Commodity Trading

The question is it possible to generate 15% long term in commodity trading? The answer is yes and no. What is more surprising for some ( inexperienced commodity trading investors)…this is not enough. They want crazy double or triple digit profits without realizing they are increasing the potential for the same in draw downs.

The reality is it is very difficult to accomplish 15% over long periods of time in commodity trading and trend following.. Only commodity trading advisors and experienced commodity traders who understand risk and deal with risk on a daily basis have and have the potential to continue to generate these types of returns. However, one must realize these are not 15% every year…year in and year out… It is more like ..up 5%.. up 25%..down -4% a rare…up+42%…When commodity trading you can do the exact same thing.. meaning same system or methodology…same large group of markets…and in one year make lets 4%…the next lose maybe even -10% or greater…and then have a year in which you earn +56%. I make the analogy that commodity trading is like fishing. You can have the best equipment..and not catch fish..and once in a while you enter a school of fish and can not stop pulling them in. If one is looking to compound their net worth..the only way is to be patient…disciplined..when they do their own commodity trading or when they allocate to a commodity trading advisor. ( The basis should be trend following with a strong risk basis)

Compounding of money should be your goal if you seek to be long term successful. To give you an example
15% return on average…on $500,000 over ten years is Yearly compounding: 15.000% $2,022,778.87
Take it to the next example 20 years
Yearly compounding: 15.000% $8,183,268.70

This is the power of compounding. The fact is most private investors can not maintain the discipline when they trade themselves and even when they allocate to commodity trading advisors…. Successful commodity trading advisors know what it takes to be long successful.. patience and discipline ( with strong risk and money management). Some of them have exceeded 15% compounded rates of return.

These are just a short list
Abraham Trading Since Inception:1,740.12% Annual RoR:14.81%(VAMI)Inception:Jan 1988
Millburn Commodity Since Inception:6,544.00% Annual RoR:13.90%(VAMI)Inception:Feb 1977
Tactical Investment Since Inception:1,522.22% Annual RoR:18.92%(VAMI)Inception:Apr 1993
Clarke Capital Since Inception: 744.14% Annual RoR:20.26%(VAMI)Inception:Aug 1997

Commodity trading when proper risk management is in place offers one of the best investment potentials. Commodity trading investors have liquidity and transparency like no other investment. If you would want to take your money out of a commodity pool or managed account..usually the longest wait would be 1 month. Compare this to a real estate investment or venture capital fund.
As far as transparency… you can see EVERYTHING in your managed account.

I put my money where my mouth is. Most of my assets are in commodities. I allocate between 2-3% of my net worth per idea. Even our own pool ( which I believe has been the culmination of everything I have learned over the last 15 years) and other trend following strategies…I allocate 3% of my net worth.. I allocate to other commodity trading advisors as well ( 2-3%). My goal is to compound my way to wealth. There will be great years…like last year..and nothing ( so far) like this year. It does not matter.. I have placed myself in the position to benefit. I have compounded money for myself and my family. If I can do it.. so can you if you have the discipline and patience and let compounding in commodity trading & trend following work for you.

Andrew Abraham
www.myinvestorsplace.com

Futures and commodity trading involve substantial risk.People can and do lose money trading.

To often when one looks to invest with Commodity trading advisors they focus only on the recent ( 2-3 year) returns. This can be a mistake. One who looks to invest in commodity trading advisors need to understand not just the returns and track record but rather how much risk was taken on in order to generate those returns. To often I have seen investors of commodity futures trading run to the results of one of the years hot commodity trading advisors. To chase results without fully understanding the methodology and more so the risk is a recipe for disaster once the first draw down occurs. When I look to invest with a commodity trading advisor I want to fully understand what gets them in a trade…what gets them out of a trade with a loss as well as a profit. There are times that the commodity trading advisor does not want to disclose their methodology. That is their right…but how would you feel when you do not understand how they trade and you encounter a hefty draw down. You would probably start second guessing and in many cases that I have seen, leave the commodity trading advisor. In my personal case there are cases since I am a commodity trading advisor myself that another potential commodity trading advisor that I would look to invest with does not want to discuss the above mentioned issues. In all reality this is foolish as I allocate 2-3% of my net worth to any idea..( even my own trading programs). I am constantly seeking new and passionate commodity trading advisors. Truthfully no one has the secret. No one knows more than the other. The key to long term success in commodity futures trading is spreading out your risks as in commodity futures trading anything can happen. The only holy grail in commodity futures trading is patience, discipline and maintaining a strong risk profile.

