Anyone who has been in the commodity markets for any length of time, has searched for the secret that will make them rich, fulfill their dreams or simply give them the answers they have been looking for.
While these searchers for this key to the financial kingdom have looked at technicals, fundamentals, seasonals, system trading or even a CTA or broker for answers, I want to tell you they are looking in the wrong place. The “holy grail” they have been looking for has been right in front of their eyes this whole time.
It has been recommended by many advisors for a long time, however most of the non-professional traders have ignored this “holy grail” in their trading strategies and will remain non-professionals if they continue to do so. The secret is simply the ability to manage their money.
In our society, the ability to handle your finances is what separates the person who lives paycheck-to-paycheck from the person who retires early. In the world of commodity trading, if you don’t manage your money, the board will take it away from you. Conversely, with the incredible leverage offered in the commodity markets, a wise trader can have the keys to the financial kingdom.
As long as I have been in this business, I have noticed one common trait of the traders that consistently lose money, they overtrade their account. Simply, they will put the majority of their entire account at risk. When they do this and they lose, the majority of their account balance is wiped out and they are forced to send in more money or suspend trading.
Here is a simple equation to use to manage your account. This money management formula is available for download on our website in Microsoft Excel. This formula will determine the amount of contracts to trade relative to the risk tolerance and the amount of risk involved in the trade.
Take your account equity, divided by the amount you will risk on the trade, multiplied by the risk percentage. I would recommend you risk 5 percent to 10 percent of your account equity if you are a conservative trader and more if you are a more aggressive trader. As an example, your account equity is $15,000, your risk percentage is 10 percent and your stop loss on a particular trade is $800.
The money management formula indicates you should trade two contracts. In order to trade more than two contracts, you will need to increase your account balance to $20,000 or decrease your stop loss amount.
In theory, the more your account equity grows, the more contracts you should trade. Conversely, the smaller your account equity, the fewer contracts you will trade.
Here’s an example: I have an S & P trading system that I follow very closely. While this trading program has done a very good job of trading, the difference in trading this system using a money management system versus not using a system is unbelievable. In 2008, the system had 46 closed trades with 33 winners, 13 losing trades for a winning percentage of 72 percent. If you started with an account balance of $100,000 on January 1 of this year; and if you would have followed every trade recommendation exactly as the program indicated; you would have a nice profit of $133,400 and an account balance of $233,400 in 12 months of trading. That sure beats any mutual fund return over the year.
This is assuming you only traded 1 contract for each trade recommendation. However, read on to discover how a money management system would have done with the trading program.
If you would have implemented the previously mentioned money management formula, and assumed a 10 percent risk tolerance for trading the program, your account balance would be $316,995! Remember, as your account equity grew, so would the amount of contracts you would trade based on the money management formula. You would have a nice profit of $216,995 and an account balance of $316,995 in twelve months of trading. Yes, proper money management really is the “key to the financial kingdom,” or “the holy grail of commodity trading.”
Remember, a sound money management system will be the most important part of your trading program.
Corn closed the week $.05 3/4 higher. Corn closed higher for the second consecutive week as persistent Chinese buying rumors offset the record fast planting pace. Farmers got off to one of the fastest planting starts in recent history and yield expectations are high.
Last week’s crop progress report showed corn planting progress at 68 percent, a new all-time record for swiftest seeding. This is well ahead of the five-year average of 40 percent. Iowa is 84 percent completed with corn seeding, while Illinois is 87 percent, Nebraska 48 percent, Indiana 71 percent and Minnesota 87 percent completed.
The weekly export sales report showed net sales of 1.85 million metric tons – a marketing-year high – for delivery in 2009/10, which is up 15 percent from the previous week and 46 percent from the prior four-week average.
Increases were reported for Japan (672,400 MT), unknown destinations (240,100 MT), South Korea(168,900 MT), Mexico (131,600 MT), Egypt (117,500 MT), China (115,000 MT), Taiwan (110,400 MT, including 57,900 MT switched from unknown destinations), and Colombia (106,500 MT). Decreases were reported for Jamaica (6,500 MT), El Salvador (3,300 MT), and the Dominican Republic. This year’s export profile is now at 1.631 billion bushels versus the USDA forecast of 1.9 bb.
Strategy and outlook: Producers should be 100 percent sold in cash/hedges. Producers should have purchased July options on a pullback into a support level on a portion of their 2009 production. Hedgers have sold a portion of the 2010 crop when December futures traded above $4.50.
The next sales objective for corn producers is the 50 percent retracement level of this last down move. Producers should look at buying new crop put option protection and add to cash sales at this level.
Soybeans closed the week $.29 3/4 lower from last week. The first weekly crop progress report was issued for the soybean market last week. The USDA reported 15 percent of the 2010 soybean crop has been seeded, well above last year’s 5 percent pace and ahead of the 5 year average of 8 percent seeded. Iowa is 13 percent completed, with Illinois at 11 percent, Indiana 21 percent, Nebraska at 8 percent and Minnesota at 19 percent finished.
The weekly export sales report showed net sales of 283,200 tons for delivery in 2009/10 were up noticeably from the previous week and 47 percent from the prior four-week average. Increases reported for China (180,000 MT), Mexico (79,700 MT), South Korea (57,700 MT, including 55,000 MT switched from unknown destinations), Japan (51,700 MT, including 47,000 MT switched from unknown destinations and decreases of 5,900 MT), and Germany (31,000 MT, including 30,000 MT switched from unknown destinations), were partially offset by decreases for unknown destinations.
Net sales of 209,100 MT for delivery in 2010/11 were mainly for China (168,000 MT). Exports of 289,400 MT were up 4 percent from the previous four-week period.
This year’s export profile remains well ahead of last year’s record pace at 1.375 bb versus the USDA forecast of 1.445 bb.
Strategy and outlook: Producers should be 100 percent sold in cash/hedges. Producers should have purchased July options on a pullback into a support level to re-own a portion of their 2009 production. Producers have sold 2010 crop when November futures traded above $10.30 and next sales objectives for producers is the 62 percent retracement level of this last down move. Producers should look at buying new crop put option protection and add to cash sales at this level.
Brian Hoops is president and senior market analyst of Midwest Market Solutions Inc. Midwest Market Solutions is a full-service commodity brokerage and marketing advisory service, clearing through R.J. O’Brien.
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