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Speculation in the Commodity Markets

InvestorEducation / Commodities Trading Aug 05, 2009 - 01:52 AM GMT

By: Andrew_Abraham


The first thought of some regarding the word, speculation in the commodity markets is of total risk or cowboy mentality. More so, the term speculator is looked down upon by the idea of trying to control the crude markets or selling short last year. All of these are inaccurate.

What really is Speculation in the Commodity Markets? If the speculation is done correctly with risk & money management rules then one might say Trend following is a form of speculation. Let’s face it. Everything we do in our lives is speculation due to the uncertainty of everything. Every business venture is uncertain. Buying a piece of real estate is uncertain. Even getting into your car and driving to work is uncertain. The idea of trend following is that one realizes and accepts the uncertainty and manages the risks. Without managing the risks… any speculation or even trend following is a gamble. This is not our goal to gamble but rather to compound money over time.

Some of the premises of a successful trend follower (Speculator) or characteristics of a successful commodity trading advisor are as follows:

1. Confident in the face of uncertainty

2. Self Reliant and does not seek out the advice of others. The successful commodity trading advisor has developed his/her strategy and knows it is all a numbers game and what to expect. Small losses.. Small profits.. Rare large profits…and the commodity trading advisor makes sure he/she does not have large losses.

3. Flexible- The successful commodity trading advisor has no opinion and is flexible to go long or short as price dictates. He/She knows that opinions do not translate into profits. Rather they trend follow and let price dictate which direction to trade if at all.

4. Patience- Trend following CTAs know that draw downs will occur with great regularity and that the durations of some are extensive.

5. Discipline- Trend following commodity trading advisors don’t change their methods or systems in the midst of a draw down. They are always testing ideas and researching to improve however they are disciplined to take every trade their trend following systems gives them.

There is not a second thought…should I take this trade or not?

The connotation of a speculator has been slighted. Too many look to blame those that are successful. Fortunes were won by trend followers in the oil markets…and in shorting the stock indices last year (besides so many other markets). The losers were the buy and hold mutual fund owners or those that believed they knew better than the markets themselves. One stand out was T Boone Pickens the oil expert who saw his energy hedge fund implode because he did not follow price. Nothing ever really changes. Fear..Greed..Panic!

This is why trend following a large basket of commodity markets are an essential part of anyone’s portfolio. Human nature never changes!

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.

Visit Angus Jackson Partners ( Contact: (

© 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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