Futures Trading

Lessons Learned

A Lifetime of Futures and Commodities Trading Education

By Lee A. Ga us

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The information contained in this report is intended for informational purposes only.

This information was compiled from sources believed to be reliable, but accuracy cannot be

and is not guaranteed. There is no warranty, expressed or implied, in regards to this

information for any particular purpose. There is SIGNIFICANT RISK involved in trading futures

and or options on futures. Investors should consider these RISKS AND EVALUATE THEIR

SUITABILITY BASED ON THEIR FINANCIAL CONDITION. No one should even think about

trading futures and options on futures with anything other than risk capital. This information is

provided freely and is not in the capacity of a trading advisor. NO liability on the part of the

author or broker exists for any trading loss you may incur in the use of this information.

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About The Author 29 Table of Contents

There Are No Silver Bullets, Magic Answers Or Trading Secrets 4

Two Basic Functions 6

Factors That I Believe Play A Large Role In Losing Trades 9

Defending Your Trade 13

Options On Futures Traded Commodities 16

The Delicate Art Of Spreading 19

Unraveling The Mystery Of Selling Short 26

Taking A Loss 30

I Told You There Are No Magic Bullets 34

About the Author 35

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There Are No Silver Bullets, Magic Answers or Trading Secrets

I sat at my desk, gazing at the screen after being slapped into the reality that

most traders lose money when 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 and hoped he would go away. But 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 again hoped he would just 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.

Since you are reading this booklet it is safe to say that you are, have in the past,

or will possibly become involved in trading commodity futures and/or options on

commodity futures. Perhaps you have even found yourself gazing at a screen

after being slapped into the reality that most traders lose money. By the way, I

will finish this true story in a later section.

If you have traded commodity futures or options on commodity futures the

following information may appear to be pretty elementary. But I am sure even a

seasoned trader may be able to find a nugget of information that might be

helpful, especially if you have found yourself “gazing at the screen.” If you are

new to commodity futures trading, you just might have the greatest potential for

success because you have not yet developed the bad habits that can, and very

often do limit potential success.

An important factor to keep in mind is that with the best advice or analysis not all

trades are winners. Let me make this clear, no matter whom you listen to, or

what books you read, or what systems you investigate there are NO magic

answers. If anyone tells you they have the magic answers don’t walk away ...

RUN! To that point, while I believe this booklet can be helpful, especially in

conjunction with the Annual Lee Gaus Traders Seminar that is held each year,

there are no magic answers or silver bullets on these pages. But that is not the

purpose of this publication.

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This booklet is not intended to provide absolute answers of fact but rather to

present a discussion of various factors that, in my opinion, are critical in trading

commodities. I do not want to mislead you. The following sections contain my

observations and opinions. Therefore, I am not presenting them as facts, even

though I believe they have validity. If you ask me to provide absolute proof I

cannot! If you want absolutes find a mathematician. The only absolutes I know of

in commodity trading is that most people lose money. My hope is that this

booklet will give you enough additional insight to increase your odds of success.

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Two Basic Functions

Going back to the introduction of this booklet I shared with you the following

story.

“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.”

I promised you that we would cover this in more depth later in the booklet.

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.

These words have helped me more than anything else in understanding markets

because it has kept me, and should help keep you, from the short term

meaningless yings and yangs of the markets. The simple question you should

ask yourself before putting on a trade is what is the market telling you? Do we

have too much? Do we have too little? If you are going to trade countra to what

the market is telling you, and there are times you will want to, can you explain

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why? This isn’t building the Hoover Dam, it is simply common sense and too

often we let our

intellect get in our way.

You may want to examine the Dollar Index from September 2002 through the first

part of March 2003 as an example. What did the market tell you? Take a look at

Euro Currency from August 2002 through the first part of March 2003. What was

the market telling you? Take a look at May Beans from September 2002 through

March 2003. What was that market telling you? Well you are probably saying it is

pretty easy to be brilliant after the fact, and you are right. But that takes us to the

discussion of the technical and fundamental analysis.

I don’t have any idea how long the debate has raged between technical analysis

and fundamental analysis, probably from the moment the first chartist drew a line

on a piece of paper. So let us discuss briefly these two different types of analysis.

TECHNICAL ANALYSIS

Technical analysis has certainly expanded over the twenty eight years I have

been in the business, much of that from the advent of the personal computer.

Twenty-eight years ago a point and figure chart maintained by hand was pretty

heady stuff. Today with the use of computer power new types of technical

analysis seem to appear everyday. So what is technical analysis? Technical

analysis, in my definition, is the accumulation of past price history that is

manipulated in a fashion so as to be depicted in pictorial chart form, or in

mathematical relationships that are thought to be able to predict future price

moves based upon past tendencies. In other words, history will repeat itself.

There are many forms of technical analysis. These include point and figure

charts, bar charts, the Japanese- originated candlestick charts, open interest

charts, volume charts, Gann charts, Elliot Wave charts, Stochastic charts,

moving average charts, and a ton of variations and others that I have not

mentioned. I do believe, however, that you get the idea. There are enough types

of technical tools to satisfy most traders. But there has yet to be discovered the

never failing Holy Grail. Something to keep in mind, however, is that it has been

said that over eighty percent of all fund systems are technically based. Anybody

remember reading Tom Clancy?

FUNDAMENTAL ANALYSIS

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So if technical analysis is basically the study of past price history or relationships

in an effort to predict the future, what is fundamental analysis? Fundamental

analysis, in my opinion, is the supply/demand dynamic overview assigned to

either non-perishable or perishable commodities or how the world situation

impacts that dynamic. Simplistic examples of fundamental analysis are: Gold

demand versus gold being mined or in the recent past demand for gold given

world uncertainty in light of the Iraqi conflict. Or take a look at the soybean crop

size in comparison to world demand, and the price impact on cocoa in light of the

civil unrest in the Ivory Coast. How has fundamental analysis changed over the

years? Twenty eight years ago as a young grain trader for an international grain

company, I read a story on the news wire that Australia sold wheat to someone.

When I ask one of the old grain traders with the firm what that meant he told me

it meant nothing at all, because only what the United States did really amounted

to anything meaningful. Well, not today! Thanks to the expanded grain production

around the world the United States is only one part of the production equation.

So when one looks at fundamentals, one must take into account the whole world.

This is true for every commodity traded.

