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Beverly Hills Commodities
5121 Westpark Dr.
N. Hollywood
CA 91601
USA
Telephone: (818) 980-9751
(800) 427-5550
FAX: (818) 980-9681
e-mail: manager@betterfutures.com
| Beginners' Corner |
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These pages are not intended to turn you into an experienced trader within 5 minutes. However, they are intended to answer some of the most basic questions a newcomer might have about commodity trading.
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Beverly Hills Commodities
5121 Westpark Dr.
N. Hollywood
CA 91601
USA
Telephone: (818) 980-9751
(800) 427-5550
FAX: (818) 980-9681
e-mail: manager@betterfutures.com
Are commodities volatile?
You may have heard comments about the volatility of commodities. That
is actually a fallacy: stock prices fluctuate much more than commodity
prices, on a percentage basis. What makes commodity
trading so exciting, is the available leverage! You can control large
quantities
of a commodity with a very small investment. It is this leverage which
allows commodity traders to amass large profits very quickly, but this
same leverage can also lead to substantial loss. It is up to the
individual trader, how much of this leverage he is willing to apply.
Leverage, when used with moderation, is a powerful tool.
How does commodity trading compare to
trading stocks?
The available leverage not only has an impact on the the size of a
trader's profits and losses, it also is the driving force for a whole
new world of trading strategies. With leverage, seemingly small and
short-lived price fluctuations can present significant opportunities to
the commodity trader. For this reason, commodity traders typically have
a
much shorter time-horizon than stock traders. Most commodity traders
frequently move in and out of position, with
trade duration being counted in days, and quite often in hours.
An additional distinction of the futures market is the commodity trader's ability to profit from rising prices (a "long position"), as well as falling prices (a "short position"). Short positions are place with the same ease as long positions.
Another significant advantage of futures trading is the uncorrelation between commodities . Even though the stock trader can choose from about 25,000 stocks in the US alone, he is faced with the fact that just about all these stocks move together, as a group, leaving with only inefficient means to diversify. The futures market, on the other hand, consists of totally uncorrelated commodities, such as lumber, cocoa, crude oil, grains, etc. One may be in an uptrend, while the other is headed down. There is always something to do for the trader.
Is commodity trading difficult?
Contrary to popular belief, commodity trading is quite simple.
The basics of commodity trading are easy to teach and easy to
learn. Our most popular seminar, an 8-hour beginners' workshop,
has turned many newcomers into accomplished market analysts. That's
the easy part! The hard part is managing your emotions when you
encounter the pressures of trading with REAL money! For most traders,
this obstacle can turn commodity trading into the most difficult
venture of their life.
Who should not trade commodities?
You should not trade, if you have to borrow money to finance your
trading. You should not trade, if a loss of your investment would
significantly change your life style. You should not trade, because
you need a large sum of money to pay your bills, and you have
no other way of earning it.
How should it be done?
A significant part of trading successfully is the freedom of stress.
Your trading activities should not resemble a nightmare. It should
be fun and exciting to trade. To achieve this emotional state,
you should only commit funds that you can afford to lose. Thus,
you will not be stressed out every time a trade does not work
as planned.
How will I know what to buy?
Obviously, economic upheavals will cause large changes of commodity
prices. A major draught will drive
grain prices higher, and the prospect of a conflict between the Iraq
and the US drove crude oil prices higher, a few
years ago. How will you, as an individual trader, be able to assess the
current situation and make an intelligent
investment?
Most brokerage firms, and many independent advisory services, publish weekly market letters which give you a reasonable overview of the fundamental background of various commodities. (Going into more depth, by conducting your own research, would be futile. The world-wide economic connections are too complex for you, the nonprofessional, to tackle!). However, such information is not necessarily a pointer in the right direction. Whatever you know or read, will also be known to other traders. And the current market price of the commodity in question will already have adjusted to this knowledge, and, even more interestingly, to all that is anticipated. A classical example of this is the above mentioned crude oil crisis: When the Allied Forces invaded Kuwait, and Hussein ignited the oil wells, crude oil prices had already been rising for several months, and consequently tumbled.
