My advice is towork hard at this level to keep the lines of communication open.You may be wondering what can be considered grounds for alegitimate complaint. Losing money? Bad advice? A trade gone sour?An honest error? None of the above. All these should be expected.Anyone who has ever traded will attest that losing money on tradesis part of the nature of the beast. Bad advice simply means your CTA,or his or her company’s research, cannot foretell the future accurately. Nobody can, and this shouldn’t be a surprise. The following aresome of the grounds for a formal complaint:Being high-pressured into opening an account.Being given unreasonable promises, such as “This CTAnever has or will lose money scale trading!”• Any fraudulent or deceitful communications made to youby your CTA or his or her firm.• Excessive trading in your account.• Uncorrected errors in your account.••
If you have an account that a third party is trading, you canask the FCM, via the broker, to send you duplicate statements. Youwant to check to see:Whether the commissions charged are correctWhether the strategy agreed upon—scale trading in thiscase—with the CTA or trader is being followed• Whether any markets you told the CTA to trade or avoidare being traded••
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It doesn’t hurt once in a while to go over daily or monthlystatements with your trader or his or her assistants. Let them knowyou’re monitoring the trading closely. Most important, you haveevery right to do this because it’s your money that is at risk.It all comes down to your clearly understanding all the risksand rewards of scale trading. You must evaluate them; do yourhomework; decide if you are suited; actively participate, no matterhow you trade; and accept responsibility for your decisions. If allthis is done, you can have a very pleasant experience scale trading.
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Summing Up the Rulesfor Successful ScaleTrading
Like most serious activities in life, success often depends onknowing the rules that must be obeyed, yet having the courage andconfidence to occasionally bend them. Scale trading is no different.As a way of summation, I would like to present you with whatI consider the most important rules you must be aware of and mustavoid violating if at all possible. That is not to say that at some timein your scale trading career you will not get away with disregarding one or more of the rules. My point is that if you do it often,eventually you will pay. Unfortunately, the commodities market isa very unforgiving taskmaster, particularly due to the leverage itoffers, and it can bring you to your knees.If you have any doubts, ask the Hunt family about theirattempt to corner the silver market. In 1973, the Hunt family wasone of the richest families, if not the richest, in America. Theydecided to buy silver as a hedge against inflation. In 1979, the twosons of H.L. Hunt—Nelson and William Herbert—formed a silverpool with some wealthy Arabs and became very aggressive buyersof both futures and the physical commodity. When their long positions expired, they took delivery. When they began, in 1973, silverwas $1.95 an ounce. By 1979, it hit $5.00 and peaked in 1980 at $54.About this time, the Federal Reserve got involved, and COMEXchanged some of its rules. Silver prices began to slide, and then tofree fall. On March 27, 1980, silver dropped from $21.62 to $10.80—
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50 percent in one day. From being one of the America’s wealthiestfamilies in 1973, the Hunts were bankrupt by 1987 with $2.5 billionin liabilities and $1.5 billion of assets. In 1988, the Hunts were convicted of conspiring to manipulate the silver market.Now, most of us cannot afford to lose millions or billions, butthe risks cannot be overlooked. Learning and following the rules isa must for self-preservation. I also believe that you must learn therules before you have a right to break them. In most endeavors inlife, rules are developed for the protection of the participants. Onceone has mastered them, it is possible to go beyond them. Take scaletrading as an example. It is obvious, I think, that you should havea few puts in place to protect yourself from the possibility of asevere drawdown. But do you always need them? In time, whenyou have learned to read the psychology of the market and cansense when volatility is in check, you might violate that rule. Willyou get away with it? Maybe and maybe not. Just understand theconsequences and be willing to accept them.Many of the rules were created to protect you from yourself.Trading is not a team sport; it is more like tennis or golf than football or basketball. You need, particularly in the beginning, a mentor or coach. Even so, the trading decisions you make are yourown. You must live with them and assume total responsibility, justas the athlete cannot take his or her coach onto the field of play.Hopefully, the rules will also give you the strength and wisdom to conquer the demons that prowl the trading pits of theChicago and New York futures exchanges. Scale traders need to beparticularly alert to resist the temptations of Greed. It will attemptto seduce you into entering a scale you are not financially preparedfor. Visions of a market that will trade smoothly to a low and justas effortlessly make a new high, taking you out of the scale with ahandsome profit, will dance before your eyes—all this accompanied by a generous number of oscillation profits.You will be sorely tempted to take a chance on this scale eventhough you know that you lack the financial resources to cover thescale if the commodity being traded plunges to a new low orpainfully forms a saucer bottom over an extended period of timebefore moving higher. I have seen too many traders new to scaletrading get into this predicament. They are halfway through ascale, and the contract simply loses all volatility. The market dies!