WHY ARE THERE BOTH TECHNICAL AND FUNDAMENTAL ANALYSIS?

In my mind there is no question that fundamental considerations eventually rule

the day in determining price. But that hardly diminishes the value of technical

analysis. The reason many people use technical over fundamental is they better

understand the mathematical data presented by technical analysis. Another long

held reason is that by the time you and I find out about the fundamental

information impacting the market the price movement is over and we have

missed the opportunity. Technical analysis allows us to recognize that something

is happening, even if the fundamental information is not yet public knowledge.

Which is better? You will have to make that decision for yourself, but I firmly

believe it is the combination of the two. In making my daily and weekly comments

I rely heavily on technical analysis because that is the only way I can adequately

follow over fifty different commodities and spreads. But in making

recommendations I want to know what the fundamentals are indicating. I suggest

that if you are going to do your own analysis you might want to incorporate both

types into your thinking. One word of advice, you cannot rely on just one type of

technical analysis, or just one source of fundamental information.

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Factors That I Believe Play a Large Role in Losing Trades

Many years ago, a close friend of mine bought stock in a company that

manufactured large recreational travel vehicles. The kind that sleeps eight, cooks

for an army and is seen on many of our vacation highways. This friend had it on

good advice, his father- in-law, that at thirty-dollars a share this stock was a sure

thing. Well, wouldn’t you know it, just after this chap bought the stock the first

energy crisis hit this country and these gas guzzlers were in less demand then

venereal disease. The stock went almost instantly from thirty dollars a share to

three. Looking at the possibility of taking a huge loss or “waiting it out” my friend

decided he would hold and wait it out. After all, until he sold the stock the loss

was only a “potential” loss. Thirty one years later I ask him what ever happened

to that stock and he told me it was in the safety deposit box down at the bank. I

think this example goes a long way in showing a major difference between equity

trading and futures trading.

The futures business is a zero sum business. For every dollar made there is a

dollar lost, and the books are settled at the end of business every trading day. In

the equity market a lot of folks can make money and no one has to lose money

and nothing is brought to market until the stock is sold. There is not a crucial time

factor in equities as there is in commodity futures. Consequently, time plays a

large part in making trading decisions (some rational, some irrational) and in

determining winners and losers. I believe in order to swing the odds a little more

in your favor you have to have a firm grasp on the role(s) time plays.

In order to better understand the impact of time you must recognize why so many

traders lose money as compared to those who make money. Right about now

some wise guy is thinking the losers pick bad trades and the winners pick good

trades. While that has some validity it is not totally true. Not all losing trades are

necessarily bad trades. In my view there are two basic reasons why making

money in the commodity market is difficult besides the trades selected. To

understand these points allow me to suggest that for just a moment you forget

everything you have heard about trading in the past and concentrate on the

points I am trying to make.

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FACTOR NUMBER ONE: THERE IS A TIME SENSITIVITY, A TIME FINALITY

AND PRICE TO LENGTH OF TIME RELATIONSHIP.

Time sensitivity is a phrase I use to express the need for near immediate

gratification and will be discussed in greater detail in the next segment.

Time finality tells us that there is not a single futures contract month that goes on

forever. Unlike the true story I shared with you earlier about my equity friend, in

commodity futures trading there is a beginning and an end to every trading

month. In equities, a short term speculation can become a long term investment

as the earlier story shows, by just putting it in a safety deposit box. There is no

“time” expiration factor that forces the owner of an equity trade to bring the loss

to reality. That is, of course, unless we are talking about K-Mart, or United

Airlines, or American Airlines or Enron, or WorldCom, or the hundreds of dot com

companies that went belly up (and the equity folks have the audacity to call

futures trading risky). In fact, short of out right corporate bankruptcy there is

nothing that forces the trader of equities to bring a bad trade to market.

In commodity trading, for every contract month of every commodity there is a

beginning and an end there is an alpha and an omega. There will be a day of

reckoning. This very factor will force the most obstinate trader to eventually

recognize a bad trade and force that trader to deal with the impact. I have often

wondered how many traders in the equities would actually be considered

successful if there were a time limit involved where they would have to accept the

consequences of their decisions (or the decisions of those honest and forthright

equity house analysts) without the luxury of putting it in a safety deposit box.

If you understand the time finality of a commodity contract month then you

understand that it is pretty rare to have a classic long term trade/investment. This

makes trading futures extremely time pressurized within the prescribed life of that

contract month. (There are ways to help modify this time pressure and we will

discuss this in a later section.) But the point is clear that without an event

extremely out of the ordinary, (i.e. drought, war, flooding, recession, inflation,) if

you are trading commodities you will be involved in durations of time shorter then

perhaps you are accustomed to in your equity account.

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I was at a seminar once where the speaker noted that in using commodities that

grew (i.e, corn, beans , cattle, cocoa, etc.) if one constructed a twenty year mean

average and determined the first and second standard deviation over and under

that twenty-year mean average, several things become evident. The price of the

commodity will spend sixty five percent of the time between the first standard

deviation above and below the twenty-year mean average. That same

commodity will spend thirty percent of the time between the second standard

deviation above and below the twenty-year mean average. That same

commodity will spend only five percent of the time above or below the second

standard deviation of the twenty-year mean average. A good example of this is

the 2003 May Soybean contract. If you examine a daily bar chart you will notice

that you have go back to the middle of August of 2002 to find a time when May

beans were not trading in a very recognizable sideways pattern. If you had

attempted to trade longer term break outs you probably were not real successful.

Had you been aware of the sideways tendencies of a commodity futures contract

(sixty-five percent of the time spent between the first standard deviations above

and below the twenty-year mean average) you would have had an opportunity to

fair better than the break out trader. Naturally, that is in my opinion.

So given the finality of a futures contract, the inherent time sensitive nature of a

futures contract (which we will discuss in a moment), and being aware of the time

a commodity futures contract spends at various levels perhaps you can see why I

say the uniqueness of time as it compares to equity trading is a factor in why

folks may lose money even if the trade they selected eventually is successful.

They simply may have failed to recognize the characteristics that are in my

opinion inherent in such a speculative beast.

LEVERAGE, FRIEND OR FOE AND TIME SENSITIVITY?

