COMMODITY FUTURES MARKETS. TRADING GAME ASSIGNMENT Fall 2014

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1 COMMODITY FUTURES MARKETS TRADING GAME ASSIGNMENT Fall 2014 The class will be divided into groups of about 4 students. The goal of each group is to trade commodity futures competitively in order to generate a profit larger than other competing groups. Trading starts September 15, but you may want to begin conservatively to avoid costly mistakes. Each group should have a leader who will ensure responsibilities are carried out. For example, you might want to have a group member assigned to trade particular commodities. But you should outline a clear plan for decision making. A five page (longer is okay) detailed description of your group's trading strategy and plans will be due September 22 so do not delay. Game ends Nov. 15 You are more likely to be successful if your trading strategy includes one or more of the following methods: 1. Technical Analysis 2. Fundamental Analysis 3. Expert Opinion Technical Analysis which uses mostly past prices (but can also use volume and open interest), is the most widely used method by professional commodity fund managers. As a starting point to understanding and implementing technical trading systems to your strategy, your group will need to complete some reading. To get a "feel" for technical analysis, split up the readings among different group members and have them report back to the group on the useful material in the readings. As a starting point, your group should at least skim technical analysis information in Teweles et al. See attached page 8 as it may help you in deciding whether or not to trade a technical system and on which commodity. Fundamental Analysis is also a popular trading method. A starting point is Chapter 6 in Teweles et al. Specific information sources for the six commodities is given in the attached table (page 5 and 6). Major current sources of day to day fundamental analysis are the Wall Street Journal, Globe and Mail, wire services and government reports (both general economic and commodity specific). Also, the long-term commodity reports from USDA and forecasting firms are often of use for longer term. But, perhaps most important is anticipating future political, economic and weather factors. For example: (1) if war breaks out and drives up gold futures prices; or (2) the economy plunges into a recession driving down housing starts, thus driving lumber futures prices down; or (3) cold weather freezes the orange crop and drives up orange juice futures prices. 1

2 Finally, the Expert Opinion approach seeks to use the advice of well respected commodity experts as a basis for trading decisions. For example, knowledge from market newsletters, trade publications and prominent research analysts and economists are often used as a basis for trading decisions. These can also be found on internet but many traders view "experts" with considerable scepticism. The end of semester final trading results (hopefully large profits!) and report will be due Nov.24. (The trading game ends on Nov.15 so you must close out your positions before then or they will automatically be closed out for you). This will be a seven to ten page, report, detailing the strengths and weaknesses of your group's trading strategy, the extent to which systems and commodities were profitable (unprofitable) and why, and what improvements you would suggest in hindsight to improve your trading strategy for the future. Grading will be based on the group's profit relative to those of other groups. However, if you experience "bad luck in the markets" but have a well reasoned and documented trading strategy and reports, this will count in your favour. The trading game operator and instructor is in charge of the operation of the trading game. In the case of any disputes or problems, the instructors word will be final. Operation of Trading Game Each group will be given $100,000 U.S. trading capital to begin trading. A $50 commission for each round trade will be deducted. Commodity trading can be risky so it is suggested that sufficient capital be set aside for margin calls. Information on some of the commodities is included in the attached table (page 5 and 6). However, trading is not required of all six starting commodities. Trading all six commodities requires considerably more analysis and thus time. But it is recommended that at least two or three commodities be traded in order to diversify and reduce risk. You may want to trade unrelated commodities to diversify further. Also, you can trade commodities other than the six commodities if you wish, once you get comfortable with trading. Trading will be allowed once daily (though it is not required to trade every day) for each commodity. Anyone cheating will receive a zero grade for the game. The trading price used will be the price nearest to when the order is entered. Market orders and limit orders are allowed. Trade equity, profits and losses are ed to you. (Daily newspaper information available is from the Wall Street Journal, Management Library.. Please see internet appendix on later page which explains how to get prices off the internet. 2

3 Trading Strategy Report (Due September 22, 5+ pages) 1. List each of the commodities you will trade and explain why they were your choice. 2. Explain as specifically as you can the factors which determine the price for each commodity you will trade. For this, your group will need to at least skim the readings in the table on page 7. Your group may want to assign each person to summarize different readings and then report on them to the group for analysis. You will want to include a diagram graphically showing price determination for each of your commodities as in Williams and Stout (pages ). 3. Explain as specifically as you can how you will make your trading decisions. What will be your information source? How will you use this information? Will you use technical, fundamental or expert opinion, or all three; why? For example, will you trade (a) purely technically, using only past price with a system such as the moving averages; or (b) purely fundamentally with supply, demand, weather, world political information; or (c) purely on expert opinion from looking over authoritative market newsletters; or (d) use all three methods. 4. If you have "bad luck in the markets," as the semester progresses, what will be your plan? Will you hope your luck improves and ride it out, or will you cut your losses and try to improve your strategy with alternative improved methods? Does your group have a plan to conduct research (reading) to improve its methods throughout the semester? 5. Who will do what in your group? Who will do research readings, analyze prices? Or will you switch responsibilities around during the semester? 6. Include group number and group members names on cover page of report. 7. You may also want to come up with a group name to makes things interesting. 8. Be sure to include your group number, group name, and student names on the cover page of your report. 3

