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Reminiscences of a Bean Trader or Why These Ain't Yo Daddy's Beans No-Mo
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Reminiscences of a Bean Trader or Why These Ain't Yo Daddy's Beans No-Mo

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Reminiscences of a Bean Trader or Why These Ain't Yo Daddy's Beans No-Mo

as the memorial holiday approaches and heralds in the dog days of summer for equities and debt, it is inevitable that a trader’s fancy lightly turns to thoughts of grains. over the years, untold fortunes have been made and lost during the summer grain markets. i have participated and traded in these markets for almost 40 years, starting in the soybean pit at the mid-america commodity exchange, trading 1 lot mini contracts, and on the floor of the chicago board of trade in the soybean pit. i then went on to trade 30 year treasury bond futures for almost 25 years, but when the bonds went to the screen, i traveled full circle and finished my career back where i started, but this time, as one of the largest traders in the bean pit.

just like the corn and wheat markets, the beans had changed dramatically from when i first stepped into the pit in 1979. the commodities markets were at one time, fragmented, inefficient, and dominated by heavy retail participation. busy summer markets would see runners lined up 10 deep trying to get retail orders into the pit to their filling brokers. the beans were both a technician’s and fundamental trader's dream. the commercials did manipulate the market, but for the most part, pricing was a value oriented phenomena that was the by-product of supply and demand. beans also charted well, because markets were more auto-correlated back then, and retail participation contributed to the self-fulling prophecy that drives ta.

my second time around however, saw a market dominated by commercials (hedgers) and commodity funds. in addition, there were now options on soybeans futures; and indexes and etfs were beginning to emerge. the result was the financialization of commodities. beans were now lumped together with other commodities into one asset class, even though each individual commodity had different fundamentals. in effect, beans were slowly losing their uniqueness, and price discovery and risk transference functions.

this perspective is important because it underscores how soybeans have changed and how a trader must adapt, so that his methodology is not anachronistic. given the near extinction of retail participation, and the almost total dominance of professional and algorithmic trading, it would be surprising to see biases and readily "available" cognitive reference points that are the providence of the retail trader, exert their influence on bean pricing. today's participants are commercials, funds, etf, indexers, and hfts. the change from a commodity to a financial instrument means that at times, price drivers for soybeans may have nothing to do with soybean fundamentals, and everything to do with their inclusion in the commodity asset class, instead. because of this phenomena, beans may be part of a risk-on portfolio, used as a a hedge against inflation, or negatively correlated with the u.s. dollar. what it also means is that you are competing against professionals in a relatively illiquid market. as a wise man once said, never play poker against a man named doc. before trading beans, one must consider if they really wish to trade against people who know their markets inside out, including the freight car loadings in kansas city each day.


general trading guidelines

one must understand: that traders operate at different time-frames, markets are interconnected, themes abound in markets, and that probabilities and departures from value govern trading opportunities

the trader who has the better (more complete) and more timely (current) analysis will enjoy the greatest edge and have the greatest success

the decision to trade and its management, flows from an analysis of price action

a trader must employ objective heuristics in decision making, and not allow stress, cognitive load, emotions, and bias, to non-linearly affect the process

a trader must strike a balance between profit maximization and loss mitigation by adjusting trade size and stop-loss levels, so that only an extreme event will trigger the stop. the goal is to keep losses in a predetermined range, and prevent getting stopped-out of a potential winner by managing expected value along with your p&l, allowing for a margin of error, so that you may stay-in-the-trade

a trader will develop a better feel for the market and gain an invaluable edge when he understands what is happening at time frames greater than the one he's currently trading



data input



themes

the recent upside break-out may have been nervous new-crop shorts spooked over potential shortages in the old-crop.
continued chinese demand would mean that the ending old crop stocks situation would remain tight and continue to support.

fundamentals

products/ crush -zm, zl
old crop/new crop spread
corn
seasonality

macro

u.s. dollar
crude oil
commodities-dbc
china- gxc

technicals

mp
vwap-daily, monthly
volatility- siv
zs daily- 15m

sentiment

cot
p/c ratio



causality can be difficult to identify because it is often very subtle, and causality can be misinterpreted because its too obvious and available. but, if one can understand the interactions of the individual factors and their effects on the system as whole, then one will be able to understand and identify, the higher order patterns that are the result of these interactions





sample workspace for trading today's beans


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Last edited by tigertrader; May 23rd, 2014 at 11:01 AM.
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Soybean Correlations


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china etf plotted against commodities

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bean volatility

monitoring bean volatility can be very helpful in timing the market and can be followed on a daily or intra-day basis, however, commodity vol is different from equity index vol because it is positively correlated with price as opposed to negatively correlated. this is because risk in the equity market is percieved to be to the downside and risk in the commodity markets is perceived to be to the upside



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old crop- new crop

july soybeans and meal have been the leaders to the upside however, the market faces both a wall of supply for the new crop season and a favorable start to the growing season. traders continue to wait to see just "how high" of a price for nearby soybeans will be necessary to assure that the market is fully covered for the tight situation for crushers during the June-August time-frame - crushers do not want to own any more old crop than necessary to meet meal commitments, when expectations are for a bountiful new crop.


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beans continue to be in an uptrend although they became overextended on what appears to be a demand related short squeeze that resulted in new highs and an bull-trap/fbo. falling volatility, weak corn & hogs, a rising u.s. dollar, new crop supply pressures, commodity weakness, and price elasticity, are all weighing on the price of beans as we head into the holiday. a continued pullback is likely, however there is always a standing caveat when it comes to being short the grains during the summer months, especially over a holiday weekend.




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Last edited by tigertrader; May 23rd, 2014 at 01:22 PM.
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@tigertrader ,

You've obviously got a terrific grasp of the bean market. It's very impressive to read your clear and comprehensive explanations of the factors driving price here.

I don't know anything about this market, but it's very enjoyable following your presentation and your logic, and it's making it a lot more understandable.

Thanks.

Bob.

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bobwest View Post
@tigertrader ,

You've obviously got a terrific grasp of the bean market. It's very impressive to read your clear and comprehensive explanations of the factors driving price here.

I don't know anything about this market, but it's very enjoyable following your presentation and your logic, and it's making it a lot more understandable.

Thanks.

Bob.

@bobwest

thank you, one has extensive experience at trading summer grains, so i will take the liberty to press home the point that there is often an inverse relationship that exists between what it takes to understand the intricacies of a market, and the skills that are necessary to be able to profit from it's daily vicissitudes and vagaries. arguably, the easier to understand markets, are often the hardest to make money in, and vis-a-vis, the harder to understand markets are where many more participants prosper. i would place es and zb in the latter category and i would place the grains and fx in the former. this i why you must bring your a-game to trade summer grains, and why you don't bring a play-knife to the bean-gunfight.

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