Commodity Trading

Product Description
An easy to understand guide to investing in managed futures. Readers will learn how to analyze Commodity Trading Advisors, build a managed futures portfolio, identify realistic investment goals and risk tolerance levels. Building Wealth with Managed Futures shows how to diversify a portfolio across trading systems and market segments. Learn how industry professionals use statistical analysis to rank Commodity Trading Advisors… More >>

Building Wealth With Managed Futures

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.

Product Description
Authoritative, up-to-date research and analysis that provides a dramatic new understanding of the rewards-and risks-of investing in CTAs
Commodity Trading Advisors (CTAs) are an increasingly popular and potentially profitable investment alternative for institutional investors and high-net-worth individuals. Commodity Trading Advisors is one of the first books to study their performance in detail and analyze the “survivorship bias” present in CTA performance d… More >>

Commodity Trading Advisors: Risk, Performance Analysis, and Selection

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

Over the last seven years the amount of money professionally managed in the commodity futures markets has more than quintupled! According to hedge fund tracking firm Barclays, assets under management rose from roughly 41 billion dollars in 2001 to more than 219 billion dollars today! 
 

As worldwide demand for commodities continues to heat up and more and more investors (both institutional and individual) begin seeing commodities as a viable investment vehicle, this trend is likely to continue. This growth has also increased the need for effective ways to choose a commodity trading advisor. In this article we will outline what we feel are some of the best tools and methods available to the individual investor when choosing which managed futures product to invest in.

 

First things first, let’s define what managed futures are and what they are not. Managed futures are not stocks or ETF’s that simply invest in commodities. Managed futures accounts are investments in which funds are invested in mostly leveraged, future dated contracts for the actual physical commodities or financial instruments. Commodities can include sectors such as food, energy, raw materials and also financial instruments like interest rates and stock indices.

 

The leverage, risks and rewards can be (but are not always) substantially higher when investing in the futures markets vs. the stock market. Managed futures investments in the United States are regulated by both the National Futures Association and the Commodity Futures Trading Commission (unless the firm / fund have “exempt” status). Regulated firms are licensed as Commodity Trading Advisors (CTA’s) or Commodity Pool Operators (CPO’s). However, keep in mind that just because a firm is licensed or regulated, this is in no way an endorsement of potential performance. Futures trading can carry large potential risks and is not for everybody. Investors should fully familiarize themselves with all applicable risks and disclosures prior to making any investments.

 

Finding lists of potential managers to sort through is relatively easy if you know where to look.  Firms such as Barclays Trading Group, Stark Research, Autumn Gold and Altegris Investments have databases of manager information available. One resource we particularly like is www.IASG.com .Institutional Advisory Services Group provides a free (with registration) online database of over 450 programs. In addition, the programs can be sorted by a wide range of parameters such as minimum account size, funds under management, various performance measurements etc.

 

The only problem we see with the online databases is that it can become somewhat overwhelming to try and narrow down your choices to just a handful of managers. In order to make the process a little easier we would like to share with you what we think are some of most important performance metrics to pay attention to.

 

First recommendation, forget return! The least meaningful statistic often is a manager’s return. How can that be you ask? What matters is RISK ADJUSTED RETURN. Just because somebody bet the farm and got lucky does not mean it was a good idea. Sooner or later (most often sooner) the inevitable wipe out will occur with a manager betting too aggressively.

 

There are a number of traditional risk adjusted return measurements, the most popular of which being the Sharpe ratio. The Sharpe Ratio compares the return relative to the underlying volatility in the investment. While fundamentally we are in complete agreement with the Sharpe Ratio’s logic, we feel it has one serious flaw. The flaw is that the Sharpe Ratio only views past volatility and makes no attempt to try and predict future volatility. As a result, we feel the Sharpe ratio does not give an adequate view of the potential risks involved in a program. 

 

A good example of this comes from the world of the “option writers” (those who sell options). Since most options expire worthless it’s not uncommon for managers that sell options (and have a good approach) to have excellent Sharpe Ratios. They can have very smooth looking equity curves that have produced for many years. However, just because an equity curve looks smooth and consistent does not mean it will stay that way. What happened in the past is meaningless if you don’t have the same results in the future. Unfortunately, option sellers with longer term excellent track records have been known to have very quick spectacular “blowups”. The problem, in our opinion, is that past volatility is not a good predictor of future volatility.