Some quick and short questions to ask your potential commodity trading advisor are as follows. ( They can give you a quick litmus test of how the commodity trading advisor sees risk)

1. Risk per trade
2 Risk per sector
3 Open max open trade equity
4 Margin to Equity

The above mentioned the quantitative methods to start to investigate a commodity trading advisor. There is the whole issue of qualitative. Wouldn’t you like to know if the commodity trading advisor had a drunk driving arrest or did not pay his real estate taxes on his house. You might laugh, but integrity is one of the major components of a commodity trading advisors success. You want to deal with someone honest. There are online services in which you do background checks on commodity trading advisors as well as the NFA which is the regulatory agency for commodity futures trading.

Bottom line don’t chase numbers, chase a concept that is logical, simple and with a strong level of money management & risk management. Even with that said there are no guarantees…and I will promise you, some where down the road your biggest draw down will occur. If you understand the methodology, understand the risk parameters you should be able to weather the draw down.

Andrew Abraham
www.myinvestorsplace.com

If you have read Market Wizards you would have read about Ed Seykota and his legendary commodity trading & trend following. Ed Seykota started trading commodities at relatively a young age.To put into perspective Seykota’s commodity trading results are in the ball park of 60% per annum from 1990 to 2000. He never advertised his services and was very selective in taking clients on. The majority of the investing world and quite possibly the commodity trading world had never really heard of him. Periodically he gives out lectures and teaches. More commonly one can access his web site in which one can glean his thinking..<a rel=”nofollow” onclick=”javascript:_gaq.push(['_trackPageview', '/outgoing/article_exit_link']);” href=”http://www.seykota.com/tribe/”>trading tribe</a>. There is no magic. He does not know any more than any other trend following commodity trading advisor. What makes Ed different is the way he thinks. There is no magical system. It all boils down to discipline and patience. He has taught a group of other commodity traders his techniques in trend following. He has taught David Druz, Jim Hamer and Jason Russell. I am fortunate to be an investor with David Druz. Even though David learned under Seykota commodity trading, David trades differently. This is a key point. One must be able to trade his personality. Ed Seykota earned tremendous returns with his style of commodity trading & trend following but the monthly volatility was high. Seykota takes big risks and garnished big returns. This style of trading is not for everyone. As stated there are no secrets in commodity trading and trend following as far as a mechanical or trading methodology. At onset of Ed’s career he wanted to prove the concept of trend following he tested the concepts of Donchian. They proved successful and from that point on Ed has been trading. Ed learned the key was how a commodity trader thinks. He has come up with statements that resonate with me as a commodity trading advisor. Such ideas as, Do you really know the future? Nope. Do you want to avoid whipsaws? (YES, was my initial answer and learned ) if I want to avoid whipsaws…stop trading..Do I want to avoid losses? My initial response when I first started in 1994..Yes..well the answer is they can not be avoided. It is part of trading. ( too bad all of Madoffs clients didn’t realize that). Another of his great statements is Risk no more than you can afford to lose, as well as risk enough in order when a trade works you benefit. (That is why I risk no more than 1% of my account). Numerous trades will not work.. ( probably almost 60% of them) and I can live another day. As well as when that rare trade does work.. with a 1% risk I can benefit strongly and make up for all the trades that did not work. Another great lesson from Ed regarding commodity trading is to accept the uncertainty. That is very strange for most to understand. We are risking our hard earned money and working hard & most want to be right. There is no right or wrong..The trade either works or doesn’t. When the trade does not work..we exit quickly to save our ( oxygen) money..When the rare trades really work we are patient and let it run where ever it wants to with out limitations or the urge to bank our profits. I am lucky one of partners also learned with Ed Seykota. He is constantly affirming the discipline needed to succeed in commodity trading. If you want to be a winner in commodity trading my suggestion is start to immerse yourself in the thinking Ed Seykota as well as read the book Winning in the Zone… Mark Douglas..Successful commodity trading is not about finding a magic system or manager. The only holy grail is finding a system or commodity trading advisor that you understand. That manages the risk, makes themselves available to a wide basket of commodities ( I personally only believe in Trend Following), and have the discipline and patience to stick with them during the eventual draw downs. The fact is most people are not successful in commodity trading just for these 2 simple reasons, They lack patience and discipline. Compounding your way to wealth takes time. This is not a get rich overnight..but over a lifetime. Andy Abraham www.myinvestorsplace.com

