Good books - futures/commodities

[Buffettology]

Hi fellas,

Just a couple quick questions on futures/commodities.

Is there a particular book you could recommend for a beginner just to gain a basic understanding on futures and how they work, pricing, strategies etc. I have only read using index futures to hedge your stock portfolio and using futures for leveraged exposure (which can be done with options also, so I dont really get the difference for that one).

Also for commodities, on the various kinds of commodities that are available to trade and how they generally work/move, i.e. seasonal variations affecting price of certain commodities (not sure if there is a book on such things or its more just something you have to learn from experience and watching circumstances such as supply/demand, war, natural disasters and applying technical analysis etc).

I understand you can trade both futures or options on commodities, however, futures are more risky and options more strategic (spreads etc), as such, futures appear to be a lot more straightforward than options? Is this correct?

Sorry if this is a bit of a mess, Im trying to process how it all works in my own mind. Hence, why I need books to really understand how all these things interact so I can make up my mind as to which are more suitable for me.

 

[tcoates]

Some texts are mentioned here

http://en.wikipedia.org/wiki/Futures_contract
http://www.asx.com.au/investor/futures/index.htm

Books...

http://www.amazon.com/Options-Futures-Other-Derivatives-4th/dp/0130224448

Part of this can be previewed at...

http://books.google.com.au/books?id...oi=print&ct=title&cad=one-book-with-thumbnail

Tim

 

[Buffettology]

Thanks tcoaates_au,

However, I understand basically how options work, well at least the basic strategies, which is all I would use at first anyways until I became more comfortable.

So I really just want a book on futures and commodities.

The websites are a bit brief and as such, it can become confusing and you do not get full information.

 

[barrett]

Thanks for posting on the Hull book, I'm going to look at getting that one.
For a beginner though (which really I still am) I can recommend Fundamentals of the Futures Market by Donna Kline, 250p (vs Hull at 700p).. Kline provides basic explanation of the futures market, contango, backwardation, etc.... also options.. and a very small section on more advanced things like synthetic calls etc. Just something to get started with.

Kline has a little info about the fluctuations etc. in the commodity markets, but the book is more about how the futures market works, how to place trades, etc.

Jeff Christian's book "Commodities Rising" provides a bit more (VERY elementary) information about the seasonal cycles etc. in some of the commodities), but for that information, since I'm guessing you're going to put money at stake, as Jim Rogers says it's best to go to the source - the CRB Commodity Yearbook. Costs about US$150/yr but it's the 'bible' of commodity investing.

 

[tcoates]

I was actually at Dymocks on the weekend and can say the range of books was not that large... and for Futures - zero. I mention this as books like that would stand out and I always have a bit of a look at new books.

Otherwise, I would start here...

http://www.amazon.com/Getting-Started-Futures/dp/0471732923/ref=pd_sim_b_title_5
http://www.amazon.com/Starting-Futu...d_bbs_3?ie=UTF8&s=books&qid=1202798474&sr=1-3

 

[chops_a_must]

Are you wanting like a broad based book on futures markets in general, specific trading strategies, or fundamental pricing in futures?

I've only read things on the specific trading strategies in futures markets so can only recommend Trading the SPI ( http://www.moneybags.com.au/default.asp?d=0&t=1&id=4945&c=0&a=74 ), and Mastering the Trade ( http://www.moneybags.com.au/default.asp?d=0&t=1&id=5058&c=0&a=74 ). Waynel highly recommends the latter as well.

But even more important than this, if you are going to buy futures at any level for any reason, is to become intimate with the better risk management books.

Cheers.

 

[barrett]

I was actually at Dymocks on the weekend and can say the range of books was not that large... and for Futures - zero. I mention this as books like that would stand out and I always have a bit of a look at new books.

