There is always "year one" for every commodity futures trader. I had mine and made every mistake a trader can make and more. Here’s my story of how I stumbled into the lion’s den, got gored a few times and even made some money. My hope is that beginners will read this and avoid some of the more obvious stuff. Here’s to all new traders!
It all started in the spring of 1979. I was 28 years old. I was in the office of my new retail electronics company. I was going over some paperwork and got a call from a young and excited broker from Boston Commodities, or some name like that. He must have had the list of new businesses and was cold calling the small business owners.
I had no idea, but at the time sugar was in a major bull market trading at around 11 cents and destined to reach 45 cents later in the year. Gold, silver and copper were also making new highs. Bunker Hunt was cornering silver on its way to $50 an ounce. Gold was destined to hit $800. Anyway, this kid from Boston was on fire and told me I was missing the opportunity of a lifetime in sugar futures contracts. He wanted to mail me some hot news off the commodity news wire. He was looking for a $15,000 stake; a lot of money in the late 70?s. He said he would buy me four futures contracts of sugar. I didn?t know anything about commodities at this point, but told him to send over the info anyway.
When it arrived, it was the usual bullish hype about shortages, disease and reasons sugar had nowhere to go but up. Somehow he knew to call the moment I received it. He convinced me I could make an easy double or triple, so I agreed to send him $15K. Now, this part gets interesting. I hadn’t opened an account or sent him money yet. He said he needed to put me on the phone with trading to lock in my four futures contracts for the next day. I was confused, but agreed.
The next thing I knew a guy answers the phone with a gruff voice and yells, ?TRADING!!!? I said I didn?t know if I should be talking with him because I didn?t know what to order. I think they had me on a speaker-phone because I heard some guys laughing in the background. He said, ?OK, you?re locked in for four Oct sugar commodity futures contracts on tomorrow?s open." I said, ?OK, I guess,? and hung up. By the way, why is it the most aggressive brokers put on a gruff, hoarse voice act, like they?ve been in the trading pit yelling all day? I hear it all the time… ridiculous.
The kid commodity broker called right back to congratulate me on my smart decision. He sent me the commodity account forms by overnight service. I must admit I was excited. I had no idea about the commission rates, risk potential, position sizes? nothing! But I wanted in! I was the perfect sucker. When the account forms arrived I filled them out and was getting ready to send everything back.
By coincidence, I got a call from my CPA on a different matter. I explained to him about this new venture. Somehow he knew something was amiss and told me to let it go. I called the Boston Commodity Kid back and told him my CPA gave it thumbs-down. I had a hard time getting the kid off the phone. He called me spineless; he said I needed to be a real man, and I?d regret missing out. He also said I needed to stop acting like a woman. For the next three days his buddies took turns working me over trying to close the sale. Meanwhile I started reading about commodity futures trading. That was the first right move I made!
The final day the Boston Broker From Hell called, I was loaded for bear. I asked him how much he charged for commissions. He balked and tried to sidestep it. After a while I got him to admit they were taking $4,500 off the top to cover commissions. $4,500 chopped from a $15,000 account! That?s over 30%. He said that over a year’s trading I would blow that much in futures commissions anyway. I later figured out they would put you into a futures contract position and let it sit until the margin call came or they rolled it into another trade. If the money grew, they would want another cut off the top. Gads. Needless to say, I insulted him and hung up.
A month later he called back and beat me up again. Sugar future contracts was now at 15 cents and I would have been up $16,000! Well, after their commission chop, make that $10,500. The kid was cockier than before and was really sounding smug. Now he wanted me to get into lumber futures.
But by this time I had read a commodity trading book called, ?Trident – a trading strategy,? written by Lindsey. A young Larry Williams was one of the promoters for the seminars. It was a $1500 seminar. I didn?t attend – just read the book. I was now enlightened. I told the Kid from Boston, ?the swing objective of sugar is 18 cents.? I asked him why I needed to pay his $4,500 commissions when I had all the answers… HA! He realized I was a lost cause and said good bye for good.
As a fitting epitaph, I understand the CFTC shut them down and they were fined for violations years later. I guess I dodged a commission bullet. Despite it all, I might have lucked out and made money in this great sugar bull market. Commodity bull markets can often forgive stupid blunders and mistakes along the way. We can be sloppy as heck and still do well at times, until the bull party ends.
Reading can be a powerful thing, especially with today?s wonderful internet. Be fully informed before you make a decision ? especially if you’re new to the game. Just because firms and commodity brokers are registered with the NFA and CFTC doesn’t mean a few won?t try to take advantage of you.