To get one step ahead of the fundamental analyst, most traders resort to "technical analysis". This is the study of charts which depict the price movement of the recent past. The recognition of common patterns, as well as the use of mathematical indicators, quite often make it possible for the technical analyst to successfully predict future price movement.
An additional incentive for using technical analysis is the use of leverage in commodity trading. Leverage allows you to pay more attention to small price fluctuations. Small short-term price changes are usually not related to any changes in the fundamental structure of the commodity.
As a beginner, you should read some books on basic technical analysis.
What is the best trading approach?
There are many ways to approach the commodity markets. Some traders
like to make long-term investments,
some stay with their positions only a few days, and some buy and sell
every few minutes. Some traders work
with futures contracts, others buy and sell options. Some traders try
to profit from the direct price movement of
a commodity, while others specialize in the price differences between
related futures contracts. Some traders use fundamental information to
make their trading decisions, while others study charts, computerized
analyses, cyclical
patterns, or use mass-psychology to gain an "edge" over the competition.
When you socialize with other traders, you will find many of them stubbornly defending their particular trading approach, as if their's was the ONLY one that made sense. It is best to have an open mind! Most trading approaches and systems have certain merits and certain drawbacks. What works best? There is no simple answer! Since commodity trading usually includes a large amount of emotional involvement, the trading approach you choose should somehow be in harmony with your "trading personality". What works for one trader, may not work for you. Only actual trading experience will reveal your inner strengths and weaknesses.
How much do I need to start?
While there are many success stories of persons who have started
out with, let's say $2,000 and turned this investment into a fortune,
you should consider the following:
Commodity traders don't just invest one time and then retire. Commodity traders move in and out of the markets very often. Therefore, their trading becomes a question of statistics. Out of a certain number of trades, some will win, and some will lose. What if you lose several times in a row?
If you lose 25% of your account on each of 4 consecutive transactions, you are at zero... the game is over for you! Professional money managers typically risk only 1% to 2% of their equity on each transaction. Thus, they can be wrong a few times in a row, and still have their trading capital in tact. To trade like the pro's, you need at least $50,000 of trading capital.
Most newcomers don't start out with such an amount of money. The average account opened in the US is near $10,000. As we said, it can be done with less than that, but be aware, that the less trading capital you have, the more your trading becomes a gamble.
How should I prepare myself for trading?
First, you want to learn about the process of futures trading:
Understand what a futures contract or option is, understand what
margin calls are, know what types of orders are available to you,
etc. You can get some literature on this subject from the exchanges,
or you can contact us. It can actually be explained in about 30
minutes.
Next, the beginner usually wants to find an economic situation which, he believes, will lead him on the road to riches. Read the commodity section of a newspaper, or get a market letter from a brokerage house (call us!), and you will have your head buzzing with trading ideas. You will soon recognize that knowing such data will not make you rich. Simply use them as background information. You must now take a closer look at the current market conditions.
This brings us to charts! You may want to order a free sample chart book from a chart publisher. Keep those current by entering daily data. That's a great way to get a feel for the market action. There is a large number of wonderful books available to get you started in basic technical analysis. If you want us to give you some titles, call us at (818)980-9751 or ask us by e-mail. Or you can browse through our extensive library.
It is important to stick to simple tools. Nowadays, most PC users go overboard with exotic computer programs. Forget them, for the time being!
How long should I study before actually
trading?
We often run into people who spend an incredible amount of time
reading, studying, and trading on paper. Often they are wasting
their time! Of course, you need to know the basics, before you
trade. But make it brief! When you learned how to drive a car,
you first got some instruction in a class room, but then you had
to get behind the wheel and get a feel for what it's like to drive
during rush hour. It's the same with trading: After you learn
the basics, you must get "behind the wheel" and do some
actual trading. Trading for real, and trading on paper are worlds
apart. There are many "paper traders" out there who
have the greatest success in their make-believe environment, but
as soon as they put their money on the line, they fail.
