Commodity Futures Trading - What's your edge?


16 ratings



Thomas Cathey

09 Apr, 2007

in Futures and 1 more

Finding your very own unique commodity trading edge is a worthwhile goal. Without one you are lost in the masses, struggling to push your head above the sea of expenses. Trading edges do exist, though for short periods of time. Psychological edges are more permanent. You need many. Here's how to find yours.

First let's talk about a good market for day trading. Next, we'll talk about finding a trading "edge."

The S&P 500 Index futures contract market may be the best futures game around for day-trading. It’s liquid and the swings are usually large enough every day to make it worthwhile. The electronic e-mini futures market (the mini S&P 500) is lightning fast for executions that rival or even exceed the floor-trader advantage. However, it would be even better if someday they would make a big “e-maxi” equivalent to the e-mini to help keep the commissions and expenses lower.

After all, five e-minis are equivalent to one present "pit-maxi." But with the pit maxi, the price skids and delay of pit executions can easily add from ½ to a full point at times. This makes paying the extra commissions of five e-minis well worth it in the end. After all, a one-point skid is $250 for a maxi while the extra commissions for five e-minis are a fraction of that.

Price skids in electronic e-mini futures contracts happen sometimes, but are rare and simply due to heavy buying or selling, compared to illiquid “air pockets” that can occur in the pit at times. The day has come where you see big guns doing 500 to 1,500 e-mini lots electronically. It’s a beautiful thing.

A look at a simple bar chart of the S&P 500 futures contract can look like Jaws V to the person without a method. What's needed are custom technical indicators and recognized patterns to present this market information to your trained mind. On any time frame, from monthly to one-minute bars, the futures price action can look random and treacherous.

But if it was an easy, trending market all the time, everyone would be rich… or better said, there would be no market because everyone would be trend following – doing the same thing, thus an impossible scenario. There must be occasional trending, chopping, extreme volatility and dullness to keep everyone on their toes. We think we have discovered a “system” (edge) and then the futures market changes.

I think change is the most important concept for a commodity futures trader to accept. As hard as we may work to find and discover the perfect trading method, the market will then change to make it worthless at times. Then it will go through its changes and come back around again and the method will work. It must be this way or else everyone would eventually be using the same trading system or method over time.

Why is it when we check out the latest high-priced commodity futures trading “system” performance listings, every year there are different ones on top, and the previous winners are often at the bottom? This is because rigid optimization does not work. Well, not for long. It's “optimized mush” as one futures trader calls it.

The perfect trading system would be one that continuously changed in sync with the futures market. It’s not hard to design a great trend following method or one that cleans house during a choppy market. But there has never been a computer program designed that can anticipate WHEN to toggle on and off the various methods to match the changing market. It’s like trying to predict the next tick - up or down? And what happens if the market does a half trend and half chop? Or, what if it goes quiet and then has tremendous spikes cleaning out the stops in a classic “search and destroy” session?

The bottom line is highly optimized commodity futures trading systems are doomed to failure, or break-even results at best. It doesn’t matter how elaborate your software is, using fuzzy logic, neural nets or any of these high tech optimization methods; they are doomed to be a wash. A wash! That’s what happens when the majority is average. The commissions and spreads take their “rake” just like the casino.

The harsh reality: You need a UNIQUE edge of some kind to pull you above the average commodity trading crowd. And if you don’t know what your edge is, then you don't have one. Think about this, because it is important. I'll cover some interesting methods that you can explore in greater detail in future articles.

When talking about trading, I cringe when I hear the word, "system." It reeks of computer optimization - optimized mush, no flexibility. A better term is trading "method." A commodity trading method is something that is less rigid and has general rules that can be bent. We need to know when to bend the rules. This brings a method out of the mediocre class into one that has an edge - a human edge.

The best commodity futures and option traders in the world are usually discretionary types verses strict rule based optimization systems people. There are exceptions. To be a 100% intuitive, method trader is a tough row to hoe, agreed, but allows dynamic change to market conditions in a heartbeat.

So, where do we find our trading edge? Is it in the latest software, book, mentor, webinar, or maybe right here? It can be found everywhere, pieces here, pieces there, but mostly, the edge is within you. Sounds mystical, but it’s the truth. You have to spend the time to develop your OWN unique edge that the majority do not have. And yours will change over time.

For example, at one point back in the late 60’s and early 70’s, few commodity futures traders had use of computers. It was found that even a simple exponential moving average worked well for the smooth trending markets of the era. Moving average commodity traders did well since the markets were trending nicely. As more traders caught on, the successful trending systems began to get diced. You will notice that many of the new and emerging foreign markets start out with smooth trends until they mature and then start the chop cycle as change moves in. It’s all part of the never-ending evolutionary commodity trading game and marketplace.

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Re: Commodity Futures Trading - What's your edge?

Too many words to describe a simple answer .This may be for amateurs .

This is true defintion

May 01, 2017

Member (3620 posts)

Without actually dissecting "the edge" this article adds nothing to the pursuit of reliable profits

Jun 29, 2007

Member (13 posts)

Good parts to this article but again somebody that has put up the blinds when it comes to "systems"

When talking about trading, I cringe when I hear the word, "system." It reeks of computer optimization - optimized mush, no flexibility. A better term is trading "method." A commodity trading method is something that is less rigid and has general rules that can be bent.

How about when discipline of execution and money management is the edge?

Apr 10, 2007

Member (2516 posts)