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Without the staying power to wait out the doldrums, they areforced to close out their positions at substantial losses.Too much volatility can create the same problem. As alludedto earlier, some scale traders were in a live cattle scale when a verynegative news story hit regarding the numbers. The supply sidewas far higher than had been previously predicted. Cattle tradedlimit-down for several days in a row. No trading took place, butmargin calls had to be met every morning. Traders with weakhands could not hold on. They were forced to abandon all theirpositions at the worst time. Those who were prepared for thiseventuality did very well because the market reversed just asquickly as it fell. Futures markets, like cattle that are extremelyvolatile, have a propensity to perpetually overreact and then overreact to the overreaction. After limiting down for several days, thecontract bottomed. All the buy orders in the market were filled.Just as unexpectedly, cattle limited up for several days. The market treated those who were prepared generously.My rule governing this type of situation is an ancient onetaught to me by Sergeant Ross of the U.S. Marine Corps: Never graba hold of anything you cannot let go of! It means that when you stakeout a position, always have at least one, and preferably two,avenues of retreat planned in advance. Never attack unless youhave a superior force. Take no prisoners. It helps to be a little paranoid both in war and when you are trading commodities.Greed will also try to convert the scale trader to its religion ofspeculations and unlimited gains. You will hear Greed whisper inyour ear when you are closing a scale with three or four long positions left in your account. It will tell you to hold those positions—”Let your winners run. Become a serious player!” You know youshould be systematically closing each position as the profit objective of the scale is reached. But Greed cajoles and flatters you intoholding the last few longs for the big move that is going to makeyou a killing.Whenever I have seen this happen, there has been an unpleasant ending to the story. The reason scale trading works consistentlyis that its discipline harnesses greed. Greed is the opium of theundisciplined trader. Enough is never enough. Each trade becomesmore reckless, more dangerous and unbridled. Either you scaletrade or you do not! There is no in-between. You are fish or bait. If
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you decide to scale trade, then you must be disciplined. You buy ona predetermined scale, and you sell on a predetermined scale. Youcan make adjustments and take steps to maximize results, but youmust be true to the basic tenets of the system.Part of managing greed is anticipating the worst-case scenarioand preparing for it. This gives you a reality check. You qualify therisks you are facing and develop a plan to manage them. Thissobering look at what can happen hopefully reinforces the wisdomof trading with discipline.Once you put on paper the absolutely worst case possible, adda 25 to 50 percent buffer to the anticipated drawdown. This shouldsober you even more. If you are optimistic or if you feel this scale isdifferent and will be well behaved, sooner or later one will bite youin your wallet or at least where most of us carry our wallets.Since I struck a paranoid note, I’ll remind you once again tocover your long positions with options—you must survive before yousurvive! No matter how well you have researched a scale trade,something can go wrong. All too often, lightning strikes early. Forexample, you are just getting filled on your first few positions andout of nowhere comes some totally unexpected bearish news.Prices collapse. You are facing the largest margin call you have everseen. Without puts in place, you would be looking at a hole thatcould take years to dig out of. Options are easy-to-use, inexpensiveinsurance. It just makes too much sense not to enter the trading pitswithout them.Another place you cannot cut corners is your plan and tradejournal. Writing stimulates thought!Writing does several very important things for you. First, itclears out your mind for the next important thought. If you try tokeep all the research and facts in your head while trading, you arebound to overlook something significant. On the other hand, ifyou put everything you need to watch on paper—create a giantchecklist—you can review it as the scale progresses so you do notmiss the release of a crucial supply or demand report, for example.The second thing writing does is keep you honest. One of theworst things you can do to yourself is pretend you did everythingright when you know you did not. If it is in black and white, youmust eventually reconcile it. It is at these times that you grow as aperson and a trader. You acknowledge your errors, mistakes, short-
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comings, and faults. Honesty like this helps you avoid making thesame mistake a second time and substantially improves your trading.Other reasons I harp on preparing a written plan and maintaining a journal is that the commodity markets repeat themselves.Human beings are facing the same situations—too much supply,too much demand, too little supply, too little demand—over andover again. And, they react the same way. The degree and the timing fluctuate, but the general reaction remains surprisingly similar.If you have a record to review before you trade a commodity forthe second, third, fourth, etc. time, you have an edge. Never tradewithout an edge!Each commodity also has a few unique aspects that need to becaptured in your resource file. For example, there is hard red, softred, and durum wheat. The hard red is valued for its protein content, soft red for baking, and durum for pastas. They are primarilytraded on different exchanges—hard red in Chicago, soft red inKansas City, and durum in Minneapolis. If you are scale tradingwheat on the Chicago Board of Trade and you see the Minneapoliswheat contract skyrocket or plunge, it may have to do more withthe Italian wheat crop (durum for pastas) than the world market.You will know to cool your burners because you wrote that pieceof information in your wheat research binder.Good golfers are good scale traders! The best golfers are not typeA individuals, nor are the best scale traders. Your personality mustsuit scale trading or scale trading will not suit you. The most successful scale traders, in my opinion, are deliberate, slow-movingthinkers. Once they make a commitment, they have everythingthey need in place to stand behind their commitment.Success in scale trading does not come from trying somethingnew each time. It comes from repeating what worked in the pastover and over again. You are not looking for new commodities totrade each time you enter the market. What you want is to repeatwhat has happened a thousand times in the past—a commodityhas reached a point where there is just too much of it on the market. It loses value until it is too cheap to be ignored by commercialusers that convert it to a higher-valued product. As they say in thepits, The best cure for low prices is low prices! Make this your mantra.It has been proven over time that maximizing the number ofoscillating profits is one of the secrets of winning at scale trading.
