2009 Top Trading Systems. What's Hot? Get the Report Here!

Want to be a Successful Trader?

Successful Traders like to see where the edge is and seize it every time it appears! Our Commodity Spreads Program was developed with this in mind, by taking advantage of one of the very few true edges we see in the market: The Goldman Roll and Long Only Commodity Funds. Seize the edge, sign up for our Commodity Spreads Program and trade your first 60 days complimentary!

I have written many articles on various topics in trading. From using diversification to monitoring emotions to using systems and one thing I've found to be befuddling is that there are almost too many areas to focus on and to benefit from in trading. Too many choices.

Today I am going to talk about taking advantage of certain "edges" that appear in the markets, especially the single commodity markets like the metals, energies, grains, meats...

There is always a risk when you put on a trade and veteran traders (ones that still have $ after 4-5 years of real trading) know that quantifying your risk and knowing the "Uncle" point is what keeps them in the game and prevents them from "marrying" their trade. Then there is the point when a trade is setting up and you have to know when to get on the horse and start the ride.

One of the ways to spread the risk in a trade is to pair off a trade, such as long gold and short silver. You can go long crude and short Unleaded or long beans and short oil. So many variations to choose from and usually there are "reasons" why each trade is done. Could be one is overbought and the other isn't. Could be a seasonal tendency for one to go up with the other being flat to down; again, many reasons.

But is there an inherent edge? And if so, for how long and how does one "know" when the time is ripe, if at all to pull the trigger and enter a trade?

I'd have to say that with all of the experience I have had in the equities and futures markets, there aren't many things that we all eventually don't know after time, no real surprises other than an inventory number being out of whack or a weather system wreaking temporary havoc or a currency meltdown out of the blue. Eventually there are reasons that each trade works or doesn't and it is only afterwards that we get to know with some certainty why a trade worked or didn't. To learn more about PowerTrade's way to seize the edge, sign up for our Commodity Spreads Program and trade your first 60 days complimentary!

In our markets there are times when the big players are making their moves and it is hard to hide a really big buyer or seller when they have to eventually leave a footprint with their actions. These buyers or sellers could be speculators, they could be the users of the raw products or they could be the actual miners or growers of the raw products, but one thing is sure: There needs to be transactions at price in order to facilitate these markets. The players all revolve around the pricing structures of the monthly and yearly market set prices driven by supply/demand and fear/greed (more aptly applied to the speculators).

Getting more to my point, there are some very savvy traders/funds/CTA's that seem to take advantage of the times when these players almost "have to" move in and out of the market and they have sophisticated technologies on their side. These edges that they uncover allow them to monitor much more than just the open interest of the contracts/months that the underlying vehicles that they trade, it's almost as if they have a metaphorical "seismograph" that allows them to see/feel the size starting to move through a commodity and to also take the direction of the trade with the volume and to co efficiently lay off the risk by hedging with a similar size in the same commodity at a different time slice.

Diversification within markets is important as a risk tool, but at what points do you add the diversification or subtract the supposed risk? Is this a time slice risk adjustment? Is this a spread based historical risk component? Is there further risk management involved beyond the standard position put on?

As an example, if one were to short Crude in a nearby month of say October because there was the beginning of a decline in the open interest (just as an example) and there was the beginnings of a buildup in a farther out month like say Jan 2010, then a position could be built around the long/short strategy there and a profit/loss model built around the inherent difference in prices of the underlying.

What if the markets were in backwardation? How is the risk handled? What if a few hurricanes arrive and go through the Gulf of Mexico, what then? How does a firm/trader hedge? With options? With other spreads? Are there statistical models that show variances at these certain seasonal time points?
Or can it be as simple as: This one is starting to go up because there is significant buying and this one is going down because of selling?

Nothing is as easy as it looks, but quite often, the reverse can be true; things can be as simple as "The Elephant is headed this way in the jungle and we can see him and we can follow in his footsteps or jump ahead of him"... Can we and do we over think things in our attempts to be right and "catch the move"?

In all my years of trading and using systems and seasonalities, I find that no matter how much research we do in what has happened and what could happen, nothing is as powerful as having something that works over time and having a smart team of people managing the real risk as it is happening without a bias on how things "should be".

It has often been said that markets can be irrational for a lot longer than we can hold out against it.

Can we use the tools of savvy traders and profit alongside them? Of course, often by playing with them as they ply their trade, that is why smart CTA's and fund managers hone their craft and work a plan to take a reasonable amount of capital from the markets that they trade without having to over risk themselves (and eventually you) by trying to be hero's with one sided bets that can go awry.

Michael Levin is the President of Genuine Trading Inc. He has been in the financial markets since 1981, having been a broker and trader on the PHLX Equity Options floor in the 1980's and ran trading firms in New York in the 1990's to 2002. He has been interviewed by the NY Daily News, Philadelphia Inquirer, Philadelphia Daily News, Chicago Sun Times and the Yomouri Shinbun (Japan's largest Daily) Michael has also had 4 feature stories in Futures Truth Magazine (2 were Featured Cover Articles) as well as over 20 plus articles in the archives of www.FutureSource.com

Want to be a Successful Trader?

Successful Traders like to see where the edge is and seize it every time it appears! Our Commodity Spreads Program was developed with this in mind, by taking advantage of one of the very few true edges we see in the market: The Goldman Roll and Long Only Commodity Funds. Seize the edge, sign up for our Commodity Spreads Program and trade your first 60 days complimentary!