Aug

14

A Spec recommended this book written in 1933. The interesting thing about old books is that they adopt unused market theory from a different cycle, from a different paradigm than the current market thinking that the majority follows now-a-days. What was old may now be coming back into use in the changing cycles. Sometimes thinking out of the box leads to a winning strategy. This book is about grain trading and though some of the numbers are different now there were many grains of truth and wisdom and interesting approaches to trading that are worthy of mention and which should receive a warm reception by Specs, and present some good ideas and variations for testing. He presents tables of historical prices, averages of the lows and highs, and the ranges which give good information on descriptive statistics. He tested his systems and rules on historical data. A few points:

  1. Year Round trading in Wheat. Buy monthly lows during down season to line limit, then hold and sell on new month highs during up season.
  2. Scalping: Buy below prior day low and hold then sell above prior day high.
  3. The long haul speculator will outperform the scalper because of commissions and slippage.
  4. Stops cause losses. He tests this against historical data. Stops causes too many rinse outs. He does have a seasonal time stop method.
  5. Do not scale in, i.e. sell every 2 cents down or buy up as it leads to bankruptcy due to over extension of margin. Do Average cost down by buying new lows and selling new highs. Stay within a predetermined ‘line’ and keep margin available.
  6. Examine fundamentals of cost of wheat production vs. cost of gold production. Under economic law of relative cost the price can never get to zero nor several times cost of production, for long.
  7. During wheat bear markets only hedgers are short and the do not care if the price drops, thus there is no new supply to buy up price. He computed wheat bear markets to be 86 days in length.
  8. Mechanical and technical methods work better for commodities than stocks as they do not rely on honesty of management.
  9. “The culmination of a bull market comes at a time when the crop shortage receives front page comment in our daily papers.”
  10. A successful trader will not pick a price and will be willing to carry a loss. “The further a man goes in analysis of price the great the need for statistics.”

Would other knowledgeable specs offer comment on whether these ideas work in today’s grain markets?


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