When Trading Futures - Expect the Unexpected

Professional commodity traders expect the unexpected when trading futures.

Eugene Fama, Professor of Finance at the University of Chicago Graduate School of Business and pioneer in the efficient market hypothesis and the random walk hypothesis, pointed out that if the movement of prices in financial markets followed a normal distribution, that you would expect a five-sigma event once every seven thousand years.

In reality, these moves happen every three or four years.

Fama concluded that if you chart market price fluctuations, the graph would have “fat tails”, meaning that at the upper and lower ends of the distribution, there are many more outliers than in a normal distribution.

These outliers are represented by the “huge” price moves. These are the types of moves that can lead to tremendously profitable years. They, however, can also lead us to quit trading. It is why we need to expect the unexpected. These rare events usually are not so rare after all and they have the tendency to cross our paths more often than not.

We need to constantly be on the look out for these huge outliers. We need to protect our account equity from these mega-moves going against us. We do that by playing defense. This means knowing and managing our risks. As traders, it is the one thing that we can completely control - our exposure to the market.

Amateur commodity traders are often not even aware of their risks or exposures when trading futures, let alone managing them. Professional commodity traders want to know every day how badly they can get hurt by an economic catastrophe, natural disaster, or an unexpected outbreak of war.

Now that you know to expect the unexpected in commodity trading, view our strategies to see what can be expected when trading futures.