A feature unique to the commodity futures industry that has been and is used to

attract investors is the leverage that an investor enjoys. The following excerpt is

taken from the Commodity Trading Manual presented by the Chicago Board of

Trade, “One attractive feature of speculation in commodities futures is the

important leverage available to individuals with venture capital. Relatively little

capital, usually 5% to 15% of the total value of the contract, gives the trader the

benefit of price movement on the full contract.”

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Re-read the previous paragraph again and then ask yourself if the leverage that

is afforded the commodity trader is a positive? It is this very feature of leverage

that allows the trader to speculate a contract worth tens of thousands of dollars

with as little as five per cent “margin money” (we will be discussing margining in

another section). But the Chicago Board of Trade manual also says, “Of course,

if the price moves adversely, the leverage will work against the trader, long or

short.” Should that happen, you have a margin call. Suffer through a number of

margin call conversations and you now have time sensitivity, the need for

immediate success or at least relief from a

market going against you. Let us look at an example. On April 3, 2003 the value

of the May contract of Soybeans was roughly twenty nine thousand dollars. The

margin required to trade that contract worth about twenty nine thousand dollars

was one thousand one hundred fifty dollars, about four percent of the contract

value. Just as an aside, if you were trading stock worth twenty nine thousand

dollars on margin you would have to put fifty percent or more of the face value.

Well, what happens if just after you place that trade, they close six and a half

cents lower? You have a margin call, brought to courtesy of leveraged trading. A

lousy one per cent fall in the value of the contract makes you a margin call victim.

If your timing is just a little off and you experience repeated margin calls the

pressure grows and there is heightened need for success or time sensitivity.

When that creature rises from the depths I can almost completely assure you the

decision that you make will be made out of pressure created by this very time

sensitivity. Frankly, in all my years in this business rarely have I seen decisions

made under time sensitivity duress end up being good decisions. But we need to

realistic in this area. If beans fall twenty cents, or a thousand dollars a contract,

or three and half per-cent of the original value, is that a really big deal? I cannot

answer that for you, but whatever your answer is may go a long way in

determining if you should be trading a commodity with the volatility of soybeans.

So how do we defend against time sensitivity? That takes us to the next section

of how you neutralize time sensitivity and defend your trade. What I want you to

understand from this section is the critical importance that time plays.

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Defending Your Trade

Many times disheartened traders say to me, “My broker lost all my money in so

and so or such and such.” My response is “How did your broker lose all your

money, wasn’t it your money? Didn’t you ask for or understand the game plan?”

Ladies and gentlemen let me be succinct. If you want to fly by the seat of your

pants be the human cannonball in the circus, that way at least someone will

enjoy your flight. You must understand that once you have initiated a trade, all

that is left is money management, or as I like to call it defending your trade. Who

and/or what are you defending your trade from? Many times you are defending

your trade from yourself, your own emotions or lack of planning. Lack of planning

can force you to defend against ill placed stops, or the confusing actions of an

illiquid market. In my view the most common attacker you have to defend against

is the pressure created by an under-funded account that leads to the

aforementioned time sensitivity.

Let us begin by discussing the trade selection process, and the game plan. In our

example you have purchased May Soybeans. The reason for May Soybeans is

that it illustrates the point I am trying to make. When you bought that May

Soybean contract, did you ask yourself, or your

broker, or your guru what your expectations would be? Were you satisfied that

the reward/risk ratios were acceptable? Did you determine if you should be using

stops and if so at what level? If you bought May beans in the mid-$5.60’s on

March 7 did you set a goal of around $5.90?

If you did what was your level of risk? It has been my experience that few traders

ask enough questions. My suggestion is begin asking the questions that will help

you defend your trade. Otherwise put that application in at the circus.

If you look at the May Soybean contract since August you can see a pretty

definitive sideways market. If you examining the previously mentioned trade of

buying May Soybeans at $5.60 on March 7 and getting out around $5.90 you can

see it would have been a good trade. If you would have attempted to buy beans

on a break out above $5.72 on the 17th of January you probably would not have

fared so well. But had you established a game plan involving acceptable risk the

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outcome would not have been fatal. Keep in mind having a losing trade is not

abnormal and should be expected, more on that later. So what have we

determined? If you are going to put on a trade there are a number of questions to

ask in order to adequately defend your trade. Failure to do so only increases the

chance for disaster.

Earlier we discussed the problems that were associated with the highly leveraged

trading aspect of commodity futures trading. It is in the area of defending your

position that leverage can have the most negative impact. As you learned earlier

a mere one percent decline in bean prices can generate a margin call if the trade

is capitalized at the minimum. So what is the lesson? Forget the minimum

margin! Rather chose to adequately capitalize your account based on the goals

and safe guards established as we discussed above. I cannot offer definite proof

of this, but it is my sincere belief that those people that adequately capitalize their

account have a greater degree of success than those who are always trading on

the skinny. Why? If they guard against over trading their capital they have

neutralized, in my opinion, the potential impact of time sensitivity. They have

done this by negating the early and repeated calls for margin. Always keep in

mind, if adequately capitalizing your account for a certain trade is more than what

you want to commit, do not elect to put on the trade. Or if you have your heart set

on doing something explore the long side of commodity options. So what have

we determined? If you are going to trade futures adequately capitalize your

account based on the game plan you determined prior to entering the trade.

Don’t trade on the skinny.

Are stops helpful in defending a position? In a word, YES… but where you place

the stops varies according to the situation. It is important to recognize the type of

market you are trading. Is it sideways and you are expecting it to remain

sideways? If so, your stop is going to be based in some form or fashion off of a

violated high or low, and the risk reward ratio can easily be close to 1:1. In the

May soybean example, when the beans were bought on March 7 in the mid-

$5.60’s the stop could have been set at $5.53, $5.38, or $5.31 depending on the

acceptable level

of risk. The profit target was $5.90; the greatest risk level was 5.31 almost 1:1.

Should you have made that trade? Only you can answer that question, but as

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you see, we have established a goal and have identified various levels or risk

limiting stops. Perhaps you are looking at a

market with the potential of having a longer term major trending move, like crude

oil during the onset of the Iraqi war. If you would have been fortunate enough to

buy crude at 2650 on December 12, 2002 your stop would have been around

2350, or a three hundred point level of risk. For those who were lucky enough to

put that trade on (I was not among the fortunate) and stuck with the trade, they

would have seen a top of 3682-over a thousand points or about a 3:1 ratio of

reward to risk. What you need to understand is that when using stops it is not

enough to just pick a chart point or a price on a whim. You have to identify what

kind of market you are trading. Shorter term sideways markets (which are my

favorite by the way), or longer term strongly trending markets. The acceptable,

logical levels of risk are different.

