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BRIAN HOOPS

By Staff | Oct 22, 2010

Have you ever wondered why it is so hard to figure out the commodity markets? Why is it that so many of us fail to market and trade well, leaving large sums of money on the table due to poor marketing or allowing “the board” to get our money when trying to invest?

Much of the stress and failures can be tied to our own psychology.

Everything we have been taught, every rational or logical thought is thrown by the wayside in the commodity markets. Where in the real world, a red light means stop; a red light means go in the commodity markets.

How many times have you heard of a market receiving bullish fundamental data from a monthly USDA report only to end sharply lower after receiving the news? It is hard to understand the psychology of the markets, but even harder to understand our own emotional and rational thinking.

A number of years ago, a reporter asked a well-known commodity trader about his odds of making money in the commodity markets. The trader replied with a straight face, “the odds are 50-50 you will lose 90 percent of the time.”

Generally speaking, it is well believed that over 80 percent of the participants in the marketplace will lose money each year. It is the minority, the 20 percent, who make money.

To examine how your mind works in a trading situation, let’s take a simple test. I will give you four trade scenarios for you to consider:

ONE: There are two possible out-comes of the first trade: A) A sure win of $3,000 or; B) an 80 percent chance of winning $4,000 with a 20 percent chance of making nothing. Which will you take No. 1 or No. 2?

TWO: Our next trade is a choice between: A) A sure loss of $3,000 or; B) an 80 percent chance of losing $4,000 and a 20 percent chance of losing nothing. If you don’t understand, read again and then decide which outcome you will choose, No 1 or No. 2.

If you are like most people, in scenario one you opted for the sure $3,000 gain. In terms of math, though, the second choice was better $4,000 x 80 percent = $3,200. In scenario two, about 90 percent of people select the second choice, losing an additional $1,000 to gain a 20 percent chance of losing nothing.

A pair of professors at the University of Chicago have conducted this survey and many other similar tests and have come away with a fascinating discovery for commodity traders. The bottom line of about 10 years of research and testing over 100,000 minds is:

The typical person avoids risk when seeking gains and the typical person embraces risk to avoid losses. It gets down to this; the way we are made is such that the fear of loss is more powerful than the hope of gain.

So guess what happens when it comes to trading? The fear of loss forces you to take additional risk – the risk of removing your stop or simply trading without one. The other side of the coin is that we avoid risk when seeking gains.

Hence, once you’ve got a profit – you will exit too soon to avoid further risk of getting greater gain. Now that you know how you act and react, you need to purge and cleanse that old noggin to a winners’ way of thinking. Let profits run and cut losses short.

Corn analysis

Corn closed the week $.34 3/4 higher. Weekly ethanol production for week ending Oct. 8 was a new record suggesting annual production of 13.4 billion gallons-well above 2011 reneable fuel standards of 12.6 billion gallons. Meanwhile, U.S. ethanol stocks are declining on strong U.S. exports and record domestic blending. 83.6 percent of U.S. gas now blended with ethanol-a record high.

Soybean analysis

Soybeans closed the week $.50 higher from last week. Last week, private exporters reported sales totaling 1,077,500 mts of soybeans to China and 278,803 mts to an unknown destination.

The NOPA soybean crush report estimated 124.917 million bushels crushed in September versus expectations for 116.5 million bushels, 122.397 million in August and 107 mb last year. Given the sharp jump in soybean oil yields this month, it appears some new crop supplies were already making their way into the system.

As seen, the September crush was the largest for the month in three years.

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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