Playboy Plays the Commodities Market

Profits on the exchange are the treasures of goblins. At one time they may be carbuncle stones, then coals, then diamonds, then flint stones, then morning dew, then tears.

--Joseph De La Vega (1688)

Twelve years ago, one of the most successful amateur commodity traders in the country, a former psychiatrist, made his speculative debut in spectacular fashion. He gave his broker $5000, with detailed written instructions to buy wheat when the price reached a certain level and to use the profits to buy more at higher levels. Then--to avoid the temptation of changing his mind--he left for Trinidad for five months. When he returned, he had a profit of over $200,000 waiting for him. Perhaps he was psychic, or just lucky. But he did prove--at least in this instance--that novices can make a killing in commodities.

To the outsider--like our psychiatrist before his happy initiation--no speculative arena in the world appears as formidable as the commodities market. Those small-faced columns of type in the financial pages of the newspaper--replete with months, foodstuffs and indecipherable figures--provoke outright apprehension in even the most intrepid stock-market plunger. This scene, the uninitiated too often conclude, is for big-timers only.

Such an attitude is both unfortunate and mistaken. Those who make a living in commodities--from brokers on up to the governors of the big exchanges--are doing everything they can to dispel it. But myths die hard, and the myth of the big-time grain operator--privy to inside information, ruthlessly crushing small speculators as he makes millions in a few days by buying and selling carloads of a product he'll never see--is as persistent as it is false.

In fact, the commodities market is no more hostile to the small speculator--one cannot in conscience use the word "investor"--than is the stock market. A speculator is someone who has money and is willing to risk it in hope of making more. The greater the risk, the greater the potential return. Those who wish to invest--to commit money at smaller risk in hope of realizing proportionately small profits--probably belong in stocks. But those who wish to speculate--who have the money to risk, the brains to commit this money intelligently and the stamina to see their commitment out--probably belong in commodities.

The notion that commodities trading is exclusively the purview of wizened old veterans and horny-handed farm tycoons is especially unfortunate in that it tends to discourage young men from taking a plunge. Commodities trading is uniquely suited for the relatively young. An unattached young man is far more likely to have $1000 or so to venture in a situation where the potential gain (one-month profits of 100-1000 percent are not unheard of) justifies the risk. He has probably not yet reached that happy plateau from which he must seek the tax shelter of long-term capital gains. (Commodities profits--and losses--usually run up in less than six months. You just add them to your salary and pay regular income taxes on the lot.) And he is far more likely to have the time required to take an intelligent position in commodities and to have the independence and flexibility to see his position through, or retreat discreetly, when the heat is on.

The buying and selling of goods to be delivered in the future--which is what commodities trading is all about--may be as old as commerce itself. The basic idea is that prices fluctuate. Prices of agricultural goods--harvested one or two months a year but needed all year round--fluctuate wildly. Before the advent of organized futures trading, grain would sell for almost nothing when it was plentiful (usually right after harvest), then gyrate madly, according to the vagaries of weather, shipping, demand and what not. This pleased neither the growers (who often felt they weren't getting a fair price for their crops) nor the processors (who usually had to bid higher and higher for diminishing supplies of grain as the season wore on, and faced the risk of colossal inventory losses if prices plummeted). To escape this dilemma, growers began selling contracts for future delivery of goods at current prices. Such future-delivery contracts protected the farmer from losses that might occur if his produce were in oversupply (having already sold the goods, he didn't care what happened to prices after that) and protected the processor from losses he might incur if prices were to increase (having already purchased, he didn't care, either). In time, futures contracts became standardized and negotiable, and speculators leaped eagerly into the middle. If they thought the price of grain were going up, they would buy contracts to receive it, in hope of subsequently reselling the contracts at a profit. If they thought the price were going down, they would contract to deliver grain at current prices, in hope of fulfilling the contract at a cheaper rate.

The commodities market has become more formalized over the years, but the essentials haven't changed. Today, anyone with a reasonable credit rating and a modicum of loot (as little as $300 is required on some commodity contracts) can take a plunge. The odds are stacked against winning (three out of four trades lose money, according to the Commodity Exchange Authority); but if you follow a few basic rules, you can be reasonably assured of emerging relatively unscathed--and perhaps even wealthy.

Trading in commodities is no more difficult than trading in stocks. You simply call your broker and tell him what you want done. (More follows on selecting a broker and making a trade.) Obviously, you can't contract to receive a freight car full of frozen pork bellies the way you might buy a few shares of A. T. & T., then sit back and wait for them to appreciate. Sooner or later, depending on how distant your contract, you would face delivery of the goods. At some point, this nightmare bedevils all novice commodity traders; but, in fact, it's not worth the lost sleep. Fewer then one percent of all trades involve people who actually have the goods or are willing to take them. The rest are speculators like yourself. Even in the highly unlikely event that you find yourself still holding a contract after the date on which you may receive notice of delivery, there are many ways to extricate yourself.

Since you can't hold commodities for the long pull, they are not--in the classical sense of the word--an investment. They are a speculation--and an exciting one. In many ways, commodities better lend themselves to intelligent speculation than do stocks. Since there aren't nearly as many commodities as there are stocks (active futures trading is confined to fewer than 25 basic products), in selecting your trade, you do not have to sift through such a wealth of data. A stock trader, for instance, might be reasonably certain of the general direction of the Dow-Jones industrial stock average; but unless he buys all 30 stocks that comprise that average figure, he can't cash in on his knowledge. No matter how good his awareness of the general trend in stocks, he still finds himself frustrated by crosscurrents in individual stocks among the 1200-plus now traded on the New York Stock Exchange alone. The individual stock represents such a small fraction of the market that it can easily move against the trend--either through sheer perverseness or through back-room manipulation.

