This is no time for risk-taking.

I’ve been warning you for months about deteriorating credit conditions. If you haven’t done so yet, I urge you once again to park your cash balances in government-only securities or mutual funds that are strictly designated “government” or “Treasury” money-market funds.

The entire world is now running hard to buy government bonds, both Treasuries and foreign government bonds like German “bunds.” Yields continue to decline.

The ongoing crash in credit markets confirms this strategy. You can tell because everything else is dropping, even investment-grade corporate bonds and municipal bonds.

Once again, buy government debt now.

If you’re an American, this means short-term Treasury bonds and 90-day T-bills, which you can buy through a broker.

Equally, a government designated Treasury money-market fund, like Vanguard Admiral Treasury Fund (VUSXX) can save your portfolio. This fund manager charges just 0.10% per annum (US$50,000 minimum).

You can also look at the Vanguard Treasury Money Market Fund (VMPXX), charging 0.24% per annum and requiring a US$3,000 minimum investment. Both funds are secure, won’t break the buck and will protect your assets. I’d scramble to place my liquidity proceeds in Vanguard before most U.S. banks, except J.P. Morgan.

Government debt is now highly in demand. Last week, Treasury bills reached their lowest yields since the Japanese bombed Pearl Harbor in December 1941 at just 0.04%. These are Depression-era yields at the moment as investors dump everything and flock to safety. During the Great Depression benchmark T-bill yields actually turned negative!

The odds of that happening again are not only likely but probable as credit conditions are now literally frozen. The global credit system is effectively at a standstill. Lenders are hoarding cash and denying liquidity to other banks and institutions.

At some point I expect all of the Fed’s efforts, including help from other central banks, to finally put a lid on this crisis. Global central banks are already pumping in liquidity at an astonishing rate.

Until central banks win the battle against deflation, make sure your cash balances or portfolio liquidity is protected. Most banks and money-market mutual funds remain a high-risk place to park your cash. Make sure you have government securities sitting in your portfolio.

The global economy is now slowing with several countries in Europe and Asia either in recession or at the brink of a contraction in output. But China, the world’s main driver of commodities consumption this decade, continues to grow, suggesting the severe declines witnessed for raw materials since July are way overdone.

Since hitting a peak on July 3, the benchmark Reuters/CRB Index has plunged 25%. All commodities representing this index have declined sharply, including crude oil (32%), gold (22%), copper (22%) and the grains (28%). The chart below, dating back to June, clearly shows an oversold condition based on the MACD that has progressively worsened over the last 60 days.

The “China Factor” applied to commodities demand remains one of the more formidable equations supporting raw materials. As commodities have crashed recently, the Chinese are once again hoarding industrial metals like copper, tin and steel scrap. This demand won’t disappear because of credit problems in the United States – not with USD inflation-adjusted interest rates in negative territory. The U.S. Fed Funds currently stand at 2% versus 5.6% inflation through July.

The Chinese have started to expand credit again after tightening the money-supply since 2006 in small increments. China can’t afford a recession; a major contraction in output would devastate the economy and result in tens of millions of people becoming unemployed. The People’s Bank of China also has the capacity to spend heavily to finance a continued expansion. 

As Eric put it in a recent blog post…

“If you think the Federal Reserve has muscle, think again. China is home to more than $1.7 trillion dollars in foreign-exchange reserves. They can literally bail-out the entire American banking system with one check! They’ll do everything they can to keep this expansion going strong.”

In short, commodities, which were heavily overbought heading into 2008, are now heavily oversold.

In Eric’s view, the U.S. government played a big role “talking down” commodities by attacking oil trading speculation. In an election year, it’s really no surprise the Feds are targeting oil prices. They wanted lower oil prices and they got it. But their talk won’t be able to hold down prices forever.

Yes, the global economy is slowing this fall. Europe is several months behind the United States in this credit squeeze and Japan is basically in recession again. But the emerging markets should get a dose of good news as oil and food prices have plunged by about 25% since July.

These countries, including China, will continue to expand even at the expense of weaker exports. China, India and many other emerging markets are piling billions into domestic infrastructure projects. Eric expects these and other domestic projects to keep those markets humming until the West can stabilize credit markets.

