“I sat at my desk, gazing at the screen after being slapped into the reality that most traders lose money. The individual sitting next to me, who happen to be a terrific trader, said, ‘Man you stink!’ I thanked him for being kind enough to notice. He continued, ‘The problem is you don’t understand the function of the market. After all, it only has two functions. You should have discovered them by now.’ Again, I thanked him for pointing out my ignorance and hoped he would leave me to my misery. Instead, he decided to share his thoughts and it was perhaps the most enlightening five minutes I had ever spent.”
So what was it that he shared with me? As he adjusted his Rolex watch and I instinctively adjusted my Timex, he again repeated that the market has only two basic functions. In other words, strip everything away and there are only two real reasons for commodity futures markets to even exist. First, in times of short supply the function of the market is to use the mechanism of increasing prices to limit demand. Secondly, in times of over supply the function of the market is to use the mechanism of lowering prices in order to stimulate usage. I looked at him as if I had just been hit in the head with a coal shovel. He was absolutely correct. In all of the technical analysis and fundamental discussions I had, in hopes of discovering the holy grail of commodity trading, I had forgotten the simple basic truth of the market. When we have supplies that are tight the price has to go up. When supplies are greater then our need then the price has to go down. And third when we have just the right amount the price will go sideways.
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