In commodities, each stock is a market in itself. Once you understand wheat, you don't have to go on to understand an individual stock--you already do. Since there are only two dozen commodities of any real significance, it's at least possible (though not recommended) to keep an eye on all of them at once. While specialized, the markets in individual commodities are hardly small. One day's transactions in wheat alone often exceed in dollar volume a whole day's trading on the New York Stock Exchange.

In commodities, the margin--that percentage of the purchase price you must put up to make the purchase--is breath-takingly low, as little as five percent, compared with 70 percent currently for stocks. This means you get tremendous leverage: At a five-percent margin rate, you can buy $10,000 worth of grain for $500. If the price goes up just ten percent (as it often does in just a few weeks), you make $1000--a 200-percent return on your investment. Of course, you can lose that much just as quickly.

Commodity orders are executed much more rapidly and in much larger numbers than stocks, which means you can buy and sell relatively large quantities without adversely affecting the price structure. Since all commodity prices are established, in the various exchanges, at open outcry (analogous to a public auction), there's less likelihood of getting an order filled at an unfavorable price--as happens all too often in the stock market, where prices are established not at auction but through "specialists," whose job is to moderate price swings.

In the U. S., futures trading actually takes place in more than 50 commodities, but only half of these are of any real interest to the speculator. These divide into four basic categories. Grains include barley, corn, flaxseed, oats, rye, wheat and--even though they're not a grain--soybeans. Most grain trades take place in Chicago, on the mammoth Chicago Board of Trade, where almost 75 percent of all commodities transactions occur. You can also buy various grains in Minneapolis, Kansas City and Winnipeg. Most grain contracts are for 5000 bushels (see chart on pages 118-119). Animal products include live and dressed cattle, fresh and frozen eggs, hides (for shoes) and frozen pork bellies--from which bacon is sliced. The contracts vary in size. Except for hides, all of these are sold on the Chicago Mercantile Exchange, feisty and volatile younger brother of the Board of Trade. Hides are sold at the Commodity Exchange, Inc., in New York. Metals include copper, lead, mercury, platinum, silver and zinc, also traded at the Commodity Exchange. The rest, mostly plant products, comprise cocoa, coffee, cotton, frozen concentrated orange juice, Maine potatoes, rubber, sugar and wool, all traded on various exchanges in New York.

Prices are generally recorded in cents per unit--bushel, pound, ounce or whatever lowest selling unit the commodity best suggests. A newspaper price of "173 1/2" for Chicago December wheat, for example, means that wheat for delivery in Chicago next December is now selling at $1.73 1/2 a bushel; "167.50" for June silver means that silver deliverable next June in New York is now selling at 167.5 cents per troy ounce--$1.675, if you will. A price of "27.01" for July 1968 cocoa means that cocoa beans for delivery in New York during that month are now selling at 27.01 cents a pound. Financial papers usually record the opening price, the high for the day, the low for the day, the closing price and the change the closing price represents over the previous day's close. Looking at the newspaper listings, you will see that futures contracts are not sold for every month. Usually there are six contract months in a year, sometimes fewer or more, depending on harvest patterns and producer needs. From time to time, the exchanges will add a new contract month or eliminate one in which trading is no longer active.

The exchanges themselves are simply places where buyers' and sellers' representatives gather to conduct their business. Most exchanges have both the allure and the acoustics of a high school gymnasium. Trades are accomplished through those traditional bulwarks of the free market: hand waving, shouting and jumping up and down. These activities are wisely confined to small arenas comprised of concentric octagonal rings. Because of their kinship to the holes in the ground in which commodities were first traded, the arenas are still called "pits."

Selecting your commitment--and doing the study required to make it a good one--is, of course, the most difficult part of the game. Decidedly the easiest way to learn about a commodity is to take a position in it. It is astonishing how interested you will become in Chicago July wheat once you have contracted to receive 20,000 bushels of it. The weather in Kansas, ice floes in the St. Lawrence, the Food for Peace program, bumper crops in Australia, drought in India, turmoil in China--all these take on an intimately personal relevance when hard cash is at stake. While this is the easiest way to learn about commodities, it is certainly not the most profitable, because you should have done your homework before entering the market, not after.

Ideally, the novice who plans to go into commodities should spend weeks--even months--getting the feel of the action before he makes his first trade. If he has some prior experience in stocks, he already knows the value of The Wall Street Journal--which is certainly the finest financial newspaper published in the U. S. today, and whose front page alone often contains more significant news than can be found in most big-city dailies. It's a must for persons seriously interested in profiting from any market.

While the Journal will provide you with a broad and easily digestible picture of world events and their relation to business and the market place, its commodity coverage is regrettably sketchy. For this reason, virtually all serious commodity traders also read The Journal of Commerce, a daily newspaper published at 99 Wall Street. Half of the JC is devoted to shipping ads of little consequence to anyone except exporters and smugglers, but the rest is made up of commodity news and penetrating economic reportage.

A wealth of commodity "advisory services"--well over 100 of them--publish weekly newsletters telling you how you can double or triple your money in a dazzlingly short time. The old counter "If they're so smart, why aren't they rich?" probably applies here, except that in commodities there's a legitimate answer. So much of successful commodity trading depends on self-discipline that it's quite reasonable to encounter veteran traders who, like Alice, dispense very good advice--but can't follow it. Doubtless, some of these have fallen into the advisory game. In the aggregate, however, the services make many more losing recommendations than winning ones, which makes them no better than individual speculators, who do likewise. A good service will at least provide information you can't secure elsewhere; and this alone, recommendations aside, might be worth the price of admission--which is rather steep, often running up to $150 a year. Most services offer a free sample newsletter, or a month's subscription for $5, so little is lost in trying them. There are so many, viewing the commodities market from such varying angles, that perhaps you'll find one that suits you.

