StrategyTrading1

The year was 1983. I had been trading stocks for about three years, and had co-traded several futures accounts for clients during the previous year (see my previous post “Other People’s Money”).

I have also mentiioned here that I had a background in forecasting - weather forecasting to be specific. I have always been very intense about my forecasting, and have used many unconventional techniques to arrive at an accurate result. My perception has been that forecasting the weather and the stock market represent  similar challenges, and can benefit from a similar approach, although I have found that weather forecasting is a LOT easier. Storms don’t turn around in a microsecond due to some unexpected statement by the Fed Chairman, or Treasury Secretary.

Back to 1983. Every year I received a call from a man who asked me about my Florida seasonal forecast, and once in a while he would call about particular weather patterns that might bring freezing temperatures to the citrus growing regions of Central Florida.

Fortunately, I had worked in Florida as a meteorologist and had been the only one in my area to call for snowfall in Northern Florida in 1977.

So, I was familiar with the situation there and when the big freeze of December, 1983 arrived I was ready for it, and knew it was coming quite far in advance.

When my caller asked me about the freeze forecast, I asked him about the reason for his call. He told me that I had made a great deal of money for him in the past by alerting him to upcoming freezes, as he had been trading orange juice futures.

Light bulb going off in head…why had I not thought of that before? In those days, the science of long range forecasting was not as developed as it is today. With the Internet, we can click on a number of websites and get a 10 to 15 day forecast, and these long range projections are often correct. In the “old days” of the 1980’s a five day forecast was all that most people were going to get from their local newspaper or TV newscast, and many of these sources only gave a three day forecast. The Weather Channel was only a few years old.

I was stretching things and trying to forecast out to 10 or more days in advance using upper-air analysis patterns and any experimental techniques that I thought might work.

After I told him about the upcoming freeze, I decided to try my hand at the orange juice futures game. So, I opened my own account at Lind Waldock, sent them $5,000 and I was ready.

As I recall I purchased the  January contract in the upper 120’s, and after the freeze hit it shot limit up for three days, where I sold. So, I made 22 cents profit for a grand total of $3300, or 67% on my $5,000.

Well, I was certainly happy about that. However, I was not using any sort of technical analysis or quantifiable strategy to get into or out of the trade, so when the contract continued up to the 150-160 range I felt foolish. I believe the high for that contract was over 170.

After the contract expired I plotted a chart of it by hand and concluded that if I had traded off that chart, and sold after a break of a simple moving average, I could have made  almost 20 cents more.

Well, to repeat an old saying, “you can’t go broke taking a profit”. But, you can feel bad.

Since I felt I had learned something valuable about applying forecasting knowledge to the futures markets, I decided to try my hand at heating oil futures. Another cold wave was coming and my analysis indicated that heating oil would go up as a result. It didn’t, and I couldn’t believe it, and not only did I lose my orange juice profits, but I found myself sitting on a $1,000 loss overall, so I got scared, sold my heating oil position, and the contract immediately shot up, and I felt even worse. Does this remind you of any trading you have done?

Welcome to the real world of  “the markets” , where common sense isn’t common, and what is supposed to happen doesn’t, and where smarts don’t make for profits, and where crazy things do happen every minute of every day.

I later spoke with a friend, who had some insight into futures trading, about the unexpected heating oil contract drop, and he suggested that when the traders walked outside and it wasn’t cold, they went back inside to the exchange and sold the contracts. Timing is everything.

I began to learn that stocks and futures can go up or down for various and mysterious reasons, and these reasons may or may not be known in advance, and may or may not be rational. And the more I thought about my adventures with the freezes I realized that I had been lucky with the orange juice and unlucky with the heating oil and that I needed to go back to my charts and my systems, and that in the real world the major forces that drive the markets may not be visible to any of us.

I didn’t close my futures account, but I did figure out another way to make a lot of money trading the “commodities” markets. I will go into that in my next post.