Well trading is not a game of certainty (unless one has inside info as seen with gold shooting up $40 fractionally before the taper/un-taper FOMC minutes a few months ago), so it's about finding an edge and looking to exploit it. It's a 50/50 theoretical deal, and then looking for ways to improve that.
Obviously one 'bad' outcome would wipe out all the smaller gains, but again, having the risk capital in the first place is basically a prerequisite such that one can stay committed and not have arbitrary moves.
Regarding things like contango/backwardation, definitely those have to be considered. This would go under the 'add to commission costs' category, so one would need to not exit until a 'sizable' profit is attained, aka not just one tick then exit.
If coffee were to compress to say below .50/lb I still don't see how there wouldn't be enough volatility to capture a sufficient gain. Coffee does not keep obviously for so much time is another factor.
They've already got it separated into the different types of coffee, robusta and arabica.
Regarding the other factors, this is risk capital, and when I mean that I mean I already have other things stockpiled such as guns, food, precious metals, water filters, etc, so if something very unlikely were to happen such that market ceased to exist/price ceiling, I would not be out on the margin.
From what I've seen of coffee intraday, it has some big range days. Again, subjective things like patience to wait it out is not something I'd have as a deterrent, as again risk capital and the whole premise of the trade in the first place being the supply/demand reversion.
I would say I'd rather do it with something like crude oil if that were the only difference. But again, it still is about relative extremes. And I say this as someone who has reverence for volatility and fat tails and black swans. Part of what I would view as a solid way to go about this is wait for such a black swan to happen such that it is so compressed or what have you, and then it just increases the probabilities.
So the risk capital aspect is a huge criterion, as is just the notion that this is about daring something very extreme to happen. Commodities are already way beaten down, looking at things fundamentally, and when credit crunches start happening historically is when the debt ponzi central/commercial banking cartel turns the printers into overdrive.
I have no clue whether I'll ever do a trade like this. Even if I never do, if I wind up in the trading industry, I do know that I believe I'd be using setups at least somewhat in this framework of daring something 'extreme' to happen.
As I said elsewhere on this thread, I more so would be looking at long crude at 92 recently where it was, SL 90.50 (hits there 89 handle seems likely and more weakness/flush longs) first tgt mid 90s, second trailing stop 102-104, as I have indicators up there of 'unfinished business' (plus that 101-104.50 area was a persistent range prior to it breaking through late summer beneath 100).
Hindsight bias cannot be ignored, no question. Looking at it game theory wise, governments throughout history when in a bind print currency/dilute the coinage of real precious metal content. They don't let the malinvestments get punished and allow real price discovery. They kick the can until Detroit happens. I am a huge Austrian school econ guy, and study this stuff a lot.
It's one way to value invest, no doubt. It's not trading in the sense of scalping and whatnot. I just am always looking for what works, no matter how unconventional. No certainty ever, but that comes with the territory of trading.
just did a sample of doing the martingale setup with coffee. Say buy 5k worth of JO (coffee ETF) at 1/lb. Hard to say what upside tgt should be before willing to exit, but I'd say 2% at least for starters (this lot here is not the key one; but if it runs quickly in one's favor say 4% or so, take profit and consider it either a done deal with coffee and that one got something out of its oversold condition, or re buy lower to finance a long.
But continuing on, then say it goes to .9/lb. Buy 10k worth of JO so long 15k at basis of .9333. Need .93955, .9427, .952 to be up 100, up 1%, and up 2 %, respectively. And it's at .9 obviously starting out.
Keep doing this, and say it gets to .6/lb. You'd be long $75k total at a cost basis of .77329/lb, and down $16,500 on the account, and at this point it would be 80k worth at .6/lb. to keep going. And then basis is .683, and long 155k worth total.
need .697 to be up 2% from here, which is a sizable move up from .6 (16%).
It's all about looking for the retrace. And obviously it's different with an ETF to a degree vs. the KC future itself, as far as what profit target is enough to be worth it. Coffee was over 3/lb. few yrs. ago, so that is a huge factor prior to getting involved in a trade like this. Other option is to even widen out the distance between scaling in, or do it every .05/lb. instead of .10 it goes down.
The needed magnitude of increase is a big deal, no doubt, as it is going from .6 to .7 roughly for the B/E, as opposed to from the initial entry of 1/lb. where going from .6 to .7 is just 10% relative to initial position.
Gold retraced from 1180 to 1430 not long ago, which is a 21% retrace.
Being down 16,500 if it goes to .6 and one has done the doubling down and total long $75k doesn't seem horrible relative to what this trade CAN entail, but it's all about that sizable retrace. And have to have enough winners, too, to make it worth it over time as well, as this could take who knows how long and not have been profitable yet. Even if it does go from .6 to .7 and one makes the 2.1% or whatever, that is only +3100 profit on the initial 155k invested.
Doing this with something way beaten down (and a commodity at that) would have to be the case for me to consider it, no question. And total risk capital, nothing 'essential0. Or obviously one could just say that's it, that's my 75k, no more adding, but I'm holding and going to hang on for however long it takes. And it's not as though one is way down on the 75k total put into JO at that point where it is .6/lb. One still has the position and it's not like a gamble where there is no underlying asset, as it's just totally a new turn.
Interesting to actually do the math behind this.
Last edited by FreeMktFisherMN; December 11th, 2013 at 01:31 AM.