Turmoil in the markets is a great time to invest or trade in one of the largest trading markets in the world.

That’s commodities, like gold, silver, oil, gas, coffee, sugar, wheat, soy beans, cotton, corn, cocoa, cattle and even orange juice.

All day every day; all over the world, commodities are being traded; going up and down based on supply and demand, offering tremendous opportunities to profit on both upward and downward movements.

Commodities are a classic counter-cycle investment to shares. Consider balancing your share investments through trading and investing in commodity warrants.

Increases in commodities tend to drive up inflation. This has become very evident over the past three years with sky-high fuel and food costs crippling the average family or man-on-the-street. At the same time these inflationary pressures tend to drive share markets down. We have seen massive corrections in the Russian, Indian, Chinese, US and Australian markets over the past year. Global instability and natural disasters also tend to drive share markets down whilst driving commodities up. Understanding and investing in commodities can help you to have a diversified investment portfolio.

But isn’t commodity trading only for experts?

No. You do need to have good advice and learn about the key factors. But these are markets in pure items – not items that have the complexities of management, production, factories, balance sheets, loads of debt etc. And global commodities markets are large enough to prevent small groups or fund managers dictating price movement.

Commodities are traded on the global stage and their price transparency is broadcast through radio, TV and media 24/7. Click here to learn more.

How can I make money if the price of a commodity only moves 2 or 3%?

That’s where leverage comes in. By using commodity warrants you can achieve 10, 20 even 50 times leverage on your money meaning that relatively small movements of 2- 3% can equal significant gains. Often in a matter of days! Click here to learn more.

But can it go the wrong way?

Absolutely. You should only trade with what you can afford to lose. And your initial outlay is all you can possibly lose with our warrants because your exposure is always limited to that outlay.

Commodity warrants are unlike CFDs or Futures contracts which can have unlimited downside.

Whilst warrants offer significant leverage, there is no gearing which means no debt associated with your investment and therefore no margin calls. You have limited downside with virtually unlimited upside potential. Click here to learn more.

So how much can I make?

Your upside is virtually unlimited. CWA warrants have achieved results of up to 700% in less than six months!

Our average warrant term is around 80 days; and in the 3 years since inception more than 65% of all CWA warrants have achieved a positive return during the life of the warrant. Of these the average maximum return has been more than 32%; achieved in an average of just over 14 days.

Remember your downside is always limited to your initial outlay. And if a market does turn against you can sell your warrant at any time further limiting your downside. Click here to learn more.

So how can you help me?

The team at Commodity Warrants Australia has years of experience. We offer warrants on 18 global commodity and stock index markets and we review each of these markets every day. We tap into the key indicators: has frost destroyed the orange juice market in Florida; has one of key holders in gold started to sell; how will a change in exchange rates likely impact prices?

Everyday we issue general advice on these markets by way of a House View Summary. We put in hours of work everyday and tie it to years of experience to rate bullish and bearish factors on each market from a fundamental and a technical perspective. Click here to learn more.

How much do I need to start?

It costs nothing to open an account and start learning about the markets. You can even ghost trade if you want and see how it works. If you don’t like it – we understand. If you do think it’s for you then you can start trading from as little as $2000-5000, depending upon the commodities you wish to trade. Click here to learn more.

How much time do I need to spend?

That’s completely up to you. We provide you with a lot of information that you can choose to study, or alternatively your dedicated broker is always available on the phone to help guide you through and provide general advice. Many of our clients trade very effectively using just 2-5 hours a week of their time. Click here to learn more.

Why buy a warrant; why not just buy the commodity?

Good question. Our warrants allow you leverage of typically 10-20:1, even up to 50:1. And they are extremely flexible. You can buy a commodity “each way”, or to go up or down. You can vary your strike or trigger price and vary your warrant term.

Of course buying a commodity outright is possible but you only get 1:1 leverage. Gold at $800 to $830 means $30 on $800 invested. A gold warrant with leverage of 10, 20 or even 50 times means significantly greater upside potential.

Palladium is one of the metals that have been highly suffering for those past 5 months. After a high posted early March this year above $571 an ounce, the price dropped to a recent low at $270. It is a 53% decline in less than 6 months.