Once you've familiarized yourself with the workings of the market, you can begin trying to outguess it. There are two basic methods of determining how commodity prices will move: fundamental analysis and technical analysis. The two are certainly not mutually exclusive, but the most rabid proponents of each tend to divide, for reasons unknown, into hostile camps.

Fundamental analysis is the more straightforward of the two. Its assumption is that once you understand all the supply and demand factors at work--the fundamentals--you will know which way the price of a commodity will move. There are several difficulties here. First, few people can agree on just what the fundamentals are or, even if they get past this, on what they mean. A bull (one who thinks prices will go up) and a bear (his opposite) can look at precisely the same figures and reach contradictory conclusions. And, in the highly unlikely event that they agree on what the fundamentals mean, there's still no real certainty the market will follow.

Relying mainly on the reams of data emanating daily from such sources as the Department of Agriculture, fundamentalists compute the potential supply for the year (adding imports, exports and leftovers from previous years) and weigh this figure against what they think the demand will be. Then, bearing in mind seasonal price patterns that tend to repeat themselves in most agricultural commodities and even in some nonagricultural ones, they compare the current price with prices in previous similar years. All this supposedly tells what the current price will do--and often enough it does. Government price supports--and Government-owned surpluses--muddy the waters somewhat in corn, cotton, oats, rye, soybeans and wheat (to name a few), but less and less so as world shortages mount and farm surpluses disappear. Except in cotton, in fact, there are no more surpluses to speak of, a revelation that has yet to penetrate most newspaper editorial writers.

Since they have their eyes on the facts, fundamental traders can sometimes profit from special situations. Anyone who read the newspapers last spring--or who examined the coins in his pocket--could have sensed that the Treasury was running out of silver. Ultimately, the Government would have to stop selling it to all comers at $1.29 an ounce. This finally happened on May 18--and in the next ten days or so, silver rose more than 30 cents an ounce. A speculator farsighted enough to buy a 10,000-ounce silver contract just prior to May 18 would have seen his $700 investment grow to more than $3500 in one exciting fortnight.

The great advantage of trading on the basis of the fundamentals is that you need not make the effort--easily transformed into agony--to watch day-to-day price movements. Fundamental analysis locates long-range price trends. If in your heart you know you're right, you can just wait it out. This was precisely the course followed by our psychiatrist friend, who parlayed $5000 into $200,000 while basking in Trinidad. He had deliberately repaired to a village lacking telephones and newspapers. "I couldn't have sweated it out if I had to watch the prices every day," he says. "I would have sold out too soon, or perhaps over-pyramided and been wiped out on a minor setback." The fact that wheat moved up almost a dollar a bushel in his absence didn't hurt, either, and testifies to his sound assessment of the fundamentals. Of course, had he been wrong, he would have lost most of his $5000.

Technical analysts avoid the fundamentals wherever possible. They reason that since all factors affecting the market are reflected in the market's price movement, the best way to locate the trend is to study the price movement itself, through charts. The most popular is eloquently called a "vertical line chart" (see chart below). On the chartist's graph paper, price is read from the horizontal lines (usually in eighths of a cent), and each vertical line represents a trading day. Every evening, the chartist draws a line between the day's highest and lowest prices, and then for good measure, adds a dash to indicate the closing price. (For those unwilling to compromise their time even to this extent, scores of services offer filled-in charts, for every commodity, air-mailed each Friday night.) If the chartist reads his drawings correctly, so the theory goes, the market, reflecting all the fundamentals, will itself tell him what it is going to do.

This is a beautiful theory, not only because it obviates the depressing prospect of having to read magazines such as Feedstuffs and Hampshire Herdsman. The true technical analyst, in fact, does not want his mind violated by a single fundamental. He reasons that any news he might hear would prejudice his reading of the charts, which already reflect the news. If it were possible, the technical purist would prefer to plot price movements without knowing what the price is or even which commodity he's following.

Chart trading is far from an occult science. A good deal of common sense supports it. Of course, as with fundamental analysis, different temperaments can interpret the same charts differently; and even when they agree, the market can still rumble off perversely in the opposite direction. But there is a surprising number of recurrent chart patterns that do seem to indicate where the market is heading. Consider the triangle in the chart shown. This is a rather common formation. The progressively narrowing price range indicates that all potential buyers and sellers have gradually been cleaned out of the triangle area. When the price does move beyond the bounds of the triangle, it can be expected to break sharply above or below the base lines--since there are presumably no buyers and sellers left inside. Chart traders look for such formations (there are dozens of different types, of relative degrees of certitude); and when the price breaks out, they will buy or sell, depending on their assessment of the basic trend of the market. In fact, after breaking out of its triangle on January 24, the corn plotted on the graph ran right off the chart the next day, closing at $1.42.

If you still think chart trading is properly classed with necromancy and astrology, bear in mind that there are thousands of chart traders buying and selling daily. Right or wrong, they are staking hard cash on their divinations; and by their very number, they can often make the market conform to their charts.

One of the most interesting--and least explored--aspects of technical analysis is that chart techniques seem to work equally well when applied to virtually any nonmathematical sequence of numbers. You can plot flips of a coin, red and black wins in roulette--even pure, random numbers. In each case, your chart will show marketlike action: congestion areas followed by breakouts, line trends punctuated by "typical" reactions, even an occasional "panic." This leads to the conclusion that the judgment of the market place, supposedly a precise evaluation of the considered opinion of a universe of intelligent buyers and sellers, is actually governed by the vagaries of sheer chance. This is a very pleasant and democratic way of looking at the market: Besides explaining what is otherwise unexplainable, it gives everyone an even break.