4 Final Trading Results Report (Due Nov. 24, 7-10 pages). Note: Print final trade results/equity after trading hours end, on the last day of trading. 1. List the commodities you ended up trading. If they are different than in your first report, why did you change commodities? 2. Did you change your trading system strategy or improve it over the semester? How did you attempt to improve it? 3. Present and discuss your overall trading performance in terms of profit, return on investment or other performance measures. Were your monthly profits fairly constant or up and down? What were your individual commodity and aggregate commodity profits? 4. Discuss some of your most profitable and most unprofitable trades. Were there any technical or fundamental reasons for the profits or losses? If so, explain these reasons. 5. Overall, what were the strengths and weaknesses of your trading strategy. Were your systems satisfactory? Did you make good (lucky!) choices and pick profitable commodities? Or were your commodities lacking the necessary price volatility and trend for you to trade successfully. 6. If you were playing the trading game again, what would you do different in terms of overall strategy? 7. Include group number and group members names on cover page of report. 8. Attach a log of all your trades (transaction history), which you can print off. 9. Be sure to include your group number, group name, and student names on the cover page of your report. 4

5 Some Commodity Specifications Examples Example: Contract Example: Example Margins Price Quote Month Value of Contract Commodity Contract Size a (Maintenance 60%) Approximately Standard S&P 500 Mini S&P $50 & Poor's Index x$ Stock $5,000 Index x index Index CME (3,000) ( ) Dec. =$90,000 US-TBonds CME(CBT) $100,000 $2, Dec ,000+ (25/32)x1000 (1620) 30yr bond $113, ,000 Canadian $3,000 ($.9129/CD) x.9129 Dollar CME 100,000 CD (1,800) Dec. =$91,290 Live 40,000 lb. Beef $1,500 cents/lb. x cents (or $1.10) Cattle CME 40,000 lbs. (900) ( cents/lb.) Dec. =$44,000 5,000 oz. 5,000 $7,000 $/Troy Oz. x $ Silver CME Troy Oz. (4,200) ($ /oz) Dec. =$91,915 (COMEX/NYMEX) 5

6 Commodity Specifications (Continued) Example Example Contract Example Margins Price Quote Contract Value of Contract Size (Maintenance 60%) Month 100 tonnes 100 metric $2,500 $/Ton x$ Canola ICE b tonnes (1,500) ($456.00/Tonne) Jan. =$45,600 Note: the game may use a 20 tonne contract size a CBT = Chicago Board of Trade; CSCE = Coffee, Sugar, Cocoa Exchange; CME = Chicago Mercantile Exchange; ICE = ICE Canada/ (formerly Winnipeg Commodity Exchange; COMEX = Commodity Exchange. For purposes of the game, margins amounts will be used that are specified by the game, and the game has its own margin amounts, shown on a page within the game. The game also shows a page with the commodity symbols. However, in real life, wheat (W) also has a symbol (ZW). T-Bonds 30 year have a symbol (US) and also (ZB). Some reasons for two symbols may be such as day trading versus evening, or open outcry versus electronic trading. Also, if a commodity is traded on different markets, it will have different symbols. An explanation and list of symbols can also be found here: 6

7 Specific Commodity Information (on reserve or reference in Agric. Library, page and chapters may change in later editions of the books) Stock US T-Bonds Canadian Dollar Live Beef Index Cattle Silver Canola Source (Stocks) (Interest Rate) (Currency) (Livestock) (Metals) (Oilseeds, Soybeans) * Commodity Trading Manual -- pages** Cohen et al. pages 7, Lindert chapter , Haugen chapter *Text (Kolb) chapter 9, * Commodity Yearbook latest -- pages See book Handbook of Futures Markets -- chapter Williams and Stout chapter , * Options and Futures: Complete Idiots Guide - - see all pages - - * Best sources to start with. ** Depends of which edition of the book you use 7

8 Some Technical Trading System Information Dual Moving Channel Relative Strength Directional Capital Management Source Average Crossover (Donchian) Index Parabolic a and Strategy pages pages pages pages pages Kaufman b 84-89, , Wilder b,c , , a A complicated system to trade. b On reserve. c Explanation is fairly long but very detailed with examples and numbers. 8

9 Internet Surfer Appendix on How to Get Prices (The following information may change) 1. For Chicago Mercantile Exchange (CME) prices, such as cattle, S&P, Cdn dollar, go to 2. For ICE, was Winnipeg Commodity Exchange (ICE) prices, such as Canola, go to 3. For metals such as silver on Commodity Exchange of New York (COMEX), go to or (COMEX joined with New York Mercantile Exchange (NYMEX), and was then bought by CME). 4. CBT futures, for Chicago Board of Trade prices, such as T-Bonds or grains such as wheat, go to or 5. If you want info on margins see the game, or for actual margins see the associated exchanges. 6. Other websites of possible interest include Agricultural Canada, USDA 7. is a good source for getting all futures prices and making charts 9

10 Other details (subject to change, this page will likely be updated) -software to be used is tradesim, from U of Illinois, please be patient as the tradesim software is often being updated and is computer software, so has some bugs, and expect your orders to be delayed a day or two sometimes, or the system to go down for a day or two -if the tradesim crashes and losses all the trades, an attempt will be made to reconstruct them. If it becomes too unmanageable or is unoperational, then grading for the game will be at the instructor s discretion -Initially you will be limited to trading, canola, live cattle, Canadian Dollar, US T-Bonds, S&P500, silver, and possibly more to be mentioned. ( the game typically treats Canola as US dollar transactions). -any contract month can be traded listed in the game; you can trade same commodity spreads (these usually have lower margins) -Orders are either market or limit -You can only make one transaction for each commodity per day (though you are not required to trade this often) -only $25,000 of your $100,000 can be invested in margins -each group needs a leader who gets s of order confirmations and equity, profits, and losses; leader can then forward s to others in group -margin calls are automatically met; margin levels can be found under browse margins part of tradesim -commission is $50 round turns ($25 buy, $25 sell) -there is no interest on the money in the account, each group pays a small fee to trade -exchange ownership notes: ICE owns the former Winnipeg Commodity Exchange; CME owns the Nymex, Comex, and CBT 10