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Change in Commodity Trading & Trend Following

InvestorEducation / Commodities Trading Jul 09, 2009 - 02:09 AM GMT

By: Andrew_Abraham


So many times I hear clients when in a draw down say ,there are changes going on in commodity trading and trend following. The commodity markets are changing. They are not like what they used to be. Trend following is dead. This draw down proves trend following is dead.

Well I will give you my 15 years plus of experience and counter these thoughts. First of all, nothing ever changes.. You need to really know what trend following is, what causes it. Not trying to be funny, but commodity trading has been going on since the times of Joseph in Egypt selling wheat. If you read your bible, he cornered the wheat market and there was a trend in wheat. The price went up. There will always be shortages, panics,fears and hedgers and for this reason there will be trends. One can look back at charts from the 1800s and look at wheat or even cotton. What do you think happened to the price of cotton during the US civil war. Do you I need to remind you what happened to crude in the first gulf war. Human nature never changes…fear and greed don’t ever seem to change…so there are trends. If you want to consider making money in commodities one of the ways I feel most strongly about is trend following. No predicting…just reacting and trying to catch a trend or as a surfer trys to catch a wave. Not too much different.

Now if you believe there are trends, then you need to realize they do not happen when we want them. There can be years at a time ..NOTHING HAPPENS..At this point most non professional investors give up and claim trend following is dead and commodity trading advisors stink. Well, so many times after this trend following comes back from the dead and commodity trading advisors hit new record trading peaks. This brings me back to my holy grail word “PATIENCE”. If you can be patient…disciplined …have a sound trading methodology based on risk management and money management…you stand the potential overtime to grind out some decent returns.

Next thought… again those same inexperienced commodity traders say… the commodity markets are changing.. I need to change my system or my methodology. Again with years of experience watching what has the chance to work and seeing all that did not … the only things that can work over time are simple ideas based on with strong risk and money management.

To give you example, Richard Donchian used a very simple idea. Buy the 22 day high..sell the 14 day low.. This is the basis.. not too complicated.. but needs more risk and money management filters. Not sure if it was John Henry from JWH or Dunn Capital..either of them stated all rules of our system can be written on the back of an envelope. Pretty funny since both at them at various points of their careers were managing in excess of $1 Billion US Dollars. If you want to be a winner in the commodity trading arena realize this takes time, discipline and patience. This is not a get rich quick. This is a compound your way to wealth if you follow the rules of risk management & money management.

All of this is easy to say… but when you are down either in your trading account or when your commodity trading advisor is down 20% or greater and you want to quit, Remember …Do you want to be a winner or a loser.

Understand exactly how your mechanical trading system works.. don’t think you will buy a black box and make money…Ask questions to your commodity trading advisor.. what gets you in a trade..out of a trade… with a loss or a profit.. How much risk per trade.. how much risk per sector… how much portfolio open trade risk…or margin to equity… If you do not do your homework ahead of time…don’t even think about commodity trading..These are the hard truths about commodity trading..this is not easy… Futures and commodity trading involve substantial risk.People can and do lose money trading.

Andrew Abraham

Andrew Abraham has been in the financial arena since 1990. He is a commodity trading ddvisor and co manager of a Commodity Pool. Since 1993 Andrew has been a proponent of quantitative mechanical trading programs. Andrew's major concern is not only total return on investment but rather the amount of risk that one would have to tolerate in order to achieve returns He focuses on developing quant models that encompass strict risk adherence and correlation. He has been a speaker at conferences as well as an author of numerous articles. Andrew has spent years researching ideas that have the potential to outperform indices as well as maintain fewer draw downs.

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© 2009 Copyright Andrew Abraham - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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