The fundamental and the technical approaches are strikingly different. The results one can expect to obtain from each are just as dissimilar. Generally, the fundamental trader will catch larger price moves, because he will hit them closer to the extremes and ride them farther. Chester Keltner, a fine fundamental grain trader who lives in Kansas City (and publishes an advisory letter there), once took a profit of 85 3/4 cents a bushel in a single position in Chicago May wheat--about a $4300 profit on each contract (then selling at $500). He himself admits he never could have made such a profit had he been technically inclined, because the charts would have told him to sell prematurely.

The drawback is that the fundamentalist must be able to stand large losses. Because he doesn't follow the daily market trend, he may make his move too early. No matter how sound his assessment, he may have to sweat through disastrously unfavorable action--losing literally thousands in the process--before the market finally vindicates him. Unless he has real confidence in his plan--and the cash to back it up--the market may prove him wrong.

If he plans his trades correctly, the technician never faces the prospect of huge losses. When he decides the market is going to move, he gets in. If he's right, well and good. If the market goes against him, he gets out immediately, at a small loss. The big danger he faces is not in many small losses (which one reasonable profit will more than cover) but in taking his profits too quickly. Attuned to every market move, the technician tends to see each minor setback--which wouldn't perturb the implacable fundamentalist--as heralding a larger sell-off.

Working for the technician, however, is his utter disregard for value. Thomas Lodge's maxim ("Buy cheap and sell dear") is anathema to the chartist. Since he follows the price trend, he much prefers to buy dear and sell dearer, or sell cheap and buy back cheaper. A successful chart trader--in the course of a few weeks--might buy soybeans at $2.16 a bushel, sell them on a minor reversal at $2.19, buy in again at $2.22, sell out when the market hesitates at $2.26, then buy back again at $2.30 and ride it up to $2.34. This sort of jockeying strikes terror in the soul of the fundamentalist--who usually finds it difficult, once he has sold out of a position, to buy back into it at a higher price--but as long as the technician's method works, and it obviously does, his fundamental cousin can't criticize too loudly.

A very reasonable trading method would be to combine the best aspects of both techniques. This would involve using the fundamentals to locate potential long-range price moves, and then using charts to limit losses by determining the precise time and place to make the trade. Unfortunately, the two techniques appeal to such different personalities that one would have to approach schizophrenia to master them simultaneously.

Somewhere in the nether world between the fundamental and technical approaches lie the mechanical trading rules. These attempt, by precise mathematical means, to provide infallible guides to profitable trading. Most of them have no merit at all; but some, especially those that try to take advantage of price trend, are worth considering. Most trend rules try to formulize what the chartist does instinctively. The rules determine which way prices are going and point out places to buy and sell. They are much too complicated to consider here; but if you are seriously interested in them, you should refer to Keltner's How to Make Money in Commodities, which treats several of them extensively--including one that would have produced profits in nine out of ten years (1950-1959) in soybeans, for a total net gain of $21,354 on a $1000 margin account. Keltner wisely points out that such rules can also rack up a distressingly large number of small losses. What proved a golden rule in soybeans, for instance, once produced 13 consecutive losses in wheat--in less than three months. During this debilitating setback, most traders would probably have thrown the rule out the window and perhaps jumped out after it--no doubt just when a hefty profit was imminent. Trading mechanically takes money; but it also takes stamina, reserves of which are often thinner than one's billfold.

There are also trading rules--if rules they can be called--that are fundamentally oriented, in that they try to capitalize on seasonal price swings. A well-known story tells how a successful grain trader's "secret" was found, after his death, among his effects. The secret (according to Gerald Gold's Modern Commodities Futures Trading) was simply a scrap of paper, on which was written:

Buy Sell

Wheat January 10

February 22

May 10

July 1

September 10

November 28

Corn March 1

May 20

June 25

August 10

This "system" is now known as "the voice from the tomb" and, according to Gold, some traders still regard the dates as important signposts--perhaps with good reason, since in the first two months of this year alone, $1000 invested on this cryptic tip would have yielded a profit, after commissions, of over $800.

While you are getting the feel of the market, you might start looking for a broker. If you have responded to newspaper ads offering samples of various brokerage-house market letters, rest assured that client-hungry brokers are already looking for you. Finding a brokers, you will learn soon enough, is no trouble at all; finding a good one is another problem altogether. Good or bad, he should work for a firm that has a membership in (or a connection with) all the big exchanges. This is just to assure you rapid execution of your orders. Most large brokerage houses qualify.

It is a sad but certain fact that all too many commodity brokers are themselves washed-out traders. Having run through their personal fortunes, they find themselves reduced to running through the fortunes of others. Their presence underscores the element of compulsion--even addiction--still associated with the seamier side of commodity trading. Frank Norris had noticed this as far back as 1903, when he published The Pit, a novel whose quaint Victorianism clashes charmingly with its exploration of the gritty mechanics of a wheat corner. Even in Norris' time, unstable elements among the relatively well to do were drawn to commodities with the same insistence that their cousins among the relatively poor are drawn to the horses. It may take years for a facile incompetent to run through a fortune in commodities. But having done so, and presumably having learned something (though manifestly not enough) in the process, he has little recourse but to become a broker. Perhaps he will become a good one--though there is small evidence that his inability to handle his own money qualifies him in handling that of others. A good broker, one who can consistently take money out of the pit, will not long remain a broker. Why should he? Why should he sit in a board room day after day staring at figures and answering hate calls from disappointed customers, when he could instead be making money for his personal account?

