Some of the most ambitious would-be traders in the world are weathermen. Sounds surprising until you think about it.
Meteorologists are quite literally trained to forecast future events. If there’s anyone that thinks they’ll make great traders, it’s them.
And I can attest to that personally. When I worked on Air Force flightlines — the part of the airfield where planes are parked and serviced — there was always a weather officer.
These were trained meteorologists. Some of them just wanted to be TV weathermen. But, as you’d now expect, a lot of them wanted to trade futures.
During the many hours of downtime that come with working the flightline, I often talked to the weather team. Especially about trading.
Many thought trading was easy because they had inside information. They knew weather patterns which helped them forecast crop yields. Armed with that info, they couldn’t lose trading corn or bean futures.
They also knew how strong hurricanes were, having access to models which showed the expected damage. When a hurricane targets Florida, just buy orange juice futures since supply is about to get hit. You could also buy lumber since wood demand will be high for rebuilding after the storm.
It all seemed so easy. But, for reasons they didn’t understand, these ideas were only good on paper. Trading them likely would’ve proved disastrous for their portfolios.
If you had an inkling to trade orange juice futures before Hurricane Ian hit last week, read on to see why you shouldn’t have…
The Market That’ll Rip Your Face Off
They knew I was a trader, so they’d pitch me these ideas all the time. I’d ask if they were trading. The answer was always no.
They didn’t know how. This was long before online brokers gave access to everyone.
So I’d offer to show them. We’d use a recent event — say a hurricane or a hailstorm in Iowa. They’d make a forecast and I’d pull up a chart.
They were wrong at least half the time. That could be okay. In futures, due to leverage, you can profit with as little as a 30% win rate. But that’s only if you’re trading a liquid market. Many futures markets are highly illiquid, and dangerous to trade.
So we looked at the market. Lumber is a great example. Take a look at this chart of lumber futures:
The indicator at the bottom of the chart below is open interest. That’s the number of contracts traders hold in the market. The higher the number, the more liquid the asset. Higher liquidity means easier trade execution.
On average, over the past three months, lumber open interest was about 1,100 contracts. For comparison, open interest for oil is 185,000 contracts. For S&P 500 futures, open interest averages 2.1 million. Orange juice is about 6,200.
Clearly, lumber isn’t liquid enough to trade. Neither is orange juice. That won’t stop you from entering an order, of course. You just won’t like what happens next.
To put it in technical terms, the market maker will rip your face off. You’ll pay too much to enter the trade. When you close the trade, the maker will rip your face off again and you’ll get back far less than you expected.
If there’s a really big move, you might see a small gain. But that’s uncommon. Individuals usually suffer losses in illiquid markets like these, whether they’re right or wrong.
I learned this by working with brokers. In the old days, there were no online entry systems. I had to call my broker to trade. My broker made enough money on commissions for her to buy a new car each year, and that was just from me.
But I wasn’t mad about that. She taught me how markets worked. These days, I buy my wife a new Mercedes SUV every couple years. (Though, I do that a different way. Market Leaders subscribers know what I’m talking about.)
This is important to remember when you think of trading news events. Like the Air Force weather officers, you might be looking to trade an illiquid market.
The Best Liquid Market to Trade
Now that you can access anything, you need to study the market structure to see if you should trade the market. This doesn’t just apply to futures. It’s also important for options.
Options are specialized, leveraged markets. They’re dominated by professional traders. It’s important to understand how to trade against these pros.
And right now, there’s an opportunity to out-trade the pros in a relatively new, but highly liquid options market.
I recently discovered an ETF that tracks bitcoin — the ProShares Bitcoin Strategy ETF (BITO).
I expected there to be problems with the ETF, but I was surprised. Turns out, it’s the best way to trade bitcoin in any market. That’s because it’s the first-ever way to trade bitcoin options from an ordinary brokerage account.
The night after it listed on the public markets, I pulled an all-nighter designing a trading system that would best take advantage of it. I hadn’t done that in quite a long time.
But it was worth it.
When I first unveiled my bitcoin research, I called it a “New Paradigm.” That’s no exaggeration.
My trading system would’ve outperformed bitcoin by 5-to-1 over the last seven years. That turns a starting stake of $500 into over $100,000, without using leverage of any kind.
Now though, because of this new ETF, the worlds of cryptocurrency and the options market have crashed together… giving us the trading opportunity of a lifetime.
We can potentially turn any move in bitcoin, up or down, into quick triple-digit profits.
Bitcoin has been a bit stagnant lately. But I believe we could be just days away from its next big move. To learn how you can best take advantage of that, click here and view my latest groundbreaking research.
Michael Carr, CMT, CFTe
Editor, True Options Masters