Home > Articles > Business & Management > Finance & Investing

The Four Essentials of Trading Commodities and Financial Futures

  • Print
  • + Share This
In this introduction to his book, George Kleinman presents various methods designed to identify profitable market patterns and the four essentials you'll need to start trading commodities and futures.
This chapter is from the book
  • “It’s tough to make predictions...especially about the future.”
  • —Yogi Berra

A floor broker once told me the following story, and he swears it’s true:

In the 1960s, there was a corn speculator who traded in the pit at the Chicago Board of Trade. He was known for plunging: taking big positions.

Early one summer, he put on a large short corn position for his own account. (Short positions make money if prices fall but lose if prices rise.)

Within days, the weather began to heat up in the midwestern United States, where the corn is grown. The corn crop needed rain, and prices began to rise. Day after day, the sun shone, the temps rose, not a cloud in the sky—the corn crop was burning up. The market continued to rally against this guy, and he knew if this continued, he’d go broke.

Late one trading session, the big trader started a rumor in the corn pit. His rumor was that it was going to start raining the next morning sometime around 10:30 a.m. The other traders laughed at this prediction.

The following morning, the sun was shining without a cloud in the sky, and the market opened higher once again. Then, almost miraculously, at precisely 10:30 a.m., rain started pouring down the windows that surrounded the grain trading room. (The old grain room, located on the fourth floor of the Chicago Board of Trade Building, had tall windows that looked out over La Salle Street.) Inside, in the corn pit, a selling panic immediately developed, as the pit traders scrambled to sell out their corn futures. Traders around the world saw prices crashing and joined in the selling frenzy. The market quickly went down the limit! On this break, the speculator covered his entire short position and was saved from bankruptcy.

How did the floor broker know it would rain at 10:30 that morning? It seems he was owed a favor from his drinking buddy, the chief of the Chicago Fire Department. The chief brought out the hook and ladders, and decided it was a good day to wash those tall windows that looked out on La Salle Street!

So you’re thinking of trading, but you don’t know the chief of the Chicago Fire Department? Actually, today, even if you do know him, it wouldn’t matter much because computer traders from tens of thousands of locations globally have replaced the pit traders, and computers don’t care about the weather.

So, let’s assume you’ve just finished reading a private newsletter, a firsthand report of how the “witch’s tail disease” is devastating the cocoa crop in Ghana. Cocoa sounds like a moneymaker, but you have no way of knowing for sure how true all this is. You do like chocolate, but you didn’t even know it all starts with a bean called the cocoa bean. (You thought it came out of a can.) Hey, you don’t even know where Ghana is, and you’re thinking of trading cocoa against the likes of Hershey and Nestlé and whoever else really does know what’s going on? Why would you do this? To make money, of course!

You do know one thing: You can observe that the cocoa market is moving higher, and it’s moving fast. Although you aren’t exactly losing money by doing nothing, it’s starting to feel that way. Do you have the guts to act? Do you have the money? Is now the time?

You assume that the shorts (those betting on lower cocoa prices) are beginning to experience financial pain. The longs (those betting on higher cocoa prices) are experiencing the opposite emotions: elation and the satisfaction that comes from being right. The accounts of the longs are growing bigger—money from nothing. The shorts are watching their money evaporate.

Let’s think about this for a moment, because it’s time for your first lesson: Even though trades are now entered using computers, trading is a human game. As a result, emotions affect price as much as, or perhaps more than, the news. You will learn that price movements themselves affect future price movements. It’s all a function of who is being hurt and who is benefiting. It’s a function of which side of the market is being “sponsored” by the “strong hands.” Shorts and longs act differently, based on price movements, and those movements affect their emotions as much as their pocketbooks.

Your job as a trader is to identify what happens next. To do that, I want you to start thinking about how others feel because feelings affect actions. People who are generally right tend to do certain things (on balance). People who are generally wrong tend to act differently. The majority acts a certain way, but be warned: The majority is usually wrong at major turning points (although they also can be right at times).

So, determine whether the majority is now long or short cocoa. The shorts are in pain, the longs are not; but then again, this can change just as fast as the market’s tone changes.

Here’s lesson number two: On balance, when talking about futures trading, the uninformed majority will lose. Because the profitable minority act in a completely different manner, you must learn what makes these people tick and how to act like them. One fact is certain: People make markets and, generally, people tend to act the way they did in the past. With certain stimuli, they could act opposite how they generally act, but you are playing the odds here. You need to identify what manner of move the market is in now. Is it a “normal” move, or is it extraordinary? (At times, the market acts in an extraordinary manner, and these can be the best times to play.) If you, as a trader, are able to accurately predict what the next pattern will be, your rewards will be substantial.