Many of the successful young men in commodities--brokers or otherwise--view with suspicion anyone who has been in the game more than 10 or 15 years. Commodity trading up through the early 1950s was more a carnival than a profession. The fabled exploits of many of the biggest plungers of that era often unfolded in the razor-thin no man's land that separates capitalist derring-do from outright fraud. These operators have now gone to their rewards--in jail or in Brazil--and their acolytes who are still active are, naturally, a trifle suspect.

No matter how sound your broker's market advice, you should not take it as gospel. The myth that since a man spends ten hours a day in the board room living and breathing commodities, he obviously knows more than you do, simply doesn't hold up. In fact, the board room is the very worst place from which to assess the market, as any good broker will tell you. Rumors flourish in the board room the way sores fester in the tropics. Those who watch the market most closely--the brokers and the market analysts--usually succumb to the all-too-human impulse of overemphasizing the news that supports what's currently happening. When the market is rising, tape watchers subconsciously play up the good news and discount the bad. This is a cumulative process, building up in increments of ever-rosier optimism as prices continue to climb. It causes brokers and analysts to be most bullish when the market is about to turn down and most bearish when it is about to turn up. Free advice is worth just what you pay for it--nothing. Be suspicious of all advice, but be especially suspicious of advice from brokers.

As you familiarize yourself with the market, you will become less dependent on your broker even for hard information; but you will rely on him more and more to execute your orders precisely. The mechanics of trading are relatively simple, but occasionally confusion, laziness or ignorance--on the part of either broker or trader--can compound with disastrous results.

One area of confusion centers on the margin requirement. It is perhaps the least understood aspect of commodity trading. It is often rather tenuously compared with the stock-market margin, but the two are so dissimilar that there is no parallel. In stocks, the margin is the percentage of the cash value of a security on which brokers are allowed to lend money. When the margin is 70 percent, as it is now, you can buy $1000 worth of a stock for $700. Your broker lends you the rest--at interest, of course--keeping the purchased shares as security.

In commodities, your broker lends you nothing, so you pay no interest. The "margin" in commodities is similar to the earnest money you would put down in a real-estate deal. It binds a contract for goods to be received in the future. As in real estate, full payment is not expected until you actually take possession--decidedly an unlikely event in commodities. While the value of your contract fluctuates, your earnest money must remain constant.

Say you buy 5000 bushels of Chicago December wheat at $1.85 a bushel. The minimum customer margin requirement for wheat, set by the various exchanges, usually with the blessings of the Commodity Exchange Authority, is now 15 cents a bushel. Perhaps--if you are a new customer of indeterminate means--your broker will require a few cents more, to give his company breathing space. At 15 cents a bushel, you must put up $750 to bind your contract. You are agreeing to receive a freight car-load of wheat--at $1.85 a bushel--sometime next December. You put up money to show your good faith--and your solvency, should wheat decline and you find yourself committed to buy at a price above the market. If the price does go down, say, 5 cents a bushel, you have lost $250. Your earnest money is no longer adequate, and you will receive a "margin call" for more. In practice, you have a few days' breathing space; but unless wheat rallies quickly, the margin call means you have to cough up $250 or be sold out.

It's usually unwise to meet a margin call, but say you do and then the wheat rallies. When it gets back to $1.85, your contract is worth $250 more than is needed to secure it, and you may withdraw that much. Thereafter, if the wheat goes up another 10 cents a bushel, your contract would then be worth $500 more than is needed, and you could withdraw that, too. In fact, you can keep withdrawing profits as long as you make them.

Short selling is another market enigma, perhaps once again because of confusion that washes over from the stock market. To make a short sale in commodities, you simply contract not to receive the goods but to deliver them, at some future date. You do this in expectation that prices will fall, enabling you to meet your obligation at a lower price sometime before you're expected to deliver.

Most Americans view short selling in stocks as somehow tainted. "How can you sell something you don't have?" they ask, ignoring the fact that magazines do it whenever they sell a subscription. Perhaps a slightly more sophisticated objection is that it's somehow un-American or immoral to profit when the value of American industry (which is presumably reflected in its shares) deteriorates. The Internal Revenue Service and the Securities Exchange Commission (which regulates stock sales) implicitly recognize the immorality of short selling in stocks and refuse to grant short sellers the tax shelter of long-term capital gains. Short sellers of stocks are also required to pay any dividends that may be declared on the shares they are short, and the SEC insists that short sales be made only on "upticks"--which means you can't sell a stock short until it is rising, which is certainly not the best time to be a seller.

Short sales in commodities may be made at any time. There are no tax penalties and no dividends to pay. In fact, morality in commodities favors the shorts. They, after all, are hoping prices will go down. They want cheap grain, so cheap that everyone can eat. It's the longs--the buyers--who are on the side of starvation. The shorts want superabundance, grain in such excessive quantities as to stuff every starving Indian. It's interesting that the dreams of the one-world liberal and the short-selling commodity speculator should so nicely coincide. Moreover, in commodities there is only a small logical leap between the long and the short side. There seems little substantive difference, for instance, between buying something you don't want and will never receive and selling something you don't own and will never deliver.

But despite the overwhelming case--moral and otherwise--to be made for the short sale of commodities, the speculative public is invariably biased toward the long side. That is, they prefer to be buyers. This is unfortunate, at least for the speculative public. Perhaps it explains why so many small investors regularly lose such large sums in commodities. Bear in mind that for every contract purchased, someone else has to sell one. Futures contracts always involve two parties. For every long in the market, there is a short. While stock prices favor a long position by tending to rise in the long run--due to inflation, increased productivity or progress generally--commodity prices do not. Improved agricultural productivity generally means lower commodity prices, so much so that the long-range trend in commodity prices is sideways--or even down. The Commodity Research Bureau price index of 25 commodities futures--based on a 1947-1949 average of 100--recently stood at 87. During the same period, the value of an average share on the New York Stock Exchange had risen from $9 to $51. While there is no long-range bias toward a long position in commodities, this information does not seem to penetrate the speculative public, who are inveterate longs. Since the public is biased toward the long side, and since the public is usually wrong, then a short position--all other things being equal--is more likely to show a profit. Even if it doesn't, you at least have rectitude on your side.

