I have come to the conclusion that the market is (dare I say) generally being manipulated/influenced by firstly the large institutions, Secondly by full time professional traders and day traders.

The general public and the “Mum and Dad” investors are the last to know what is actually happening and invariably the ones that lose out in the long run.

The advantage the Institutions have is the “Millions” of dollars that they have available to use at any given time. This is usually obtained from the public in the first place, in the form of Insurance, Superannuation and Managed Funds etc. Which we (the general public) all contribute to on a daily basis.

The largest advantage they have is the enormous amount of shares they are able to purchase at any given time.

What occurs is that even a small movement in share price means big profits for them, because of the volume/turnover of shares which occurs whenever a share transaction takes place.

Now Volume is the “Fuel” driving the market.

An uptrend in share price to survive and to continue must be nourished by new buyers who are being fed by cautious, seemingly reluctant sellers.

Consistent volume is very important, if there is to be any change in the existing trend. There must be a surge of buyers or sellers capable of changing the current share price.

Remember for every “Seller” there has to be a “Buyer” and vice versa.

The seller thinks or knows the share price is going down and the buyer thinks the opposite.

Now too much selling will invariably force the price downwards as will too much buying forces the share price upwards.

This is the law of “supply and demand”.

This “Law” is taken advantage of by the large Institutions who are well aware of what happens when they buy or sell in huge volumes of shares.

Remember they are in the market to make a profit not a loss.

This past month, I saw a professional newsletter that stated that there was almost nothing good to buy right now. That most major markets including leading emerging markets in China and India were overbought and that a buying opportunity would not present itself until there were major corrections. Though I mostly agree with that statement as it pertains to traditional stocks, this comment reflects how narrowly focused the overwhelming majority of self-proclaimed investment “gurus” out there tend to be.

One asset class that corrected steeply at the end of 2006 and beginning of 2007 was gold stocks. If you have been keeping track of gold and gold stocks, then undoubtedly you used the dip at the beginning of the year to add to existing positions and even possibly to establish new positions. Even if you didn’t, with the past couple of weeks being stellar for gold stocks, it is not too late. Of course, as has always been the case, rapid ascents will be followed by steep drops that will shake out a lot of gold investors that do not fully understand this asset class. However, I contend that by no means is it too late to buy into gold stocks.

Why?

It is always better to buy into this asset class a little a late during dips and consolidation phases and sell out of this asset class a little late during bull runs versus buying and selling too early. Why?

During consolidation phases and corrections, declines in gold stocks can be steep and rapid. Often there are days of temporary rises when it seems that the correction has bottomed, only to be followed by another steep decline much to the dismay of many investors. It is better to wait for some sustained momentum, and perhaps give up 5% of the next upleg rather than get in too early, lose 30%, sell out prematurely and miss huge gains that follow.

As far as selling, how many stories have you heard about people that owned Microsoft and sold out at a 50% profit only to miss the next several thousand percent they could have had had they held on? Again because gold is such a volatile asset, and you may be tempted to sell out during a great upleg after 150% profits, it is better to widen your stop loss strategy at this point to account for the volatility of this asset class.

If your stock dips 25% from this point, and then goes another monster run of 400%, you don't want to be kicking yourself. Widening your stop loss point where you would be stopped out at a 90% gain is still a huge gain, and probably sufficient to keep you in the game during even a steep correction in a continuing upleg. As you gain experience, you will develop a better feel for exactly how much you may need to widen your stop losses to prevent getting sold out too early, but always remember that is much better to sell out a little late and give up some of your profits rather than sell out too early and give up enormous profits that you would have earned by holding on.

A word of caution. You must know what you are doing when you buy into gold stocks. During major gold bull runs there literally have been differences of several hundred percent in the returns of even major gold stocks. You will almost never see differences of this kind among similarly structured companies in any other major asset class. For example, seeing a 20% return in Exxon stock but a 370% return in British Petroleum just isn’t very likely to happen. As long as you learn how to buy gold stocks before you do it, that’s the most important step.