In this book, I present various methods designed to identify profitable market patterns. No method is foolproof, and the best I can do is try to put the odds in your favor. My goal is to teach you to approach commodity futures and options trading like a business. This is not a casino. In a casino, risk is artificially manufactured for risk’s sake, and the odds are engineered in favor of the house. In the commodity futures and options markets, you are dealing with natural risks associated with the production and consumption of the materials that make life possible and worthwhile—food, metals, financial products, and energy. You cannot bend these risks to your will, but you do have tools to manage them. Unlike in a casino, in the market, I believe you can move the odds to your side of the table. To do this, you must be disciplined.

You will need patience, and you will need guts. I cannot force these qualities upon you, but I can describe how a successful trader acts. It will then be up to you to act the right way. To profit in the commodity futures and options markets, you will need a systematic approach, a well-thought-out strategy. I will present you with some good ideas, but it’s up to you to implement them systematically. After all, a strategy is just a consistent approach to trading.

Do you have what it takes?

If you’ve decided to risk some of your hard-earned cash, go for the big bucks, and trade commodities, you need to know that this is a zero-sum game—that is, for every dollar someone makes, someone else loses it. Some of the money goes to your commodity broker in the form of commissions, and a small amount goes to the Exchanges for their fees. Then, if you are lucky or skillful enough to win, you owe the taxman some of your profits. When you lose on any particular trade, most of your loss is transferred electronically to someone else’s account (and you still pay that commission). You will never see this person on the other side of your trade, but he (or she) is out there somewhere.

You will be pitted against some of the best financial minds in the world. Professional traders, hedge fund managers, commercial firms that use commodities, and other commercial firms that produce commodities. Then there are those other individuals with more experience than you have. Can you hope to compete? The answer is, emphatically, yes! But I didn’t say it would be easy, did I? You will need to develop a sensible trading plan and a feel for the markets. This book will help you. You must develop certain human qualities, too, which nobody can give to you.

More than 50 years ago, the legendary speculator W.D. Gann discussed the four qualities essential for trading success: patience, knowledge, guts, and health and rest. Gann’s observations are just as valid today as they were half a century ago, and trust me, you must have these qualities if you ever hope to compete and win. (If you don’t have them now, then develop them!)

  • + Share This
  • 🔖 Save To Your Account

InformIT Promotional Mailings & Special Offers

I would like to receive exclusive offers and hear about products from InformIT and its family of brands. I can unsubscribe at any time.

Overview


Pearson Education, Inc., 221 River Street, Hoboken, New Jersey 07030, (Pearson) presents this site to provide information about products and services that can be purchased through this site.

This privacy notice provides an overview of our commitment to privacy and describes how we collect, protect, use and share personal information collected through this site. Please note that other Pearson websites and online products and services have their own separate privacy policies.

Collection and Use of Information


To conduct business and deliver products and services, Pearson collects and uses personal information in several ways in connection with this site, including:

Questions and Inquiries

For inquiries and questions, we collect the inquiry or question, together with name, contact details (email address, phone number and mailing address) and any other additional information voluntarily submitted to us through a Contact Us form or an email. We use this information to address the inquiry and respond to the question.

Online Store

For orders and purchases placed through our online store on this site, we collect order details, name, institution name and address (if applicable), email address, phone number, shipping and billing addresses, credit/debit card information, shipping options and any instructions. We use this information to complete transactions, fulfill orders, communicate with individuals placing orders or visiting the online store, and for related purposes.

Surveys

Pearson may offer opportunities to provide feedback or participate in surveys, including surveys evaluating Pearson products, services or sites. Participation is voluntary. Pearson collects information requested in the survey questions and uses the information to evaluate, support, maintain and improve products, services or sites, develop new products and services, conduct educational research and for other purposes specified in the survey.

Contests and Drawings

Occasionally, we may sponsor a contest or drawing. Participation is optional. Pearson collects name, contact information and other information specified on the entry form for the contest or drawing to conduct the contest or drawing. Pearson may collect additional personal information from the winners of a contest or drawing in order to award the prize and for tax reporting purposes, as required by law.

Newsletters

If you have elected to receive email newsletters or promotional mailings and special offers but want to unsubscribe, simply email information@informit.com.

Service Announcements

On rare occasions it is necessary to send out a strictly service related announcement. For instance, if our service is temporarily suspended for maintenance we might send users an email. Generally, users may not opt-out of these communications, though they can deactivate their account information. However, these communications are not promotional in nature.

Customer Service

We communicate with users on a regular basis to provide requested services and in regard to issues relating to their account we reply via email or phone in accordance with the users' wishes when a user submits their information through our Contact Us form.

