[quote]Dr. Pangloss wrote:
[quote]Aragorn wrote:
I’ve never learned so much as in this thread Pangloss. Its interesting, your advice thT “your experience dictates the sixe of your trade, not your pocket” combined with your illustration of your grandpas will nd starting small is exactly the same advice I hear poker players give to new players. A good friend of mine plays semi professionally (because he is a tenured professor–he would be ok playing full time) and says the exact same thing in almost the same language.
I’ve never heard anybody say they’ve never been so scared as when they traded lumber…it made me laugh put loud for some odd reason–probably because I’ve never thought about the ags as being scary because I’ve always been on the other side…the farming one. My relatives farm. It blows my mind thinking that it could just drop out for no reason. I’ve never thought about it being able to do that.
I have exactly zero trading or investing experience. :-)[/quote]
Trading, at least the way I trade, is very much like poker. It’s not enough to simply know the odds, you need to know who else is at the table with you and how they play. Are you playing with weak hands or strong hands? What happens when the guy across the table stops playing tight? Who’s bluffing?
During high volatility periods, market are moved by two things: fear and greed. You can run all the probabilities you want, but if fear has overtaken a market you’d better get out of the way.
The ags are like the wild west. Unlike financial markets (stocks, bonds, fx, etc) there are supply shocks that send the markets violently in one direction or another. You might have a frost that wipes out %20 of the orange crop over night, or a virus that kills every third piglet. No one will ever say, “whoops, Bank of Japan misplaced %10 of all the yen in circulation” or, “Well, McDonalds just found an additional %20 of their stock in a file cabinet in the basement…” Abrupt changes in the supply and demand of ags cause huge dislocations in the markets.
Those dislocation, ironically, are magnified by market limits. Simply, if the hog market (for instance) moves up or down %2 in a day, the exchange will close the market until the next morning. Ostensibly, this is to allow cooler heads to prevail and prevent a panic. Realistically, it has the effect of trapping people in losing positions for days on end.
An example: your a novice trader and you buy 5 hog contracts thinking the market will rise before it closes today. You hope to make $650 on the trade but will get out if it moves $350 against you. Two minutes after you put the trade on, an announcement is made that a vaccine has been developed to inoculate piglets against the virus that’s been going around. In the face of all this new, unexpected supply of hogs, the market drops %2 immediately. It happens so fast, you can’t get out (I’ll go over the actual mechanism in another post). So, you’re in a trade that you hoped to make $650 on, and now you’re down $20,000. The market stays locked limit down and closes for the day. You go home, your wife asks you how your day was and you mumble something about it being not that great.
The next morning, as the market prepares to open, it’s obvious there’s going to be more selling. The bell rings, and before anything can trade, a wave of orders come in and pins the market down another %2 against the daily limit. The exchange closes the market for the day, and it’s only 9:11 AM. You’re down another $20,000 and you can’t even get out. You can’t go home because your wife is going to wonder what’s going on. You sit in the bar until 2:15 comes and you can head home. Your kids want to tell you about their day, but your only half paying attention to them. You mention to your wife that maybe this isn’t a good year to take the kids to Disney World, even though you promised them a trip over winter break.
The same thing happens the next day, and the next day, and the next day. Except by day 6 you don’t even want to go home any more, not after last nights argument. Your wife doesn’t understand why you’ve asked a real estate agent to come take a look at the house, when you just moved in 18 months ago. This was supposed to be your “forever” house. The kids are in good schools, they have their friends and activities…
Finally, on the eighth day, the market opens above the daily limit and you can get out of your trade. The total loss is $155,000 and you only had $85k in your account. Your trading privileges have been suspended and the President of your clearing house want to know when and how you’re going to come up with the $70,000 you’re short. You emptied out your checking account and your IRA and came up with $42,000, but you’re still short. You’re out of work until you can cover the $28,000 debit and re-fund your account with another $50,000. And your mortgage is due in 6 days. And so is the deposit on your kids’ summer camp…
I toned down the story above lest you think it’s hyperbole. The actual stories are far worse. I know a guy who watched a market go limit against him for 11 days and lost 7 figures. It’s bad when the only way out of your problems involve a term life policy.
The ags are crazy. There are guys who are up or down $200,000 - $500,000 a day, every day. These aren’t bank traders or hedge fund traders, these are individuals who trade these markets for their own accounts. [/quote]
That is crazy.
In that scenario how much were the initial contracts?
Is there nothing that can be done to stop that or keep it from happening.
