this happens all the time because it does not.

You can derive the same spread chart at FutureSource, which I advise you learn to do.

Go to “Get A Chart” and enter the following syntax where it says “Symbol or Contract.” Then click the green button “Get Chart.” (There’s a graph below that shows you what to put where.)

= (‘CT Z1′ – ‘CT K1′)

There are spaces between the contract symbol and the expiration months in the equation above.

CT = Cotton
Z1 = December 2011
K1 = May 2011

It should look like this:

The spread widened approximately 5 points (3.70 + 1.36) which equates to $2,500 per spread. The margin for the spread is $2,800. I wouldn’t get hung up on making the big gains. I would, however, focus on how much the margin and the volatility mean to your account. You get paid to manage your downside and play good defense.

Download The Ice Cotton Brochure

I need to get writing. Apparently I have a book coming out.