How to make money trading precious metals and reduce your risk like a hedge funds pro
7:14 AM
Dear Entrepreneur:
The gold futures market is a powerful tool for making money. But, there’s a significant downside risk in this market, I’m not pulling any punches.
However…there is a way eliminate or greatly reduce your risk, I’ll show you how.
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I’ll show you a way to make money in the gold futures market which is hidden form the masses. If the average guy on the street understood and applied this tactic it would rip the curtain back on the Great Oz of Wall Street.
And don’t kid yourself… I’m not talking about a “perceived risk” here.
I’m talking about actual, real time, fortune losing risk! But let’s get real…every business has some risk.
The secret to being a successful gold trader is reducing or eliminating risk. Let’s take a peek at this bad boy strategy…
The gold futures market is a 24-hour trillion dollar raging torrent of cash
I recommend staying away from unregulated futures markets; it’s not worth the trouble. There’s no reason to get involved with unregulated markets when regulated markets are available.
On top of that, my preference is to avoid markets with low open interest.
Open interest is the number of open contracts in a particular market.
The open interest for the December 2011 gold futures contract is about 135,000 contracts. This number will increase just prior to the expiration date as speculators, traders and investors rush in to make a quick buck.
The idea is to focus on the markets which are easy to get in and out of quickly. Open interest is how you determine total participation.
Know the Market
It’s important to understand the market you’re trading. If you ignore this key you’ll pay dearly for your lack of knowledge. In other words, every market has its own “ebb and flow” or subtle difference.
On top of that, it’s a good idea to study a market’s “ebb and flow” and cyclical patterns. You can do this by reviewing historical price charts, and observing how the market reacts to events, shocks or “bad news”.
The “masses” rarely make (and keep) money in the gold futures market because of a lack of knowledge and understanding.
An Easy System for Removing Profits from the Market
When you trade you need an easy system for removing profits from the market, and protecting oneself when things go from bad to worse. There are thousands of software trading programs which claim to do this and some of them better than others.
And, I’m not living in the dark ages. I realize high frequency trading (HFT) and other sophisticated software programs is what the ‘BIG” money uses these days. But I’m not talking about a software trading program.
I’m talking about a system which incorporates human logic and common sense. Most of the new traders do not understand the market they trade nor do they understand how to remove profits. I’ll show you how to do this today.
Commodity Futures Learning Curve
A futures contract is an obligation to buy or sell a given quantity of an asset at a specified future date and at an agreed-upon price. Futures contracts have standard delivery dates, trading units, terms, and conditions.
A futures contract can be based on any number of underlying assets. You can trade coffee, cotton, currencies, precious metals, and soybeans… to name a few. To “open” a futures position, you either buy or sell a future.
To “close” a futures position, you do the exact opposite – either selling or buying the same future. Most futures contract positions are “closed out” in this way before they expire.
If you believe that the price of the underlying asset will rise, you would buy a futures contract. This is referred to as LONG position.
When you own a contract (long) it commits you to take delivery of the underlying shares, or equivalent cash value, at a prearranged price and by a certain date – unless you sell it. If you believe the price of the underlying asset will fall, you would sell a futures contract. This is referred to as a SHORT position.
When you sell a futures contract (short) it commits you to deliver the underlying shares, or equivalent cash value, at a prearranged price and by a certain date – unless you buy it.
The most active futures contracts are traded on government-regulated exchanges like the Chicago Board of Trade (the largest futures exchange), the Chicago Mercantile Exchange, the New York Board of Trade, the London Metal Exchange, and the ICE (Intercontinental Exchange).
Little-Known Gold Trading Strategy
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New traders trade like they’re on a weekend junket in Vegas! They don’t stick to a strategy and they don’t understand the games they play.
When novice gamblers win big money they spend it even faster on drinks, parties, and entertainment and more gambling. It’s a great business model when you own the casino!
Rookies trade with reckless abandon
I’m not trying to bring you down, or overwhelm you with negative “vibes”. But it’s important to know this stuff because you WILL be faced with it if you trade gold futures.
What’s more, novice traders usually “let it ride” after a winning trade with the intention of making even more money. Professional traders don’t trade like this (except for people like Job Corzine at MF Global. His trading losses will probably top $650 million).
Professional traders usually understand trading is a business, not a hobby. Most (but not all) professional traders know how to make and keep profits. My trading mentor always removed part of his profits and wired it to another bank account.
The Markets are Predictable (to a Degree)
Every market moves in cycles, trends, and “waves.” This is an incredible truth, and very good news for traders.
For example, hogs are a popular livestock futures market. Hogs have gone up in price the last part of March and into the first week of April for the past 45 years or so like clockwork.