Online commodity trading advisors can be individuals or organizations that advise people on buying or selling commodities. They are registered with the Commodity Futures Training Commission. Registration for commodity-trading advisors is done through the National Futures Association, which is a self-regulated association responsible for reviewing and accepting registrations. Investing money with the help of a commodity-trading advisor can prove to be a very beneficial option. Online commodity traders are expected to manage separate accounts for each of their clients. An experienced and qualified broker can also help an individual interested in commodity trading to get a good commodity-trading advisor. Knowledgeable and trained commodity trading advisors can help people protect their financial security and invest their funds in the right commodity, which is expected to give good returns on sale. They are responsible for making the right investment decisions for clients who have a large sum of money to invest, as this kind of investment comes with an element of risk.

Commodity trading advisors are usually compensated with management and incentive fees for advising people on options, futures, and the actual trading of managed futures accounts. Managed futures are investments that permit people to access the world?s futures markets with the assistance of online commodity trading advisors. Investing in commodity trading is a feasible alternative investment, which utilizes a diverse range of financial instruments. Many online commodity-trading advisors are highly specialized and trade only in their area of expertise, which is why many people would prefer to opt for them so as to avoid the risk of running into heavy losses.

Commodity trading advisors engage in the business of advising others directly or through publications, electronic media, or writings. They are shown to have risks and returns, which are comparable to investment in a single equity. They are prohibited by law from accepting funds in the their name from a client for trading commodity interests.

Author: Jason Gluckman
Article Source: EzineArticles.com
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Commodity trading is remarkable, especifically because it is possible to make large amounts of money in a short period of time. It is simply a means of trading any physical material that is exchangeable with another like item that investors buy or sell. Commodity trading is basically speculation on the future price actions of a basic raw material. Commodity trading is the one area of the financial markets where any individual with persistence, money to risk, and discipline can be extremely successful. Commodity Trading is also a way to make money fast, but carries considerable risk to your principal. Commodity trading is too risky to try without some sort of trading system or strategy.

Traders enter commodity trading with a view to making big money. Contrary to what many traders say, the mechanics of trading is uncomplicated. You can gain a thorough understanding of how the commodity markets work just by reading a basic guide to Commodity Trading. It should include how to place a trade, contract sizes, margin requirements, and more useful information for newbie traders. Short-term trading is how the majority of traders and would-be traders take part in the markets. Discover what professional commodity traders do that separates them from the losing masses. You will also want to find a firm that offers commodity traders low commissions, quick executions, charts and free quotes.

You should be advised that commodities trading is not for everybody, and if you decide to open a commodity trading account be sure you understand all the risks involved. You may make all of your own trading decisions. Or, for individuals who prefer to leave trading up to a professional commodity trading advisor, a managed account may be the better choice for them. Discuss your commodities trading plan with a commodity broker.

Commodity trading is one of the few remaining level playing fields available to traders. Commodity trading is certainly not for everyone because it can be one of the most volatile markets you can trade. If you are thinking about trading on the futures markets, please do your research and read a commodities trading guide to see if commodity trading is for you.

Author: William McWilliams
Article Source: EzineArticles.com