This article may be freely reprinted on another website as long as it is not modified, changed, or altered in any way and as long as the below author byline is included along with the active hyperlink exactly as is.

J.S. Kim is the Managing Director of SmartKnowledgeU™. He has over thirteen years of experience in finance and financial services, and has earned a BA in Neurobiology from the University of Pennsylvania, a Master in Public Affairs from the University of Texas at Austin, and an MBA with a concentration in finance from the McCombs Business School, University of Texas at Austin. He is the inventor of the revolutionary MoneyPing™ investment strategies, a novel approach to learn advanced wealth planning techniques and how to build wealth, not dreams.

Speaking of sugar, I later took the plunge. My swing program said sugar was due for a big swing up. Trident normally tracked the standard 1-2-3 zigzag move and entered the “3” wave. I went long four sugar futures contracts on this signal. The trade started out fine but stalled and reversed down.

Max suggested I sell four farther out futures contracts as a hedge. (That makes a lot sense, right?) He said this way I would be more apt to later remove the hedge. Otherwise, I might not get back in. Whatever. Of course, I put the hedge on at the exact low when I was the most scared. As sugar futures started to rally again, I removed the hedge and the race was on.

Maybe Max was right. Sugar futures contracts ran up to my Trident objective and I got out with a few grand profit. I got cocky and stupid and decided to reverse and go short four contracts at the close on Friday. Trident was flat and I was doing a "drunken sailor" trade. I was so pumped up I gave two of my employees a share of the potential profits. Monday came and sugar gapped up against me. In no time I gave back all my previous sugar profits. I got out and decided never to buck the trend again. Well, at least until I got greedy and stupid again. I told my two employees to forget about any losses and that was that.

Max was making good futures commissions from me and I think I was becoming one of his more active commodity traders. I liked that feeling. I even told some of the young women I met that I was a commodity futures trader. That went nowhere. Back then, it was like saying I played poker or shot craps for a living. But, I couldn’t leave sugar alone. A few days after that loss, the market was still moving up. It was Friday again. The futures market had moved up about 350 points that week. It was kissing 23 cents. I said the heck with Trident and told Max to buy one futures contract at the market.

After his “lightning fast” execution finally got back to me, I had paid about 50 points more than the last quote! I was stunned. But then it kept going up into the close. It closed limit up and I was up a good $1000 on one contract. (The limits were expanded yet again) Monday came and it was limit up again. A few more limit up days and I got out with a nice $5,000 gain. Too bad I didn’t buy four contracts, but I was still feeling the pain of the last loser.

Those were some fun days trading futures. I still look back and realize my innocence was in many ways my strength. After all, it was a bull market in commodities and “drunken sailor” trades usually work out. But as the years passed, so did the bull, bear and chopping markets. I learned how the commodity futures markets could beat you up. I replaced my intense aggressiveness and became conservative in a speculative arena. But that’s the way you need to be.

It’s all about survival. Small positions that go far are a great way to trade. Ringing the cash register often with high win/loss ratios works as well. Just remember that you need to be flexible and prepared to let go of old ideas that no longer work - and keep finding new ones that do. I think even the Boston Commodity Broker from Hell would agree with that. I know Max would.

Good Trading!

There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.

Beginning traders, my best advice to you would be to avoid doing “comfortable” trades. I see it all the time. The futures contract is forming a bottom and traders want to short it. It feels better to go with the trend after it is a ”sure thing.” But we need to be scared when getting on board. Since all of us are basically similar mentally, what scares you in the futures market will probably scare me. To be different is the way to stay apart from the crowd mentality. My rule is to never buy in the middle of a range. I find trading indicators work poorly there, as well as having false starts.

The big commodity boys buy and sell at the extremes. You need to think like them. The futures market must be rock ‘n rolling to enter or you are doing a comfortable trade. This doesn’t mean to buy falling daggers. It means to get in after the spike at a double or triple bottom. You want to have time to see the signs that quality buying is taking place first. There is usually plenty of time to get in. If we simply wait a few price bars before pulling the trigger and then cutting our position in half from what it normally is, we would instantly become better futures traders.

