Back in 1993, I was five years out of college, and while making decent money as a commercial real estate appraiser, I was still searching for something new.
Just the year before I had started making decent money for the first time in my life, and this had carried over to 1993. So, I was looking at the financial markets as a possible solution.
I was subscribing to Investors Business Daily, and had read William O’Neil’s classic, How to Make Money In Stocks.
I was also subscribing to various newsletters and financial magazines, looking for answers.
Because of these subscriptions, I was aways receiving other subcription offers in the mail.
One such offer was called the SuperInvestor Files, and I thought I’d give it a whirl.
This subscription was delivered once each month and it involved a variety of futures trading strategies. Most of these were spread trading strategies, or some sort of strategy involving futures and options.
Needless to say, I was quite intrigued.
So, in early 1994, I opened my first futures trading account with the old First American Discount Corp. This was a discount brokerage founded by William Mallers, Sr and Leslie Rosenthal in 1984.
The first trade I put on was a spread trade involving unleaded gas futures and heating oil futures.
We were heading into the Spring, and the idea was that unleaded gas would begin to outperform heating oil. Therefore, I bought the gas futures and sold the heating oil.
I’m pretty sure I closed out that position with a small loss.
Around that time, I had just read Jack Schwager’s first book, Market Wizards, which was a collection of interviews of traders who had made big money in the 1970’s and 1980’s.
Among the traders interviewed was the aforementioned William O’Neil.
Many of the traders were involved in the futures markets, and are regarded as absolute legends. These include Richard Dennis, Paul Tudor Jones, Jr. and Ed Seykota.
One day, I was reading my copy of Technical Analysis of Stocks and Commodities magazine, and within that issue I saw an advertisement by one Russell Sands.
Sands was teaching the trading system he had learned from Richard Dennis back in the mid-1980s.
Unbeknownst to me, Sands was a controversial figure who was actually either asked to leave the training program set up by Dennis, or resigned after a dispute with Dennis.
Regardless, it appeared he had some valuable info, and I plopped down my $2,000 to learn the strategy.
Based upon what I learned, I soon made two short trades, one in Live Cattle and one in the old Live Hogs contract. I traded the smaller contracts on the defunct Mid-American exchange.
Both markets immediately moved in my favor, and I ultimately made nice profits in both.
Within a few weeks after entering those positions, I bought a coffee futures contract.
At the time, due to the small size of my account, I had no business trading coffee futures due to the size of the contract. One coffee futures contract is equivalent to 37,500 pounds of coffee.
A one cent move in the futures was equal to $375, and at the time, the typical daily trading range was close to two cents.
Similar to my trades in hogs and cattle, the market immediately moved in my favor. I ultimately added to my position several times over the next few weeks, and made a significant profit in this market.
I was hooked on trading futures.
What I didn’t realize is that it wasn’t supposed to be that easy. My goal was then to trade for a living, and over the next several years, I failed miserably.
But, these markets do serve a significant purpose.
Why consider trading futures?
The futures markets have evolved quite a bit since the mid-1990s.
For one thing, many markets trade electronically almost 24/7. Back then, we had to actually call a broker to enter a trade during normal session hours.
Commissions have dropped significantly if you want to trade on your own. You can literally trade futures for under a dollar per round turn (a dollar total for your trade entry and trade exit, per contract). When I first started, I paid $25 per round turn.
There are still some full service brokers out there, and for some people it makes sense to use them.
But, the fact is, few of these small retail traders ever experience long term success.
This is due mainly to unreasonable expectations and the goal of getting rich quick… the same goal I had nearly 30 years ago!
Now, however, we also have more mini and micro sized contracts, and therefore, it is now possible to trade a more diverse portfolio without needing a million dollar account.
The futures markets offer valuable diversification away from the stock market. This is THE main reason anyone should consider trading futures.
In my view, the best way for the average person to trade these markets is with a “discretionary trend following” strategy.
By discretionary, I mean you should do some analysis to determine whether the probabilities of the trade are in your favor. Most Commodity Trading Advisors who manage money for customers tend to employ a systematic approach, where discretion is not involved.
I recently wrote about my thoughts on the Gold market, and an appropriate point to enter a position. This was an example of analysis that could lead to a discretionary decision on whether or not to enter a position. Gold futures ran up over $150 since then before correcting.
We’ve also witnessed significant moves in crude oil, soybeans, corn, and wheat that could be exploited by any individual investor with enough capital to trade these markets.
Investing is work
Keep in mind, actively trading your portfolio requires work. You need to treat this work as if it were a second job.
It is interesting to me that many investors are willing to do this in the real estate market, but far fewer do it in stocks and futures.
I suppose it is due to the perception that you can’t lose money buying real estate. (Hint, you can, and many go bankrupt).
There will be years where you lose money.
But, if you are in it for the long haul, the futures markets can help you offset losses in the stock market when economic conditions are not so good, such as now.
In fact, it is these inflationary environments where the futures markets tend to produce the most opportunities, but there are opportunities in just about any economic environment.
If you have any interest in learning how to trade these markets, have a look at my Futures Trading Course.
Leave A Comment