Trading Commodities and Financial Futures

Cocoa sounds like a moneymaker, but you have no way of knowing for sure how true all this is. You do like chocolate, but you didn’t even know it all starts with a bean called the cocoa bean. (You thought it came out of a can.) Hey, you don’t even know where Ghana is, and you’re thinking of trading cocoa against the likes of Hershey and Nestlé and whoever else really does know what’s going on? Why would you do this? To make money, of course! You do know one thing: You can observe that the cocoa market is moving higher, and it’s moving fast. Although you aren’t exactly losing money by doing nothing, it’s starting to feel that way. Do you have the guts to act? Do you have the money? Is now the time? You assume that the shorts (those betting on lower cocoa prices) are beginning to experience financial pain. The longs (those betting on higher cocoa prices) are experiencing the opposite emotions: elation and the satisfaction that comes from being right. The accounts of the longs are growing bigger—money from nothing. The shorts are watching their money evaporate. Let’s think about this for a moment, because it’s time for your first lesson: Even though trades are now entered using computers, trading is a human game. As a result, emotions affect price as much as, or perhaps more than, the news. You will learn that price movements themselves affect future price movements. It’s all a function of who is being hurt and who is benefiting. It’s a function of which side of the market is being “sponsored” by the “strong hands.” Shorts and longs act differently, based on price movements, and those movements affect their emotions as much as their pocketbooks. Your job as a trader is to identify what happens next. To do that, I want you to start thinking about how others feel because feelings affect actions. People who are generally right tend to do certain things (on balance). People who are generally wrong tend to act differently. The majority acts a certain way, but be warned: The majority is usually wrong at major turning points (although they also can be right at times). So, determine whether the majority is now long or short cocoa. The shorts are in pain, the longs are not; but then again, this can change just as fast as the market’s tone changes.