Billions of dollars were made and lost trading commodities in 2006.

The financial press has a habit of comparing the relative performance of competing investments to let you know--with 20/20 hindsight--just where you should have placed your money during the previous year. But by whatever method performance is generally measured from January to December, the bottom line is it all boils down to timing.

You certainly could have been a buyer or a seller higher or lower than where the market is today, and today there’s not one market trading above its 2006 high. Many futures got ahead of themselves last year based on excessive optimism.

Consider the following. Here are the 2006 high prices, with date achieved, for a set of commodities futures contracts:

• March 2007 Sugar--18.54 cents, April 19

• February 2007 Crude Oil--$80.39, August 7

• March 2007 Copper--$3.61, September 5

• February 2007 Gold--$755, May 12

• March 2007 Silver--$15.02, May 11

• March 2007 Wheat--$5.60, October 12

• July 2007 Corn--$4.04, December 29

• March 2007 Sugar--11.09 cents, down 40 percent

• February 2007 Crude Oil--$56.31, down 30 percent

• March 2007 Copper--$2.53, down 30 percent

• February 2007 Gold--$607, down 20 percent

• March 2007 Silver--$12.23 down, 19 percent

• March 2007 Wheat--$4.70, down 16 percent

• July 2007 Corn--$3.84, down 5 percent

All commodities are currently below their 2006 highs, but sugar lost 28 percent on the year and oil lost 12 percent while gold gained 14 percent and corn gained 53 percent. How many analysts predicted in early January 2006 that oil would lose while gold would gain? Not many.

Let’s take a look at the closed-out Futures Market Forecaster trades for last year. Our most-profitable trade was in silver (sold at 14.04 on April 20 for a gross profit of $6,850 per contract traded), while our worst trade was in natural gas (sold at 8.45 on February 2 for a gross loss of $1,524 per contract traded).

We can continually learn from our successes and failures, so here are three of my mandatory rules for successful trading in the coming year:

Have no preconceived notions; the “experts” are often wrong. (The best trades are the hardest to do.) The news will always sound the most bullish at the top and appear to be the most hopeless at the bottom. This is why the technical tone of the market is so important. If the news is good, but the market has stopped going up, ask yourself why and then heed the call.

Bottoms can be the most confusing. The accumulation phase, where the smart money is building positions, can be marked by reactions, crosscurrents, shakeouts and false reversals.

After the bottom is finally in place, many traders will be looking for the next break to be a buyer. After all, the market has been so weak so long that the odds favor at least one more break, right? But it never comes. The smart money won’t let it. The “smart money’s” objective (after the bottom is in place) is to move the market up to the next level; therefore, the best time to be a buyer will often feel uncomfortable. However, the train has already left the station, and at some point, you need to have the courage to hop on for the ride.

Have a plan before you trade, and then work it. If you have a plan and follow it, you’ll be able to avoid the emotionalism that is the enemy of any trader. You must try to stay calm during the heat of the session and remain focused. In those unusual major moving markets (that occur rarely), you need to shoot for abnormal profits. This is one of the keys to success.

The next is that you must always limit losses on trades that aren’t going according to plan. This takes willpower and is as essential a quality as having plenty of money. In fact, it’s more important than having lots of money. Money isn’t to hold on with; that’s for the sheep, and you don’t want to be sheared. If big risks are required, don’t take that trade. Wait for an opportunity where you can place a tighter stop. Legendary trader Jesse Livermore told us he used to look for opportunities where he could enter very close to his risk point. That way his risk per trade was small in relation to the profit potential.

If you don’t have the willpower to take the loss when your mental risk point is hit during the trading session, then you must use stop loss orders. Simply place your stop at the same time you place the trade.

I have a plan laid out the night before I make a trade. I generally know what I’ll do if the market acts the way I anticipate and, just as important, what I’ll do if it doesn’t. If a market isn’t acting “right” according to my plan, I know it’s time to act, either to take the profit, if available, or cut the loss if not.

And remember this: There’s nothing better than getting out quickly the minute you perceive you’re wrong.

Buy the strong markets, and sell the weak. Looking at the above statistics, oil may look cheap in relation to corn. But there’s a good reason the only open position we own right now in the FMF Portfolio is long corn. When a market is cheap or expensive, there’s probably a good reason why.

Livermore told us he always made money selling short low-priced markets that were the public’s favorite and in which a large long interest had developed. Alternatively, he cashed in on expensive markets when “everyone” was bailing out because the public thought the market was high enough for a healthy reaction.

The public was selling soybeans short at $6 dollars per bushel in 1973 because it represented an all-time high, as well as technical resistance. Who could have guessed soybeans weren’t even half way to what would eventually be a record high at $13? Corn, although perhaps expensive by historical standards, still may be quite cheap going forward based on the new demand dynamics brought about by ethanol. It’s not the price that’s important; it’s the market action.

For the new year, I wish you good luck, but combine it with sensible trading.

© 2007 George Kleinman
Editor of Commodities Trends
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Risk Disclaimer

Futures and futures options can entail a high degree of risk and are not appropriate for all investors. Commodities Trends is strictly the opinion of its writer. Use it as a valuable tool, not the "Holy Grail." Any actions taken by readers are for their own account and risk. Information is obtained from sources believed reliable, but is in no way guaranteed. The author may have positions in the markets mentioned including at times positions contrary to the advice quoted herein. Opinions, market data and recommendations are subject to change at any time. Past Results Are Not Necessarily Indicative of Future Results.

Hypothetical Performance

Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.