Otherwise, I would start here...

http://www.amazon.com/Getting-Started-Futures/dp/0471732923/ref=pd_sim_b_title_5
http://www.amazon.com/Starting-Futu...d_bbs_3?ie=UTF8&s=books&qid=1202798474&sr=1-3[/

I had the same experience at Borders recently.. a whole rack of books on investing but almost nothing on trading futures.

Have you used either of the above books? I have the Powers book, it's one of two recommended by Fat Prophets. The other is Kline. Others may find Powers useful but I haven't. Includes a lot of more general stuff like what's the yield curve, the role of the fed and the banks, should you hedge?, a chapter called "your banker and hedging" (wtf? lol), a chapter called "choosing a broker" (bit outdated), and the book is laced with trite philosophies.. I just found it annoying TBH and haven't used it. Others might not, and the other book you linked I'm not familiar with.

Chops, thanks for the tips.. can you recommend any good books on risk management?

 

[Buffettology]

I was actually at Dymocks on the weekend and can say the range of books was not that large... and for Futures - zero. I mention this as books like that would stand out and I always have a bit of a look at new books.

Otherwise, I would start here...

http://www.amazon.com/Getting-Started-Futures/dp/0471732923/ref=pd_sim_b_title_5
http://www.amazon.com/Starting-Futu...d_bbs_3?ie=UTF8&s=books&qid=1202798474&sr=1-3

Yeh, I was just at Borders today and bought one book (the latest Buffett one as posted in another thread), I also had a close look for futures books and found one but for the commodity and futures "maniacs", ha ha. I dont think Im quiet there yet, and think it would probably be a bit too complex for me, so I didnt buy it and thought I would ask here for beginners books instead. The one written by Lofton looks ok also, might check it out a bit more when I get time.

Thanks for the other tips guys, I will take a good look at them.

Barrett, that Kline one looks interesting, I will take a look. Thanks.

Chops, I guess I am after just a broad based book on futures markets in general. As I have absolutely NO experience in trading futures and am not sure if its even the right thing for me (looks a bit risky? and I think I can accomplish most of what I want to do with options and stocks), I really just want to get a feel for what its all about so I can decide without writing it off straight away. I also want to learn about commodities encase I start trading spreads on them. I might just start out trading a couple of them and slowly expand from there. Bit of information overload lately as I look to expand my horizons from simply value investing.

 

[chops_a_must]

Chops, thanks for the tips.. can you recommend any good books on risk management?

Trade Your Way To Financial Freedom is great, and probably the one everyone needs to be familiar with if trading. Trading the SPI is half dedicated to risk management as well. And believe it or not, A Random Walk Down Wall Street has some good stuff. ROFLMAO. There are plenty of others as well.

 

[Buffettology]

the CRB Commodity Yearbook. Costs about US$150/yr but it's the 'bible' of commodity investing.

What is this book about? Is it a kind of book that is released every year and updated to match current commodity environments, or is it a kind of standardised book just used to gain information on the various commodities?

Cheers

 

[barrett]

Thanks Chops..

What is this book about? Is it a kind of book that is released every year and updated to match current commodity environments, or is it a kind of standardised book just used to gain information on the various commodities?

Cheers

It's both.. current information, set in the context of historical data and charts on 100 different commodities plus commentary on factors affecting fluctuations in their prices.. if you're interested, one option is to have a look at it in a local library (or have them get it on interlibrary loan) before forking out the US$126 + postage for the 08 edition.

From the inside flap (of the 06 edition):
"Since 1939, professional traders, commercial hedgers, portfolio managers, and speculators around the world have come to rely on The CRB Commodity Yearbook to help them navigate the uncertainties of the commodity markets.

The single most comprehensive source of commodity and futures market information available, the Yearbook is the book of record for the Commodity Research Bureau, which is, in turn, the organization of record for the commodity industry itself. Its sources””reports from governments, private industries, and trade and industrial associations””are authoritative, and its historical scope is second to none.

