Lesson 17: Method or Market Approach

There are only two ways to invest in commodity futures or options contracts. These two ways are the 'method' or the 'market' approach. When a trader is unable to make a decision about entering a market, it is often because he or she has not yet decided which investment method to use.

In the 'market' approach, the trader selects a particular market and decides to trade it. Often the trader will have blindfolds on with respect to other markets. There are traders who like silver and nothing else. Some investors prefer soybeans. I knew someone once who would trade nothing but eggs, back in the days when the Chicago Mercantile Exchange offered a futures contract in eggs. Traders that trade a single market tend to believe that they have a 'feel' for their market and they are comfortable trading it. Other markets may even make them nervous.

Many futures and options traders use a 'method' approach. These individuals use one of the many methods that are available for trading futures and options contracts. One method might be to buy or sell when a particular commitment of traders report comes out indicating that the large traders have a substantial net long or short position. Another method might be to use a moving average and trade the moving average regardless of which market the moving average signals occur in. Some traders follow volume and open interest statistics and look for variations in patterns that indicate good buying and selling opportunities. A 'method' trader is likely to have a history of trading between five and twenty different markets. A 'market' trader may have a history of trading just a single market, certainly less than ten.

Which program is the best? This is my personal opinion and you can judge it for that. Based on thirty-three years of futures and or options trading, my opinion is that the 'method' trader has the best opportunity for making significant profits from his or her investments in futures and options contracts. The reason is simple. A method trader is not confused with what is actually happening at any given time in any given market.

Think of the young investors who started trading stocks for the first time ten years ago and who then experienced several years of financial success. Most were probably 'market' investors. They may have picked a single corporation or perhaps less than a dozen different corporations to invest their capital in. Let's assume that investor A bought shares in corporation 101 and corporation 101 experienced a period of sustained growth from 1990 to 1999. Assume that the price of the shares of corporation 101 went from $3 to $100 during those nine years. Investor A may have been falsely led to conclude that the best method of investing in a stock is to buy on every dip in price. This works great, when prices are going up. But when prices are declining, it works the opposite of great.

Investor B decided in 1990 to become a 'method' investor. Assume investor B bought corporation 101 stock but made purchases only when a moving average showed a ten day line crossing a forty-five day line. When corporation 101 reached the price of $100 a share and started down, investor A, the 'market' investor, kept buying at $90 a share and $80 a share and $70 a share and eventually at even $20 a share. If prices ever advance to $70 again, investor A may get his money back. But investor B, not being a market investor, did not buy at $90 or $80 or $70 or $20. In fact, investor B sold all her stock in corporation 101 at $90 and hasn't bought a share since. She will buy corporation 101 again, however. Once the ten-day moving average line crosses above the forty-five day moving average line or whatever method of investment she may use to buy shares of any corporation's stock.

The 'market' investor, A, has a paper loss now so large that it is hard to imagine. Investor A has been trying not to think about it for the past eight months. Our 'method' investor, however, has no paper loss. The mistake "A" made was in believing that one could go on forever buying the stock of corporation 101 and that such purchases, regardless of at which levels they were made, would always be bailed out when prices rose to new highs. Investor A bet the farm on corporation 101 over and over and over again, much to investor A's current dismay. The 'method' investor, however, understood that no stock advances forever and that new highs in some stocks are often not seen for months or years or even decades. Quite simply put, the 'method' investor was prepared for a bear market in shares of corporation 101. The 'market' investor was not.

In futures and in options it is just the same. You can be a 'market' investor or you can be a 'method' investor. My personal opinion is that a trader will be more successful if the trader uses the 'method' approach than if the trader uses the 'market' approach. If you trade nothing but sugar futures or options for the rest of your life, what do you do if sugar prices trade in one-cent ranges for two years? Or, if you are always long sugar what do you do when prices decline? Or, if you have all your capital committed to sugar and soybeans start making large advances week after week; are you prepared to take advantage of the soybean move?

My advice to the futures and options trader is to become a 'method' investor. A 'method' investor can move from market to market with ease. A 'method' investor will have the opportunity to take advantage of price trends wherever they occur. A 'method' investor can switch from sugar to silver at the first sign of a bull market in one and a bear market in the other. Learn a good trading method - whatever it may be - stick with it, transfer it with your capital from market to market and you have a good chance of making substantial profits by investing in futures and options contracts.

Horace Greeley said, "Go West young man, Go West". I say, "Become a 'method' investor and increase your likelihood of succeeding as a futures and options trader."