I saw the movie Syriana on Sunday, and it really gave me a different perspective on the financial markets. I have read some articles, and have decided that it is time I begin to learn commodities trading. I had opened an account back in September and even had cash sitting in there waiting for me to start investing, and so I figured today would be the perfect day.
I had traded crude oil, on the hopes of the hurricane that was coming after Katrina would not be downgraded to a tropical storm. I bet the wrong side of that equation, and closed out my position at a couple point loss.
This time, I decided I would trade gold, as it has been climbing as of late, and has been more volatile. With the Federal Open Market Committee making its anouncement on whether or not to raise interest rates today, I figured it would move the gold market more than any other commodity.
I started my position by opening up a long position for Feb06 at 527.255 and a short position for Apr06 at 530.90. After noticing that I wasn’t going to be going anywhere with this all day because both securities advanced and declined in tandem, and after seeing continuous downward movement in the morning, i decided to sell the Feb06 contracts at 523.10, for a loss of 4.155 per ounce.
I figured I would try to regain ground by holding the short position as the price of gold moved lower. It was then that the price starting moving against me. After watching the chart for a little while, I finally covered at 527.995, making 2.905 per ounce and offsetting the loss generated by my previous trade.
By just watching the graph, I knew I’d be able to trade out of the loss and into the green. So I re-bought into the Feb06 contracts at 523.80 and then sold half at 525.90 and half at 526.00. This wasn’t my strategy, I just had not adjusted the number of contracts on the trade screen by accident. So I made 2.15 per ounce on this trade.
After these trades, waiting for the Federal Open Market Committee anouncement, I was up .9 per ounce on my trades (2.15+2.905-4.155). My gut feeling was that gold was going to go lower because the interest rates were going to be raised and the wording towards futures raises would be changed. I felt this would drive the price of gold down, since investors and speculators would be taking money out of gold and putting it into US dollars.
So I sold Feb06 contracts at 524.10 2 minutes before the anouncement, expecting the price of gold to decline. The FOMC raised a quarter point, and changed the wording, exactly as Wall Street had anticipated. But when I saw prices begin to rise, I panicked and thought I made a mistake. I bought at 524.80 for a loss of .70 per ounce.
I then turned around and bought 20 Feb06 contracts at 525.00 thinking it was going to go higher. After thirty minutes of trading down, I decided to close out the position at 523.40, losing 1.60 per ounce. Those last two trades had completely wiped out all my gains from the morning.
If I had held onto the contracts I sold at 524.10, I would have made some good money considering gold closed at 521.60 today. I will definitely have to not second guess myself, and the only reason, I know I did, was because this is a new market for me. The leverage is alot higher, so the gains and losses will be alot more extreme.
I plan on going into leverage and risk in the near future and why I think its a great tool, especially for younger investors. I will also continue to trade commodities, as I feel there is a great opportunity in these markets once I understand the movement in them a little better.
One thing I have noticed thus far is that while investing in company stock is for the long term in that you can hold onto them for months at a time, commodities are the exact opposite. The volatility and prices fluctuate second to second. To be honest, I like them both, and I feel I will be just as successful trading commodities as I am with stocks.