The breadth and depth of information make the Yearbook indispensable for identifying changing trends in supply and demand and for projecting important price movements. This 2006 Edition provides crucial information on more than 100 domestic and international commodities””from aluminum to gold to zinc””and includes seasonal patterns and historical data from the past ten years as well as current (as of the last three months) pricing and trading patterns on a monthly and annual basis.

The information is formatted to make researching a particular commodity as convenient as possible. Each commodity is introduced by a brief article that describes its salient features, pricing trends in recent years, and factors””be they droughts, wars, diseases, or politics””that have influenced prices in the past, and may do so in the future. The data itself is presented in over 900 tables, graphs, and price charts that are clear and easy to read. A companion CD-ROM is included to provide readers with valuable commodity information in an easy-to-use electronic format.

Also featured are major articles on key markets and important issues by prominent professionals in the commodity industry that have been commissioned exclusively for the Yearbook.

For its wealth of information and the authority of its sources, The CRB Commodity Yearbook 2006 stands alone as the guide to intelligent trading in commodities and futures. "

It sounds like they're blowing their own horn here, but Jim Rogers seems to basically agree. He says once you have your trading/investing approach worked out then this is about the only book you need for trading commodities.. or the most important anyway.

Don't bother with Jim Rogers' book 'hot commodities' though - it reads like he dictated it while on the stationary bike at the gym.. which is probably what happened lol

 

[wayneL]

Lind Waldock brought out a good nuts and bolts book on commodity futures which I saw in a few bookshops...

The complete guide the futures trading or something like that. Basic, but covers all the mechanics of the various markets.

 

[Rogue Trading]

Some good books on futures are
1:The Futures Game by Teweles and Jones
2:How to make profits in commodities by W.D. Gann
3:Trading Australian Futures by Stuart Moore & Chris Jasch
4:Understanding Futures Trading in Australia by Chris Tate
5: Trading Optures and Futions by Joe Ross
6:The Definitive Guide To Futures Trading vol 1 & 2 by Larry Williams
7:Long Term Secerts to Short Term Trading by Larry Williams
8:Getting Started in Technical Analysis by Jack Schwager
9: Trading the SPI by Brent Penfold
10: Street Smarts by Connors & Raschke
11: Bulleye by Matt Kirk
12:Secrets for Profiting in Bull and Bear Markets by Stan Weinstein
13:The Profit Magic of Stock Transaction Timing by J.M. Hurst
14:New Concepts in Technical Trading Systems by Welles Wilder
15: Advanced Commodity Trading Techniques by J.D. Hamon

Some light reading here to get you starting.
Cheers.
Rogue Trading

 

[Buffettology]

Lind Waldock brought out a good nuts and bolts book on commodity futures which I saw in a few bookshops...

The complete guide the futures trading or something like that. Basic, but covers all the mechanics of the various markets.

Ahhhh, trusty old Wayne! Thanks Champ, too good! Sounds like the EXACT book I am looking for! Just all the basic "nuts and bolts" of commodity futures. I think I might get this one first and then look into that one you recommended Barrett, the "bible" followed by Mastering the Trade and Trading the SPI, if futures are something I even want too get into.

 

[chops_a_must]

Ahhhh, trusty old Wayne! Thanks Champ, too good! Sounds like the EXACT book I am looking for! Just all the basic "nuts and bolts" of commodity futures. I think I might get this one first and then look into that one you recommended Barrett, the "bible" followed by Mastering the Trade and Trading the SPI, if futures are something I even want too get into.

If you are going to trade futures, make sure you can trade stocks as well. You have to develop a few "staple" trades or at least types/ philosophies of types of trades, and act on them decisively, because implementing them in the futures markets are a lot harder. Things happen at a 100x the speed seemingly.

If you are a fundy, and that's what you are best at, stick to it I say. The soft commodities seem to be where more of the fundamentals type futures players are. Well... until one goes nuts and all the directional hedge funds get into it... like wheat. Maybe that area could be your niche?