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Therefore, you must aggressively go after them. I call this rule Rideto the sound of the cannons! Nothing makes more noise in the pitsthan increased volume and price volatility. You must learn to anticipate where the next red zones will be and make the most of them.With all the rules I have tossed about so far, do not forget themost basic: Supply and demand rule scale trading! Without having agood feel for the answer to the supply-demand equation, youshould never enter a scale. It is one of the simplest of axioms, butone of the hardest to follow. There is too much information in mostcases to time every scale precisely.I remember when I first got involved in fundamental analysis.Many of the top research institutions, like the Wharton School ofBusiness, attempted to develop econometric models that would takeevery supply and demand factor into consideration. These reportswere certainly interesting to study and track, but none was capableof answering the $64,000 question: What was the price of corn, silver,gold, wheat, live cattle, cotton, etc. going to be tomorrow?Looking back, the reason for this lack of success was simple—too many of the variables were in flux, and too much bad informationwas being circulated. For example, about the time you pegged theimpact of a favorable weather system reaching the Midwest, a floodravaged China’s best growing regions and offset the fair weather pattern. Unfortunately, the analysts do not hear about the two events inthe same week. Nevertheless, we all believed at the time that theincredible power of the computer, just making a foothold in the financial industry, would be able to overcome all obstacles. Foolish us!You will always be dealing with uncertainty at one level oranother when you attempt to predict the future. But, as a scaletrader, you can be satisfied with partial answers. You can makemoney if you are just close. Scale trading takes advantage of one ofthe most basic financial laws, that of supply and demand. To opena scale with confidence, all you need to know is about when youwill be able to: See some light at the end of the supply-demand tunnel!Having an idea or at the least a strong feeling as to whereyou are headed with a scale takes us to the next rule: Never tradewithout clarity! Clarity has multiple meanings for scale traders.First and foremost is what was just mentioned. Equally critical isa pure and true understanding regarding the trading philosophybehind scale trading.