We believe in a "learn while you trade" approach. Only real trading will teach you to stand up to the speed and emotional pressures of the markets.
While you experience some winning and some losing trades, you will also learn about yourself. Not all people react to the market in the same way. Each person has to find the approach that's comfortable for him. Any technical tool that you will pick up along the way, must fit your "trading personality". (That's why we didn't want you to concern yourself with complex trading systems, at the beginning of your training)
We have given hundreds of seminars, introducing beginners to the world of futures and options, and helping experienced traders improve their trading. But we don't stop there. We work with our clients on an ongoing basis, we teach, we share, and we explore while we are trading.
How do I open an account?
Simply give us a call at (818)980-9751 (toll-free in the USA
800-427-5550),
or send us e-mail and we will help you get started. You will have to
fill out the account forms of Man Financial and return them to us.
These forms can be obtained from us, or you can download them with one
of the icons at the bottom of this page. Your funds will can be
deposited through bank wire directly to Man Financial, Inc, or you can
include a personal check, made out to Man Financial with your account
forms, and we will process it for you.
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Beverly Hills Commodities
5121 Westpark Dr.
N. Hollywood
CA 91601
USA
Telephone: (818) 980-9751
(800) 427-5550
FAX: (818) 980-9681
e-mail: manager@betterfutures.com
Should the futures price run dramatically beyond the specified price (their "striking price", the option holder is entitled to all the profits on the futures contract, beyond the striking price. These could be substantial! Should the futures price fall, the option holder will only lose the premium paid at the beginning.
In a way, this very similar to car insurance. When you buy car insurance, you make a bet with your insurance company that you will ruin your car. If you don't, you simply lost your premium. If you do, the insurance company will pay for all the damage to your car beyond your deductible.
What are the advantages and disadvantages of
options?
While the holder of a futures contract can lose large sums of money,
and even more than the equity of his account, while in a losing
position, the option buyer's risk is limited to the premium. Yet, the
profit potential is unlimited.
While this sounds rather attractive, there is really a negative side to it: An option buyer has to chose from various available striking prices and various expiration dates. The more time to expiration, the higher the cost. The closer the striking price to current price levels, the higher the cost.
This means, an inexpensive option with a far-away striking price and a short life span has little chance to be profitable. Most options expire worthless.
Is it not true that options can provide huge
profits?
Yes, an option bought during a calm in the market, right before the
beginning of a major move,
can provide spectacular profits. However, to do so requires either a
good deal of market knowledge, or a big dose of luck.
Can options be used for short-term trading?
Yes, many traders use options as a short-term trading vehicle. For this
purpose, the more expensive
options (with a striking price near the current market price) are more
suitable, as they fluctuate more
readily with the current price of the underlying commodity.
Is option trading difficult?
At first glance, holding an option seems a much more relaxing way to
participate in the commodity markets. The prospect of limited risk
allows the option trader to take a more detached approach to trading.
Yet, options have a more complex nature than their futures
counterparts. Option prices are not only influenced by the price of the
underlying future contract, but also by time-to-expiration and
volatility. Nevertheless, options are often the entry vehicle of choice
to the beginner.
For an option to be profitable at expiration, the futures contract not only has to overcome the chasm between current price and striking price, it also has to happen within an allotted time period. Trading options successfully, requires just as much, or even more, good research and analytical work as needed for futures trading.
Are options suitable for small accounts?
Small accounts often have no other choice but to trade options. The low
premiums and the limited risk are often the only way for the small
trader to participate in the futures market. Yet, the need to look for
small premiums steers the buyer to options that are too far away, and
with too little time left, to be profitable at expiration.