 

[Buffettology]

If you are going to trade futures, make sure you can trade stocks as well. You have to develop a few "staple" trades or at least types/ philosophies of types of trades, and act on them decisively, because implementing them in the futures markets are a lot harder. Things happen at a 100x the speed seemingly.

If you are a fundy, and that's what you are best at, stick to it I say. The soft commodities seem to be where more of the fundamentals type futures players are. Well... until one goes nuts and all the directional hedge funds get into it... like wheat. Maybe that area could be your niche?

Thanks Chops.

Well I have actually recently quit work and am trading full-time as of a week ago. Made $900 last week, so its an OK income for now anyways, between jobs.

Definately a fundy, but trying to learn a lot more about technical analysis (though I find it kind of boring sometimes and absolutely confusing, strategies seem to contradict eachother............). Dumb question, but what are "soft commodities"? I was looking at wheat the other day, ha ha, its going through the roof hey!

Only time I look at commodity prices, is when I am thinking of buying a mining company.

 

[chops_a_must]

Thanks Chops.

Well I have actually recently quit work and am trading full-time as of a week ago. Made $900 last week, so its an OK income for now anyways, between jobs.

Definately a fundy, but trying to learn a lot more about technical analysis (though I find it kind of boring sometimes and absolutely confusing, strategies seem to contradict eachother............). Dumb question, but what are "soft commodities"? I was looking at wheat the other day, ha ha, its going through the roof hey!

Only time I look at commodity prices, is when I am thinking of buying a mining company.

Soft commodities are usually all the agricultural products. Wheat, soybeans, belly button lint. All that stuff.

$900 is pretty good going in a week. Fantastic in my mind if you aren't leveraged. Be careful you don't start getting the gamblers mindset happening! Because some weeks you will lose, others you wont. But stocks are a great place to learn, and build discipline, or even find out if you have discipline in trading at all! Downside is much less than in the futures markets.

IMO techies should learn something about fundamental analysis, and vice versa, so learning this stuff I doubt would be wasted.

It is going nuts, wheat that is. The only things I can see stopping it are a change in European regulations on biofuels, and or a likely bumper crop out of Australia. Both are a chance.

But I haven't paper traded soft commodities, so I'm trying not to get suckered into dabbling into it, especially with wheat going limit up days in a row! A bit out of my league that stuff. But an understanding of the futures market could very well help you in FA of the related equities. Knowing about backwardation and contango might get you into good FA positions before the market moves. For instance, I'm not trading wheat futures, but I did eventually get into IPL last week based on what I saw happening. Perhaps just before it becomes the next ZFX or SMY (before them tanking of course). Not a recommendation, just an example.

But never be afraid to just sit, watch and learn, when it comes to futures. They do some pretty interesting things at times...

 

[Buffettology]

Belly Button lint? I think I might start buying some futures on that

Yeh, I was happy with $900 for doing what I absolutely love, not to mention the time I get to study my azz off full-time on all of this stuff! Well a bit more than full-time I think, it seems these days I am either online reading about investments or in a book, from the time I wake up until the time I hit the hay! Really just want to get the basics down pat so I can choose the strategies I want, and most importantly, keep it simple!

Yeh, I am not leveraged at all, fortunately I have (I think for my age at least, only 25), a very decent size portfolio. And I definately have no gambling streak in me thank god. Only thing I am seriously considering doing, is borrowing against my assets when I start working, so I can use dividends and some income to service the interest repayments and hope I can make some large gains over the long-term! Its all about compounding rates of return hey, not to mention, you need serious money to make serious money!!

Agree 100% on the mix between fundamental and technical. I just wish I knew the basic technical strategies to apply (which would be most useful for fundies). Ive so far started looking at moving averages, RSI, volume and momentum, resistance and support, now about to look at head and shoulders and candlestick formations (I think thats their names).

As for futures, I had a fascination with them after seeing how they predicted some of the recent market moves before they happened and as you say, they could definately help me with investments in their related equities.