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There are two separate and distinct schools of thought when itcomes to trading. One is discretionary and the other is systematic.Discretionary traders make decisions based on experience and intuition. Their approach to trading is extremely flexible. They react tothe day-to-day, minute-to-minute developments of a trade or themarket. For example, a discretionary trader is in a gold trade. It isgoing well, up $2.00 per ounce. All of a sudden the trader closes thetrade, just before gold retraces the $2.00. Was it luck? Intuition?Experience? Or a combination of the three? Did the trader see volume waning and price resistance at the next price level? What provoked the trader to pull the plug?Time and again, I have seen traders trade like this. And thisbehavior is common in all other pursuits of life as well. It is oftenmost visible in professional sports. A football team runs a reversetwice in the first half of a game giving the ball to the reversing runner. The middle linebacker on the opposing team plays the reverseand makes the tackle. Early in the second half, a fake reverse istried. This time the linebacker doesn’t take the fake. Why? Goodinstincts and experience.The same goes for the discretionary trader in the precedingexample. Years of following gold and other commodities havetaught him or her when to close a winning trade. But the uniquecharacteristic of discretionary traders is they do not always reactthe same way to what appears to an outsider to be the same situation. The next time the trader is in a gold trade and it is up 2 bucks,he or she may hold. Something looks different this time. A decisionis made based on how the trade looks at that moment, not a preordained set of rules.But successful discretionary traders are not gunslingers. Theyare not arbitrarily jumping in and out of trades. The unsuccessfulones may well be. The pros do their homework. They study thecharts and know the fundamentals. But they make their decisionsbased on their intuition and experience, rather than a hard-and-fastset of rules.By now, you probably have come to the conclusion that thesystematic trader is a follower of rules. Many of these traders havedeveloped complex computerized systems. For example, a computer engineer whose experience included developing programs topredict which asteroids might enter the earth’s atmosphere and
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when, designed one I once represented. Other discretionary tradersuse a simple set of technical analytic rules, such as point-and-figurecharts or multiple moving averages.Where one type of trader appears to fly by the seat of his orher pants, the other is fixed in concrete. The discretionary traderhas the luxury of overriding or changing his or her opinion, whilethe systematic trader does not have to think and cannot deviatefrom the plan once set in motion.To which camp does the scale trader belong? For the traditionalists, it is the systematic. They teach traders to enter scales virtually automatically once the commodity has reached the lowerone-third or one-quarter of its 10-year trading range. The trader isthen expected to run on automatic pilot until the scale is complete,even if it requires rolling over positions several times.As I hope you know by now, my method takes somethingfrom both disciplines. Scale trading is definitely a systematicapproach to the market. But I still like to see traders use some discretion. It is particularly needed in the selection of which commodity to scale and when. Just because a commodity is in thevicinity of an entry point for starting a scale, you need to use somediscretion to determine when that commodity will resurface. Thereis nothing that says you can’t wait until the commodity is tradingin the lower 20 percent of its long-term trading range to begin ascale. Or you can pass on a scale if it doesn’t look right. Once in ascale, you do not have to stay in it until the very end. More important, you can take steps to manage risk as needed.On the other hand, scale trading is definitely a systematictrading strategy. If you do not scale in and out of positions, you willhave no discipline. Thus you will become susceptible to the temptations of the demon Greed. It is my opinion that you will find yourgreatest success, once a scale has begun, with a systematicapproach. Always before entering and occasionally when exiting,you may have to exercise some discretion.The question you must ask yourself is, Does this manner oftrading suit my personality? Do you have the self-discipline totrade systematically once the scale has begun? If so, are you alsothe type of person who can exercise a substantial amount of judgment prior to opening a scale trade? If the answer to both thesequestions is no, you may be better suited to trade utilizing the
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traditional scale trading method as outlined in Chapter 3. It works.It is just, in my opinion, hard on the trader because it requiresenduring many stressful situations.Another very important rule is: Never try to scale trade from theshort side! The reason is that it is too risky picking tops. What if youscaled silver from the short side when the Hunt Brothers bid it upto $54 an ounce? Or when soybeans rocketed over $12 in 1973?From the long side if you open a scale at the lower 25 or 33 percentof the 10-year trading range, the very worst you are looking at is thecommodity going to zero. The only exception I know of is the onioncontract that traded below the cost of the burlap bags the onionswere packaged in. In reality, the cost of production generally is thelowest a commodity trades, and even that is rare. The exception tothis rule is commodities, such as silver or gold, that are byproductsof the mining of base metals such as lead or iron ore. Even so, commodities rarely stay at these low levels for long. With trading theshort side, the risk-reward odds are not in your favor.Those who wait