The price came back to a level where it found a support line that does exist since April 2003 (point A on the long-term chart). It is a long-term support that was tested and validated also in 2005 (points B and C).

What happened recently to produce such volatility and such a price action?

Palladium fell below its intermediary support line, around $415, in the second fortnight of July (when it crossed below the red line on the chart) as the US Dollar gained against other currencies. As a result, it cut demand for the metal as inflation hedge.

Indeed, many investors buy metals priced in dollars to preserve value when the Greenback weakens.

Moreover, you may know that palladium (with platinum) is used in pollution-control devices in the car industry. The economic slowdown in the US has strongly hit the car-industry. The statistics data show that the car and light truck sales in the US, which is the biggest market in the world, have plunged to the lowest levels since 1993.

However, despite the bad economic conditions and the US Dollar strengthening, there are also in the Palladium market industrial-bargain seekers buying at the current low prices.

Technically, as the price hit a support level, there is a real potential for a rebound. In exactly 2 months, from June 19 to August 19, palladium price crushed down in a clear linear way, by 44% (between points A and B on the short-term chart). A correction of this move is more than likely.

Actually the rebound has already started. But a further price action on the upside is expected. The technical indicators have triggered clear bullish signals, as they show that the oversold configuration is over. The MACD and the RSI have bottomed, turned upward and crossed above their respective signal line. It opens the way to higher prices on the near-term.

In this scenario, the Fibonacci retracement levels of the recent 44% decline may be the immediate resistance levels for the current bounce back. The 38.2% ratio is set around $355 and the 50% ratio is set at $380. Currently the price is trading around $307.

Commodities Still Rising

Speaking of oil, what price action can we expect from it now? Over the past few weeks it has been suggested that the oil gluttons in the US have pared back on driving which has resulted in a major drop in gasoline demand.

After reaching nearly USD$150 a barrel the price of oil has since dropped back to below USD$120, but it is still a high price. And it has been a similar pattern for many commodity prices across the board, in that although they have fallen back from peak levels they are still significantly above levels since even just one year ago.

The chart above shows five commodity indices that include a cross section of commodities such as energy, agriculture and metals.

The impact of China is still the overwhelming influence on commodity prices, and now that the Olympics have finished, the next few months should indicate whether the Chinese economy will pick up from where it left off prior to the games, once they reopen factories and industry again, or whether the Olympic Games was the peak.

It’s just a hunch, but we get the feeling that the former will be the case.

let’s takes a look at one of those commodities below, natural gas.

Inflation Story that Nobody Is Telling You

The vast majority of consumers see “inflation” as what we’re paying for groceries, gas, a Starbucks coffee, and electricity.

Yes, it’s true that rising prices for these necessities has been the poster child for inflation lately. But there’s much more to inflation than just forking over more at the gas station or coffeehouse.

When it comes to Europe, wage push inflation plays a crucial role.

Producers Pass the Inflation Buck

the Consumer

Producer prices are simply the costs required to produce goods and services. Naturally, when producers have to pay higher costs to produce goods, they’ll demand higher prices for the goods they’re selling. In other words, they pass their higher costs to you, the buyer.

Rising commodity prices tend to be a big reason why producers’ costs rise. More money spent in production means smaller profit margins at current prices. If a producer wants to make up for shrinking profit margins but can’t control his input costs, then he must pass on these costs in the form of higher prices. Excess money creation is what drives this type of inflation, affording higher prices.

No doubt, this is exactly why rising energy costs have been such a huge driver of the inflationary environment we’ve trudged through over the last several months.

The debate is heating up among whether this global inflationary period is coming to an end. I tend to believe it is. But, more importantly, economic growth and available credit across the globe is rolling over at the same time surging commodities have left inflation concerns on everyone’s mind.

For this reason central bank policy makers are struggling.

The cost of energy has buoyed the cost for producers, consumers, and everyone in between. But what happens when this pressure eases for a considerable stretch of time?