 

What is a good predictor you ask? In our opinion one of the best volatility predictors is called the “Margin to Equity Ratio” (MTE). The MTE tells you approximately how much of your investment would be used for margin purposes. This number will vary day-by-day for a given manager but you can get the average range. If for example a managers MTE was 10% this means that for every $100,000 invested the manager uses approximately $10,000 of that for margin at any given time. Keep this in mind; the exchanges set margin based on their approximations of risk. The higher their perceived risk in a contract the higher the margin they set. We encourage you to think just like the exchanges and raise your expectations for potential risk as the MTE goes higher. If we go back to the example of the option writers with good Sharpe ratios you will also often see that they have very high MTE ratios. We believe that these high MTE ratios could have been the tip off to have avoided many disastrous scenarios. Once again, just as the exchanges often raise margin requirements as their expectation of volatility rises, so too do we see the potential for volatility (risk) to be higher as the MTE rises.

 

Another important use of the MTE comes down to simple math. If you have two managers that both made a $30,000 return yet one used $30,000 in margin to do it and the other used $60,000 in margin to do it then the results are not the same. Based on margin usage one manager’s return was twice as high as the others. This is very important to keep in mind because often managers can appear to have very similar performances but when you dig down into their margin usage you see large differences.

 

What is an ideal MTE? In our opinion we don’t like to see margin to equity ratios much above 10%. This is on the low end of the spectrum for managed futures accounts and eliminates the vast majority of managers. While it is true that having a low MTE is no guarantee of lower risk (managers with low MTE’s can “blowup” too) we feel that at the minimum it is possibly a good indication of sound risk management. Once again, it is our belief that as the MTE rises so does the potential for risk. There is also a related risk measurement often referred to as “portfolio heat” that uses similar concepts.

 

In summary, what we suggest is that you compute returns not based on what the manager reported, but rather on what the return was based on margin (you should also compute the risk and drawdown the same way). This will level the playing field and allow you to compare apples-to-apples. Furthermore, we are in favor of being on the conservative side of the MTE spectrum, for us that means that we would likely reject any manager with a ratio above 10%. Using this method can help you narrow down your list of choices to a manageable number rather quickly. After you have done this then you can then look and compare all of the other risk adjusted performance measures and further refine your selection. (At this risk of this article being too long we will save the other risk adjusted performance measurement discussions for future installments).

 

We want to caution once again that ultimately no measure is a guarantee or assurance against risk or losses. Past performance is not necessarily indicative of future results. Futures’ trading involves high risks and is not for everybody. We are simply sharing with you what we feel is the best method by which to select a manager.

 

For a related article to this topic please visit the following URL:

 

“The Small Futures Account Conundrum”

http://www.traderstech.net/The%20Small%20Account%20Conundrum.pdf

 

 

Sincerely,

Dean Hoffman

 

So many times I hear clients when in a draw down say,”There are changes going on in commodity trading and trend following.” The commodity markets are changing. They are not like what they used to be. Trend following is dead. This draw down proves trend following is dead.

Well I will give you my 15 years plus of experience and counter these thoughts. First of all, nothing ever changes. You need to really know what trend following is, what causes it. Not trying to be funny, but commodity trading has been going on since the times of Joseph in Egypt selling wheat. If you read your bible, he cornered the wheat market and there was a trend in wheat. The price went up. There will always be shortages, panics, fears and hedgers and for this reason there will be trends. One can look back at charts from the 1800s and look at wheat or even cotton. What do you think happened to the price of cotton during the US civil war. Do you I need to remind you what happened to crude in the first gulf war. Human nature never changes…fear and greed don’t ever seem to change…so there are trends. If you want to consider making money in commodities one of the ways I feel most strongly about is trend following. No predicting…just reacting and trying to catch a trend or as a surfer tries to catch a wave. Not too much different.

Now if you believe there are trends, then you need to realize they do not happen when we want them. There can be years at a time…NOTHING HAPPENS. At this point most non professional investors give up and claim trend following is dead and commodity trading advisors stink. Well, so many times after this trend following comes back from the dead and commodity trading advisors hit new record trading peaks. This brings me back to my holy grail word “PATIENCE”. If you can be patient, disciplined, have a sound trading methodology based on risk management and money management, you stand the potential overtime to grind out some decent returns.

Next thought… again those same inexperienced commodity traders say, “The commodity markets are changing. I need to change my system or my methodology.” Again with years of experience watching what has the chance to work and seeing all that did not. The only things that can work over time are simple ideas based on with strong risk and money management.

