An Insiders Perspective: Tips and Tricks

 

My Favorite Commodity Market Technical Indicator 

One of the most common questions that I get from clients and prospects is, “What is your favorite indicator”.  In my opinion, it really doesn’t matter which indicator I like, they are all very similar and blindly followed would likely yield similar results in the long run.  What is more important is what your personal favorite is, and can it help you make money in these treacherous markets.

Nevertheless,  my favorite commodity market barometer isn’t a technical oscillator at all.  Instead I try to gauge market psychology, partly based on the behavior of clients and prospects.  The trading practices of the general public can be used in price speculation.  Unfortunately, I have found that the average speculator tends to lag the market considerably.  In fact, they are often so far behind that once they react to a market move, the current trend is coming to an end.   Believe it or not, a market top or bottom can sometimes be anticipated by a large influx of phone calls made by traders looking to participate in a market that has been making its move for a substantial period of time.   An even better indication that a market may be in store for a reversal is a sudden influx of  “virgin” commodity traders looking to buy a particular commodity that they saw a story about on the news.

For example, when crude oil futures were trading at its all time high around $150 per barrel, the phone was ringing off of the hook in many commodity brokerage firms.  Random and inexperienced commodity traders were banging down the door looking to open a trading account to get long crude oil, or better yet, buy $200 calls.  As a broker, it is my job to warn of the potential consequences of being late to the party, so to speak.  However, ultimately it is the clients money and they are capable of making their own decisions.  If after a friendly warning they insist, it is my job to get them the best possible execution. 

During times like this I ask myself; “Where were all of these people when crude was trading under $15 per barrel?”  That was the time to be rushing to the energy markets. 

Unfortunately, this was a prime example of the general public being behind the move.  Crude oil didn’t really garner much attention until it broke the $80 mark; at that moment the masses became interested.  Looking back to early to mid 2008 it seems highly likely that the average trader lost a lot of money by being late to the rally.

As a futures broker, I am able to observe the behavior of clients with various capital backing, experience, trading strategies, etc.  In this particular case, it seemed that by the time many of the inexperienced traders began to enter the market the trend was coming to an abrupt end.  For example, our average client is a prospect for several months prior to opening an account.  During this time frame they become comfortable with their level of understanding and the potential risks and rewards.  However, during the “crude oil frenzy it seemed that many prospects were rushing to open accounts.  Their mission was to buy call options in a market that they strongly believed would be trading at $200 or higher at sometime in the near future.  It was almost as though people felt that the market was going to leave without them, and they threw caution to the wind to pay excessive premiums for options that were deep-out-of-the-money.

As a trader, it is important to be able to recognize mass hysteria for what it may be…the end of a market move.

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