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 changesfear and greed dont ever seem to changeso 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 predictingjust reacting and trying to catch a trend or as a surfer trys 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 patientdisciplined have a sound trading methodology based on risk management and money managementyou 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.. dont think you will buy a black box and make moneyAsk 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 riskor margin to equity If you do not do your homework ahead of timedont 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.
Andrew Abraham
www.myinvestorsplace.com
Futures and commodity trading involve substantial risk.People can and do lose money trading.