Once you've located a broker, opened an account and deposited the necessary margin, you'll find that placing an order is relatively simple. (Often, in fact, the difficulty is in refraining from placing an order.) You simply call your broker and tell him what you want done. The simplest of instructions is a market order: You tell your broker to buy or sell at whatever price prevails. There are also all sorts of limited orders, the best-known being the stop-loss order, often called a "stop." This is an order, to buy or sell at the prevailing market price only after the market touches a certain level.

Stops are especially useful to technically oriented traders, who, after studying their charts, might decide that oats will run away as soon as they break out of their current price range. Rather than checking the price of oats every few minutes, for days or even weeks, the chart trader would decide precisely to what level oats would have to rise to indicate a breakout, and then instruct his broker to enter a "stop-buy" order at that level. When oats finally touch the designated price, the trader's limited order becomes a market order, to be filled immediately at the best price available.

Stops can also be used to protect profits. Say you purchased 5000 bushels of soybeans at 282 ($2.82 a bushel) and the price has risen to 305. You have a profit of 23 cents per bushel--$1150, not bad. You suspect soybeans may continue to rise, and if they do, you want to ride with them. However, they have run up rather sharply and may turn around with equal exuberance, in which case you would want to get out in a hurry. Here you would probably decide to enter a "stop-sell" order two or three cents below the current market price, say, at 303. If the beans did begin to collapse, you would be sold out automatically, and most of your profit would be preserved. If the beans kept rising, your profits would rise with them, and you could advance your stop periodically, always trailing the market by two or three cents. When the beans finally did turn around--and they always do--the market would sell you out automatically, at a cozy profit, indeed.

There are many varieties of limited orders, and your broker is probably capable of complying with virtually any order he can understand. One of the more common types is the MIT (market if touched) order, more or less the opposite of a stop, requesting to sell at the market if it runs up to such-and-such a price, or buy at the market if it runs down. MIT orders, favored by fundamental traders, are especially useful in getting in or out at a good price. Another common limited order goes by the suggestive acronym FOK (fill or kill), also called a "quickie." The trader sets his own price; if the order can't be filled immediately at that price, it is canceled.

Besides normal buying and selling transactions, there's almost an unlimited number of arbitrage possibilities. Arbitrage, in the stock trader's speculexicon, describes the simultaneous purchase and sale of two different, but related, stocks. A big-time stock trader can occasionally take advantage of intermarket aberrations--by buying, say, 10,000 shares of General Motors on the big board at 78, while simultaneously selling the same amount on the Midwest Stock Exchange at 78 1/8. The profit (not subtracting commissions and taxes) would be $1250. You can make similar transactions between a common stock and its warrants (the rights to buy it, which are sometimes traded themselves) or between a common stock and its convertible bonds. Unfortunately, you may need a real boodle--in the example above, well over $500,000--to trade in quantities large enough to make such deals worth while.

In commodities, an arbitrage transaction is called a spread or a straddle. The two terms are generally interchangeable, but old-timers like to use "spread" when they're talking about grains and "straddle" when referring to anything else. For reasons that will be explained below, the cost is much less than a comparable transaction in stocks. In fact, it's actually cheaper to set up a commodity spread than a normal, one-way transaction. And since commodities are interconnected by a vast variety of subtle relationships, only your imagination, your bank roll and the Commodity Exchange Authority limit your horizons. The purpose of a spread transaction is to take advantage of price disparities that grow up between related commodities. The assumption is that sooner or later a more normal relationship will prevail.

The most straightforward of spreads involves the same commodity in different months. A glance at the newspaper statistics will reveal that in most commodities, the more distant months become progressively more expensive. This is quite reasonable, because the distant futures represent the price at which you can buy, today, goods to be received some months hence. Until delivery, storage costs are borne by the seller. Thus, in a hypothetically normal market, the distant futures should increase in value over the current cash price (often called the "spot" price) by a sum precisely equal to the carrying charges--the cost of storage, insurance, periodic inspection and what not. The monthly carrying charges for each commodity have been carefully computed (it's currently 2 3/4 cents a bushel for wheat, for instance, and 19/100ths of a cent per pound for cocoa), and this computation should be reflected in the distant future price.

Usually, however, extraneous factors--impending shortages or surpluses, a new Government crop-loan program, or a whole galaxy of others--send the hypothetical normal market into disarray. Spreads are set up to capitalize on such disarray. Speculators buy one month and sell another, betting that the spread between the two will widen or close.

One of the most interesting spreads occurs on those rare occasions when there actually is a "normal" market. When July wheat is selling at a premium of 11 cents a bushel over March, the July price fully reflects the carrying charges--four months at 2 3/4 cents a month. In such a case, there is literally no risk in selling the distant month and buying the near month. This is because the mechanics of the market place will prevent the distant month from ever selling at more than 11 cents over the near month. If this were to happen, owners of grain elevators--or anyone else, for that matter--could make a profit simply by buying March grain and simultaneously selling July. They could receive the March grain, hold it for four months, make delivery against their July contract and still make a profit.