To give you example, Richard Donchian used a very simple idea. Buy the 22 day high…sell the 14 day low. This is the basis… not too complicated, but needs more risk and money management filters. Not sure if it was John Henry from JWH or Dunn Capital…either of them stated all rules of our system can be written on the back of an envelope. Pretty funny since both at them at various points of their careers were managing in excess of $1 Billion US Dollars. If you want to be a winner in the commodity trading arena realize this takes time, discipline and patience. This is not a get rich quick. This is a compound your way to wealth if you follow the rules of risk management & money management. All of this is easy to say, but when you are down either in your trading account or when your commodity trading advisor is down 20% or greater and you want to quit, Remember: Do you want to be a winner or a loser.

Understand exactly how your mechanical trading system works. Don’t think you will buy a black box and make money. Ask questions to your commodity trading advisor… what gets you in a trade..out of a trade… with a loss or a profit.. How much risk per trade.. how much risk per sector… how much portfolio open trade risk…or margin to equity. If you do not do your homework ahead of time, don’t even think about commodity trading. These are the hard truths about commodity trading. This is not easy. Futures and commodity trading involve substantial risk. People can and do lose money trading.

Author: Andrew Abraham
Article Source: EzineArticles.com
Provided by: Smart cooker

One of the biggest differences in trading is that many successful commodity trading advisors use trend following mechanical systems. Of course there are other commodity trading advisors that use pattern recognition …counter trend as well as basic fundamental analysis to base their decisions. However in my opinion, when a commodity futures trader uses a mechanical trend following system they put themselves in a position to capture rare large moves. The success of commodity trading comes from capturing these rare large moves with proper risk management. This is the key to compound money over long periods of time.

Trend Following trading advisors over the years have programmed their ideas into mechanical systems that detail trade potentials (entry and exit) as well as position sizing. There is no real thinking. Trend Following commodity trading advisors are looking for price to move. They do not predict, rather react. The goal is to catch a new trend. Commodity trading advisors look to take pieces out of the trend. Only liars catch bottoms and tops. There is no holy grail in trend following unlike buy and hold (pray). It all boils down to making yourself available for those rare large moves (not losing too much money when they are not occurring).

Virtually everything is pre thought out with an exact plan (yes an exact plan with successful Commodity trading advisors). The markets trade are thought out. The amount of correlation between similar markets are planned. Risk per trade is planned. What constitutes an entry signal.. How to exit a trade with a profit as well as a loss. What is the total open trade equity that is acceptable. This is like a well trained army or football team. Everyone knows what to do. There is no gut thinking.. I will x number of contracts today because I think this or that.. With successful commodity trading advisors, what will make them buy is that there is a price move beyond a certain threshold that in their model possibly signifies a beginning of a potential trend. The successful commodity trader asks himself/herself.. how much is this going to cost me to see if this trade works. Commodity trend followers know that any trade is 50/50. There is nothing about being right. It is very simply…the trade is going to work or not..If there is a trend..it is working.. Pretty simple and clear. The huge difference between successful commodity futures traders and others is in their trend following mechanical system there is not just focus on entering …but rather ..how many contracts can I put on for my predetermined risk tolerance.. (R). Successful trend followers know it does not matter to be right..actually, most trades don’t work. Lets say the win/loss ratio can be 30% wins and 70% and the commodity trading advisor can be extremely successful Simple.. small losses..rare..large gains.. and position sizing (when the trade works..if the commodity trading advisor has numerous contracts based on his/her risk model). Look at it this way..lets say the JY goes from 100 to 108 and you have 1 contract…you make x.. but for the same risk per trade you were able to put on 2 contracts for the same risk..you have made much more money. Forget about all the nonsense of snake oil advertisements like 80% winners. It is the surest way to be a loser.

There are key questions the trend following mechanical system needs to answer

1. Which markets to trade based on my equity
2. What signifies a buy or sell
3. How do exit with a profit or a loss
4. How many contracts do you put on..(risk per trade.. risk per sector..total open trade risk)

Of course there are other issues..More so don’t think for one minute this is easy.. Even when you have a trend following mechanical system or a commodity trading advisor you need the discipline and patience to follow the system/commodity trading advisor for at least 4-5 years.. Otherwise really don’t start.. I have seen more people quit at the first sign of a draw down and run to another system or commodity trading advisor. More so.. keep it simple..but not simpler..

Author: Andrew Abraham
Article Source: EzineArticles.com
Provided by: Pressure cooker

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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