TRADETHINK ARTICLES : Are Financial and Commodities Futures the Best Trade?

January 28, 2009

Are Financial and Commodities Futures the Best Trade?

By Chris Morse

Who would have suspected that commodities futures might have one of the better risk/reward rations?

The bottom has fallen out of traditional and even unconventional investment vehicles. Stocks are down 40% in 2008. Interest rates are down close to nothing. Big fancy money managers are thieves. The economy is at its worst in decades. Real Estate is collapsing. Jobs are being lost. What is a trader or investor to do?

Well, our system results had their best year ever in what would typically be called high risk. We track commodities and financial futures. We don't just track some commodities, we track almost every commodity or financial futures market sector with our selected trading strategy TradeThink.

So, in addition to following markets that are moving (like gold or Crude oil), we also trade to be in a position to where we can go long or short a market. It is important to not be dependant on a long bias type trading or investing strategy. The folks that only go long were probably wiped out and long gone.

In addition to having an open game plan type of trading approach it is necessary to have iron clad discipline when trading. One cannot be scared to go long or short.

The TradeThink trading algorithm triggers some of the trades we see to be in or to have been in recently. Lets look at a few real world examples of some current and recent trades.

Currently TradeThink is shown short (sell) the Natural Gas futures contract. TradeThink signaled to go short (sell) NG on 1/13/2009 at 5.282. Please see the chart below:

As you can see TradeThink went short (sell) and is still short with an open profit of $8,370 per contract. We have a protective stop to buy back (cover the short) at 4.8987 to let the trade breath and if the market reverses the strategy locks in $3,833.
Currently TradeThink is also showing to be short (sell) the Lean Hogs futures contract. TradeThink signaled to go short LH on 1/14/2009 at 64.7. Please see the chart below:

As you can see TradeThink went short and is still short with an open profit of $1,600 per contract. We have a protective stop to buy back (cover the short) at 63.1 to let the trade breath and if the market reverses the strategy locks in $1,440.
Currently TradeThink is also showing to be short the British Pound. TradeThink signaled to go short the British Pound on 1/20/2009 at 1.4329. Please see the chart below:

As you can see TradeThink went short (sell) and is still short with an open profit of $1,168.75 per contract. We have a protective stop to buy back (cover the short) at 1.4583 in order to let the trade breath, and if the market reverses the strategy would look to minimize damage with a controlled loss of $1,306.25 in this scenario.
It is not only important to have ongoing risk management throughout the duration of a trade (like the trades above), it is equally if not more important to see how that risk management would have faired when you where shown to exit a trade.
The strategy is designed to let the trades breath. A trade needs room to move one direction or another to gather the strength to capture the really big trend (see some examples below.)
Here are some recent trades that TradeThink signaled to exit.
Recently TradeThink showed to go long (buy) the Euro Bund futures contact (European interest rate). TradeThink signaled to go long the Bund on 11/16/2008 at 118.47. Please see the chart below:

As you can see TradeThink signaled to go long (buy) and showed to exit on 1/23/2009 at 124.09 for a move of $5,620 per contract. TradeThink used protective stops throughout the duration of the trade. Finally when the market showed to reverse or consolidate the strategy said it was time to get out of the trade and to exit (sell) the position.
Late in 2008 TradeThink also showed a signal to go long (buy) the Ten Year US Treasury Notes futures contract. TradeThink signaled to go long (buy) the Ten Year Notes on 11/14/2008 at 115.11 or 115 7/64. Please see the chart below:

As you can see TradeThink showed to go long (buy) Ten Year Notes and showed to exit (sell) on 1/20/2009 at 124.75 or 124 24/32 for a move of $9,625 per contract. TradeThink used protective stops throughout the duration of the trade. Finally when the market showed to reverse or possible consolidation the strategy said it was time to get out of the trade.
Late last Summer TradeThink also showed to go short (sell) the Brent Crude Oil futures contract (trades on ICE). TradeThink signaled to go short the Crude on 9/01/2008 at 119.13. Please see the chart below:

As you can see TradeThink went short (sell) Brent Crude and showed to exit (buy back and cover the short) on 12/31/2008 at 48.76 for a move of $70,370 per contract. TradeThink used protective stops throughout the duration of the trade. Finally when the market showed to reverse the strategy said it was time to get out of the trade.

