Lesson 31: An e-mail from Emma
Mrs. B has two e-mail addresses established for the exclusive use of
her robots. One address is set up to receive reports of the
profitable trades made by each individual robot. She calls this the good
news account. Robots in trouble use the other e-mail
address. As you may well imagine, she calls this the need
help file. Mrs. B has designated the emails sent to
her 'good news account' to be colored green. The e-mails she receives
from robots suffering losses are always red. Whenever she receives an
email, Mrs. B can immediately determine if a robot is in trouble or
in profits. In allocating her time, Mrs. B always directs her
immediate attention to those robots that need help.
In a way, Mrs. B is like the real world mother with ten children who,
when asked by a friendly neighbor, "Which of your children do
you love the most?" responded, "I love the one the
most who needs me the most at any given time." Mrs. B
would have liked this real world woman. Mrs. B also tries to help the
robots that need her the most, at any given time. She feels that
robots that are making profits don't need much help at all; they are
doing pretty well on their own. She follows their progress by the
green emails they send her daily but beyond that Mrs. B devotes most
of her attention to "those robots who need her the most".
With 60 robots running wild through the commodity markets of the
nation, half of them long and half of them short, there are always
several in great need of great help. Thus it was that Mrs. B was not
surprised when on Thursday, February 8th, 2001, Mrs. B received the
following need help file email from robot Emma,
"Mama
B, I am in the July contract and in trouble. I am being hurt badly
by the February break. What shall I do"- signed Emma.
Mrs. B knew that Emma traded only soybean oil. She knew that she was
always long and that she had taken her current position "at the
market" on the close of trading just one week earlier. If Emma
was feeling pressure from losses in the July soybean oil contract
this meant only one thing, July soybean oil futures were lower at the
close of trading on February 8th, than they had been at the close of
trading on February 1st. Emma's red e-mail signified that she needed
help and Mrs. B had to act quickly. Before she responded, however,
Mrs. B would have to do a little research into exactly what the "February
Break" was and how it affected soybean oil prices.
There is a historic tendency for grain prices to move lower into the
month of February. No one knows exactly why this is so. It used to be
said that it was due to tax selling, or when traders sold out for
long term capital gains when such existed in the futures markets.
Some say the February Break results when foreign buyers
hesitate purchasing grains in January and so prices decline into the
month of February. It has also been noted, however, that once
February is over there is a tendency for grain prices to rise into
mid-summer. This pattern is often reflected in the prices for wheat,
corn, oats, soybeans, soybean meal and soybean oil. The possibility
of a February Break in prices for these commodities is
well known by most grain and oilseed traders. It didn't take Mrs. B
long to learn about this February Break tendency and it
didn't take her long to see if the tendency for grains in general
also held true for soybean oil futures. Before responding to Emma's
e-mail, Mrs. B located a set of graphs for the price of July soybean
oil futures for the past 41 years. Mrs. B generally limits her
research to approximately a 40-year period believing that going back
to around 1960 sufficiently reflects modern trends in commodity
prices and that going back to the 1930's, 40's, even the 1950's is
not necessary in most cases. When Mrs. B looked into the February
Break in grain and oilseed prices for the past 41 years,
this is what she found,
There is a tendency but not a certainty that grain
prices and oilseed prices will move lower into the month of February.
There is also a tendency but not a certainty for
soybean oil prices to move higher once the month of February is over.
In her research Mrs. B assumed hypothetically that she had purchased
July soybean oil futures "at the market" on the close
on February 1st for each year out of the past 41 years. In 32
of those years she discovered that there would have been an
opportunity for profit by such a purchase and that this opportunity
for profit could be calculated at 78%. Simply dividing
32 by 41 arrived at this calculation. Mrs. B likes profit
opportunities where the percentages are 75% or higher in her favor.
Mrs. B not only likes profit opportunities, she also likes profits.
Emma's e-mail has resulted in a situation that might allow Mrs. B to
give Emma some sound advice and also enable her to pick up a little
profit for herself on the side. Mrs. B likes this; in fact it is one
of the reasons why she uses robots in the first place.
When Mrs. B takes a futures or options position, she likes to keep
her risk of loss relatively small. She has to adopt this policy, she
has only $5,000 with which to trade and she does not wish to assume
any risk beyond $5,000. In the case of soybean oil, Mrs. B thinks a
risk of about 50 points is reasonable. Fifty points is a risk of
$300, not including any commissions she will have to pay or any
slippage that might occur if her orders don't fill at the exact
location where her stop/loss or profit/exit orders are placed.
