commodity markets, profitable trading, make profits

The primary purpose of commodity markets is to ration, at a reasonable price, existing and future supply to those who want it the most. Trading is not something mysterious and unfathomable. You trade almost every minute of the day.

Trading is really simple (again, I didn't say easy). Let's illustrate this with what A. P. Pacelli (1989) calls the Flintstone market. You remember Fred Flintstone, a rather rough and outdoors kind of guy, and his more domestic next-door neighbor, Barney. Fred sees himself as a macho he-man who likes to hunt dinosaurs. One day he goes out and kills a big some- thingsaurus. His freezer is already full of dinosaur burgers. Barney does not enjoy hunting and killing but he likes eating dinosaur burgers. Barney prefers to sit around his backyard whittling wood and making clubs.

Fred wanders over to Barney's backyard and gets an idea. Why not swap Barney a couple of platters of dinosaur burgers for that new club he is finishing. Fred rarely takes time to make his own clubs. He'd rather hunt. So he puts this proposition to Barney: "Barney, I'll give you two platters of dinosaur burgers for that new club. How about it?" Barney says, "OK, you got a deal."

Fred and Barney have created a commodity market. It is just that simple. All commodity markets in the world are based on one principle that is the basis of all trading:

AH commodity markets are created by people who disagree on value and agree on price!!!!

Barney would rather have the dinosaur burgers than the club, and Fred would rather have the club than the two platters of burgers. They agree on price and disagree on value. When you bought your last car, the car was worth more to you than the money you paid for it. However, to the person who sold you the car, your money was more valuable than the car. You created a miniature commodity market when you made your deal.

We buy bonds when we would rather own the bonds than hold onto the money we're paying for them. Our fantasy (trading is a fantasy game; more about this later) is that the "value" of the bonds will go up. We buy them from some unknown trader who is just as sure that their value will go down. We have a real disagreement on current and future value, but we agree on price.

Every market in the world is designed to ration or distribute a limited amount of some commodity (whether agricultural, financial, or whatever) to those who want it most. The market does this by finding and defining the exact price where, at that moment, there is an absolute balance between the power of those who want to buy and those who want to sell.

The commodity markets find that place of balance very quickly. They find it before you and I can detect any imbalance and before the traders on the floor become aware of the imbalance. If the above scenario is true, then we must come to some very simple and important conclusions about information that is distributed through the market and accepted without question.

The first thing we can throw out of our tool bag is bullish and bearish consensus. If the markets are doing their job (and they do it well), there can be no such thing as bearish or bullish consensus. Those who tout the bull-bear information get it by surveying a group of traders and asking them their opinion about the market. If, for example, they report a 75 percent bullish consensus in bonds, that means they haven't surveyed all the bears. The markets cannot endure even 50.01 percent bullishness before the price rises.

If there is no such thing as bullish or bearish consensus, then it logically follows that there cannot be any such thing as an oversold or overbought condition, even though analysts talk about it all day on CNBC-FNN and have an oscillator that supposedly measures it. How can it be measured when the market will destroy any oversold or overbought situations in seconds, well before the audience sees it on the TV screen?

Let's examine some other paradoxical misconceptions. Two often repeated formulas for successful trading are: (1) Buy low and sell high, and (2) To make profits, trade with the trend. These two statements are absolutely incompatible. If you buy low or sell high, you are standing in the way of the trend, not following it. And if you follow the trend, you are not buying low or selling high.

I agree with Mark Twain, who supposedly said, "I am less and less interested in what's so and more and more interested in not believing what's not so."

As we start eliminating these misconceptions, we can begin to see the market as it really is. Trading becomes a more profitable occupation when it is based on reality rather than on someone else's imagination.