There are some interesting nuances you may want to know when selecting

trades, or stops. It is my opinion that if a market is going to have over reactive

swings that can elect stops, only to then turn around and go back the other

direction it will happen more often on Mondays and Tuesdays. Can I offer hard

and fast proof? Nope! It just has been my unscientific observations over the

years and it does not mean that these same swings don’t happen the other three

days of the week. My belief is that it is more LIKELY to happen on Monday

and/or Tuesday. So what is the point in knowing this? You may want to be more

aggressive with stops on Monday and Tuesdays and then tighten them up on

Wednesday through Friday.

So what do we want to understand in defending your position?

1. Have a plan

2. Determine the kind of market you are trading

3. Adequately capitalize your account

4. Be comfortable with the risk/reward ratio

5. Research for market nuances

Defend your trade, it is your money!

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Options on Futures Traded Commodities

Commodity options, once banned by the government, have been around now for

nearly two decades. Educating the trading public on the use of commodity

options has probably been even more difficult than in educating agricultural

banker and producers in use of hedging. I have long thought it is because we

make a simple concept far too difficult. If we strip away all the fancy verbiage it

really is pretty simple. Buy a call and have the right to be long a futures contract

at or above a certain price at sometime in the future IF IT IS TO YOUR

BENEFIT! If it is not to your benefit, all it cost you was the price of the option and

the various fees associated with the purchase. Confusing? How about looking at

it this way; do you think Tampa Bay will win the Super Bowl? Bet on Tampa!

Think the Angels will win the World Series? Bet on the Angels! Think that beans

have a good chance to be over seven dollars in November? Bet on Beans! If you

happen to be wrong all you lose is the price of the bet. Well, what if you think the

price will go down? Buy a put! If the price goes lower you have the right to be

short the market at or below a certain price at sometime in the future IF IT IS TO

YOUR BENEFIT! If it is not to your benefit, all it cost you was the cost of the

option and the various fees associated with the purchase. Sound simple? Well,

understanding how options work is simple using them to make a profit is

something that is a little more difficult.

First, you have to understand that the vast majority of options purchased expire

worthless. The figure often used is somewhere between seventy and eighty

percent of all options expire worthless. What does that mean? Well, it does not

mean profit for those folks who bought the puts and calls. It means that the

people who sold the options made the money, which is again thought to be

normal. So that is simple to solve, just be a seller of options and make the

money. Well, in my opinion it ain’t that easy either. So right about now you are

probably thinking, “Well, what the heck do you mean.” Maybe we need to

examine the question of options a little closer.

Buying calls and puts gives the buyer the right to be long (if they bought a call) or

short (if they bought a put) at an agreed upon price by a certain agreed upon

date. What are the advantages to buying a call or put? Perhaps the biggest

advantage is that the risk is totally limited to the cost of the option, the

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commission and the associated exchange, clearing house and NFA fees. Your

risk is limited to that definable amount. Must you risk that entire amount? No! You

can exit the trade and reclaim whatever value remains at the time of your

decision to exit. One final disadvantage, most long positions lose money.

Selling puts and calls saddles the seller with the obligation to provide a long

position to a buyer of a call, or a short position to a buyer of a put should the

buyer choose to exercise their right to be long or short. For that obligation the

seller receives a premium that is determined by the open outcry in the trading

pits. An overly simplistic but helpful understanding would be; the buyer of a call is

betting the market will rally, the seller of the call is betting it will not, the buyer of

a put is betting the market will go down, the seller is betting it will not. As I have

already stated the sellers are usually right, so why not just be a seller?

Well like everything else in this business, it just isn’t that easy. What are the

advantages of being a seller? Sellers of options are considered to be the money

makers, but their profit is limited to the premium collected while the risk is

unlimited. They are not only faced with unlimited risk and limited revenue, sellers

are exposed to margin call liability.

What really bothers me about being a seller of options is that with unlimited risk

some of the ugliest, nastiest, worst losses I have witnessed have come from

sellers of options who got caught in a run away market. Perhaps the best

example that you might recall is on black Friday and Monday in 1997. You might

recall that it was reported that many folks lost huge amounts of money from their

equity portfolios because they sold puts (the right for someone else to be short)

and the huge plunge in the market crushed them like a grape. The same thing

has happened in the commodity markets. So does that mean options should

never be used? Nope!

WHEN SHOULD OPTIONS BE USED AND WHO SHOULD USE THEM?

I personally believe that agricultural producers, especially grain and soybean

farmers, should be buyers of puts equal to 100% of their anticipated production.

Since the risk is limited and the upside potential is unlimited, I believe producers

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should use options more aggressively and manage their cash grain/bean

positions in conjunction with their put ownership.

As for speculators, it is my personal belief that several times a year aggressive

call or put ownership is warranted. Those times are usually when the markets are

very overdone and the underlying sentiment is so lopsided as to believe the

markets cannot possibly go the other direction. As an example, let us look at the

gold market several years ago. The market was very depressed and central

banks were selling their stocks of gold on the world market which in turn pushed

the supply over and above the demand. Then without warning the gold market

exploded and those who bought calls at extremely low prices made huge

amounts of money. Another example more recently seen was in the soybean

market which many analysts had predicted would go below four dollars a bushel.

Indeed, the situation looked pretty bleak, but all of a sudden with November

Beans at $4.08 a bushel the market rallied and those long calls had a chance to

do very nicely.

What I would like to get across is pretty simple. If you are a producer think about

using puts equal to 100% of you production. If you are a speculator like a good

pugilist, pick your spots. If you want to be a seller of options ask your broker how

to spread your risk to protect yourself. Remember you have options even when

trading them.

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The Delicate Art of Spreading

If there is one section of this booklet that I want to inspire you to learn more

about it is this section, The Delicate Art of Spreading. That is why we will

probably spend an inordinate amount of time on spreading and spread trading

during the Lee Gaus Annual Trading Seminars. Let me make this very simple, if

your broker is not real familiar with spreading, or finds spreading to be of little

value, then find another broker. If you are trading on your own at discount and

you are not familiar with spreading, get a broker who can help you. If you need

help finding one, call me and I will recommend several. In the world of commodity

trading, spreading or to be spread is a serious and potentially powerful trading

strategy.