Other Collection and Use of Information


Application and System Logs

Pearson automatically collects log data to help ensure the delivery, availability and security of this site. Log data may include technical information about how a user or visitor connected to this site, such as browser type, type of computer/device, operating system, internet service provider and IP address. We use this information for support purposes and to monitor the health of the site, identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents and appropriately scale computing resources.

Web Analytics

Pearson may use third party web trend analytical services, including Google Analytics, to collect visitor information, such as IP addresses, browser types, referring pages, pages visited and time spent on a particular site. While these analytical services collect and report information on an anonymous basis, they may use cookies to gather web trend information. The information gathered may enable Pearson (but not the third party web trend services) to link information with application and system log data. Pearson uses this information for system administration and to identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents, appropriately scale computing resources and otherwise support and deliver this site and its services.

Cookies and Related Technologies

This site uses cookies and similar technologies to personalize content, measure traffic patterns, control security, track use and access of information on this site, and provide interest-based messages and advertising. Users can manage and block the use of cookies through their browser. Disabling or blocking certain cookies may limit the functionality of this site.

Do Not Track

This site currently does not respond to Do Not Track signals.

Security


Pearson uses appropriate physical, administrative and technical security measures to protect personal information from unauthorized access, use and disclosure.

Children


This site is not directed to children under the age of 13.

Marketing


Pearson may send or direct marketing communications to users, provided that

  • Pearson will not use personal information collected or processed as a K-12 school service provider for the purpose of directed or targeted advertising.
  • Such marketing is consistent with applicable law and Pearson's legal obligations.
  • Pearson will not knowingly direct or send marketing communications to an individual who has expressed a preference not to receive marketing.
  • Where required by applicable law, express or implied consent to marketing exists and has not been withdrawn.

Pearson may provide personal information to a third party service provider on a restricted basis to provide marketing solely on behalf of Pearson or an affiliate or customer for whom Pearson is a service provider. Marketing preferences may be changed at any time.

Correcting/Updating Personal Information


If a user's personally identifiable information changes (such as your postal address or email address), we provide a way to correct or update that user's personal data provided to us. This can be done on the Account page. If a user no longer desires our service and desires to delete his or her account, please contact us at customer-service@informit.com and we will process the deletion of a user's account.

Choice/Opt-out


Users can always make an informed choice as to whether they should proceed with certain services offered by InformIT. If you choose to remove yourself from our mailing list(s) simply visit the following page and uncheck any communication you no longer want to receive: www.informit.com/u.aspx.

Sale of Personal Information


Pearson does not rent or sell personal information in exchange for any payment of money.

While Pearson does not sell personal information, as defined in Nevada law, Nevada residents may email a request for no sale of their personal information to NevadaDesignatedRequest@pearson.com.

Supplemental Privacy Statement for California Residents


California residents should read our Supplemental privacy statement for California residents in conjunction with this Privacy Notice. The Supplemental privacy statement for California residents explains Pearson's commitment to comply with California law and applies to personal information of California residents collected in connection with this site and the Services.

Sharing and Disclosure


Pearson may disclose personal information, as follows:

  • As required by law.
  • With the consent of the individual (or their parent, if the individual is a minor)
  • In response to a subpoena, court order or legal process, to the extent permitted or required by law
  • To protect the security and safety of individuals, data, assets and systems, consistent with applicable law
  • In connection the sale, joint venture or other transfer of some or all of its company or assets, subject to the provisions of this Privacy Notice
  • To investigate or address actual or suspected fraud or other illegal activities
  • To exercise its legal rights, including enforcement of the Terms of Use for this site or another contract
  • To affiliated Pearson companies and other companies and organizations who perform work for Pearson and are obligated to protect the privacy of personal information consistent with this Privacy Notice
  • To a school, organization, company or government agency, where Pearson collects or processes the personal information in a school setting or on behalf of such organization, company or government agency.

Links


This web site contains links to other sites. Please be aware that we are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of each and every web site that collects Personal Information. This privacy statement applies solely to information collected by this web site.

Requests and Contact


Please contact us about this Privacy Notice or if you have any requests or questions relating to the privacy of your personal information.

Changes to this Privacy Notice


We may revise this Privacy Notice through an updated posting. We will identify the effective date of the revision in the posting. Often, updates are made to provide greater clarity or to comply with changes in regulatory requirements. If the updates involve material changes to the collection, protection, use or disclosure of Personal Information, Pearson will provide notice of the change through a conspicuous notice on this site or other appropriate way. Continued use of the site after the effective date of a posted revision evidences acceptance. Please contact us if you have questions or concerns about the Privacy Notice or any objection to any revisions.

Last Update: November 17, 2020