Inflation Is a Little Bit Different on the Other Side of the Pond

They don’t serve ice cubes in their drinks. They can drive on the left-hand side of the road. And inflation is also a little bit different in Europe. Despite this fact, inflation analysis in these respective regions often focuses on generalities and overlooks one particular difference. Let me explain…

Let’s focus only on two countries and two central banks: The Federal Reserve and the European Central Bank. If you haven’t been hiding under a rock for the last year, then you probably have some kind of idea how their respective policies vary.

The Federal Reserve has knocked off more than 3% from its benchmark interest rate in the last year. In that same time, the European Central Bank has mostly stood its ground, mixing in one rate hike of 25 basis points that brought its benchmark up to 4.25%.

And if you’ve been following my currency articles lately, you also probably know that this monetary policy discrepancy has been a boon to the euro, and a detriment to the buck. For many months, even years now, the relative performance of each currency has been primarily based upon expectations for this rate differential to change.

As you might imagine, inflation expectations play an enormous role in monetary policy expectations. Even though inflation has received plenty of attention over the last several months, many analysts have neglected an important difference between European inflation and U.S. inflation.

Now’s the time to pay closer attention.

What All the Analysts Have Missed Over the Last Few Months

In the last few weeks, commodity prices (particularly crude oil) have cracked. With that abrupt downturn also came a reprieve in inflation expectations. And that’s got many accepting the potential for a lasting shift towards even lower prices and less inflation pressure.

With that in mind, the dollar has managed to rally on two simple facts:

1. The U.S. Federal Reserve has already lopped off a considerable portion of its benchmark interest rate. So they’re now ahead of the rate-cut curve, which has helped maintain some growth in the U.S. relative to Europe.

2. The European Central Bank will be forced to bailout their deteriorating economy by cutting their benchmark interest rate.

Up until this point, the European Central Bank had a good reason to keep fighting inflation. But with commodity prices easing up, now may be the time for ECB policy makers to take action. Here’s why they’ve struggled…

Why Hasn’t the ECB Joined the Worldwide Rate Cutting Party Yet?

With many threats to global growth and concerns over several Eurozone member countries, many have been surprised the ECB has gone so long without letting up on the interest rate front. After all…

• The Federal Reserve has made several moves to lower rates
• The Bank of Canada has followed suit
• The Bank of England has gotten the ball rolling
• So has the Reserve Bank of New Zealand
• The Reserve Bank of Australia is likely next

If you’re wondering why the ECB hasn’t budged, look no further than labor unions. Simply put: Wage contracts put in place via labor unions have employees’ wages moving higher in lock-step with inflation.

There’s really no thought to profitability (the point when workers typically consider demanding higher wages). In other words, rising headline inflation fuels this wage-spiral. And this wage-spiral spurs greater headline inflation. And it continues on like this. That’s something Ben Bernanke hasn’t had to deal with.

You see, the Fed has been able to react to weakening growth by cutting interest rates. The plan: As growth moderates, or rolls over, inflation is likely to follow. But that assumption is more difficult to make when you’ve got rising wages keeping prices unnaturally high. The ECB hasn’t yet been able to make that assumption. Its interest rates remain high.
But here’s what you should expect…

When the ECB finally decides to cut rates, they will do so substantially and they will do so quickly. It will be their way of reloading. Because we know, with the labor unions continually eroding profit margins and forcing prices higher, the ECB will need some fire power for their next inflation shoot-out.

If they cut back rates now, they’ll be able to hike rates and combat inflation when the time comes again. All you need to do is be prepared to act accordingly.

As I said yesterday, the commodity bull market isn’t over…not by a long shot. Even with the higher dollar and the temporary correction in oil prices, it’s still a mistake to think we’re on the cusp of a commodity bear market. 

This simply isn’t the same oil bull market we saw in the 1970s. For starters, the energy sector is not as reliant on U.S. domestic consumption compared to 10 or 20 years ago.

Compared to the last oil shock in the 1970s, China was barely a factor in global consumption. Today China is the primary reason why most commodities are in a secular bull market. That’s also the case regarding oil. It’s a primary demand-driven trend that won’t end anytime soon.

