A Trader’s First Book on Commodities:
An Introduction to the World’s Fastest Growing Market
By Carley Garner
$34.99; 244 pages
Traders searching for reliable information on trading commodities will find that Garner’s basic book is a comprehensive guide to the subject. For the uninitiated, the author includes an annotated glossary of key futures market terminology. The author begins her book with a look back at the causes of the commodity rally in 2007 and early 2008, which was followed by the big decline in late 2008. She then explains the speculator’s role in the commodities markets and how fortunes are made and lost, using examples of the treacherous crude oil futures market.
Garner provides a realistic and candid view of the commodity markets based on her experience as a senior market analyst and broker. She continually points out the pitfalls and potential hardships for new traders to warn them of the potential risks involved in commodity trading. She recommends that a combination of technical, seasonal, and fundamental factors be used to form an educated opinion of a commodity’s price action. Furthermore, Garner says that “you should approach every trade with modesty and with the understanding that you could be wrong.”
She begins her introduction to commodity trading by covering contracts listed at CME Group and the Intercontinental Exchange. Contract basics are reviewed as well as the mechanics of the futures contracts, futures spreads, and commodity options. Also covered are the differences between hedging and speculating. The difference between the open outcry (aka pit trading) and electronic trading are clearly delineated. Traders need to understand when and how to use each of these two trading methods for their benefit.
Garner covers selecting a trading platform, working with margin, choosing a brokerage firm, knowing how commission costs work, and understanding the difference between introducing brokers, Futures Commission Merchants and discount and full service brokers with clarity. There also is a section on selecting brokers that fit each trader’s specific service requirements. Garner states that beginning traders should carefully weigh the benefits of using a competent full service broker to enter orders, rather than go the self-directed online route, since the broker’s advice and guidance can have a dramatically positive impact on the trader’s bottom line. Commodity trading is complex and experienced brokers are well worth the extra cost, especially at the outset for novice traders.
Each of eleven order types is defined, illustrated with examples, and reviewed as to exactly when to use them. Even though each commodity has its own set of rules and each contract is standardized, comparing commodities with different underlying assets and memorizing the contract price multiples, contract size, minimum tick value and quote terms (e.g., cents per bushel, per pound, dollars per metric ton, etc.) is not an easy task, according to Garner.
Another section is devoted to explaining all the key features of stock index futures, interest rates and currencies. Again the author lays out the basic contract information, and adds commentary on each financial future. Next up is a discussion on how to cope with margin calls. A definition is provided together with details of initial and maintenance margin, day trading vs. overnight margin, margin calls and how to handle them.
Based upon a trader’s risk tolerance, trading timeframe and specific goals, each trader needs to determine which trading vehicles, contract size, and indicators to use. Also, a method to determine entry and exit points needs to be decided upon. Since many commodities offer leverage, the trader must determine how much risk to take and know how to manage it before unforeseen circumstances wipe out the trading capital.
Garner writes, trading should be treated like business that requires a detailed written plan. Moreover, she suggests that traders adapt the plan to changing market conditions; that is, being nimble is the key while being stubborn can be catastrophic. Additionally, the author has found that good instincts and experience are more valuable that any technical indicator or chart.
Garner points out that there is no “holy grail” or easy way to make money in commodities trading. The key to success, according to the author, is to keep your emotions under control in all types of markets, especially in volatile markets. Traders need to control fear, greed, and frustration, understand their rationale when taking profits too early and understand the pain of taking losses. Traders must identify and manage their risk of loss, and of course, capital preservation is critical to a trader’s ability to stay in the game.
Garner tackles a multifaceted subject and distills it into easily understandable chapters. Her straight forward and logical approach also helps readers absorb the critical information with ease. Newbie futures traders will find the material presented to be a valuable and worthwhile introduction to the subject.
Leslie N. Masonson is author of “Buy--Don’t Hold” and “All About Market Timing.” Reach him at email@example.com