{"id":383,"date":"2024-09-28T16:24:23","date_gmt":"2024-09-28T16:24:23","guid":{"rendered":"https:\/\/50yeartrader.com\/blog\/commodity-futures-shoot-out-risk-versus-reward\/"},"modified":"2026-09-30T21:26:32","modified_gmt":"2026-09-30T21:26:32","slug":"commodity-futures-shoot-out-risk-versus-reward","status":"publish","type":"post","link":"https:\/\/50yeartrader.com\/blog\/commodity-futures-shoot-out-risk-versus-reward\/","title":{"rendered":"Commodity Futures Shoot-Out: Why Reward Without Risk Fails"},"content":{"rendered":"\n

The year is 1977. I have opened my office next door to a regional brokerage house. The top broker there promotes both my stock and commodity managed accounts. He is also a top salesman for one of the country’s largest gold mutual funds.<\/p>\n\n\n\n

A Six-Month Contest<\/h2>\n\n\n\n

The gold fund manager decides to create a commodity futures fund of $1,000,000 to $2,000,000, big money at that time. Commodity funds were very much a new thing in 1977. He will select three traders and give each $50,000 to trade for six months. The winner will be named the fund’s trader.<\/p>\n\n\n\n

My broker convinced the manager to make me one of the three contestants. Another was an already well-known commodity trader in New York. I was asked if I knew of anyone else to consider, and I suggested Bruce Gould. I called Bruce and we chatted a few minutes. He was not interested. He traded for himself at his small office in Seattle and wrote his well-respected market letter. He told me his father often sat with him while he watched the markets and they talked story. For him that was as good as it got. He thanked me for thinking of him and we stayed connected over the years. Next to Charles Goodman, Bruce Gould is my only trading hero.<\/p>\n\n\n\n

So it was a shoot-out between me and a young New York hotshot for a big account with much upside potential. I was naturally very excited. Charlie, by contrast, was skeptical of the entire program, especially the “shoot-out” aspect.<\/p>\n\n\n\n

“Be careful, dad. Just because he’s a big mutual fund manager doesn’t mean he understands commodities! There’s a difference between buying gold and holding it forevermore and trading!”<\/p><\/blockquote>\n\n\n\n

Those turned out to be prophetic words.<\/p>\n\n\n\n

Conservative Trading Against a Hotshot<\/h2>\n\n\n\n

My plan was to trade conservatively, using what I knew at the time about Goodman Wave Theory. I assumed the fund manager’s criteria would consider both risk and reward, and my broker agreed with the strategy.<\/p>\n\n\n\n

The first month I made very few trades, perhaps three or four, and was up a small amount. The other trader, by contrast, burned through the $50,000 and hit the 50% drawdown limit. Apparently he went hat in hand to the manager and asked for another chance with a full $50,000. I have no clue how he justified getting more money after losing the first grubstake, but he was back in the game.<\/p>\n\n\n\n

Cut to the chase. At the end of six months I was up 38%. I had never used more than 40 percent of the account funds and my maximum drawdown was under 10 percent. I thought those were good numbers and Charlie agreed. I was only 26, but I already traded in the Belgian Dentist* style.<\/p>\n\n\n\n

The New York trader made well over 100%. I did not know his risk and exposure parameters, but I have a pretty good idea based on what happened next.<\/p>\n\n\n\n

The Winner Crashes the Pool<\/h2>\n\n\n\n

He was declared the winner and was given a $1,000,000 commodity pool. I believe most of the money came from close associates of the gold fund, but I do not know that as a fact. There was never a public offering.<\/p>\n\n\n\n

It took the hotshot less than three months to crash the $1,000,000, dropping it to the $500,000 failsafe cutoff. My broker told me the gold fund manager declared, “I will NEVER get involved in commodities again!” Charlie’s words came immediately back to me.<\/p>\n\n\n\n

The prestigious gold manager thought like so many new and unsophisticated traders. He looked only at the reward and did not consider the risk and exposure variables in the trading equation. What is required to attain such a profit in such a short time? How frequently does it trade? What is the typical drawdown? How deep into the capital does it dig?<\/p>\n\n\n\n

The more things change, the more they stay the same. Nearly half a century later, fear and greed still rule the trading roost, and I am certain they always will. Social media and online marketplaces are chock full of programs promising enormous returns, with rarely a mention of risk or exposure. Of course “AI” is now the magic buzzword. Sure, you can make 200% in a week trading FX or futures. But the risks you take guarantee eventual failure when the door swings the other way.<\/p>\n\n\n\n

*In Europe at that time, Belgian dentists had the reputation of being extremely conservative investors.<\/p>\n\n\n\n

This post is educational commentary. It is not investment advice. Trading futures and FX involves substantial risk of loss.<\/em><\/p>\n\n\n\n

Good Trading!<\/p>\n\n\n\n

Michael Duane Archer<\/p>\n\n\n\n

Related Reading<\/h2>\n\n\n\n