When You Get a Hit, Keep Running Until You Are Tagged (stopped-out) Info for Traders about How 90% Winning Trades are Possible Selling Options!
Historical Article of the year by Traders Club member Robert Edwards
Today is Well, it's early in the morning, Dec 21st and I have already liquidated my S&P500 "Christmas trade" which I bought on the close of Monday, Dec 19th and it is not even Christmas. Yes, I made just enough to pay my commission with a little extra to go out to dinner, leaving the big dollars sitting on the table.
After buying, I placed a $2,500 stop-loss order. I was never in danger of losing even $1,000, yet I'm already out of the market. Another potential home run wasted. Why didn't I make the market take me out of the trade? I cut my losses short but seem to consistently cut my gains even shorter.
I watch the daily gyrations of the futures market and can get better fills than guys with their Hotlines and market calls. But when the market makes a small profit I take it, usually in the $100 to $300 range. I tell myself I'll get back in, but rarely do. Then a few days later the market really moves and I'm not in. I recently bought the lows in frozen orange juice, but rarely made more than a dollar or two on the trades and sometimes took unnecessary losses.
I somehow manage to always get out of a trade just before the market booms. I am a very short-term trader, it's just the type of player I am. In my mutual fund account, I'm up about 16% for the year, remaining almost totally in cash, except a few trades lasting a couple days here and there. The same would be true, I guess if I were playing baseball. Using the baseball analogy, several times this past year I was at the exact right place in the lineup to come up to the plate with the bases loaded and the starting pitcher was running out of gas (momentum fading). I picked the right pitch and turned the ball back the other direction, hitting it so hard and fast it was heading for the bleachers for sure. (I had picked either a top or bottom of a market and had a quick profit and all I had to do was sit back and place a stop-loss order at where I got in).
The commodity market would never have stopped me out, just as there is no way an outfielder can catch a ball hit high into the bleachers. Yet, while everyone else was rounding the bases, I decided I better play it safe and stay on first base or worse, I didn't even make it to first because I ran into the dugout and was called out leaving the base path. This happened to me recently when I bought December Cotton at 70 cents but got out at 72 cents while the market soared up another $12 or more. This happened several times in coffee. I bought in the 70's for a 2-3 cent profit, when I would never have gotten stopped-out and could have rode the contracts to the moon.
My trade research work shows most trades (85% to 95%) are either small winners or small losers, and these tend to cancel out each other. In fact, with commissions, these trades usually result in not a gain but a net-loss. However, the few successful people who make it to "pro" status, put themselves there and stay there by hitting a few home runs each year.
My memory of past losses -- times I struck out at the plate, the proverbial "Casey at the bat" scenario, continues to paralyze me. I'm talking about baseball because commodity trading is the "big leagues." I've traded since 1980 and I've learned to pick my pitches as good as anyone. I have a phenomenal batting average, running between 65% to 80% winning trades. Yet like most average traders, I will make a profit for the year before commissions, but will show a small loss after commissions.
I must change my trade patterns. If I don't change, I know I will never be anything but a journeyman, going back and forth between the majors and minors. Just switching teams regularly every time I decide to try a new program or advisor. I will end up on a minor league bus someday heading for a town with a name no one would recognize, with hardly enough change in my pocket to buy a hot-dog!
My new year's resolution is to get some "guts." I may strike out even more next year, but that is fine -- most home run hitters do strike out a lot. But they are among the highest paid players because the home runs make up for it. The same is true in commodities.
A "super trader" is consistently successful because he or she hits a few big winners to make up for the many mistakes. The few big trades that occur in a year are responsible for the profits of the pros. It is what makes a "super trader" claim that title and maintain it over time. If I can just learn this one point, I know I can become a "super trader" too! I must quit taking myself out of the market and force the market to take me out. When I hit those big hits, I will keep running the bases until I am finally tagged (stopped) out!
To diverge a second from baseball, I heard every time one takes on a position, it's like throwing an opened pocket knife in the air and catching it with one's bare hand. Eventually, you get bloodied. With every throw, the chances of getting cut are increased. You don't want to make any more throws than you have to, and likewise in commodities you want to limit your trade frequency and subsequent brokerage commissions.