Such a tidy situation doesn't usually present itself; but as the premium for distant months approaches the carrying charges, spreads that "sell the charges" (that is, sell the distant month and buy the near month) become progressively more attractive. If you look hard enough, it's not unlikely that you'll discover a spread where the risk is only one or two cents a bushel--and where the potential profits are limitless. The threat of an immediate shortage could send the near month (which you purchased) into orbit, while the distant month (which you sold) might remain constant, or--if it reflects next season's crop--it might even plummet, reflecting possible surpluses caused by farmers reacting over-enthusiastically to current high prices.

There are many other types of spreads. You can take advantage of price differentials between different markets (buying Chicago July wheat and selling Kansas City July wheat, for instance); between related commodities (buying December oats and selling December corn--since the two are virtually interchangeable as livestock feed); between a commodity and one of its by-products (selling September soybeans and buying September soybean oil); or even capitalizing on such an apparently tenuous relationship as that which ties the price of hogs to the price of corn--on the theory that if corn becomes inexpensive relative to hog prices, farmers will tend to indulge their pigs, rather than slaughter them, until a more favorable relationship prevails.

While the possibilities for spreading are many, they all share the basic characteristic of limiting your risk. Having sold March soybeans and bought November, the speculator doesn't care whether the beans go up or down--as long as the gap between his buying price and his selling price narrows. On January 3, 1967, for instance, you could have sold 5000 bushels of March soybeans at 293 and simultaneously purchased 5000 bushels of November beans at 280 1/2. (This, incidentally, was an "inverted" market. The distant futures were cheaper than the near ones--reflecting scarcity in the actual supply on hand and fears of abundance in the next crop.) Seven weeks later, on February 14, you could have canceled the spread, buying 5000 March beans at 285 1/2 and selling 5000 November at 276. You would have lost 4 1/2 cents a bushel on the November transaction but made 7 1/2 cents on the March--for a net gain of 3 cents a bushel, or $150, less commissions of $24. This may not seem a great deal, but it's still over 25 percent, in less than two months, on your $600 margin--and made at a time when the cash price of soybeans dropped more than 10 cents a bushel. Had you simply taken a long position in soybeans on January 3, you would have lost--assuming you stayed around to endure it--over $500.

Because spreads limit your risk, margins and commissions are proportionately less. Commissions on a spread are usually not much more than the commission on a single transaction. Margins are much less than would be required on two unrelated transactions--usually less than that for a single transaction. In fact, at least one national brokerage house requires no margin whatever on spreads. You can actually spread a million bushels of soybeans--simultaneously contracting to receive and to deliver goods worth in the aggregate well over $5,000,000--for the niggardly sum of $4400, representing only the commissions on the transaction. And you don't pay the commissions until after you've lifted the spread. Applying capitalist initiative of this sort to our soybean example, the profit, subtracting commissions, would have been $25,600--in two months, on an investment of literally nothing. While such a transaction is theoretically possible, no sane broker would have let you--or his firm--into it. Yet it's something to consider, at least in a truncated version, after you have established your credit and built up a trading account.

Besides its widows-and-orphans investment advantages, spreading can also be used to beat Uncle Sam--legally, of course--by carrying short-term profits into long-term capital gains. If you are fortunate enough to face problems such as this, you are well advised (and you can certainly afford) to consult a good tax attorney. Tax law governing large-scale commodity trading is, indeed, a thorny thicket, which novices enter only at their peril.

While there are many "systems" that supposedly permit one to win consistently in commodities--ranging from the engaging simplicity of "the voice from the tomb" on up to the most esoteric of fundamental or technical methods--it should be apparent that none of them works for long. No matter how good the system, when too many people start using it, the mechanics of the market place will crush them.

Systems don't work, but principles do. All successful commodity traders follow a few basic principles. Applying them is more a matter of self-mastery than of market sophistication. There are many wealthy commodity traders today who don't know a frozen pork belly from a flagon of mercury but who profit year after year because they have the psychological attitude that separates the winners from the losers.

To win consistently, you must admit that you will make mistakes--not just a blunder here and there, but mistake after mistake after mistake. It is difficult to admit that you are wrong. To admit it when hard cash is at stake is even more difficult. To take a $500 loss, when there's always the prospect that the market will reverse tomorrow and give it all back to you, requires monkish implacability. But it is essential.

To win consistently, you must enter the market with a plan. Whether it's based on fundamental analysis, charts, an old trader's system or whatever, is not particularly relevant, so long as you have a plan. Once you have a plan, you should enter the market only when it promises to give back more than you risk. Good poker players do this instinctively, weighing the odds between the pot and their bet, their cards and the draw. When the odds favor them, they get in. Commodity trading is a colossal poker game. Many people will ante into the pot and a very few will rake in the chips. As in poker, if you consistently play the odds and if you can afford to stay in long enough, you're bound to win.

Of course, as in poker, you should never risk money you cannot afford to lose; and even within this stricture, in commodities it is seldom wise to commit all your money to one trade. Even the best of trades may not work out; and if you pyramid your profits, you may find yourself risking ever-greater sums in ever-more-ambitious campaigns. The losses you do take will be whoppers--at the expense of hard-earned gains. If you just plow 10-30 percent of your profits back into your trading account, in the long run you'll have the satisfaction of having enjoyed your winnings.

If you're a winner, when the market runs against you, you'll admit your plan was wrong and get out. If you decide to buy wheat at $1.65 a bushel, in expectation of its going up to $1.80, you shouldn't stay around if wheat drops below $1.62 1/2. Your plan was wrong and must be abandoned--at a small loss. Many of the most successful traders take losses on 60 percent--sometimes even 75 percent--of their trades. But when they buy wheat at $1.65 and it does run up to $1.80, they have recouped enough to cover a dozen one-cent mistakes and still give them a profit.

