Trading Commodities Is Absolutely Impossible By Using Fundamentals (if you want to profit that is)

What has the last 6 months proven? You can’t trade commodities, whether Gold or Wheat or whatever, with success using fundamental analysis. If you find an analyst telling you to buy or sell commodities based on some fundamental factor — watch out. Trend following is how you trade all commodity markets. There is no debate.

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17 thoughts on “Trading Commodities Is Absolutely Impossible By Using Fundamentals (if you want to profit that is)

  1. I love Jim, but I don’t think he is telling anyone his exact entry/exits and why! 🙂

  2. How about the numerous investors who have discretionary funds that are more of the asset allocation type that rotated out of equities into gold in the earlier part of last decade? I would say they made a great call… I love trend following but I think you go too far in dismissing all other types of investor types.
    Look on your Bloomberg FSRC function, there are plenty.

  3. Jonathan, it depends on what people want. Consistent track records from top traders over decades trading commodities that prove trend following viability OR what you describe. That’s not an attack against you, just a very stark comparison. Some group of people made the correct ‘call’ to go long when? Who? Where are the track records we can see? From a research perspective that’s what I want.

  4. PTJ
    “You pick an instrument and there’s whole variety of benchmarks, things that you look at when trading a particular instrument whether it’s a stock or a commodity or a bond. There’s a fundamental information set that you acquire with regard to each particular asset class and then you overlay a whole host of technical indicators and that’s how you make a decision.”

    “Kovner is what’s known as a macro trader. He focuses on commodities and currency and uses fundamental analysis as well as charts and technical analysis.”

  5. I post every couple of months when I see that you say price action is the only consideration that is really necessary. It may be. I selfishly would like to see you interview for your next book guys like Jones or Kovner or even Jim Rogers (he’ll do an interview with anyone.) I would be curious to see them prove that fundamentals add to their bottom line.

  6. @Mark…

    All fundamental information filters into the markets and is captured by price action…

    Many successful trend followers who follow price, do not need to know any other fundamental data at all…copper can be traded the same way as the S&P, as cotton…they are all just prices

  7. Larry if you are going to lie and misrepresent someone’s position then you should expect some contention. Again, Simons says its not about the subject matter that was studied, its about the thought process and extracting signals from noise. Galaxies have nothing to do with it!

    So I’ll leave it up to the readers. Jim Simons a guy who has made $8billion trading recommends people think scientficially. Larry, a guy who to me quite frankly sounds like a used car salesman, discourages and mocks scientific thought. If you are discouraging scientific, rational, and logical thought then you are in fact encouraging emotional thought, emotional trading.

    Jim Simons has average annual returns of 35%+, and thats after 40% fees. So he’s really clocking in at over 50%/yr for more than 20yrs. If anyone has a better track record I’d love to see it. Here’s a couple links you made find interesting, read it and weep….

    http://www.turtletrader.com/trader-simons.html

    http://www.insidermonkey.com/blog/wp-content/uploads/2010/12/Best-Hedge-Fund-Jim-Simons-Medallion.png

  8. Ken, I’ll keep the conversation on the point to add value…Michael opens these boards up for thoughtful discussions, so let’s push the discussion intelligently.

    No doubt, Simons is a complete genius. I have studied him and his systems repeatedly and have the utmost respect for him.

    My point is that not ALL profitable systems trading has to be as complicated as you make it to sound.

    ALL systems trading is designed to be mechanical and use a scientific approach…so my opposition is not to the scientific approach, it is to your adding additional noise. My personal trading is systematic, and I believe there is no other way to trade profitably over time than using a scientific method.

    Simons is a quant by all accounts and his systems by nature are more complex. Not all winning trading systems have to be as complex in their entry/exit signals, but do have to have considerable attention paid to bet-sizing and risk management rules.

    Trend Following entry/exit signals, by design are much less complicated than many quant and arbitrage styles.

    Dunn, Campbell, Hite, Seykota and others are on record in Michael’s books as using very simple entry/exit signals. The S1 and S2 systems the Turtles used are very simple signals. Bet-sizing and risk management are much more important.

    Studies have been done, by Van Tharp for one, using a random entry signal, which with proper bet-sizing and risk-management can be profitable and have postive expectancies.

    So keep in mind, we both agree on the scientific method. I do know for a fact, from my own personal profitable trading, and from my contacts with many professional traders and both systematic and discretionary money managers, that not ALL profitable systems trading requires the complexities of scores of mathematical experts. I am not in the financial industry currently, but the internet opens up great channels for communication, and my personal network is extensive.

    As Michael references in his know v believe statements…a TF firm who says we have have successfully and profitably traded billions over decades using a simple x-day breakout with a filter or 2 may not have as much “sizzle” to attract instituional capital as a firm who has scores of “experts” on their payroll. Instutional money wants to be “dazzled with brilliance”.

    So the bottom line is if you want to debate my points, feel free, but be sure you grasp what my points are.

    Systems trading and scientific thinking and methods I believe in 110% and trade only in that manner.

    Over complexities, over-optimization, curve-fitting, and over reliance on entry signals, I do not subscribe too.

    The need for scores of scientifc experts is not necessary for ALL winning systems, maybe for SOME.

    The bigger factor in profitable trading systems is the traders ability to execute every signal, and proper bet-sizing and risk-management.

  9. For what it’s worth…from a 2007 interview with Jim Simons (his words):

    Mr. Simons said that “trend-following is not such a good model. It’s simply eroded.” Things change and being able to adjust is what made Mr. Simons so successful. “Statistic predictor signals erode over the next several years; it can be five years or 10 years. You have to keep coming up with new things because the market is against us. If you don’t keep getting better, you’re going to do worse.” Mr. Simons said that his models change weekly.

  10. DG, I am not buying that from Simons about weekly changes. Everyone has to do their level headed best to decipher the truth from some comments from some traders. Some like to be fuzzy in answers occasionally.

    Eckhardt said trend following would die in the early 90s. People still ask me about that.

    Trust, but verify.

  11. I trust only one thing…the bank roll. Take what you start with, subtract outside money you add along the way, and calculate the return.

    If the absolute long-term result blows the doors off, then I don’t care if you use 17 dwarfs with Phd’s, a lucky rabbit’s foot, and an astrologer, I’m checking it out.

  12. @TraderKen…

    I was really hoping you were going to bring alot more to the table regarding a discussion of systems trading and designs than to tell us that Jim Simons has a great system and post his returns. Is there anyone on this site that does not know that?

    I put my theories out there for you to break them down if you can. Usually personal affronts are a disguise for lack of content.

  13. Im a numbers/stats guy. The content that I think is most important is the performance figures. Start with that and work backwards. Look for similarities. Talk about any theory you want, but at the end of the day it’s performance that matters.

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