As you can see from the trades above, TradeThink follows a diversified group of commodities and financial futures for diversification. Also, TradeThink takes trades both long and short. The importance of diversification cannot be over emphasized. As a great trader said "The only free lunch on Wall St. is diversification".

About the Author

Chris Morse is the Developer of the TradeThink trading system. He has been involved in the development of trading strategies for nearly ten years. Mr. Morse developed a very robust system which is now in private use at one of the largest FCM's and has earned sizable returns for the last 3 years. Mr. Morse now focuses his time exclusively on developing and managing his systems.

Disclosure: Commodity trading has large potential rewards, but also large potential risks. You must be aware of the risks and be willing to accept them in order to invest in the futures markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to buy/sell commodity interests.

Notice: Returns are hypothetical. Hypothetical or simulated performance returns have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since trades have not actually been executed, the results may have under or over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight, no representation is being made that any account will or is likely to achieve profits or losses similar to those shown.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. INVESTMENTS IN FUTURES INVOLVES HIGH RISKS AND YOU CAN LOSE A LOT OF MONEY.

FUTURES TRADING HAS LARGE RISKS. YOU MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN ORDER TO INVEST IN THE FUTURES MARKETS. DON'T TRADE WITH MONEY YOU CAN'T AFFORD TO LOSE. YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN THE FUTURES INDUSTRY. IN SO DOING, YOU SHOULD BE AWARE THAT TRADING FUTURES AND OPTIONS ON FUTURES CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE VALUE OF YOUR ACCOUNT. THIS IS NEITHER A SOLICITATION NOR AN OFFER TO BUY OR SELL FUTURES INTERESTS.

USERS OF THE SOFTWARE ARE SOLELY RESPONSIBLE FOR THE OPERATION OF THE SOFTWARE. TRADE POSTINGS TO THIS WEBSITE ARE EITHER ONLY EXAMPLES OF HOW THE SOFTWARE WORKS OR THE RESULTS OF OPERATION OF THE SOFTWARE AFTER THE MARKET CLOSES. THIS IS PROVIDED TO LICENSEES OF THE SOFTWARE ONLY TO HELP VALIDATE THEIR OPERATION OF THE SOFTWARE. TRADE THINK DOES NOT MANAGE ANY MONEY OR PROVIDE TRADE OR INVESTMENT RECOMMENDATIONS. PROSPECTIVE TRADE THINK CUSTOMERS ARE ADVISED TO MAKE DECISIONS BASED UPON THEIR SPECIFIC CIRCUMSTANCES AND NOT MERELY ON THE INFORMATION CONTAINED ON THIS WEBSITE. THIS BRIEF RISK DISCLOSURE STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THE FUTURES INDUSTRY, WHICH SHOULD BE CONDUCTED INDEPENDENTLY BY YOU WITH THE EXPERTS OF YOUR CHOICE.

ALL TRADING INVOLVES HIGH RISK. THERE HAVE BEEN NO PROMISES, GUARANTEES OR WARRANTIES SUGGESTING THAT ANY TRADING BY TRADE THINK USERS WILL RESULT IN A PROFIT OR WILL NOT RESULT IN A LOSS.

ALL RETURNS PRESENTED ON THIS SITE ARE HYPOTHETICAL. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

TRADE THINK AND ITS CURRENT EMPLOYEES HAVE HAD LITTLE OR NO RECENT EXPERIENCE IN TRADING ACTUAL ACCOUNTS FOR ITSELF OR FOR CUSTOMERS. BECAUSE THERE ARE NO ACTUAL TRADING RESULTS TO COMPARE TO THE HYPOTHETICAL PERFORMANCE RESULTS, CUSTOMERS SHOULD BE PARTICULARLY WARY OF PLACING UNDUE RELIANCE ON THESE HYPOTHETICAL PERFORMANCE RESULTS.