A more reasonable approach would be to not hold the options to expiration, but sell them at the open market when a modest profit is achieved. In other words, trading them rather than investing in them.
Who sells the options we buy?
When you buy an option, another trader sells this option to you and
takes your premium into his account.
The option seller faces limited and small profit potential, and
unlimited loss potential. Yet, the same reasons that work AGAINST the
option buyer, work FOR the option seller: the time decay built into
every option works against the buyer and for the seller. Selling
options is the option strategy of choice for the professionals. It is
not a strategy a beginner should consider until he has acquired
sufficient experience.
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Beverly Hills Commodities
5121 Westpark Dr.
N. Hollywood
CA 91601
USA
Telephone: (818) 980-9751
(800) 427-5550
FAX: (818) 980-9681
e-mail: manager@betterfutures.com
Needless to say, discount firms offer lower commission rates. While this is obviously appealing, there are certain negative aspects: When you place an order with a discount firm, you will communicate with a clerk who does not know your position or your trading style, nor does he have any idea what you have planned to do. It is up to you to place your orders correctly.
Such service serves experienced traders well, but it is could be a dangerous environment for the inexperienced trader. An inexperienced trader should work with a full-service broker. The full-service broker usually gives his client an opportunity to discuss trading plans. He knows the client's position and trading habits. When his client decides to make a trade, he can use plain language to communicate with his broker, and his broker will place the appropriate order on his behalf. The broker will catch and correct errors that could arise from sloppy communication.
The full-service broker will often make special efforts to watch his client's positions and either notify the client of unusual market activity, or execute a prearranged trading strategy on the client's behalf.
In most cases, there also is a large amount of educational support.
Unfortunately, many newcomers start out with discount houses, lured by the lower commission rates. However, one avoidable beginner's error can easily erase the commission savings of many transactions.
If you would like to discuss these issues in more detail with us, please contact us by phone or e-mail. If you are interested in discount brokerage and online trading, we will provide you with the necessary software that allows you to directly send your orders to the exchanges via your home computer. However, if you are new to commodity trading, we would recommend our full-service brokerage. Each one of our principals has more than 25 years of trading experience, and we take special pride in our success as educators.
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Beverly Hills Commodities
5121 Westpark Dr.
N. Hollywood
CA 91601
USA
Telephone: (818) 980-9751
(800) 427-5550
FAX: (818) 980-9681
e-mail: manager@betterfutures.com
The individually managed account
An individually managed account looks very much like a regular
self-directed account, with one exception: a third party has the
authorization to trade on your behalf. This third party could be your
broker, a registered Commodity Trading Advisor, or your uncle Harry.
When you hire a professional to trade for you, he will charge you a fee. This fee is typically a profit sharing fee, such as 20% of your profits, although many advisors also charge an equity based fee in addition to the profit sharing fee.
The key points in such an arrangement: The account is still in your name. The advisor has the right to place orders on your behalf, but not to make withdrawals from your account. You can terminate the relationship at any time.
The commodity fund
Some investors prefer to join a commodity fund (commodity pool). A
commodity fund is in most cases a Limited Partnership. The management
fees are comparable to the fees charged to individual accounts.
The advantage of such a structure: the investor's liability is limited to his investment.
However, there are also some disadvantages:
a) The investor's funds are no longer under his control. The investor
hands over total control of his funds to the General Partner of the
pool.
b) The investor no longer can monitor the trading activity in his
account. The pools trading is not disclosed to the investor. The only
documentation received will be a quarterly summary report.
c) The investor will not be able to withdraw his funds at will. Most
pools require the investor's funds be remain with the pool for a period
of time, such as 12 months. After that, withdrawals can only be made at
the end of a quarter.
If wish to find out more about managed accounts, please contact us
by phone or e-mail.
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| Quick Reference Library |
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Correct order placement Types of orders |
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Contract specifications |
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Current margin requirements |
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