Commodity Resource Corp.

Originally published by Futures Magazine Group, June, 2001

George Kleinman, editor of Futures Market Forecaster, is a successful trader and broker who has written the acclaimed book, The New Commodity Trading Guide: Breakthrough Strategies for Capturing Market Profits, (Financial Times, 180 pages hardback). Since 1983 he has headed up his own advisory & brokerage firm, Commodity Resource Corp. To give you the opportunity to get to know George Kleinman, we asked him about his trading background, style and philosophy.

How did you get into futures trading?

In the late 1970's, I was in a totally different business—a product manager for a pharmaceutical company. I saw an ad from a now defunct commodity broker touting soybeans and took the plunge. I have always been a gambler, and in this case I made $4,000 in less than a week. Of course, it was just beginner's luck and shortly after I paid my tuition to the school of trading hard-knocks, the first of many.

I did see the potential of the markets, however, and shortly after made the decision that this is what I wanted to do with my life. So I started calling all the Chicago commodity brokers and due to my total lack of experience, I received a fairly uniform response, something like, "When you have a book of business in three or four years, give us a call."
The only firm interested in interviewing me was Merrill Lynch, because they were expanding their commodity futures business and had just about the only formalized training program in the industry. Merrill told me that while they did not have an opening in Chicago, if I were willing to move to Minneapolis, a major grain-trading center, they would train me and give me a shot. The offer involved a six-month-only guaranteed salary, after that I was on my own. That salary was half of what I was making at the time. About this same time, I was offered a better job as a product manager with a prestigious San Francisco pharmaceutical firm. They offered me a 50% salary increase, moving expenses and many other benefits. We just had our first child and I had to think long and hard about the pros and cons of each opportunity. I tried to tell myself I could always trade on the side if I took the corporate job, but in the end I went with my gut and we moved to Minneapolis. By the end of my full first year as a commodities broker I was earning twice as much as the better salaried position, plus I loved what I was doing. I've been trading for more than 25 years now and I have never looked back.

Who have been the greatest influences in developing your trading style?

I have always been a voracious reader of market lore and have been influenced by the writings of some of the past master traders. The two that come to mind are W.D. Gann and Jesse Livermore. There also are certain traders at the exchanges I have been associated with who have had a profound influence on the way I trade.

How would you describe your trading style?

I remain cognizant of the fundamentals and would like to see a fundamental basis to support my technical work. If the fundamentals, as I analyze them, are totally contrary to my technical work, I may stay on the sidelines. Yet, as George Soros once said, "The ultimate fundamental is credit flows"—meaning money—and my primary approach to the markets is technical. I look to identify trends then attempt to jump on for the ride. I never try to pick tops and bottoms, which in my opinion is next to impossible. My approach is to attempt to take a chunk out of the middle of moves. In terms of specific indicators, I use moving averages in various ways. I firmly believe they have validity as trend identifiers. I also analyze open interest and volume, monitor the positions of the major players in the markets, and while I do not trade contra trend—I do use overbought and oversold indicators to identify extreme situations where I may want to cash out or alternatively tighten stops.

Do you trade each market differently? If so, how?

Absolutely, each market has its own idiosyncrasies, plus the character of a market can change with market conditions.

First of all, a trader must be aware of the current trading environment. This is why I am not a systems trader. I personally cannot blindly take a signal. I need to ask myself what is the context when the signal is generated. For example, corn can be sleepy and not tradable for long periods, but can trend beautifully in a weather situation—but then again weather markets are mercurial. The currencies tend to trend well, but a trader needs to compensate for the overnight risk and frequent gap openings. The stock indexes and energy can trend well for months, but a trader needs to recognize when they turn into a consolidation phase so as not to get totally chopped by random motion.
I generally look to trade a mix of non-correlated markets with differing volatilities and will adjust risk/reward parameters based on the nature of the beast and the current environment.

