T2W Trading Community

Book 4: Tactical Dispositions

The good fighters of old first put themselves beyond the possibility of defeat, and then waited for an opportunity of defeating the enemy.

Why were futures created? If you know the answer then you are ten steps ahead of average futures trader out there. If you actually use what you know you are most like one of the 5% of traders that succeed when it comes to trading futures and forex. You can stop reading this article now.

For the rest of you what I am going to write may or may not register right away, that's okay. I want you to meditate on it, research it, and email me. I remember when I wrote that gasoline would be $4 at the pump a few years back and people wrote me all sorts of hate mail. Since then gasoline has $4 at the pump in various states.

The big secret is quite simple. Futures investing was designed as an insurance tool. That's it. The spot market, the futures market, and the option market were designed as a daisy chain of protection, each with a successive higher and higher leverage, because of the markets perceived belief that the buyers and sellers actually own the product or have the cash to pay for the product in whole.

When I first decided to become a commodities broker I thought that I would be learning how to trade. I assumed that the test would discus technical analysis and market strategy. Imagine my surprise to discover that the test was all about hedging. How farmer's protect themselves from loss in crop value, how banks use treasury futures to manage interest rate fluctuations, and how to protect yourself from currency devaluation. Dry stuff.

To secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy is provided by the enemy himself.

That kernel of information didn't mean much to me when I was 19. My goal was to pass the test. As time went on and I began trading for my lcinets, and eventually for my own account I realized a simple truth. Gambling and speculation were two different things. To gamble with futures meant I was looking to be right about being long or short. To speculate meant that I was protected even if I was wrong. Like everyone else I thought stops were the definitive risk management tool. That's when it occurred to me if the markets were designed to be an insurance vehicle for the commercials, would there be an advantage for the retail investor.

By looking at trading through the eyes of the people that actually buy and sell the products you are able to trade both sides of the market, with a little foresight, and manage your risk more efficiently than using stops alone. By combining spot, futures, and options products together you are able to raise your level of trading sophistication to the same level as the true professionals.

Security against defeat implies defensive tactics; ability to defeat the enemy means taking the offensive.

Depending on your level of trading sophistication you may not be comfortable using spot, futures, and options either because of commission costs or level of understanding. While it may take a little time to understand the risk management parameters, delta of options, and calculating your total profit/loss scenarios, once you have mastered it you raise your trading from the amateur level of gambling to true speculating. They feel that they are only paying twice as much in commissions plus locking up the premium.

The great part of trading this way is that you will have reduced margins, reduced commissions, and reduced risk. Don't be afraid to combine spot, futures, and options together it will add a depth to your trading that will put you ahead of the 95% of the traders that fail.

This is my favorite edition of the Art of War and these quotes are excerpted from it:
The Art of War:The Definitive Interpretation of Sun Tzu's Classic Book of Strategy for the Martial Artist by Stephen F. Kaufman, Hanshi 10th Dan
ISBN 0-8048-3080-0
Tuttle Publishing