The more you trade commodities, the more chances there are of making a mistake. If you trade, you will error. And yes, every trader gets bloodied. The laws of physics work the same, whether it's a "super trader" throwing the knife or just me. Although everyone gets bloodied, the super traders have made enough money to buy themselves some padding, so the blade never actually pierces their hand. They rarely feel the pain of the loss. They have the needed confidence to keep throwing the knife, when I will have already given up. I may lose next year. If I do, it must be, it will be, because a better team beat me. It will not be because I beat myself.
Recently Dave called me for the first time in several months, on my birthday Nov 30th. During that call, I explained to him that I had recently been quite successful selling out-of-the-money calls and out of the money puts in the Live Cattle market. Although I was intermediate term bullish on the market, the Live Cattle market was in a short-term correction going down. It just happened to bottom the day Dave called.
I had sold Live Cattle call options in the February contract all the way down to the low which was hit that day, while selling additional April Cattle puts at higher and higher premium values. Because February Cattle was falling faster than the April, the profits I was making on the 12 short February calls was equaled to the short-term losses I was experiencing in the 20 short April puts, although none of the April puts were ever in the money (I sold April 64, 66, and 68 strike puts and April Cattle bottomed at 68.20).
With live cattle futures bottoming on 11/30, I took profits on all call options the following morning and bought 2 April Cattle futures contracts and went long a January Feeder Cattle. Now, all I had to do was hold the short trade April puts and hope the market held the low. The market more than held up, it rallied strongly in my favor and on 12/5/94 I was now at near break-even on my April puts, so I dumped them all and also took profits on the 2 long April futures, and Jan. Feeder Cattle.
Even though it looked like a good move for one day, based on the drop that occurred on 12/6, the market has since rallied greatly and I never got back in. It took several days to put that position on and I could not get myself to ever get back to selling puts to put it all back on.
The $9,000 total dollars of put premium I received when I sold the April puts, has dropped to less than half of the original amount, to about $4,000. If I had waited to liquidate the position today, I would have a $5,000 profit in only 3 weeks. With the rally present in Cattle, it is likely April Cattle will close above 68.00 and all puts will go off worthless. It appears likely I could have kept all $9,000.
I told Dave that day on the phone, when live cattle happened to be at the bottom, that selling the 64 April Put for over 60 cents ($240) was the best trade on the options board. Editor's Note: That is correct, Bob did say that on Nov 30th) Today, three weeks later, the 64 April Cattle Put is trading at 20 cents ($80). It looks like the option will expire worthless. Another home run wasted.
I wrote another article in an earlier CTCN explaining how 90% of futures exchange option buyers lose, and 90% of options sellers win. I don't think there is any better trading strategy in commodities futures trading vs selling out-of-the-money puts and calls. But I am still working out any bugs or issues.
Ken's Organization will be offering new commodity futures trading products and new financial services for commodities markets traders ... Soon you will be able to "trade corn" "trade wheat" "trade gold" "trade live cattle" "trade mini S&P" and trade other financial futures markets with trade placement brokerage assistance of your "Commodity Broker" and Ken the Commodity Trader...
Editor's trading tips of the month: Some profitable commodity futures traders use Fibonacci numbers in their trading. Here is the Fibonacci number sequence under 1,000: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987. Please note, each subsequent number always equals the sum of the prior two numbers in the Fibonacci sequence.
The sunflower is a good example in nature of the fibonacci series of numbers what with sunflowers having florets in Fibonacci number spirals of 34 and 55 around the sunflower's outside area. As an interesting note, the sunflower photo to the right is using Fibonacci ratios itself what with its 233 width by 144 height and 8 pixel border.
The Golden Ratio aka The Golden Ratio is closely related to the Fibonacci number series, with the numbers 0.618 and 1.618 considered to be the most important Fib Numbers. On a more personal trading level, successful commodity futures traders like Ken have also discovered 38% 50% and 62% time or price retracement ratios to be a potentially profitable trading tool, especially 50%. However, the most important Fibonacci ratios are always 1.618 (uppercase Phi), and 0.618 (lowercase phi). 1.618 is also well known as the "Golden Ratio" or referred to as the Golden Mean. More information regarding Fibonacci Numbers.
Ken the Commodity Trader will have new position trading and day-trader tips, plus details on these unique and interesting trading methods later, so please visit web.trading/ken on a regular basis. In the meantime, please contact us if interested in personal consultation on an hourly fee basis about commodity futures.
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