for certainty will be driven in disgrace from the hallsof trading! Life and scale trading are just not made for individualswho must have all the answers before they venture into theunknown. You must have the faith of a submariner that what goesdown must come up in order to begin a scale. But I would augmentthat with a good feel of the supply-demand situation, which meansknowledge and research. It is also critical that you do your ownevaluations. Do not leave it up to your broker. Use your broker andhis or her firm as a resource, but always second-guess them.Find backup verification for all key facts and insights! This isespecially true of anything you read on the Internet. There will becommodity brokers participating in the scale trading chat rooms.Some will try to minimize all the risks and portray scale trading asa fail-safe system. Scale trading wanna-bes will share fantasies ofincredibly profitable scales. Don’t let any of them fool you.Nothing having to do with trading futures, or any other investment for that matter, is risk-free or easy. You know that in yourheart and probably from experience. Nevertheless, there is something in all of us looking for a free lunch.Another pitfall you must avoid is trying to trade when you areunderfinanced. If you do not have the resources, wait until you do.What about starting on the MidAm? I would still try to dissuade
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you for these reasons. First, the MidAm does not have the liquiditythat is really needed. It can work for the grains, but that is about it.Second, you do not get the best fills. Third, I recommended theMidAm only as a training ground, a place to get a feel for scale trading, not as an incubator to grow your account to a size you canmove up to the Board or the Merc. Even with the small contract sizeand margin requirements, you can still get hurt. Wait until you havethe funding to trade on the Big Boards and train on the MidAm.When you take the risk and trade without the financial backingrecommended, you put an enormous amount of pressure on yourself. Traders in this situation have only one or two chances to successfully trade a scale. They must be right the first time. This stresscan result in bad judgments. The prime example is the traders previously mentioned who were in the cattle scale. A few limit-downdays blew them out. With proper funding, they could have heldtough and prospered. In the trade, it is said: Scared money never wins!Having patience is equally important for the well-financedtrader as for the underfinanced. There is no need to feel obliged totrade every commodity that reaches the lower quarter of its longterm trading range. Match the scales you trade with your personality as much as this is possible. Some traders like long drawn-outscales. These traders build an inventory of dozens and dozens oflong positions. Slowly the commodity bottoms and heads north. Asthis occurs, these traders haul in profits like fishermen emptyingnets teeming with tuna. Other scale traders fancy shorter scales.They like to be in and out of three, four, or more scales a year.Now neither preference is right or wrong. Nor can either traderbe sure the scale being entered will meet his or her objectives.Scales, like the futures market, have a mind of their own. Thetraders who prefer the short-term scales trade when they can seethat the scaling opportunity is short-term in nature. The long-termer might pass up that scale. What neither knows is whatunknown factors could change what appears to be a short-termscale into a long-term one. You must find the scale trading opportunities that most suit your personality, but you must prepare forthe unexpected as well. Never enter a scale unless you think you knowhow it will end—but always plan for the unexpected!My last piece of advice is: On day one, you will be as bad as youare ever going to be! Take heart. The day you open the first position
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of your first scale, you will think of a million things you think youhave overlooked. Do not let this bother you. As the scale progressesand if you entered using the rules in this book, you will becomemore and more confident, because scale trading does indeed work.Slowly, ever so slowly, you will see the market coming to you.Unlike speculators, who are forever chasing fleeting markets, scaletraders patiently wait for the inevitable laws of supply anddemand to bring profits to them. All the same, keep your powderdry and your options loaded. Good hunting!
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Commodity Futures ContractSpecifications1
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Maintenance Margin 2
Exchange 3
Contract Size
Agricultural CommoditiesCorn
$500
CBOT
5000 bu
Corn
$100
MACE
1000 bu
Oats
$200
CBOT
5000 bu
Oats
$100
MACE
1000 bu
Soybeans
$1000
CBOT
5000 bu
Soybeans
$200
MACE
1000 bu
Soybean Oil
$450
CBOT
60,000 lb
Soybean Oil
$100
MACE
30,000 lb
Soybean Meal
$700
CBOT
100 tons
Soybean Meal
$200
MACE
50 tons
Wheat
$550
CBOT
5000 bu
Wheat
$100
MACE
1000 bu
Live Cattle
$350
CME
40,000 lb
Lean Hogs
$700
CME
40,000 lb
CocoaCoffeeCotton
$600$3500$750
CSCECSCENYCE
10 metric tons37,500 lb50,000 lb
FCOJ
$500
NYCE
15,000 lb
SugarLumber—Random Length
$500$1100
CSCECME
112,000 lb80,000 bd ft
Livestock Commodities
Food and Fiber
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Daily Limit
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Minimum Fluctuation
Trading Hours (Central Standard Time)
12c/bu$60012c/bu$12010c/bu$50010c/bu$10030c/bu$150030c/bu$3001c/lb$600$0.01 lb$300$10/ton$1000$10/ton$50020c/bu$100020c/bu$200
1/4 c/bu 5 $12.50
9:30–1:15
1/8 c/bu 5 $1.25
9:30–1:45
1/4 c/bu  $12.50
9:30–1:15
1/8 c/bu  $1.25
9:30–1:45
1/4 c/bu  $12.50
9:30–1:15
1/8 c/bu  $1.25
9:30–1:45
1/100/lb  $6.00
9:30–1:15
1/100c/lb  $3.00
9:30–1:45
10c/ton  $10.00
9:30–1:15
10c/ton  $5.00
9:30–1:45
1/4 c/bu  $12.50
9:30–1:15
1/8 c/bu  $1.25
9:30–1:45
1.5c/lb$6002c/lb$800
2.5c/cwt.  $1