Assuming she owns 1 contract the risk will probably be less than $500
for the trade. Mrs. B is willing to consider such a trade and such a
risk when there is an opportunity (not a certainty but an opportunity)
for profit with a 75% or more probability working in her favor.
Before answering Emma's e-mail, then, Mrs. B thinks that this is what
she might do in her own $5,000 account. (And her plans are always
subject to change at any time market conditions change). She might
tell Emma to ride through the February Break in soybean
oil prices. Telling Emma to hold on should be good long-term advice
for that robot. Mrs. B might then join up with Emma by going long
July soybean oil in her own account once prices return to their
February 1st closing level. On paper, it would look like this,
|
July soybean oil closed on February 1st at |
15.82 |
|
July soybean oil closed on February 8th at |
15.18 |
|
This decline of 64 points might be the notorious February
Break. |
If it is, Mrs. B will make her purchase of July Soybean Oil when
prices once again close at 15.82 or higher. If this
happens, it could mean that the notorious decline in prices for the
month of February is over (the other possibility always being that
the decline in prices for the month of February is not over) and that
the 78% opportunity for profit when buying soybean oil on February
1st is now starting to present itself. Mrs. B used her research into
the February Break that occurs in grain and oilseed
prices to take two immediate actions. She first responded to Emma
with the following e-mail,
"Hold
on Emma. The February break should not last much longer. There is a
78% probability that by buying July soybean oil on February 1st you
will have the opportunity to sell your position for a profit before
the month of July arrives. Hold on, Emma -signed,
Mama B.
After Mrs. B had clicked to send this email to Emma, she took the
following action on her own behalf. She called her own commodity
broker and gave her broker this order,
"Buy 1 contract of July Soybean Oil futures for me the next
time July soybean oil futures close at 15.82 or higher. When this
happens, enter a stop/loss order for me 50 points below my purchase
price. Then give me a phone call letting me know at what price my
purchase order filled. Once I know my purchase price and the price at
which my stop/loss rests, I will let you know what my profit/exit
order will be. Don't forget to phone me once you know that my buy
order has filled."
Mrs. B took a deep breath. She was not in the market yet but
it was a very good possibility that she would own a position when the February
Break was over. She felt good about her e-mail to Emma. Emma was in no
real danger; she was only down $384.00. Even if Emma took a hit, she could
always recover her losses by borrowing some money from Jordan. After all, isn't
that what robots are for, to help each other out in times of need. 384.00 pounds
of pressure on Emma was nothing. Mrs. B had designed her robots to stand up to
10,000 pounds of pressure each before imploding. Emma had a long way to go
before she could ever suffer a $10,000.00 loss on one contract of July soybean
oil purchased "at the market" on the close on February 1st, 2001.
Mrs. B took another deep breath. Emma was okay, she felt pretty sure
of that. Jordan, she knew, was plenty happy since he was showing a
profit in his soybean oil trade. Mrs.
B knew that she, most likely, was about to take her first commodity
futures position in the year 2001. She
would initially risk 50 points and would enter a profit/exit order
once she knew at what level she had made her purchase. Mrs. B took
another deep breath and began to relax. She had not felt this good in
a long time.
Unfortunately, Mrs. B was not able to rest for long before she heard
the sound of a ping on her computer that told her that she had
received another e-mail message. Glancing up she saw that it was from
Hailey. Having helped Emma, Mrs. B's eyes now scanned down the
computer screen to see what Hailey had to say. The message, being in
red, did not surprise her,
"Mama
B, Mama B, I am feeling the pressure. I am long the December
contract and I am in big trouble. What shall I do" - signed Hailey.
Mrs. B smiled. Which of her robots did she love the most? The one who
needed her most at any given time and it was now time to help out
Hailey. Hailey always seemed to be getting into trouble these days,
maybe she should be reassigned to another commodity contract, perhaps
one that none of the robots had ever traded before. Mrs. B smiled
again and tried to relax. Of course, she would have to do a little
research before she could help Hailey but she was prepared to do
that. Mrs. B enjoyed research and she enjoyed helping others. It gave
a meaning and a purpose to her life and sometimes offered her the
opportunity to pick up a little profit on the side as a reward for
her help. Mrs. B was a happy and contented woman. She really was.
Hailey needed her help now and Mrs. B proceeded to help as best she
could. Would any mother ever do less?
To send Mrs. B any thoughts you have about her buying July soybean
oil with a 50 point stop/loss order once prices again close at the
February 1st closing level , click
here and send her an e-mail or click on her mailbox to do the same.
After sending Mrs. B your thoughts, suggestions, or observations, you
may then proceed by clicking here.