The modern day version is the so called, ?$200 commission commodity houses.? They usually put your entire $5,000 account into five $800 options at a $250 commission each. To demonstrate how heavy these expenses are, if you broke even with entry and exit price on FOUR successive trades, your account would be wiped out from option commissions alone. FOUR trades (five options each trade) equal $5,000 in commissions. Yikes! Then there’s the offshore Forex option scams. Please be careful out there.
Let’s go back to 1979 and fast-forward a few months after the Boston Commodity Broker from Hell episode. I occasionally glanced at the commodity futures contract quotes in the Wall Street Journal and noticed sugar kept climbing. So did gold. I couldn?t take it anymore and decided to drive down to Merrill Lynch and walk out with some Krugerrands. I walked into the cigar smoke-filled office. Gold closed at $420 an ounce that day. I met Max, the sole commodity futures broker among a sea of stockbrokers.
Max was a serious looking, dark haired guy of about 45 years old who sat in the corner. He looked like he had been around the block a few times. He would become my commodity futures and options broker for the next year or so. I liked Max. They say the main reason you do business with a broker is because you like him. Making money is secondary. Strange but true.
Being a commodities futures broker, he said I should buy gold futures, not coins. (of course) I opened an account and funded it with $15,000. Commodity commissions were somewhat better at $100 a trade. Gold was quiet and in a correction, so I switched to cattle. I spent the next few weekends at the library looking up cattle prices and charting them. I drove the librarians nuts running up and down the cellar stairs pulling out the old Wall Street Journals. Poor things. But, I wanted to be a ?meats? trader!
Max called the shots and after getting permission for each trade, put in the futures day-trades for me. Over the next month or so he made about 25 losing futures trades in a row. All were small day trading losses. I was down about $3,000. I told him this couldn?t go on. He agreed, but what could he do? Now that I think about it, most of the loss was made up of commissions. Twenty-five trades times $100 = $2500.
One thing that stands out to me is the flow of commodity news we traded on. This has to be the most confusing way to trade. I would sometimes stay on the phone for an hour as he gave me the results of the trade. Just like a horse race. One day I went short cattle futures because of some oversupply report on his noisy little real-time mechanical commodity ticker machine. I could always hear it rapping in the background.
The cattle futures market started to rally against me. He told me the news ticker said it was raining in the Midwest and, ?the cattle were in the mud and couldn?t be brought to market!" I covered at a loss and went long. I don?t remember the reason today, but that trade was also a loser. Then we decided to ?diversify.? I went long soybean oil because a hot story came through about soybean ?crush? shortages. The futures market started dropping like a bomb and I was losing again.
He told me the commodity news ticker said a major crop processor had discovered a large quantity of soybeans that had been unaccounted for. It had potential to flood the market. I panicked out for a loss. Minutes later he said the report turned out to be a rumor and the futures market was rallying big. I bought back and lost again, of course. Max always held my hand after a loss. Whenever I had a winner, he always gave me credit and would say, ?you? made a great trade. When there was a loss, it was, ?we? got hit. I always remembered that.
Then there was the time when I had more nerve than sense. I bought two futures contracts of cotton at limit down! I didn?t know any better of the risk. But as dumb luck would have it, the futures market opened limit up and did so for three days in a row! I made a cool $5,000 on that trade. I had arrived! I made all the Max losses back and finally had a profit – all in one trade. And I did it myself! That was the turning point for me. I started reading and looking for anything I could find on commodity futures trading. In those days there was very little. The trading system promotional hype, books, internet, computers programs ? they were all to come much later.
A few months later things started to evolve quickly. I had my business programmer write a commodity price swing program on my Radio Shack TRS-80 computer. It took a month, but when it was done, it gave automatic buy and sell signals with swing objectives. This was in 1980! It was like magic to me and I couldn?t wait to see what it would spit out each day. Actually it was based on the Trident commodity trading system, for those of you who know it.
The first time you work with an automated computer system, it’s magic! You feel like this artificial intelligence knows all and the market MUST listen! In the beginning, each recommendation that comes out gets followed religiously. After a number of losses, we then get more skeptical and start second guessing it. It’s fun for a while though. More on the dangers of optimized systems in later articles.
The first night this new system was working, it printed out a buy recommendation for the British Pound, the Swiss Franc and German Mark – all at the same time. I had no idea how the concepts of diversification or redundancy applied here. I didn?t realize these three currencies were like buying the same thing. They all moved pretty much together.
The next morning at the open I rushed in and bought two futures contracts of each. The price skids were horrendous, as if everyone was trading Trident that day. I bought the highs of the day on the open – in all three. I got stopped out for a $4,500 loss by the close. This was my stiff entry fee into systems trading. Back to the drawing board!