So what is spreading? To appreciate the Art of Spreading you have to begin with

the basic understanding that the prices of many commodities can move in a

somewhat parallel fashion because they are impacted by similar economic

realities. In spread trading you are attempting to determine how two different

months of the same commodity (July Corn versus Dec Corn), or two different

commodities (June British Pound versus June Aussie Dollar) are going to react in

relationship to each other. You would initiate a spread trade when you have

reason to believe the price difference of the respective contracts is either too

close together or too far apart. In other words you are simply trading the

difference between the two commodities or commodity months.

You might be thinking that if buying or selling one commodity contract is risky,

spreading two contracts must be doubly risky. Well, that is not necessarily the

case. In fact there are those, and I am among them, who believe spreading by its

very nature is less risky than out right long or short positions. But I have to

remind you there are no absolutes, and spreading is not absolutely less risky. In

fact spreading can be more risky on occasion. As an example the July versus

November Bean spread was the demise of more then one cash grain trading

giant in the last 25 years. So like everything else in this business, you must

understand there are no absolutes.

Why spread? It has long been rumored on the floors of the major exchanges in

the United States that the most successful traders over the years have been

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spreaders. In fact one of those traders I knew personally prior to his death. When

I ask him what he looked for in his daily trading he told me he wanted to

determine what the most bullish commodity on the floor was and what was the

most bearish commodity on the floor. Then he would try and be long the bullish

commodity and short the most bearish. There must be a reason for this. I believe

one major reason was that spreads can diminish the effect of time sensitivity.

Remember from the earlier section, time sensitivity refers to the need to not only

be correct in the selection of a futures trade, but also to be correct in the timing of

the execution of that trade. You can be totally correct in the analysis of a market

as to buying or selling a single future contract and still lose money by entering

the market prematurely. While there are times when a spread can act with a

great deal of volatility, normally a spread moves much slower, and therefore

diminishes the impact of time sensitivity and the need to be so perfect in the

timing of the trade. It is my opinion that any time a trader can diminish the

potential impact of time sensitivity the chances of a successful trade are

improved. I will attempt to give you some insight into The Delicate Art of

Spreading and perhaps open up a completely new avenue of commodity trading

for you.

SPREADING, WHAT IS IT?

There are several different forms of spreading. We will concentrate on the Intra-

market spread and the Inter-commodity spread. Intra-market spreading is the

simultaneous purchase and sale of the same commodity on the same exchange

with different delivery months. Now that is a pretty solid text book definition, but

fact is in a spread the purchase and sale do not have to be simultaneous.

EXAMPLE:

Buy one contract of March Corn, Sell one contract of July Corn, or for those

willing to accept more risk Buy July Corn (which represents the old crop supply)

and Sell December Corn (which represents the new crop supply).

Inter-commodity spreading is the simultaneous (or near simultaneous) purchase

and sale of different but economically related commodities on the same

exchange with the same or different delivery months.

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EXAMPLE:

Buy one contract of June Heating Oil, Sell one contract of June Crude Oil.

It is important that you understand that when you are trading a spread, you are

speculating on the price difference or spread between the two contracts. Spread

traders are not concerned with the up or down price action of the individual

contracts. They are focused on the price relationship between the two contracts.

A spread position is not to be looked at as two separate trades, but rather as one

trade. The success or failure of the trade is determined by the change in the price

difference between the two contracts or commodities. It is very common for one

side of a spread trade to make money, and the other side of the trade to lose

money. It is the hope of the spreader that the winning side makes more than the

losing side. You might ask, “Why don’t you just put on the winning side and forget

about spreading with the losing side?” The answer is simple. A spreader does

not know which side of the trade will be the prime mover and impact the spread

value.

INTRA-MARKET SPREADS

The intra-market spread is perhaps the easiest to understand and the most

commonly used type of spread in the industry. A spreader of an intra-market

spread is attempting to profit from the price difference between two futures

contracts of the same commodity, traded on the same exchange, but with

different delivery times. The trader putting on this spread believes that for

whatever reason, the price differences are too close or too far apart.

EXAMPLE:

If you bought March Corn at $2.70 and sold July corn at $2.80, the spread would

be ten cents July over the March. Why would you do that? Because you would

have reason to believe that the price of March corn would gain on or get closer to

the July price. If after a month March Corn was at $2.86, and July Corn was at

$2.88 the spread would be 2 cents July over March. The outcome would be an

eight-cent profit, less commission and fees.

Bought March Corn $2.70

Sold July Corn $2.80

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Sold March Corn $2.86

Bought July Corn $2.88

$ .16 cents profit $ (.08) loss = .08 cents gross profit

As you can see in this example the trade was profitable, but one side of the

spread lost money.

Two common factors that help determine the value of the spread are supply and

demand. When supplies are adequate as they relate to demand, commodities

normally trade at what the industry calls a carrying charge. In a carrying charge

market the nearby futures contract is priced below that of the deferred futures

contract by an amount somewhat equal to the cost of storing the commodity. One

must keep in mind that carrying charges include the cost of storage, interest,

insurance and shrink.

EXAMPLE OF FIGURING CARRYING CHARGE:

Givens –

Soybeans January delivery month, on January 1, $ 8.00

Soybeans March delivery month, on January 1, 8.07 1/2

Interest: Ten percent

Shrink and insurance: Three percent

$8.00 (price of January delivery beans on January 1) x .13 (interest + shrink and

insurance) = $1.04 (cost of carry for a year) / 360 days (a financial year) =

.002888 (cost of daily carry).

.002888 x 59 (number of days between January 1 and March 1) = .17 cents

The logic of full carry assumes that if soybeans are worth $8.00 on January 1,

they should be worth $8.17 if delivered on March 1. Since March is trading at

only $8.07, should a spreader buy the March and sell the January based on what

we know? Not without doing further research to see if the supply-demand

situation has changed somehow. It may well be that the supplies remain

adequate and a prudent trader would buy the March Soybeans and sell the

January Soybeans. It may be that supply-demand relationship has somehow

changed and the market is

becoming inverted.

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When commodities are in short supply relative to demand, the nearby futures

markets will likely be trading higher than the deferred futures market. This is

called an inverse or inverted market. An inverse market is an example of how the

futures market indicates a refiner/merchandiser’s immediate needs compared to

their needs six months from now.