What is your trading time frame—day-trader, short-term or longer-term?

For the majority of my positions I would classify myself as a swing trader, holding positions from one day to two weeks, with an average of perhaps three to five days. However, at times I also can be an active day-trader for certain markets, but this takes total focus and concentration and in my opinion, you cannot day-trade effectively every day. Finally, I am always looking for what I call a "mega-trade." Mega-trades are those we are lucky enough to get into early and have the vision to hang onto for the long haul. They are not easy to identify. Jesse Livermore once said, "Men who can both be right and sit tight are uncommon." However, at the end of my best trading years, it is always those "mega-trades" that have been the key to success.

What has been the most significant change in your trading since you started?

Probably the fact that I have more patience now, as this is one of the essential qualities for trading success (as Gann would say). Patience, to an extent, is a function of greater staying power. I now have the capital necessary to margin positions and not trade on a shoestring. However, patience means much more. Traders can be adrenaline junkies, always looking for action, but a good trader will possess the patience to wait for the right opportunity. He or she will not be over anxious because over anxiousness consumes capital and over time will tap you out. When a trader is fortunate enough to catch a good trade that starts to move the right way, he needs the patience to hold it.

Perhaps the primary failing of the amateur is to close out of a profitable position too soon. In other words, patience is required for both opening and closing a position. Hope and fear will need to be eliminated. In a profitable position, instead of fearing that the profit will turn into a loss, hope it becomes more profitable. In this case, you have a cushion to work with. In a losing position, instead of hoping that it will turn around, fear it will get worse. When I see no definitive change in trend, I work harder than ever to use patience and stay the course.

How do you handle a losing streak?

To be honest, not always that well, but what I try and do is close out all positions and not overtrade to "get the loss back"—a recipe for disaster. This is the time to take a break from trading.

Describe your money management rules.

When evaluating a particular trade, I first determine the maximum I'm prepared to risk. I'm willing to risk more on markets with greater volatility; it is not a static amount. I use this number to determine my position size because I have a maximum percentage to risk for an account. This maximum for any trade is never greater than 10% of the account—and for me to risk 10%, the trade would have to be a "10" in terms of reward to risk. It is usually closer to or less than 5%. For example, if the maximum I will risk on a particular trade is $900 (maximum risk includes my "worst estimate" of slippage, plus fees and 7% of the account value) then for a $25,000 account I would trade two contracts. I religiously stick to my maximum pre-set risk point and once in a position, I constantly look for opportunities to reduce my maximum risk on that trade.

What advice do you give new traders?

You will need a well thought out and thoroughly researched trading plan before you begin. To find this you will need to do your homework. Your plan should always have a mechanism to cut the losses on the bad trades and to maximize profits aggressively on the good ones.

You must be organized and remain focused at all times. If your plan is a good one, you will need the consistency to stick with it during the down periods.
You must cultivate the ability to identify a signal, react automatically, then feel good about the trade—win or lose—if you trade correctly. Do not look for an easy way out. It will take hard work but if you do your homework, you'll make it easier on yourself.
Anger and greed result in defeat, so you must develop anxiety control. A very successful trader told me many years ago, "slow and steady wins the race." It took me many years to truly understand the wisdom of this simple statement.

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COMMODITY & FINANCIAL FUTURES AND OPTIONS; OUR ONLY BUSINESS SINCE 1983. COMMODITY RESOURCE IS A MEMBER OF THE NATIONAL FUTURES ASSOCIATION (NFA) AND REGULATED BY THE COMMODITY FUTURES TRADING COMMISSION (CFTC). CLIENT FUNDS ARE HELD ON THE BOOKS OF R.J. O'BRIEN (EST. 1914). R.J. O'BRIEN IS THE LARGEST, FULLY DIVERSIFIED, INDEPENDENT FCM IN THE INDUSTRY AND A MEMBER OF ALL MAJOR COMMODITY AND FUTURES EXCHANGES.

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