The Good, the Bad and the Ugly - Part Four

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Continued From Part Three...
         
Winners & Losers
There are quite a few commodity futures and options traders who make millions of dollars every year. A select few have even been known to earn several hundred million dollars a year. These traders consistently make a great living, to say the least, while so many others consistently lose. Commodity trading is a big arena, just like the stock market.

I used to wonder why the CFTC didn't come down hard on commodity firms and brokers who consistently lost money for clients. I thought that if it was any other kind of business, wouldnít the consumer protection arm of the government shut them down?



Zero Sum Game?
Then it dawned on me - this is a zero sum game (although many would argue that contention when it comes to options)! It's actually a negative sum game when commissions and so called "exchange, transaction, etc." fees are added in. For every commodity trader who is long there is someone short. For every winning tick for one trader, there is a losing tick for another trader. Such is the circle of trading life.

This means that half of the money must be lost by someone if half of the pack are winners. A more likely scenario is that 95% of the money is lost by commodity traders who give it to the fortunate 5%. With a zero sum game, there MUST be many losers, and a few big losers if there are big winners. If the CFTC did an audit of any random commodity brokerage firm, they could certainly EXPECT to find brokers with customer accounts that are doing poorly. After all, brokerage commissions and profits won by the best traders must come from somewhere.

This is the way that the futures markets (and stock markets to some degree) have worked for over a century. As long as everything was done legally and ethically, there is no problem with customers losing. There is always a winner and loser in commodities. The same is true with Las Vegas. Vegas is also a negative sum game, given the house odds. The casino house is equivalent to the best commodity traders. (and brokerage houses, of course)

Interestingly enough, at least theoretically, the stock market is an exception to this rule. You could have 100% winning traders if everyone were long and all the stocks kept going up. Even the commissions could be covered. But this is never the case in the real world. There is probably no difference in losing statistics for stock or commodity speculators. Itís a strange one, this trading world. You simply must remember that it is YOU against the competition and there are a number of sharp traders out there. In the purest capitalistic sense, you must make it as difficult as possible for them to take your commodity account money away.

Bottom Line...
When your commodity trading methodís accuracy is low by design, you MUST let your profits run longer than your losses. Also, you must limit your losses in to survive over the long haul. You should also never risk more than 5% to 7.5% on any one trade.

When your trading accuracy is high by design, then you can let the profit to loss ratio get closer to 1:1 You can also take quicker profits and slower losses and risk up to 10% on a single trade. Remember that your goal is to eventually risk 5% or less per trade,  which is how the big boys do it....

            
Continued In Part Five..."

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