An inverse market usually takes place when a commodity is in short supply as a

result of a drought, production problems or intense demand. Attempting to

spread an inverted market is a little more difficult than a carrying charge market

since there is no mathematical formula that can be used to determine just how

far inverted a futures market can become.

Popular intra-market spreads involve buying old crop futures and selling new

crop futures in hopes that the old crop will increase in price as supplies get

smaller and the new crop or new supply price gets cheaper. The opposite can be

the case should adequate supplies exist in the present, but new crop production

may be threatened. One must keep in mind that if one chooses to spread

different crop or production years, the risk associated with the spreads becomes

greater. Why? The market knows virtually everything about the old crop and

virtually nothing about the new crop.

INTERCOMMODITY SPREADS

Inter-commodity spreads are a little more difficult to understand, and therefore

not used as much as the intra-market spread. A spreader of inter-commodity

spreads is spreading two different but related commodities, in the same or

different delivery months. Examples of inter-

commodity spreads are cattle/hogs, corn/wheat, gold/silver, heating oil/crude oil,

T-Bills/T-Bonds, Canadian Dollar/Swiss Franc and this is just a small sample of

the inter-commodity spreads available to trade.

The key to understanding inter-commodity spreads is to understand they are

different commodities, but related or substitutable. Think of it this way, if beef

prices are too high relative to pork, pork can easily be substituted for beef.

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A popular inter-commodity spread is the Chicago wheat/ Chicago corn spread.

Several years ago for whatever reason the Chicago Board of Trade stopped

recognizing the corn/wheat as a spread. Because of this policy by the Chicago

Board of Trade both sides of the trade have to be margined as two separate

speculative trades, but I still think this is a good spread to watch. Let us examine

the basic logic behind this spread. Wheat is considered a cereal grain and the

primary use of wheat is for human consumption. Corn is a cereal grain

considered to be almost exclusively for animal consumption. Corn is the main

energy component in most animal feed rations, while wheat may or may not be

included in the ration. Should the price of corn and wheat move closer together, it

may become advantageous to increase or add wheat to the ration. Should the

price difference become extremely close, it will almost certainly cause an

increase in the amount of wheat in the livestock ration. It may be advisable for a

spreader to consider buying wheat and selling corn in equal increments.

Increasing the amount of wheat used for feed, will lead to decrease wheat

supplies, and a decrease in the use of corn in the feed ration will lead to an

increase in the supply of corn. These factors could cause this spread anomaly to

swing back to a more normal relationship, and benefit those long wheat and short

corn.

It is also accurate therefore to point out that if the price spreads were believed to

be too far apart, a spreader could buy the corn and sell the wheat, as feeders

revert back to more traditional sources of feed energy and remove wheat from

the ration.

The easier it is to substitute one commodity for another, the more sensitive the

price-spread relationship. If careful study of the market suggests that a current

price relationship between two related commodities is outside historical points of

equilibrium, a spread trader would examine the wisdom in buying the futures

contract of the lower priced commodity, and selling an equal number of futures

contracts of the higher priced commodity.

WHY SPREAD?

1. I believe spreading just gives you a greater chance of success by limiting

the impact of time sensitivity.

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2. I also believe spreading allowing you more time to think and make

decisions.

3. While there is still risk associated with spreads, it is accurate to say that

normally the risk associated with futures spreads is less than the risk

associated with straight futures trades. As so well stated in the Chicago

Board of Trade published “Commodity Trading Manual”, “Since most

price relationships providing spreading opportunities are relatively

immune to effects of volatile fluctuations in price levels, the financial risk

is usually much smaller in the various types of spreads than in simple

long and short positions”.

4. Keep in mind that intra-market spreads in carrying charge markets are

probably the least risky of spreads because the potential risk faced by

the trader is limited to the amount the spread can go to achieve full carry.

5. A number of spreads demand zero margin funds.

Spreading is a more sophisticated trading tool than just purchasing or selling

futures or option contracts. You should spend time reading related material and

discussing spread opportunities with your broker. But do not let this step up in

sophistication stop you! This is not open heart surgery or attempting to fine tune

the engine on high performance race car. Simply put, in my opinion it is easier to

grasp the concept of spreading than it is to understand the feeding patterns of

the large mouth bass.

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Unraveling the Mystery of Selling Short

Over the years I have written a number of articles on this subject and I have

conducted seminars and workshops on this subject until I have lost my voice. No

matter what method I employed, or how hard I tried, the concept of being “short”

the market never seemed to take hold. So in this piece I am going to take a

different avenue. We are going to pretend that this morning as you drove to work

the Good Lord Almighty just appeared in the passenger seat next to you sipping

on a cup of coffee. In between sips, and in all his splendor and glory, he told you

that over the coming months gold was going to drop in price by over one hundred

dollars an ounce! WOW! You have just been given the key to unbelievable

wealth. You will never have to work again. But what are you going to do with that

information? How are you going to take advantage of this information? The Good

Lord Almighty took time in between sips of coffee to tell you that the price of gold

was going to go way down, not up! Buying gold will do you no good at all. So

what are you going to do? You can sell your high school, college and wedding

rings before the price goes down, but that will get you enough for a tank of gas.

So how are you going to enrich yourself with this information? Ladies and

gentlemen, you are going to SELL THE MARKET SHORT! UNDERSTAND YOU

HAVE TO BE SHORT THE MARKET TO MAKE MONEY WHEN THE MARKET

GOES LOWER!

WHAT IS SHORT SELLING?

Simply put, being short the market means you sell a commodity BEFORE you

buy the commodity. It is just that simple. I think the verbiage “sell the market

short” lends to the confusion. Perhaps if we just said “sell the market” that would

make it less confusing. But what you have to understand is that one can sell a

commodity first and buy it later, just as you can buy a commodity now and sell it

later. We are not talking about the Theory of Relativity here, we are talking about

sequence.

Perhaps the best way to begin understanding selling the market is to first deal

with having bought the market. When you buy, or are long the market at a

specific price, you hope that the price will go higher. That would enable you to

sell the contract at a higher price than where you bought it, ergo providing you

with a profit.

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EXAMPLE 1:

You buy one contract of Comex gold for $300

Market advances and you sell that Comex gold contract for $310

You make a $10 per ounce profit $10

Or a $1,000 gross profit, $10 x 100 ounces.

