Speculation In The Commodity Markets

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!