As for paper trading, ha ha, I havent been able to do that either, I always get sucked into dabbling small amounts. Though futures are something I wouldnt dable in until I was absolutely certain! Just in the process of getting my options account opened now, covered calls are something I think is absolutely a MUST for all value investors. Strike price at fair value and income generaion, how can you go wrong?

 

[barrett]

Soft commodities are usually all the agricultural products. Wheat, soybeans, belly button lint. All that stuff.

$900 is pretty good going in a week. Fantastic in my mind if you aren't leveraged. Be careful you don't start getting the gamblers mindset happening! Because some weeks you will lose, others you wont. But stocks are a great place to learn, and build discipline, or even find out if you have discipline in trading at all! Downside is much less than in the futures markets.

IMO techies should learn something about fundamental analysis, and vice versa, so learning this stuff I doubt would be wasted.

It is going nuts, wheat that is. The only things I can see stopping it are a change in European regulations on biofuels, and or a likely bumper crop out of Australia. Both are a chance.

But I haven't paper traded soft commodities, so I'm trying not to get suckered into dabbling into it, especially with wheat going limit up days in a row! A bit out of my league that stuff. But an understanding of the futures market could very well help you in FA of the related equities. Knowing about backwardation and contango might get you into good FA positions before the market moves. For instance, I'm not trading wheat futures, but I did eventually get into IPL last week based on what I saw happening. Perhaps just before it becomes the next ZFX or SMY (before them tanking of course). Not a recommendation, just an example.

But never be afraid to just sit, watch and learn, when it comes to futures. They do some pretty interesting things at times...

I fully agree, especially with your last comment.. when you're trading well, keep trading. When you're trading poorly, reduce your leverage, and/or stop for a while and watch. If you have a decent sized portfolio it's usually possible to trade futures with no leverage at all, which makes them rather less risky than they're usually perceived to be, though still mostly more volatile than stocks.

A comment about wheat and the grains in general, and a potential idea.. the surge in their price really seems to have changed the equilibrium in the farming sector. Most farmers have quite a choice in what they can do with their land. With wheat at such high prices, and the cotton price, for instance, has barely moved, many cotton farmers around the world are planting the more lucrative (and water-efficient!) grain. At some point it is likely to create a supply squeeze in cotton. The same goes for livestock. Livestock prices have not joined the commodity bull in earnest, partly because droughts in various places have caused herds to be culled and sold off. The grains, especially wheat, are a much more trouble-free land use than cattle, and given the depressed beef price, it's likely that more herds will be slaughtered to make way for grain. Making cattle farming even less attractive, the fodder used to fatten livestock in feeder lots has gone up very much with the price of the grains.

So, providing the demand for beef does not fall off a cliff (unlikely with Asia's increasing appetite), it seems likely that livestock prices may in the coming year or two be 'plays' on the high grain prices, since all the investor and farmer attention on the grains will squeeze supply in the neglected commodities (mainly cotton and livestock as I see it). And cattle farming, because of reproductive constraints, is a bit like mining.. it takes some years to get the numbers up again to meet a supply shortfall. Maybe cotton is an idea for this year, and livestock for later in the year, depending on the herd-culling. My plan is to take a low-leveraged position at some point later in the year, and double up if it starts to move in my favour. Just an idea at this stage.....

In sometime around mid 2006 I expected the grain price to go up, so not having a futures account at the time, I bought AWB.. horror.. I sold out at a loss after the scandal, but it has made me more inclined to buy the commodities directly.. and more aware of the things that can go wrong with individual stocks. But usually the stock approach works out well as long as it's a good company and no Trevor Flugges in the closet! Cheers

 

[Buffettology]

But usually the stock approach works out well as long as it's a good company and no Trevor Flugges in the closet! Cheers

ha ha ha.

Thanks for that analysis Barrett. Makes perfectly good sense, logical and rational! Sometimes such simple ideas are the best predictions of the lot!

Interesting to see your from the ACT Barrett, same place as me! Good town, lot of cash around!