Part of the answer is Easter! More ham and bacon are sold around the Easter holiday than at any other time of year! Most professional hog traders understand this cycle and trade it accordingly.
Professional traders typically specialize in one market. For example, a professional coffee trader would know if prices were at historical highs or lows. He or she would know when a coffee crop is vulnerable to freezing temperatures in Brazil (a huge producer).
A professional coffee trader waits patiently and watches the market. Then just prior to the winter “freeze season” he might load up (buy) coffee futures. When the news hits of a “devastating freeze,” the coffee trader might load up with more positions.
The savviest traders sell into a panic, remove profits, start trading a small position again and if the conditions were right buy more contracts.
Wall Street Gold Trading Secret
Most professional traders understand hysteria doesn’t last forever.
At some point he or she knows the market settles down and prices return to an “average” trading range.
As a professional trader you can seize this opportunity like a Wall Street insider. Professional traders can make a lot of money when markets move into an “average” trading range by selling options.
The Wall Street gold trading secret is a little different. We’re going to trade gold futures and options – together. Let’s say you believe gold futures are going to go down in the short term. This is actually a good trade because almost NO ONE believes the price of gold will go down today.
It’s like betting on a football game. My friend and gambling icon Wayne Root said you will never make big money betting on favorites or sure things. You make the biggest payday going against the crowd and betting public.
So…if you think gold is heading lower you could sell one January 2012 gold futures contract. This means you are “shorting” the market expecting it to drop. You could place a stop loss order above the current price at whatever point you feel comfortable.
In other words, let’s say you are only willing to lose $3,000, no matter what. Then you would place a stop loss order $3,000 above the price where you enter the trade. Okay, now you buy one gold futures call option at a strike price $3,000 above the point where you sold.
If your short trade goes against you, and the price of gold rises, the losses you incur in the futures market will be offset in part by the rise in value (and profit) of the gold call option.
In other words, whatever direction you feel the gold market is going, buy a call or put option on the other side of your trade, to offset any losses. It’s like having insurance on your trade, thereby reducing your risk — big time.
This is what hedge fund managers do to protect themselves – and they often trade tens of millions of dollars in gold futures. There are thousands of strategies like this which involve futures and options, but this is one of the easiest to implement and understand.
As always……please send or post your feedback, on this article, or anything! Feedback makes the world go ’round.
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Trade wisely,
Marc Charles
“The King of Business Opportunities”
(Ed Note: Marc Charles is referred to as “The King of Business Opportunities” ….and for good reason. He should be known as “The King of Legitimate Business Opportunities”…because he’s launched, bought, sold reviewed and advised on hundreds of businesses and money making opportunities. He understands legitimate opportunities. Marc has agreed supply League of Power members with crucial updates regarding legitimate business and money making opportunities.)
Action Strategy
Paper trade!
Paper trading is the most powerful tool available to futures and options traders. It enables you to trade “on paper” without risking a dime.
You can start practicing on paper right now to see if the strategy I gave you works.
You can open a paper trading account free of charge at the Paper Trading Club
Valuable Resources:
World Commodity Futures Exchanges
Commodity Brokers
Futures Trading Education and Tutorials
Chicago Board of Trade – Options Institute
Chicago Mercantile Exchange – Simulated Trading
New Book Recommendations
Trade Your Way to Financial Freedom
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Commodity Trading Manual
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Trading Futures for Dummies
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Winning in the Futures Markets: A Money-Making Guide to Trading, Hedging, and Speculating
by George Angell
Market Wizards: Interviews with Top Traders
by Jack D. Schwager
The New Market Wizards: Conversations With America’s Top Traders
by Jack D. Schwager
All About Futures
by Russell R. Wasendorf
Trading Tip:
There are basically two ways to approach any market – either from a technical or a fundamental point of view.
A technical view is based on charts, cycles, Elliott Waves, and mathematical equations, etc.
A fundamental view is based on supply, demand, weather, crisis, and facts etc.
If you can utilize BOTH approaches to make your investment decisions, it’s even better.
For example, with an Elliott Wave technical view of a market a trader would wait for signals based on Elliott Wave structure on price charts.
The three major aspects of Elliott Wave analysis are pattern, time, and ratio.
The basic Elliott Wave pattern consists of a five wave uptrend followed by a three wave correction. Each “leg” of a wave in turn consists of smaller waves.
Elliott waves can be used define where a market is in relation to historical prices.
Then you would review the actual supply and demand figures. These are harder to find then you might expect because everyone (farmers, miners, government, traders, hedge funds or anti-capitalists) has a bias.
One of the coolest projects I’ve seen regarding supply and demand is the Wolfram Demonstrations Project. You don’t need a PhD to enjoy it.
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