The attitude of the losing speculator is precisely the opposite. In fairness to losers, this is understandable. It is normal--though mistaken--to let your losses run and take your profits quickly. "You never lose taking a profit" is another hoary maxim that has been fleecing small speculators since the South Sea Bubble. Of course, you do lose taking a profit, if you take it prematurely and if one tiny profit has to cover a sizable string of losses--which are almost inevitable in commodities. The loser's impulse to tiptoe in and steal a miniprofit before the market takes it all back is almost as foolish as his steadfast refusal to take a loss of any size. It's possible--though decidedly unprofitable--for the small investor in stocks to sit on ever-mounting losses through an entire bear market. After all, they're only "paper losses" until they're taken, and the stock is bound to come back someday. But paper losses in commodities have the distressing habit of turning very quickly into real losses. Your $600 margin on a soybean contract, for instance, will dwindle to nothing in a 12-cent move. Anyone who was misguided enough to buy a July 1967 soybean contract at $3.44 1/2 early last September and then compound his delusion by holding onto it down to $2.83 (February 15) would not only have lost $600, he would have had to ante up that sum five more times just to meet margin calls.

Successful traders never try to call the tops and the bottoms of a price move: They trade with the trend. When prices are going up, they're buying. When prices are going down, they're selling. The loser's attitude--while once again understandable--is once again the opposite. He tends to buy because things look "cheap"--that is, lower than they were last week. The professional knows that if prices are lower than they were last week, chances are they'll be lower yet next week. That's how markets work. If soybeans, after a long move downward, finally do turn around and rally 10 cents a bushel, the loser will be reluctant to get in, because he missed the bottom, and he sees the beans as "expensive"--which, indeed, they are, in relation to last week's prices. The pro doesn't think in terms of cheap or dear. He sees that the beans are rising, figures they'll continue to rise and buys. If he's right, he'll make a nice profit. As the beans continue to move up, he may use his profits to add a few more contracts, at ever-higher prices. He will take care, however, to pyramid down, rather than up. That is, if he originally purchased four soybean contracts, he may use his profits to add three more, then an additional two--and top it off with one more. This way, should the market reverse, he still emerges a winner.

The loser's impulse is to use all his profits to add another contract. Then, if the market is still with him, he'll use all the profits from the two to add two more, and so on. Of course, when the market finally turns around--as it always does--he will be wiped out. Usually, just when the losers are jumping back in, finally persuaded that the beans will rise forever, the pro is the one who is selling to them. Prices may still continue to rise, in an orgy of public speculation, but the pro never bemoans the fact that he didn't get out at the top. His attitude is that of the Rothschild who, when asked how he made his millions, replied: "By selling too soon." This was his hyperbolic way of saying that reasonable profits, consistently taken, can't hurt, while the foolish quest for unreasonable profits can prove disastrous. The loser, groping for the peak, inevitably finds the chasm beyond.

Perhaps because so many losers take such a beating, the commodity exchanges--and most of those who deal in or write about commodities--have erected an elaborate public-relations edifice to justify their own existence. The words "hedging" and "transfer of risk" recur repeatedly in their outbursts. The theory is that commodity speculation is necessary to permit producers to "hedge" the risk they run by holding startling quantities of goods whose prices fluctuate. For $20,000, for instance, you could conceivably go into the grain-storage business by building a million-bushel elevator. But once it's full of wheat, a 2-cent decline--hardly an hour's move on a typical day--would cost you the price of your elevator. On a 10-cent decline (the maximum daily limit), you'd be out your elevator and the price of four more, to boot. The futures market, so the theory goes, exists so that persons in such a predicament can hedge their inventories. Once they buy a million bushels of wheat for storage, they can go into the futures market and sell a million bushels--at today's prices--for delivery some months off. If wheat declines, they will still have received today's price; and when delivery time comes, they can simply deliver, without a loss. Of course, if wheat goes up, they will still have to deliver and will forgo a profit. But presumably this won't bother them, because they are in the grain-storage business, not the speculating business. Hedging, in other words, is a way to insulate an inventory from price swings--in either direction. Speculators, as the slick brochures from the exchanges readily point out, are willing to assume risks that the grain trade can't afford. Good-hearted humanists that they are, the speculators stake their hard-earned money to provide an active and well-lubricated market for all this hedging.

This is a fine theory, with much merit to support it. But fewer than one percent of all futures contracts are actually settled by delivery. Even granting that many hedges are lifted without delivery, this still means that for every hedging transaction, there are six or a dozen speculative trades. Hedging could disappear altogether and you'd hardly know it by looking at the daily volume statistics. Even worse, the hedgers are speculating. Holbrook Working, a market mathematician who produced several landmark studies, was quoted in Fortune a few years ago as having reached the conclusion that hedging is "undertaken most commonly in the expectation of a favorable change in the relation between spot [cash] and futures prices." That means the hope of a profit.

Despite the fact that since 1884, almost 400 bills have been introduced in Congress to prohibit or further limit futures trading, the pit's pious efforts at self-justification seem largely unnecessary. Race tracks survive without belaboring the public with their contributions to the improvement of thoroughbred horseflesh. Race tracks flourish because people are self-interested and enjoy the possibility--no matter how remote--of turning a small sum into a fortune. While there are several quite valid justifications for commodity futures trading--for instance, besides helping hedgers, it provides small farmers with widely published figures that enable them to get a fair price for their crops--this one is sufficient. Public participation in the commodities market would be greatly increased if those involved in the market would stop drumbeating its undeniable economic usefulness and describe it in terms speculators could understand--as a giant, Government-sanctioned lottery, where the losses can be staggering and the rewards immense.