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| Allow me to address a couple of issues & in an effort to not offend anyone, & while some may agree & some not, my interest is of an information nature. I have covered this subject before, but I think some perspective is important at this time in these markets.
Additionally, I am writing a private manuscript for one of our sons who shows interest in the markets, and part of this is part of that process. I enjoy a wealth of wide-ranging experience & if any mistake is possible in trading, I assure you, I have been there & hopefully learned.
First, good research is difficult to find. I learned this when I first entered the field of futures & is why I have since, always prepared my own conclusions as from my experience I believe I know those subtle factors which can either lead to a bull situation or those factors which will eventually unwind a market.
No one. In a free market atmosphere, not a single person of whom I am aware, can predict the price of anything in a free market with any degree of accuracy. Most ,particularly an economist (and my education is in economics and statistics), who is using data which is weeks old, in some cases months, and sitting in an office running regression models. And, the person is most likely prohibited from actually trading & does not have a clue about the workings of markets & after a period of time the research is prepared solely to “look good” for his/her employer when it is time for a performance review & to allow the employer to offer something intellectually consumable by clients.
However, trends and regression models are useful in predicting the possible general range of prices: for example in livestock it is essential to estimate tonnage of beef, for example & then refine that by studying price moves of pork and beef in the form of ratios & then measure against poultry. Using these methods, it is possible to come within $5 or $7 from a market high or low. But, not much better and I have tried all methods.
To attempt this in ethanol is useless as it is a young commodity, every day there is more distribution & new efficiencies; and has to be measured to RBOB which is a function of the Crack Margin. There simply is not yet enough data on ethanol.
The ultimate in research, in my opinion, was prepared by a USA firm which was acquired a few years ago by an international firm. The founder is now deceased & donated a portion of his wealth to a couple of ag related universities. He and I enjoyed many heated discussions about markets, he was an absolute genius with a world-wide reputation. Additionally, a large trader so he knew markets.
Markets are here and now, yesterday’s action is past, tomorrow is an unknown. History is very important as each market has unique characteristics. This knowledge is valuable but it does not meet margin calls.
When younger, I was very fortunate to have created a very large business in futures in dealing with industry & international companies. Through the course of this experience met with & assisted hundreds of producers, large and small & never for a fee; my roots are in agriculture. If these were large operators, some became clients. I did not transact retail business, being limited in time & in the marketplace with 30,000-50,000 trades each month, the smaller operators became friends, not clients; I simply did not have the time. But, I was always there to assist, when I did have the time. The producer contact I maintained was important in preparing my personal research.
Just as on this forum. A free flow of information is important in the marketplace.
I am generally an outspoken person with a very independent spirit. A long time ago, I learned that if I relied on groups, boards or committees, those decisions were limited by the dumbest guy in the group & a sure fire route to disaster.
If, as a producer, you do not want to take the time to study markets and become fully informed in the mechanics of trading & hand over this responsibility to an advisor, in my opinion, the following is very important: is this a person with whom you are compatible? Do you like him/her? Is the person qualified? Is he/she flexible & the type who can discipline their ego to change horses mid-stream?
Use me as an example. I have a zero tolerance for mis-management or for error. My attitude and approach would raise considerable tension in an advisor. The advisor has to be comfortable, and not afraid of your wrath, or sarcasm, should he/she change their mind. Therefore, any relationship between an advisor & me would be strictly social. It is extremely difficult, both ego wise and emotionally, to admit a decision was a mistake & another action should be considered. You both have to be flexible in a mindset with maximum profit in mind. If you made a premature sale, he/she should be comfortable in advising you to immediately initiate an option trade to improve your position.
Hedging is a challenge for producers. A grain merchant using futures (hedging) becomes a speculator in the basis & is able to manage risk within certain boundaries.
A producer speculates in flat price & has zero control over the basis. A producer must either base sales on historical seasonal price patterns or some other system based upon cash flow needs and timing of sales. There is little flexibility. Options offer some flexibility, but requires detailed knowledge otherwise costs become a significant factor.
The key element is discipline, a plan to control risk, meaning a give up point at every stage of the price move in order to limit losses or to improve a position. Daily information and or theories or other elements of the news mean zilch; it is important to measure the market response to news, but the news is seldom a reason to initiate a trade. The ultimate goal is to maximize profit. You maximize profit by taking small losses.
Markets, in my opinion, are a combination of random walk, chaos theory and probabilities; prices feed upon: human emotion, a money stream, supply and demand factors which unfold slowly over time, and folks who are positioned wrong in the market.
I am not a day trader. There are very few successful day traders. It is too easy to give up a good long term position in the market and too hard to re-enter and again get your head on straight.
A bull move begins when folks who have been buying finally give up, throw in the towel and set a price bottom. In normal markets, 75% of the time, prices are in consolidation ranges & spend 25% of the time in vertical moves.
A bear market begins when sellers finally give up & no longer provide a money stream for price to follow; the final top is put in when the shorts cover. And, the bear market, by this time is a falling knife, will feed upon those folks who once again are buying because they missed the original move & believe the market will provide a repeat performance, it seldom does.
Let’s look at the market participants. The competition. Funds. Some are badly managed but are still in the market; some are on top of their game. Their trading methods are generally technical but not always.
If I return to my generation of traders, as examples, one a friend of a long time ago & now retired, in a slow year, would trade in excess of a million contracts for his own account. The other, not necessarily a friend, a little too arrogant, is of the same breed & a third, a trader in the pits, a real artist in moving a market around in a trading range & able to entice buyers in a down move and sellers into an upswing, I used him if I got myself in trouble & needed to liquidate a position gracefully. Among these three, I have never heard them speculate on ‘a specific price for a commodity’…if you would ask them ‘where are beans headed?’ They would either say “higher or lower.” They didn’t have a clue about a specific level. Why? They just either followed or led the market until they saw evidence of rationing or sensed the losers were beginning to choke.
Someone seeking the exact high price in a futures market, is an amateur- it simply does not work that way—A goal? Sure. Lucky? Sure, that happens. If you focus on specific price levels in a market, you most likely will be distracted from the real task at hand & that is sensing when a big move is finally completed. That signal may occur 10% below the high or 10% above the low. Flexibility is key. Further, within the above comments, most traders have their own unique style. Success is the result of survival.
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