Fear and Greed: Two Strong Emotions to Manage in a Grain Weather Market

There is nothing like a rip-roaring "weather market" in the grain futures to seriously challenge the two most important emotions a trader can experience: fear and greed. In the heat of a weather scare in grains, prices become extremely volatile and trader emotions run very high, as the latest weather forecasts can and do turn markets "on a dime."

Some would argue that "fear" and "greed" are terms that have been over-used and over­emphasized in our industry. Yes, they have been bandied about a lot, but for good reason. In general terms, too much fear in trading will not allow a trader to even pull the trigger to enter a trade. Or, even if a trade is entered, fear will prompt a trader to set a stop that's too tight, or to exit a trade before a strong-trending move gets well under way. Importantly, fear can cause a trader to lose sleep at night, which by itself can cause a myriad of problems.

Generally, greed will cause a trader to become intoxicated with thoughts of hitting the "grand slam" of trading, instead of being content with a base hit or even a double. Home runs and grand slams occur only rarely in trading futures. However, weather markets do allow for numerous base hits and a few doubles--and even a triple here and there.

Trading a full-blown weather market in the grains--and surviving to trade again another day--is a great experience for all traders. While there is some degree of a weather market scare in the grain futures nearly every year, the "full-blown" and highly volatile weather markets that are usually marked by severely dry weather conditions in the U.S. Corn Belt come around only once in a few years. While the year 2002 does not compare with the last major weather market of 1988 (at least not as of this writing), it does rank well above the "run-of-the-mill" weather markets that occur about every year in the grains.

Here are a few valuable lessons that a trader can learn by trading the grains during a weather market--lessons that can be applied to trading other markets during more volatile trading conditions.

¾ My experience in trading weather markets is that there is tremendous pressure on all traders to "follow the herd." Deviating from the consensus market opinion is not easy. However, it's the traders that can step in and sell into rallies or buy into dips that seem to have more success in trading weather markets. In other words, doing some contrary thinking and trading can pay dividends in weather markets.

(I'll give you an actual example of how contrarian thinking and trading can be successful

in the grains. The year was 1988, the last big drought year in the Midwest that saw corn

and soybean prices skyrocket. It was a Friday in July that saw corn and bean prices trade

sharply higher, based on ideas the hot and dry weather would continue in the Corn Belt.

Then, after the close, the National Weather Service issued its 6-10 day forecast that, sure enough, called for more hot and dry weather for the Corn Belt. Bulls confidently headed home for the weekend. Even "local" traders on the Chicago Board of Trade floor went home long--something most never do, especially over a weekend.

Well, come Monday morning, the updated weather forecasts had changed a bit, but more importantly, trader psychology had changed immensely. The drought and resulting poor yields had all been factored into the market with prior price gains, culminating with Friday's big push higher. Corn and bean markets traded limit down on Monday and recorded very sharp losses for around three days in a row.

I know of one trader who used contrary opinion thinking and bought put options on corn that Friday that prices were pushing higher. He made a good deal of money that next week. )

¾ For bulls, it's important to remember that markets are the most bullish at the very top--it's downhill from there. Recognizing the clues that suggest a top is in place in the grains, during a weather market, is especially difficult, as technical indicators can become less reliable. Thus, being content to catch a bigger part of a price trend should be the goal of the trader. Don't be disappointed if you did not capture all of a price move in grains in a weather market. Becoming greedy and trying to do just that will usually get a trader into serious trouble.

¾ Pyramiding trades or "averaging down" losing trades is a no-no. (Unless, adding futures positions was in your initial trading plan of action.) One cannot believe the extreme temptation there is to add to winning positions when a profitable trade is occurring in a weather market in grains. Being long soybeans and hearing a bullish weather forecast heading into the weekend certainly invites adding a couple more long contracts on Friday. But that is pure greed kicking in. Greed in trading is not good.

That is it for this week. You can also visit my daily blog at www.traderblogs.com. Have a great weekend!

Jim Wyckoff became a financial journalist with Futures World News for many years, cutting his teeth as a reporter on the futures trading floors in Chicago and New York, where he covered every futures market traded in the United States at one time or another. Click here for full bio >>