March 2, 2005

Lee Gaus is a 54 year old industry veteran of twenty-six years. Lee began his career in the livestock feed business before becoming a grain merchandising/commodity trader with a leading international company. [more]

Get your copy of "Lessons Learned", written by Lee Gaus!

There are no silver bullets, magic answers or trading secrets in this booklet. There are, however, helpful insights from Lee Gaus' 25 years of experience. If you are new to commodity futures trading you just might have the greatest potential for success because you have yet to develop the bad habits that can and do very often limit potential success. Even seasoned traders are likely to discover beneficial insight from Lee Gaus. Don't wait - get your complimentary copy of this valuable booklet here!

The following are excerpts from Lee Gaus' next booklet "Stop the Market I want to get Out" set to be released in late spring of 2005.

STOP THE MARKET I WANT TO GET OUT

As an avid tournament fisherman I had the opportunity of attending a fishing clinic conducted by a top professional in the sport. During the question and answer period, a friend of mine asked what, in the view of this tournament professional, was the most important skill needed to be a successful tournament fisherman. The pro thought for a moment and then said "Whatever you are the worst at is the most important skill for you". Well, given that our skills were lacking in almost every area, his answer didn't offer us much help. But it did point out that one is no better than the level of his worst skill. It is my opinion the same can be said of commodity trading. I would further suggest that for the retail, or non-pit traders the greatest weaknesses are in understanding and using stops and stop-loss orders.

Room Full of Traders

If you ask a room full of active and inactive (those who have lost all of their money) commodity traders which skill is the most important in becoming a successful trader, the answers would represent, to a great degree, the weaknesses of those present.

I would guess that the most common response would have to do with picking the right trades at the right time. Well, ya think?!? No kidding! Gee, all one has to do is pick nothing but winners and what else is there to worry about? In reality, no matter how brilliant you are, if you are going to trade commodity futures, you are going to have losing trades.

Another common answer might relate knowing when to liquidate profitable trades. This has definite merit. I have watched a good number of traders turn sizable profits into sizable losses simply because they were perplexed as to when to take profits.

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What would be the third area addressed? I wonder if anyone would stand up and ask about taking a loss? I doubt it, because taking a loss is considered a negative. Who wants to talk about losing money when we all want to talk about success? I DO ... AND SO SHOULD YOU!

It is my strongest contention that the inability of commodity traders to accept a loss is one of the biggest obstacles - if not the biggest - to becoming a profitable commodity futures trader. Yes, you read that correctly. I believe that possessing the mental toughness to accept a loss, and the ability to know when a loss should be taken, are traits I believe to be at the foundation of being a profitable commodity trader. Let us understand each other right now. If you trade commodities some of your trades, if not a majority, will be losers.

Taking a Loss

If you are going to be a trader of commodity futures, you are going to have trades that lose money ... pure and simple. The best commodity traders in the New York, Chicago, Kansas City, Minneapolis, Frankfurt and London have all experienced losing trades in the past ... and they will suffer losing trades in the future.

In my first booklet, "Lessons Learned", I recounted a true story of one of my clients from years ago. He bought a contract of corn just prior to the release of a government report. The report was a bearish report, but for some reason the market did not react immediately to the government numbers. He had an opportunity to get out of the trade with only a quarter cent loss ($12.50), but he refused. He wanted to break even and he was not going to budge with a loss ...not even a loss of just twelve dollars and fifty cents.

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In the end, he liquated the trade and lost over two thousand dollars - all in an effort to save twelve dollars and fifty cents. Do you get the picture? HELLO! Do you see the point? If you are going to trade commodities the chances of having losing trades are pretty high. Ladies and gentlemen, if you are going to have a chance to be successful I contend you must know how to TAKE A LOSS ... and understanding how to effectively use stop-loss orders can be a great help. Like my old account, you can pay twelve dollars and fifty cents now, or two thousand later.

Do Not Look Back

Over the years I have witnessed the Looking Back Syndrome or LBS, a phrase I coined years ago when dealing with befuddled users of stop/stop-loss orders. It applies equally to those protecting profits and those attempting to use wise money management and limit losses.

If one is to become a trader with a decent chance of success, it is my belief that that trader has to understand that they cannot plan for every contingency, every event or every market movement. If a trader is going to use stop/stop-loss orders (which I highly recommend) the trader needs to understand that there will be times that the market will hit their stop and then turn around and go back the other way.

Money Management

What is money management? There are a number of old sayings that I believe give a hint to the true nature of money management. One is simply, "If you are wrong, live to play another day". One of the first old wags I learned as a rookie in the commodity business was, "The best loss to take is the first loss", and the Chicago Mercantile came out with a popular poster that said "Risk Not Thy Whole Wad". I find it interesting that each of these deals with limiting losses. Is that not a good understanding of money management? My personal definition of successful money management is to limit losses to acceptable levels (not risking thy whole wad) while providing the trader with an adequate opportunity to realize a profit from the trade.

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The Dreaded Mental Stop

What is a mental stop? Why is it dreaded? Why does one decide to use the dreaded mental stop? Let us start with the last of these questions first. Why does one come to use the dreaded mental stop? It is usually preceded by having been stopped out of the market only to have the market reverse and go the other way, causing the trader to miss a possible profitable opportunity.

So now let us address the question of "what is a mental stop". A mental stop is a price the trader determines where they should accept the loss ... but with no real intention of doing so. An actual stop-loss order is never placed. The trader wants to see how the market re-acts when it reaches that "mentally recorded" level. They do not want it to reverse on them, so they will sit and watch it to make sure that it does not happen again ... therefore you see, the trader is suffering from LBS.

The problem is that by the time the trader determines the market is not going to reverse, the market has gone through the mentally determined stop-loss area. Now that they are sure the market will not boomerang they are willing to take the loss ... when the market gets back to their mental stop-loss area. Yeah, right! And cows jump over the moon and pigs fly. If the market does rally back to his area, they will definitively want to make sure that it does not continue in their direction, and the whole fiasco starts over again.

If you have any questions, please call Lee Gaus 1-877-304-1369, or email me at lee@efggrp.com. Don't forget to check in on the Lee Gaus weblog at leegaus.com.

Lee Gaus is a 54 year old industry veteran of twenty-six years. Lee began his career in the livestock feed business before becoming a grain merchandising/commodity trader with a leading international company.

In 1992, Lee established EFG Group along with his two partners who are long-time friends. Since then, Lee has traveled the U.S. conducting seminars and trading meetings for retail traders and commodity offices. You can reach Lee Gaus at legaus@refco.com, or 1-877-304-1369.

Get your copy of "Lessons Learned", written by Lee Gaus!

There are no silver bullets, magic answers or trading secrets in this booklet. There are, however, helpful insights from Lee Gaus' 25 years of experience. If you are new to commodity futures trading you just might have the greatest potential for success because you have yet to develop the bad habits that can and do very often limit potential success. Even seasoned traders are likely to discover beneficial insight from Lee Gaus. Don't wait - get your complimentary copy of this valuable booklet here!