What Kind of Commodity Broker is Worth Full-Service Commissions - Part Two

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...Continued From Part One

A Comedy Of Errors
Another thing to consider when evaluating a broker is trade entry errors. A full-service broker's job is to become familiar with you and your account. The chance of putting through an order error is greatly reduced when two people are involved. For example, a common error that customers experience is when their broker tries to liquidate a short position by selling contracts. I've seen this mistake far too many times over the years. As you might expect in this scenario, the customer ends up with a double short position. That's hardly what the customer intended when he submitted his order.

The bottom line is that your broker can wipe out years of discount commission savings with one big error. It has happened to me when using a discount desk, but I've never had an error go through when using a full-service broker. That's purely anecdotal evidence, but it has kept me from dallying too often with discount brokers. While the commissions may be cheaper, the end costs can be far more than you anticipate.



There's another important reason to have a full-service broker - a good broker will instill courage in his clients. We need to embrace risk in order to get an edge in the derivatives market. A broker should show his client how to hold a naked futures contract or sell naked options with confidence. It's like showing someone how to scale a mountain. It may be terrifying, but it can be done with proper guidance.

A broker who simply advises his clients to buy and hold "safe" options until they erode to nothing is not earning his commissions. A good broker needs to teach his clients strategies to profit from risk while also surviving the bad times. After all, derivatives are a risk-based business in which there are no guarantees. If your broker is worth his salt, then he will teach you how to balance opportunity with your risk tolerance to formulate a strategy that suits your needs and your personality.

Slay Our Own Dragons
Let's discuss one more subject before we close. All traders need to eliminate potential trading mistakes that are personal and habitual to us. We must slay our own dragons. This means staying out of markets that we don't understand or have a bad track record with, regardless of current price action.

For example, one broker friend recently told me about a client who does very well day trading commodities. However, this client also loves to trade the currencies and the E-mini in his personal accounts at night. He does this for his own enjoyment, even though he usually could have gotten far better prices by entering on the open the next morning. As you might expect, many of these overnight trades end up being losers. My friend felt that if this client could just eliminate these overnight emotional trades, he would be very profitable. But the client just loves the night action and continues despite his broker's advice.

In a nutshell, we need to clean out the stuff that pulls us down. Take a look at your own futures and options trading habits and decide which ones feel good to you, but are costing you money. You need to find your own best techniques and kick out the bad ones. Also, you need to keep in mind that things that work for others may not work for you. Ask your full-service broker if he sees a trading problem or pattern that you need to correct. It pays to feel comfortable with your commodity futures broker's opinion and his method of selecting trades. Having this edge can put you above the other traders in the market.

Avoid The Weather Vane Syndrome
As we discussed in Part One, your broker should have distinct bullish or bearish opinions on certain markets. However, if he has a distinct bullish or bearish opinion on every single market that you follow, it is a sign that he suffers from weather vane syndrome. In that scenario, it's time to cash in your chips and switch to another broker. After all, if you wanted uninformed opinions on every single market under the sun, you could just turn on any cable news channel. You are paying full-service commissions for a reason. Be sure that your broker is worth his salt. If he's not, there are plenty more fish in the sea.
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