COMMODITY FUTURES MARKETS
TRADING GAME ASSIGNMENT Fall 2016
The class will be divided into groups of about 6 students, and each group should choose a group leader to arrange deadlines and plans. The goal of each group is to trade commodity futures competitively in order to generate a profit larger than other competing groups. Trading starts Monday September 19, 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 26 so do not delay. Game ends Nov. 19 Saturday. Final trading report is due Friday December 2. Hand in all assignments paper copy. You are more likely to be successful if your trading strategy includes one or more of the following methods: 1. 2. 3.
Technical Analysis Fundamental Analysis 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 five 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
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!) report will be due and you must close out your positions before end of game or they will automatically be closed out for you). This report 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 $20 commission for each round trade will be deducted ($10 buy, $10 sell). 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 five starting commodities. Trading all five 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 five 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 emailed 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.
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Trading Strategy Report 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 534-35).
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.
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Final Trading Results Report, 7-10 pages. Note: Print final trade results/equity after trading ends. 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.
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Some Commodity Specifications Examples
a
Commodity
Contract Size
Standard & Poor's 500 Stock Index
S&P 500 Mini Index x$50 CME
US-TBonds
CME(CBT) $100,000
Canadian Dollar
Live Beef Cattle
Silver
CME
CME
100,000 CD
40,000 lbs.
5,000 CME Troy Oz. (COMEX/NYMEX)
Example Margins (Maintenance 60%) Approximately
Example: Price Quote
$5,000 (3,000)
S&P 500 Index (1800.00)
$2,700 (1620)
113.25 30yr bond
$3,000 (1,800)
($.9129/CD)
$1,500 (900)
$7,000 (4,200)
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Contract Month
Example: Value of Contract
$50
Dec. Dec.
Dec.
x1800.00 index =$90,000 113.25 113,000+ (25/32)x1000 $113,781.25 100,000 x .9129 =$91,290
cents/lb. (110.000 cents/lb.) Dec.
40,000 lb. x110.000 cents (or $1.10) =$44,000
$/Troy Oz. ($18.383 /oz) Dec.
5,000 oz. x $18.383 =$91,915
Commodity Specifications (Continued – Note: Canola is listed here below for information only)
Contract Size
Example Example Margins Price Quote (Maintenance 60%)
100 metric $2,500 Canola ICEb tonnes (1,500) Note: the game may use a 20 tonne contract size
$/Ton ($456.00/Tonne)
Contract Month
Example Value of Contract
100 tonnes x$456.00 Jan.
=$45,600
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. 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: http://www.barchart.com/education/symbols.php.
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Specific Commodity Information (on reserve or reference in Agric. Library, page and chapters may change in later editions of the books)
Stock Index (Stocks)
(Interest Rate)
Commodity Trading Manual -- pages**
275-280
261-274
Cohen et al. pages
7, 10
--
Lindert chapter
--
--
Haugen chapter
--
13
*Text (Kolb) chapter
9,10
Source *
*
Commodity Yearbook latest -- pages
US T-Bonds
Canadian Dollar (Currency)
257-260
--
Live Beef Cattle (Livestock)
Silver (Metals)
Canola (Oilseeds, Soybeans)
217-214
217-232
201-206
--
--
--
--
--
--
--
--
--
--
6-8
11
--
5
5
14, 15
See book
Handbook of Futures Markets -- chapter
49
48
47
31
44
30
Williams and Stout chapter
--
--
--
22, 23
--
--
*
Options and Futures: Complete Idiots Guide - - see all pages - * ** Best sources to start with. Depends of which edition of the book you use 7
Some Technical Trading System Information
Source
Kaufmanb Wilderb,c
Dual Moving Average Crossover
Channel (Donchian)
Relative Strength Index
Directional Parabolica
Capital Management and Strategy
------pages------
--pages---
------pages------
---pages---
-------pages------
83-84,113-14 398-402
382-97
84-89, 336-39
336-39
--
--
97-99
63-70
a
A complicated system to trade.
b
On reserve.
c
Explanation is fairly long but very detailed with examples and numbers.
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6-21, 35-53
111-15, 116-17
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 www.cme.com 2. For ICE, was Winnipeg Commodity Exchange (ICE) prices, such as Canola, go to https://www.theice.com/futures-canada 3. For metals such as silver on Commodity Exchange of New York (COMEX), go to www.nymex.com or www.cme.com. (COMEX joined with New York Mercantile Exchange (NYMEX), and was then bought by CME). 4. CBOT futures, for Chicago Board of Trade prices, such as T-Bonds or grains such as wheat, corn, soybeans, go to www.cbot.com or www.cme.com Also, the CBOT was bought by the CME. 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. www.barchart.com
is a good source for getting all futures prices and making charts, such as moving averages.
8. Long-term price charts e.g. 25 years back, can be found here: http://www.indexmundi.com/commodities/ 9. For those involved in agriculture or farming, and looking for regional/cash grain prices in Canada, here is a website: http://www.pdqinfo.ca/
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Other details (subject to change, this page will likely be updated) -software to be used is stocktrak.com -if stocktrak crashes and losses all the trades, an attempt may 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 five commodities: live cattle, Canadian Dollar, US T-Bonds, S&P500, silver, and possibly more to be mentioned. (Assuming the game allows Canola to be traded, and you still may want to avoid trading Canola at first since it is in Canadian dollars so may be confusing), since other commodities would be in U.S dollars. -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 -margin calls are automatically met -commission is $30 round turns ($15 buy, $15 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 CBOT
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