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This is a story about the failure of an inexperienced commodity futures
trader. Perhaps it is not really a failure. It may be that the subject
recognized his limitations, and decided to stop trading. With more study
and reflection he may pick up the pieces, change his strategy and come back
as a successful trader. Some time ago, The Washington Post carried a
story about a carpenter in Long Island who decided to lock himself up in a
room with his computer and get rich. I wondered how he did, and a
follow-up story in the Aug 24 WashPost "Putting Futures in the Past"
describes the outcome.
I believe the outcome of his trading would have been far more successful
had he been exposed to the commentary, advice and shared experience of our
RealTrader's group. A side-issue is the problem of blindly relying on a
"cookbook trading system sold by a commodity investment advisor".
The moral of the story: Some of our more experienced traders are very
generous with some very good advice. New or inexperienced traders, take heed.
Nick Pishvanov
An original copy of the story can be downloade from The Washington Post at:
http://search.washingtonpost.com/wp-srv/WPlate/1997-08/24/058l-082497-idx.html
....................copied:.............
Putting Futures in the Past
Carpenter's Commodities Stint Shows How
Amateurs Can Get Hammered
By Brett D. Fromson
Sunday, August 24, 1997; Page H02
The Washington Post
WATER MILL, N.Y.—In 1993, James Ewing, a carpenter living in
the Hamptons, where many wealthy Wall Streeters go to relax,
hit upon a scheme to get rich too.
Ewing, 49, bet $30,000 of his hard-earned savings in the
commodity futures markets -- notoriously difficult places for
amateurs to make a buck.
"I'd always dreamed about being able to support myself from
home. So I got into a get-rich-quick mentality," said Ewing, who
has found it harder to work as a carpenter because of increasing
physical weakness stemming from childhood polio. "It's that
greed, that sense of wanting to get rich quick."
In the subsequent three years, he said, he lost half his stake in
an enormously painful process that caused him many sleepless
nights.
"So I quit last year," he said. "I couldn't take it anymore. I didn't
have the stomach for it."
In an age of buoyant financial markets and mass enthusiasm for
their wealth-creating power, Ewing's attempt to support himself
through speculation is understandable. But his unpleasant
experience is a cautionary tale for anyone thinking about
speculating in the commodity futures markets.
These exchanges, in Chicago and New York City, are used
mainly by professional speculators or by farmers and companies
that want to hedge price fluctuations in commodities they produce
or consume.
Study after study has confirmed that amateurs lose money on
commodity futures contracts, bets that commit them to buy or
sell a commodity such as pork bellies or copper at a set price
within a certain time period. Investors can lose money on the bets
and get hammered on brokerage commission as well.
The federal Commodity Futures Trading Commission, which
oversees the U.S. commodity markets, is sufficiently concerned
about the perils for individuals that it has prepared a publication
for the uninitiated, "Futures and Options: What You Should Know
Before You Trade."
What makes the game so risky for amateurs is that commodity
prices whip around as wildly as tornadoes. Prices are pushed and
pulled by unpredictable forces, such as a drought in the wheat
fields of the Midwest or an unexpected labor strike in the copper
mines of Peru.
In addition, commodity bets are made with borrowed money -- "on
margin," as they say in the financial markets. Putting up $1 for
every $10 to $20 you bet is not unusual. You could buy, for
example, a $15,000 wheat contract for about $800 to $1,600.
For every 1-cent move in the price of wheat, the value of the
contract could vary by $50. So if wheat prices rise by 10 cents,
you would make $500. Conversely, if the price falls 10 cents, you
would be out $500.
As in Ewing's case, the amateur typically puts money into a
margin account with a broker who holds it as collateral in case
the bet is a loser and the customer can't come up with the money
to cover the loss.
Ewing became accustomed to "margin calls" -- requests from a
broker for more money. For example, he lost money betting that
lumber prices would fall. They rose. Then he lost money on silver,
betting the price would rise. It just kept falling. He also lost a fair
amount on pork bellies.
"I lost money on everything more than once," he said.
Like many players, he was relying on a "cookbook" trading
system sold by a commodity investment adviser. Ewing used a
program that based trade recommendations on "seasonal
fluctuations," how commodity prices have moved during certain
times of the year.
It didn't work for him. "The method required me to make a lot of
personal trading decisions. I didn't have the stomach for that. I
don't trust myself to make subjective judgments," he said. "And I
was getting eaten alive by brokerage commissions."
Looking back on the unsuccessful episode, Ewing recalled the
addictive appeal of commodity speculation.
"When I stopped, at first I missed it. I had a feeling of withdrawal.
. . . I couldn't wait to get up in the morning and turn the computer
screen on to see what the markets were doing, even though it
would then be a nightmare."
What caused him to quit?
"Basically, I ran out of the desire to gamble. I hated accepting the
losses. It was such a dreadful experience. So I got to the point of
not being willing to put more money on the table," Ewing said.
After the initial withdrawal symptoms, he was glad to have quit.
"In time, I felt so relieved," he said. "I was feeling good not to have
the constant pressure of losing money and getting margin calls
from my broker asking me to send more."
A few months ago, Ewing considered trying again. A friend
suggested that they try a new trading system devised by a
commodities trader. Ewing said he felt momentarily confident that
he had learned from his mistakes and could beat the market with
a new, better system.
Ewing and his friend spent two days "back-testing" the system,
to see how it would have worked under previous market
conditions. But in the end, Ewing decided he didn't have the
mental toughness to play the game.
"Looking back on the whole period, I come away with a heavy,
unpleasant feeling about the whole process. Occasionally, I
watch commodity futures markets and I remember the emotional
state I was in, obsessed but not tough enough to handle the
pressure. . . . It can be fascinating, but I don't want to do it
again."
@CAPTION: James Ewing in 1993, at the start of his three-year
commodities adventure.
© Copyright 1997 The Washington Post Company
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