OK, one more Max story. It was in the early days a few months after the Boston Commodity Broker From Hell called me. I was day-trading with Max. There was a big time commodity sugar analyst at Merrill that I could sometimes hear in the background. I can still remember his name and this was over 25 years ago. He was on a one-way squawk box barking to the commodity brokers all over the country. He was always blabbing about how bullish sugar futures was.

He was right. Sugar kept going up for days on end. Then came the day when he literally screamed at everyone to buy, saying the futures contract market was about to go limit up and to get clients in before it was too late. It sounded like he was losing it. Max asked me if I wanted to get in too, but I told him I was looking over my Trident program and it didn’t have a buy signal yet.

Later that day I called Max and sugar future contracts had instead reversed to go locked limit down! This was with expanded limits, so it must have been close to 100 points. Here was a mini-crash with blood running in the streets. Max was licking his wounds and was beating up the sugar guru for getting him into this fix. I must admit I smiled.

Suddenly in the background the sugar guru appeared again. He was STILL barking about how bullish sugar was! He was urging all commodity brokers to buy more at limit down. I told Max it was like a toy factory blowing up. All that was left was a broken, dysfunctional, talking doll staggering in a daze and stuck in a continuous loop about sugar. Max laughed pretty hard. I heard a click in the background and the doll stopped talking.

As a fitting epitaph, sugar futures contracts went limit down for another two days before stabilizing. Afterwards, the sugar guru sounded rather quiet for the rest of the bull move. Watch out for scenarios and gurus! Scenario trading often results in the biggest trading disasters in both commodities and stocks. I've witnessed many stubborn scenario traders implode. I have more articles coming soon on this subject.

Part Four of Four - Next!

There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.

While we’re on the subject, let’s talk about commodity trading systems, seminars, books, advertisements, computer programs, and ads on the web offering to make you rich. It’s easy, right? Just throw $30,000 at these offers and you’re bound to find what you need. Everybody is looking for the "Holy Grail," but the truth is it doesn't exist because it's always changing.

A commodity trading system may hit 100% for short periods, but then falls apart when the market changes. Unfortunately, perhaps less than 1% of the stuff offered for sale will give you the tools you need to be a consistently profitable trader. Maybe less. And much depends on what you do with it. It will probably do you more harm than good. Bad habits are hard to break. You will be depending on commodity trading programs and systems written by someone else instead of yourself.

We need to take full responsibility for our trading results. Blaming failure on the latest black box will get you nowhere. I’ve attended many seminars. And each time I thought, “this is it!” But sadly, (or perhaps happily!) the only commodity methods and systems I use today are the ones I created myself. And all of them came from within. They don’t always work with all markets. In fact, I have to keep rotating them to find what method to use in which futures market. But that’s because the futures markets are always changing. Forever.

That’s where new traders get lost. They think there is a rigid method or system that will always work – somewhere out there for a price. The truth is that even Max’s 10-day moving average is a killer system when the market is trending in perfect 10 MA fashion. And it happens. For a given market and time frame, a commodity futures trader needs both a short-term and long-term timing method. They are to be used together. We need to know the main trend and trade within it. The main ocean tide is coming in and we want to ride the smaller waves. But watch out for the stormy, choppy seas, also.

We need various trading indicators and tools to make us feel comfortable. We need a way of measuring futures selling panics and buying panics. This is the key to positioning yourself. Most moves work off the previous high or low climax. If it’s a “blood running in the streets” climax low, then expect the following move up to be capable of going far. If the bottom was a dull, lazy, comfortable affair, be ready for a dull rally and possibly a break to new lows before a good rally can occur. This trading technique does not always work, of course. It's just another sign of a high probability trade coming up.

I feel another good method for a commodity trading novice is using cycles. They don’t always work, but they give us a feel for the ebb and flow of the futures market. Getting a feel for the rhythm is important to keep one from the comfortable habit of buying the top of a rally or selling the bottom of a decline. You are less apt to sell into a big bottom if you are paying close attention to cycles of all time frames.

Part Three of Four - Next!

There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.