Very interesting article appeared in the Spread discussion forum, which is accessible to all the graduates of my Online Commodity Spread Course.
It is kind of a personal confession of the spread trader, about why he chose to trade the commodity spreads.
Thank you Roman, and I am pleased to publish it here:
on an informal meeting of stock traders I met new colleagues as well as my experienced teachers. The pleasant evening was filled with new insights and experiences from both new and old colleagues. I am trading options, futures contracts, but mainly commodity spreads. I admit that I actually tried everything from stocks to forex, from intraday trading to the current trading portfolio. I even did not stop with shares, part of my profits from trading goes to shares, because my long-term portfolio is based on shares, fairly conservative, dividends with additional income from selling calls against my long stock position.
But why are the commodity spreads my main trading part? With time, everyone learns what is the best for his nature and psychical well-being. I was thinking a lot and I found out why I will probably stay with the spreads. I don´t want to say forever, because times, markets and people are changing. That’s why I never say (except for few personal things) NEVER!
So why do I trade commodity spreads more than futures or options themselves? The main answer for this question is RRR. Risk-to-Reward Ratio. Options can be traded, and are usually traded with a high probability of profit, but the RRR is low. Experienced traders can deal with it, but it is not an ideal combination for my nature and mental “comfort”. For futures, the situation is exactly the opposite! RRR is, or should be high, e.g. RRR 1: 3 or higher.
An experienced commodity trader is working with much higher risk (in general he needs also bigger account), but he is looking forward for a quick and high profit. However, the probability of profit is significantly lower than the option trader´s one. An option trader using 1 standard deviation works with a probability of around 84%, a futures trader usually works with a probability of success in the range of 40-50% . And that’s how I get to the point of my choice, though I am politically right wing person, here I am choosing a golden middle way. Probability 50% or higher and RRR 1:2 and higher. Theoretically, the risk level is low and the risk-to-reward ratio is high. I am moving between futures and option strategies from both risk and RRR perspective. For me, the comfortable position from the psychology point of view is the most important thing for trading (at least surely for me). Do you know what is a major problem of stock traders? Maybe you can guess, maybe not, but try to think about your beginnings or even about your current trades! I believe every one can keep the stop loss until the end, but can you stick with the profit target? How about after two, three losses behind? That is psycho, don’t you think? If you shall not pass this, your chance is rather small, maybe even zero.
A futures trader must be very accurate in his analyzes and market entering techniques, when selecting the stop loss and profit target, or when managing the trades. An option trader might be earning for weeks and months, but one bad trade can cause serious hit to his capital and months of work are gone. Experienced traders can eliminate it, but for me it is a “comfort zone”, which matters. Commodity spreads are for me this zone as well as my way to financial freedom.
Thank you and good luck! Roman