Professional Money in Commodities
The commodity markets are known for the small speculator who tries to make an overnight fortune, with a total disregard for risk. Some hit it big, while some lick their wounds and vow to never return. This is the romantic part of the commodities markets, but there are professional money managers involved in the markets that methodically take profits from the unsuspecting amateurs.
The typically small trader usually has an idea that a particular commodity market will move up or down and some money is placed on a trade.
Or, an amateur trader might read a book or two on trading and study some charts to make a trading decision. Their intensions are good, but this effort pales in comparison to those who manage millions or billions of dollars and make a living based off a percentage of the trading profits they earn for clients.
Most professional money managers in the futures industry had some type of formal training with one of the large investment banks or they have experience trading on the floor at an exchange. Some are actually self taught, but they typically put years of hard work into creating a trading system that withstood rigorous back testing and real world trading.
Many hedge funds employ a staff of Ivy League graduates to create and test trading strategies. Imagine a team of very smart people with a virtual unlimited means of technology that spend all day testing every trading strategy man can dream up. They have access to information about the markets that a small trader can’t even imagine.
Professional money managers are able to see the markets in statistics.
If they know that a particular type of trade makes money x percent of the time and they average x amount of dollars per trade, they won’t hesitate to take the trade.
Amateur traders do not have the confidence and backing of this type of information. This is why they often switch strategies and have undisciplined and erratic trading. Small traders are often trying to make an unrealistic amount of money when they trade commodities.
Money managers are concerned about making a respectable return for their investors so they can retain their investors and also collect a paycheck. Fund managers typically earn about 20 percent of client profits. This philosophy usually keeps money managers from blowing their accounts out and account values typically only change a few percent each month. The same is not common for most amateur commodity traders.
When we talk about the professionals in the commodity markets, we are often referring to the managed futures funds, hedge funds and large institutional traders. They are classified as large speculators on the Commitments of Traders report that the CFTC publishes weekly.
Some consider the Commercials to be professionals in the commodity markets. The commercials are the people who have a vested interest in using the physical commodity. They are often considered the smart money, since they have an intimate knowledge of the supply and demand for particular commodities. They usually sell as prices are trending higher and buy as prices are trending lower. This is the opposite approach of the trend following large speculators.
Regardless of whether someone is considered a commercial player in the commodity markets or a large speculator, much can be learned from the professionals. They approach the markets in a methodical way with a special purpose for buying and selling. There is an ultimate goal and they take small steps at a time to reach those goals. That can rarely be said for small traders.
The professionals in the commodity markets make up a majority of the volume and open interest. The small traders actually have many benefits over large traders, as they can get in and out of positions unnoticed. Many of the professionals that are managing large amounts of money have a difficult time moving in and out of the markets without having some type of influence on the price. They are also prone to other professionals that are jockeying for positions at the same time.
Many of the hedge funds and futures funds use similar trend following techniques. The markets are usually approaching an extreme when the funds are holding a record amount of positions. Then the market starts to move lower and they eventually begin liquidating positions. If the market continues to move in the opposite direction they will eventually take positions in that direction and a new trend is established. Then, the whole process repeats itself.
The typically small trader usually has an idea that a particular commodity market will move up or down and some money is placed on a trade.
Or, an amateur trader might read a book or two on trading and study some charts to make a trading decision. Their intensions are good, but this effort pales in comparison to those who manage millions or billions of dollars and make a living based off a percentage of the trading profits they earn for clients.
Most professional money managers in the futures industry had some type of formal training with one of the large investment banks or they have experience trading on the floor at an exchange. Some are actually self taught, but they typically put years of hard work into creating a trading system that withstood rigorous back testing and real world trading.
Many hedge funds employ a staff of Ivy League graduates to create and test trading strategies. Imagine a team of very smart people with a virtual unlimited means of technology that spend all day testing every trading strategy man can dream up. They have access to information about the markets that a small trader can’t even imagine.
Professional money managers are able to see the markets in statistics.
If they know that a particular type of trade makes money x percent of the time and they average x amount of dollars per trade, they won’t hesitate to take the trade.
Amateur traders do not have the confidence and backing of this type of information. This is why they often switch strategies and have undisciplined and erratic trading. Small traders are often trying to make an unrealistic amount of money when they trade commodities.
Money managers are concerned about making a respectable return for their investors so they can retain their investors and also collect a paycheck. Fund managers typically earn about 20 percent of client profits. This philosophy usually keeps money managers from blowing their accounts out and account values typically only change a few percent each month. The same is not common for most amateur commodity traders.
When we talk about the professionals in the commodity markets, we are often referring to the managed futures funds, hedge funds and large institutional traders. They are classified as large speculators on the Commitments of Traders report that the CFTC publishes weekly.
Some consider the Commercials to be professionals in the commodity markets. The commercials are the people who have a vested interest in using the physical commodity. They are often considered the smart money, since they have an intimate knowledge of the supply and demand for particular commodities. They usually sell as prices are trending higher and buy as prices are trending lower. This is the opposite approach of the trend following large speculators.
Regardless of whether someone is considered a commercial player in the commodity markets or a large speculator, much can be learned from the professionals. They approach the markets in a methodical way with a special purpose for buying and selling. There is an ultimate goal and they take small steps at a time to reach those goals. That can rarely be said for small traders.
The professionals in the commodity markets make up a majority of the volume and open interest. The small traders actually have many benefits over large traders, as they can get in and out of positions unnoticed. Many of the professionals that are managing large amounts of money have a difficult time moving in and out of the markets without having some type of influence on the price. They are also prone to other professionals that are jockeying for positions at the same time.
Many of the hedge funds and futures funds use similar trend following techniques. The markets are usually approaching an extreme when the funds are holding a record amount of positions. Then the market starts to move lower and they eventually begin liquidating positions. If the market continues to move in the opposite direction they will eventually take positions in that direction and a new trend is established. Then, the whole process repeats itself.
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