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Lesson 32: Mrs. B's Research

When Mrs. B received the red e-mail from Emma and started to do her research into the soybean oil market, how did she go about it? Mrs. B's first thought was that she would need a set of charts showing the price of July soybean oil for the past 40 years or more. A good set of price graphs is similar to a set of road maps. There are many ways to drive from New York City to Oklahoma City and then to Salt Lake City. In fact, there are at least 41 different ways. A set of 41 road maps might show a traveler the different ways that this journey could be made. Likewise, there are many patterns that the price of July soybean oil can display in the time period between February 1st and the expiration of the July contract in any given year. A set of price charts of July soybean oil for the past 41 years will give the trader 41 different ways that prices can move. Mr. B wanted to look closely at those 41 different patterns before making a recommendation to Emma and so she located a set of July soybean oil charts and started to research the years from 1960 through 2000.

Once she had these graphs in hand, Mrs. B took a look to see if there was a tendency for soybean oil prices to decline into the month of February. She found that there was. It was not a certain event, but it was a tendency. The year 2001, Mrs. B knew, was following this tendency. July soybean oil was currently declining into the month of February. Mrs. B's conclusion was that Emma was in a market that was following the general historical tendency of a February Break in grain and oil seed prices. Once Mrs. B knew this, the question for her became one of whether, once this February Break was over, did the price for July soybean oil futures contracts move higher into the summer? If prices did advance, how often did they advance, how far did they advance above the February 1st price and how deep was the "valley of death" before the rise occurred? The "valley of death" being the lowest price July soybean oil declined to after February 1st and before the July contract expired.

Mrs. B examined her 41 graphs of July soybean oil for the years from 1960 through 2000. She made notes on each of them as to the depth of the "valley of death". She indicated on each graph whether there would have been an opportunity for profit for a trader who bought on February 1st of each year and sold out sometime after that date. She examined every graph with the idea of determining how great that profit opportunity was each year and whether it was worth taking a position and assuming a risk in order to earn a part of that profit opportunity. Mrs. B even estimated how long one would have to hold a long position in July soybean oil purchased on February 1st before such a profit opportunity arose. She tried to come up with a rule for placing her stop/loss order assuming she had entered a position each and every one of those 41 years. Should she place her stop/loss 50 points away from her entry price or 150 points away? Should she place it 500 points below the purchase price? She looked at each of the 41 years to see what would have happened to a trader's position when different stop/loss orders were used during different market patterns and conditions.

With regard to profit/exit orders, the analysis was similar to but unlike the analysis done for stop/loss orders. Mrs. B wanted to use a stop/loss order that would not be hit, or if it were hit would provide for small losses. For profit/exit orders, however, Mrs. B wanted to select a price level that would be hit and when it was hit would provide for large profits. Mrs. B looked at her charts very carefully. Before she could reply to Emma's red e-mail and before she could consider taking a position in her own $5,000 commodity account, Mrs. B wanted to be very comfortable with the conclusions she was making. She did her research well, she feels very good about her research and she is willing to share it with you. If you would like to examine the exact set of 41 price graphs for July soybean oil which Mrs. B used to reach her conclusions, along with all annotations, notes, and comments made on each graph regarding the "valley of death", the length of time before the profit opportunity occurred, the value of the profit opportunity offered in each of the 41 years, you may do so by clicking on the link below.

    To order a set of 41 price charts for July soybean oil for the years from 1960 through 2001 along with personal notes, annotations and comments made by Bruce Gould on each of these charts click here.

Once Mrs. B had made her decisions, based on researching the price patterns of July soybean oil for the past 41 years, to recommend to Emma that she stay the course and remain long July soybean oil futures and that Mrs. B would join with Emma by going long July soybean oil in Mrs. B's own $5,000 trading account, Mrs. B had to decide at what level she would enter the July soybean oil contract on the long side. Mrs. B considered that she might go long at one of the following locations,

    1st. She could go long immediately "at the market" on the open, whenever trading first became available on February 9th.

    2nd. She could go long at a price equal to or lower than the price that July soybean oil closed on February 8th, 2001, that price being 15.18.

    3rd. She could wait to go long once prices closed at their February 1st level or higher again, her rationale being that the February Break might be over once this happened.

    4th. She could wait to go long after the month of February was over, taking a long position on March 1st thereby assuming that the February Break was over because the month of February was over.

    5th. She could go long at other levels than those outlined above with the list of possible entry prices being almost endless.

Mrs. B would like your opinion. Assuming that after carefully examining the 41 graphs of July soybean oil from the years 1960 through 2000, Mrs. B has definitely decided to go long - where would you advise her to enter the market on the long side? The choices for you are as follows,

    A. She should go long as soon as she possibly can so as not to miss the move.

    B. She should try to buy July soybean oil at a price of 15.18 or lower realizing she might miss being long altogether if prices don't drop below 15.18.

    C. She should go long once prices close at 15.82 or higher thereby being assured of being long if prices rally to their February 1st closing level or higher.

    D. She should go long "at the market on the open" on March 1st, 2001.

    E. She should enter at another level, which is (your own recommendation may be included here).

 

Mrs. B would like your opinion. Assume that Mrs. B has very carefully examined the 41 graphs of July soybean oil for the years 1960 through 2000 and has definitely decided to go long July soybean oil. This decision has been made and cannot be changed by anyone. This decision made, Mrs. B would like your opinion as to where you believe she should enter the market. The choices for you are (A) (B) (C) (D) or (E). To send Mrs. B your opinion by e-mail simply click on her mailbox below and send her one of these five letters. If you select the letter (E), please tell her the exact location you believe she should enter the market long. If you wish to send along any personal comments or observations with your e-mail, feel free to do so. All e-mails will be read, the results tabulated and revealed shortly thereafter. Mrs. B is expecting to hear from you. Click on her mailbox and send her an e-mail with the letter (A) (B) (C) (D) or (E). If you select (E) please provide specifics. If you wish to send the reasons for selecting the letter you selected, feel free to do so. Mrs. B is waiting to hear from you.

 After sending Mrs. B the level you recommend for her entry into the July soybean oil contract, proceed by clicking here.

            Bruce Gould

 

Always remember that stock, options, and futures trading may involve substantial risks and that past performance is no guarantee of future performance.