Now let us take the above understanding of being long or having bought the

market and simply reverse the sequence and mindset. When you sell the market

at a specific price it is your hope of that the price will go lower. That would enable

you to buy the contract back LATER at a lower price than where you sold the

market, ergo providing you with a profit.

EXAMPLE 2:

You sell one contract of Japanese Yen for 8620

Market breaks and you buy back Japanese Yen contract for 8580

You made a forty point profit 40

Or a $500 gross profit, $12.50 x 40 points.

So what is the major difference between the given examples? SEQUENCE! It is

this sequential difference that causes problems for many retail commodity

traders.

SELLING BEFORE BUYING

In the normal course of everyday life people do not sell something they do not

own. First a house is purchased, and after the addition of several children the

house is sold and another is bought. A car is purchased, driven then sold or

traded-in and a new car is purchased. It is normal for ndividuals to first buy, or

own a product and then sell that product AFTER a period (short term or long

term) of ownership. To reverse that sequence and to first sell a product or

commodity that one does not yet own is not the sequence most people are

familiar or comfortable with.

Many retail traders worry about the consequences of short selling, or selling

something they do not own. There is a very old commodity wag that goes like

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this, “He who sells what isn’t his’n, buys it back or goes to prison.” Within this

cute little rhyme the answer is given. If at first you sell a commodity, in order to

balance the ledger you must buy the commodity back. Just as in being long or

owning the commodity, in order to balance the ledger the trader must sell the

commodity. Selling a market is not open heart surgery, but does represent

a valuable trading tool every commodity trader should understand.

WHAT HAPPENS IF I CANNOT DELIVER WHAT I SOLD?

What happens when you take delivery of what you bought? Nothing is going to

happen, because you are not going to take delivery and you are not going to

make delivery. Delivery is no more of consideration when one sells the market

than if one buys the market. According to the Commodity Trading Manual,

published by the Chicago Board of Trade “... fewer than 3% of all futures

contracts culminate with the delivery of the actual goods against the contract.”

Your goal as a commodity trader is basically the same using either commodity

trading tool. Buy the commodity and then hope to sell the commodity higher than

where it was bought. Sell the commodity first and then hope to buy the

commodity lower than where it was first sold. Doing all of this long before the

delivery period becomes a factor. The only thing that is different between the

long and short strategy is the sequence, not the risk of delivery.

WHY WOULD A COMMODITY TRADER CHOOSE TO BE SHORT?

In a simple phrase, learning to use the short side of the market would double the

tools of many retail commodity traders. Instead of constantly looking for a

commodity to buy, and many times getting involved in the dangerous - if not fatal

game - of “picking bottoms”, you can begin to look for those markets where the

supply is abundant and cheaper prices may be in the offing. Should a commodity

trader forgo the long side of the market? This is a danger you need to avoid. Of

the few traders I have been able to show the benefit of being short, several have

then become so enamored with the concept they have abandoned the other side

of the market. The purpose of learning and getting comfortable with the use of

selling the market is to provide you with additional tools, not to replace one for

the other.

29 | P a g e

Becoming proficient in the use of the short selling tool does not guarantee

anyone that they will be profitable, it only expands the tools that a trader has at

the ready. Just as one can buy high and sell low for a loss, one can sell low and

buy high for a loss. Poor judgment is rarely if ever overcome by increasing the

tools used by the trader. Hopefully, by beginning to unravel the mystery of selling

the market you will better understand factors influencing the markets and better

understand the next section.

Always keep in mind the only difference between buying the market and being

long, and selling the market and being short is merely sequence. So just in case

you get an unexpected visitor sipping Starbucks as you head to work, you will be

prepared to take advantage of the information.

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Taking a Loss

You know what I think is one of the most important parts of successful

commodity trading? Well, you can probably tell by the title, how and when to take

a loss. Why? Understand this and let no one ever mislead you, commodity

trading is a risky business and even with the best analysis and thought process

you will experience a loss at some point in time. In fact, if you are like most

traders you will experience more losses than winners. So what is important is

how you take a loss. Do you live to play another day? There is an old saying that

if you trade commodity futures long enough you are bound to hear, “The best

loss to take is the first loss.” The Chicago Mercantile put out a poster several

years ago that summed it up well, stating, “Risk Not Thy Whole Wad” pretty

much says it all!

Several true stories I think help underscore what I mean. About twenty years

ago, there was a successful advisor who spoke at a gathering that I attended. His

whole message was simple, “Guys (at that time we were an entirely male

audience) if you take every trade I recommend seven out of ten will be losers but

the three winners will be huge.” How could he stand up in front of a group and

say such a thing, seventy percent of his recommendations were losers! He was

able to say that because he knew the importance of how and when to a loss.

Even more important than his knowing, was that his customers and their

customers knew how and when to take a loss. By the way, he is retired and living

well as you are reading this.

About that same time, I had a client who loved trading a contract here and there.

Nothing big, but he always had something going. The problem was in the years

he was a client he never ended a year making money. This guy would rather

lose a thousand dollars trying to keep from losing a hundred, than lose a hundred

and move on to the next trade. He had no idea how or when to take a loss and

no intention of listening to the concept. I distinctly remember a corn trade he

placed just prior to a government report. The report was not helpful, but the

market did not react drastically…at least not for the first half hour of trading.

During that critical half hour the market missed his order to get out at break-even

by one-quarter cent. No matter how much I begged him to move his order and

simply get out, his pride simply would not allow him to exit the trade with a loss.

31 | P a g e

So in an attempt to save twelve dollars and fifty cents he lost well over two

thousand dollars. Go figure!

I hope you are getting the point. If you trade commodities your chances of having

a losing trade are pretty high. The trick is in understanding it will happen and

limiting the loss to an acceptable level. An acceptable level is a level that gives

you an adequate opportunity to make a profit (your stop is not so close as to be

elected by mere insignificant market movement), but protects you from a loss in

such a way that the loss does not wipe out your “whole wad.” There are a

number of tools available to help you determine what risk levels you face or

choose to face, but being able to take the loss is a mental discipline you must

acquire. This brings us to a very special section for commodity traders, that

section is margin calls.

