Dow Jones-Irwin Guide to Commodities Trading

Since the appearance of the first edition of the Guide in 1973, spectacular changes have transformed the scene of commodity futures trading. The number of futures contracts traded rose from 25.8 million to 76 million. The value of these contracts skyrocketed from $520 billion to well over $2 trillion. New volume and value records were set every year during the 1970s. Thousands of new players – traders, speculators, brokers, hedgers – have entered the game, and they have come from all walks of life to seek the extraordinary profits offered to the minority of skillful winners. Always an integral component of the American economy, futures trading has dramatically taken a leading role recently in international economic affairs. Headlines at home and abroad trumpet the ups and downs of wheat and soybeans, gold and silver, Treasury Bills and foreign currencies. Futures trading has arrived in a very big way.

The accelerating importance of the futures markets has revolutionized the institutions of trading itself. In the last eight years, a flurry of entirely new futures contracts has created a tremendous market in futures for precious metals and financial instruments. This innovation and success story itself made most earlier accounts of the futures business obsolete. The growth of lucrative opportunities in futures prompted the once-disinterested brokerage industry to alter its ways and jump aboard. Brokers now crowd together with trading advisors, analysts, pool and fund managers in a scramble for escalating profits. All offer the trader a bewildering assortment of opinions, methods, and programs. The adjustment has not always been an easy one, as in boom times con artists or the merely incompetent take their inevitable too. As a direct result government regulation has increased significantly with the creation (1974) of the Commodity Futures Trading Commission. Meanwhile the futures exchanges themselves have expanded the size and sophistication of their operations to meet the conditions of a new age.

This new edition of the Guide has been totally reworked to take account of these unprecedented developments. Every page has been revised or entirely rewritten to cover recent events and prepare for the decades ahead. Most of the illustrations have been replaced with newer figures. However, the qualities that I think made for the popular success of the first edition – clear explanation, common sense, concern for the average speculator – have been retained. New sections and chapters have been added, covering such topics as the history of futures to the present, women in commodities, selecting a broker, pools and funds, the CFTC, commodity options metals, financial futures, and individual account management.

The book’s revisions and additions, as they respond to new events, also grow out of my continuing work as a speculator and author. In 1969 when I was fresh out of law school, I made $80,000 on a $5,000 investment in less than seven months. I have since never turned my back on commodities trading.

Whether you are a novice, a practiced trader, a student or a broker, the statistical odds are that you are losing money, or at best not making as much as is easily possible. Few have the excuse of great success that would allow skipping even the most introductory chapters here, for in these is much of the general consensus and common sense advice all too often forgotten in the dash for profits. The Guide will now take you from a simple definition of commodities and futures, through a complete overview of trading and its mechanics, into the complexities of pricing for the principal commodities, and lastly to instructions for designing your own trading program.

Without apology, the Guide reflects my own trading philosophy as it has been refined through years of research and actual trading. Readers already familiar with the markets and how to trade will thus find value here in the particular perspective with which old facts and new events are viewed and explained. The newcomer may be assured, however, that the Guide has been written with constant consultation of other viewpoints, and has incorporated these whenever they contributed to a balanced, thorough presentation of topics notoriously subject to sharp disagreements.

The book is divided into three parts, beginning with a general overview of the futures market: why it exists, who uses it, how it is used. This gives a comprehensive but not overwhelming introduction, providing a framework with which the reader can understand the difficulties of pricing and then construct a trading program. Along with the facts, I have given whenever appropriate and interpretation of them that will aid the speculator in his attempt to beat the odds. The speculator plays price changes, and the second part of the book is limited solely to the whys and hows of price analysis. After a look at a general theory of price moves, chapters examine the determinants of cash price, and in turn of the futures price which is tied to but independent of the cash market price. A logical chain of relationships is established that will serve in the analysis of any commodity’s cash and futures prices, which is after all the trader’s main concern. A final chapter of the section details the nature and price factors of all the major commodities currently being traded on the futures exchanges.

In Part III, attention shifts to the actual program for futures trading and speculation. Although the book, as a matter of principle, takes a skeptical stance toward predicting the future, the speculator is going to come across prediction systems by the dozens, and will eventually develop one of his own. Thus every widely used forecasting method is included and discussed: supply and demand, chart reading, moving averages and oscillators, seasonal trends, etc. Inclusion does not necessarily mean recommendation. I have attempted to be objective, and work them all in, so that the newcomer may pick and choose on his won. My own preferences, I believe, are clear, but these matters and my own personal trading methods have been reserved for detailed discussion in other writings. Finally, the last chapter covers the general rules for designing a trading program, organizing the account, and managing the positions taken in the market. Price analysis and forecasting are the basis of any program. What to do when a position is actually chosen will determine a trader’s success.

In constructing the book so that the entire market can be understood by someone with no prior knowledge of commodities, surprisingly little specific data had to be left out. More complex matters are dealt with as the argument proceeds from definition to detail. The book does admit to distinct limitations, however. Prices and dates, although almost all have been revised, will soon be once more out of date; but the principles they illustrate will remain unchanged. A balance of coverage among the many types of commodities has been sought. Yet in harmony with the market’s own character, agricultural products still receive heavy attention. Specific markets and their special aspects are covered in other books on commodities (see Appendix I). The trader is encouraged to acquire much more information than can fit between the covers of this book, and to use that data to build an individual plan. It should also be noted that the Guide is written from the viewpoint of the speculator. I believe farmers, hedgers, and other industrial and commercial players will find it a valuable introduction to futures trading, but they will have to go on t