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Hello everyone and welcome to 2011! It’s great to be able to communicate with you all again through the vehicle of the Safety in the Market Monthly and Platinum newsletters. As you all know, I am not currently presenting seminars, but I am very much involved in the markets and in research and study, much of which I hope to share as we go forward.
At the 2010 Hot Commodities Summit I spoke about the great opportunities that lay ahead in soft commodities, and this has been amply fulfilled in the past 6 months. For many of you who are in the early stages of your trading careers, your focus currently will be trading CFDs on stocks, and this is a good way to get started. However, I want to encourage you to broaden your focus to commodity futures as soon as you feel comfortable, since in my view the trading opportunities are much greater.
With this aim in mind, I am going to address my articles to the subject of the futures markets. Most people, myself included, approach futures initially with some trepidation. But this is unnecessary. Futures, like CFDs and options, are a trading instrument, which enable us to trade in a commodity without having to physically buy and sell it. You can, indeed, trade commodities using CFDs, but these are done through a market maker, whereas the futures contracts are traded directly through the various exchanges. I believe this is an advantage.
I mentioned earlier the term ‘soft commodities’. This is one class of commodities and covers chiefly the following:
- Wheat
- Corn
- Soybeans
- Soybean Oil
- Soybean Meal
- Cotton
- Sugar
- Coffee
- Cocoa
Why have I titled this article, Where to Find the Best ABC Trades? The reason is this. In the Master Forecasting Course, David Bowden makes a comment that often, when traders have a very successful period, what they actually mean is that they found a strong trend. And strong trends are found much more frequently in the commodity markets. Nowhere in recent times has this been more apparent than in the Cotton market.
Chart 1 – Monthly Chart of Cotton Futures
click chart to enlarge
This chart covers a period of 50 years, and you can see from it that there are big moves up followed by equally big moves down, which for a trader means that you can make just as much money on the short side as the long side. What is more, one of these big runs occurs every 3-5 years.
In fact, as I write this article on 13 February, we are at a historical milestone, for on Friday Cotton broke what is, to my knowledge, the longest standing all-time high of any market in history – 189 set on 23 August 1864. On 11 February 2011 this high was broken and the March contract closed at 191.23.
So what do we need to know about Cotton in order to trade it? Firstly, Cotton trades on the Inter-Continental Exchange (ICE), formally the New York Board of Trade (NYBOT) and originally the New York Cotton Exchange. It is priced in cents per pound and trades in increments of 1/100 cent, so that the current price of 191.23 is equal to $1.93 23/100c per pound.
We cannot buy and sell an individual pound of Cotton, as it isn’t traded that way. The unit of futures is the contract, and for Cotton one contract contains 50,000 pounds. So at 191.23, one contract would be worth
191.23 x 50,000 = 9,562,500c or $95,625.00
But just as you do not have to outlay the full purchase price of shares when you trade CFDs, so with futures you simply deposit Margin or Performance Bond with your broker. In this case it is set by the Exchange, and is currently US$7,000 per contract.
The big difference between CFDs and futures is that there are a number of different contracts for each market, and each one has an expiry date. For Cotton there are contracts that expire in March, May, July, October and December. You will cease trading in each one about a week before the expiry month begins. So currently we would be in the March contract, but will soon move to May. However, each contract starts trading about 18 months prior to expiry, and you can trade it certainly during the last 6 months or so of its life, as there is sufficient volume. All of this information can be found on the exchange website www.theice.com.
For analysis we join the individual contracts together according to which one has the most volume, and this is called a ‘spotv’ chart. The ProfitSource code for Cotton is therefore CT-Spotv.
Chart 2 – The Breakaway Point
click chart to enlarge
A great resource point for soft commodities is Gann’s book How to Make Profits in Commodities, as most of these markets were trading back in 1941 and are covered in the book. Gann talks repeatedly of a ‘breakaway point’, which is a point where an old top or resistance level is broken. This is the place where big moves start, and you can certainly see this in Chart 2. The low in November 2008 was 36.70. The low in July 2010 was 72.96. That’s a 100% increase in price. But in the last 7 months prices have exploded to the current high of 194.55, a 265% increase on the July low and a 530% increase on the November 2008 low! The greatest rate of increase has been since the breakaway point in September, when prices broke above the old high of March 2008.
What if you had started trading ABCs on Cotton after the breakout in September?
Chart 3 – ABC Trades
click chart to enlarge
In this period there have been 9 ABC trades, long and short. 6 of these trades made profits, while 3 were stopped out at Point C. Big deal, you say. What if I told you that all 3 of the unsuccessful trades were quite easy to identify as ones you shouldn’t take? What if I told you that Trade 2, the most successful trade, could have made as much as $12,875.00 for 1 contract in 8 trading days? Would you be interested?
I could run a half-day seminar just on these ABC trades, and we could spend the other half day looking at the other ways you could have traded during this period, particularly the time in 2011 when there have been no ABC trades. The trading rules are in the Number One Trading Plan and the WD Gann Commodities Course.
You may think there is not much value in studying a past period like this. But I ask you, how else are you going to prepare for the next such run that comes along? And believe me, there will be another, and another, and another…
Knowledge is Power!
Tim Walker
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