MARGIN CALLS

One of the features of commodity trading, as we have discussed earlier, is the

leverage factor. Remember, you are able to trade a futures contract with as little

as four to fifteen per cent of the value of contract deposited as margin. That initial

amount is called a margin requirement. The acceptable definition of a margin

requirement is something like a good faith deposit placed with the clearing firm in

order to trade commodity futures. Which is true, but you may want to think of it as

an amount of money to protect the Futures Commission Merchant from

sustaining a loss generated from your trading account. It also is an indication that

you have the means to be trading futures.

Who determines the margin requirement? The exchange where the futures

contract is traded determines the minimum margin. The Futures Commission

Merchant you are dealing with then has the right to establish any margin

requirement above that minimum. Higher than minimum requirements are not

rare in the indices such as the Dow, S&P, and NASDAQ, etc., but are not limited

to those commodities. Keep in mind that the margin requirement is determined

by the perceived risk and volatility of that market.

Margin calls are a little different. Margin calls arise once you have placed a trade

and the market has moved against your position in an amount great enough to

32 | P a g e

cause your cash balance to be below the acceptable level as determined by the

exchange or Futures Commission Merchant. If you remember from the previous

section, if you fund your account at a minimum it does not take much of an

adverse move to put you on margin call country.

When you enter the land of margin calls you need to take a moment and think.

Margin calls are usually trying to tell you something; unfortunately it has been my

experience most people choose not to listen. What could a margin call be trying

to communicate? Well, if you funded you account at a minimum, it could be

saying, “Get serious, stop wasting every ones time and adequately fund your

account.” Yes it could be saying that! If you did indeed adequately fund your

account and then experience a margin call, it could be telling you, “Psst, hey

friend you’re wrong, get out.” Or it might be saying, “You are right but early and

there will some near term pain involved before this thing goes your way, can you

afford the discomfort?” No matter what the answer is, if you are on margin call, it

is trying to tell you something. The question is will you be smart enough to listen?

From years of observation there are two mistakes traders make when it comes to

dealing with margin calls. The first mistake is what I call “Playing the Game with

the Margin Clerk”. So many traders I have witnessed over the years (especially

those that have traded for a while) think the proper response when receiving a

margin call is, “How long do I have to get the money in?” When the proper

response should be, “I will send it today!” Why? Because those who are margin

call game players lose sight of what it is they are trying to do, which is make

money. All of a sudden it is as if making money has become secondary to seeing

how long they can string the margin clerk along before absolutely having to send

the money. All this does is add to the pressure caused by time sensitivity. Too

many times I have witnessed a trader instead of finally sending the money just

plain liquidate the trade. So what was that all about? Was the function of the

trade to make money? Was the purpose of the trade to waste time? Did they not

understand the concept of time sensitivity? Was the reason to put the trade on to

make the life of the margin clerk miserable? From my observations, of the four

possibilities mentioned most times only the last three were accomplished. So

what is the point? Don’t play games that detract from what you are trying to do!

You are trying to analyze the market in an effort to make a profit. The margin call

33 | P a g e

game playing that takes place detracts from what should be your main focal

point. So send the money in and get on with what is important.

Mistake two is failure to understanding that one can exit the market, stop the loss

and just as easily get back in if the market direction reverses. This is not the local

high school prom, where once you are out you can’t get back in. If the market is

going against you, and for whatever reason you feel you are out of step like a

rookie soldier learning how to march (it happens,) get out. You can get back in

just as easily as you got out and you will have accomplished several things. One,

you will have stopped the margin calls and two you will have given yourself a

chance to rethink the trade without the time sensitive pressure. Don’t get

paralyzed by indecision, there are options.

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I Told You There Are No Magic Bullets

Years ago I had an acquaintance who spent more time looking for the magic

trading systems than he did studying the market. He would always find some

new program, or method or book that someone was selling. He would buy the

latest discovery convinced he had finally found the magic system. He would put

on the first trade that the latest “can’t miss” system recommended and wouldn’t

you know, it usually was a loser. Then, with great disappointment, he would

shove this latest system in the drawer with all the other can’t miss, first trade

losers. There just isn’t that silver trading bullet. To that end neither is this booklet.

What I hope we have accomplished in some small way is to discuss items that

help in improving your odds to some degree. I want you to understand how time

can have an impact on your trading and how time can influence the odds of

success or failure. Understand how properly funding your account can have an

influence on your rate of success, while under funding can have an opposite

effect. Become familiar with understanding the functions of the market and how

that they should influence your trading decisions. If you are doing your own

research, remember you need more than one technical indicator and more than

one source for fundamental data. Get yourself a broker, some books, and any

other material that can help you understand spreads. I want to emphasis this one

more time! If you come away with nothing else from this booklet come away with

the desire to learn about spreads. In my opinion this one subject can have the

most dynamic influence on your success/failure rate. Become comfortable with

the concept of short selling, the use of options, taking a loss and making your

margin calls.

I hope you are successful in your trading, and I hope to see you at one of the

Annual Lee Gaus Traders Seminars.

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About the Author

Lee A. Gaus is 62 years old, married to Alice for over forty years and the father of

three children. Lee is a native of Flint, Michigan, a decorated Viet Nam veteran,

and graduated with honors from Illinois State University with a degree in Finance.

Upon graduation from Illinois State University, Lee accepted a position with the

agricultural giant Cargill of Minneapolis where he experienced his first taste of

American agriculture. After spending two years with Cargill, Lee accepted a

position with the Archer Daniels Midland Company. While with the ADM, Lee was

a Grain Merchandiser for both the grain division and soybean-processing

subsidiary. While with the grain division, he also acted as a commodity broker

dealing with retail and commercial clients. As a commodity broker, Lee was

tutored in a proprietary trading system by a renowned Illinois commodity

speculator. This system is the foundation for the Lee Gaus Daily and Weekly

comments that are read today by

thousands of traders around the world.

In 1983, Lee was promoted to Vice-President of Marketing for ADM Investor

Services, the commodity futures subsidiary of Archer Daniels Midland. Under the

marketing leadership of Lee, ADM Investors experienced an unparallel level of

growth, going from two retail locations to almost two hundred. In 1994, Lee co-

founded International Futures Group, which specializes in retail commodity

offices around the world. Over the past twenty-seven years, he has conducted

hundreds of meetings, seminars and workshops all aimed at the retail commodity

trader and broker.

Lee also conducts the Lee Gaus Annual Trading Seminar each year. For more

information on the workshop, or to receive the Lee Gaus Daily and Weekly

comments call 1-877-304-1369, or e-mail at lee@efggrp.com.