The Chinese are becoming big global consumers. Total domestic retail sales in China grew a formidable 23% year-over-year through July compared to just 0.1% in the United States. The Chinese are avid consumers and of course, major exporters. The economy will continue to grow and that means the consumption of raw materials, including oil.

Compared to the 1970s when China was barely a dot on the consumption map, today they   devour excess supplies of most commodities - especially on corrections or when prices dip lower. The Chinese hoard commodities during big corrections.

Barely Any Demand Destruction in China

What some investors fail to understand is the primary source of new oil demand comes from the emerging markets, not the United States or Europe.

According to Merrill Lynch, oil demand growth in the emerging markets has never contracted year-over-year in the modern era. Although demand destruction has started in the emerging markets, the overall trend for consumption remains long-term bullish.

Total oil supplies remain in deficit to the tune of roughly 2 million barrels per day or 87 million barrels of demand compared to 85 million barrels of supply. That discrepancy in supply and demand has been consistent for over a year and remains threatened by supply bottlenecks in many oil-producing markets and threats of regional conflicts.

Oil Stocks are Cheap

A stable dollar is a plus for world growth because a lower dollar will help moderate inflation for many emerging market currencies. This should stimulate economic growth and demand for oil and other distillate fuels at a time when the global economy is slowing.       

Provided that U.S. interest rates remain low for the foreseeable future, and they will, global economic growth will continue. Oil prices will find a floor. That makes energy stocks a great buy at these distressed levels.

I’ve been busy buying oil and energy services companies over the last few weeks following big price declines. Most oil stocks are not priced for US$75 oil let alone oil prices north of US$100 per barrel. And compared to banks, energy stocks have real assets and real earnings!

Cash-flows for the majors in the United States, Canada, and Europe are bulging and dividend payments are still increasing. These stocks now trade at 52-week lows and should form a bottom over the next several few weeks or sooner as oil prices finally trough.

Thank God for the Chinese!

To recap, the global macroeconomic picture is nothing like it was in the 1970s. This is perhaps the most significant bullish point I can make about this big correction for raw materials. We don’t have skyrocketing interest rates and double-digit inflation.

China is now a major player with regards to commodity consumption. It was almost insignificant 30 years ago. Thank goodness for the Chinese. If they didn’t exist the bear market in U.S. stocks and bonds would be far more severe, the dollar would be near-worthless and commodities would be trading in the basement.

Provided that global interest rates remain historically low and the United States and Europe can eventually stabilize the ongoing credit crisis then global economic growth should reaccelerate later in 2009.

A stable dollar will also mitigate inflationary pressure globally and that’s a positive development for new consumption. Also, slowing growth and lower commodities prices now will eventually open the door to central bank rate cuts in 2009 - a boon for commodities.  

The time to buy or accumulate new positions in the energy sector is now. The oil majors and the oil drillers have been smashed hard over the last six weeks and offer great value in an otherwise sluggish earnings landscape. Earnings for the oil majors and the drillers will continue to flourish even at US$75 oil, which I don’t expect unless the Chinese economy collapses. And that won’t happen anytime soon.    

Take account of ecology. Where does the other side live? What does he eat? Does he respond best to slow or fast lures? Always consider the rhythms. Try to synchronize your activities with how fast or slow the currents are moving.

Everything is booked together. To get good results, pay attention to language, science, economics, literature, religion, and art. Remember Hamlet, “A man may fish with the worm that hath eat of a king and eat of the fish that hath fed of that worm.”

If you must know how good you are, enter a contest or tournament, but remember that completely different techniques are appropriate here from those that win in the normal day-to-day fray. The winner of a contest has nothing to lose and therefore takes much more risk than would be appropriate for you or I even to consider in the usual course of events.

Above all, be a contrarian. Once you hit a winner you’re very unlikely to find a winner in that same place. The best fisj swim deep and all fish are not caught with he same flies.

Everything is affected by the weather. When the moon is full the easiest pickings are often nearest at hand. The wind is your friend but often the direction of the wind changes the play and the response of the prey.

The weakest preys are the easiest to catch. When you see red on the battlefield, prepare to reel in the bigger winners.

Stay calm. Keep your emotions in check. A loud voice can upset your concentration and give away your position. The time for exhilaration is after you’ve bagged the winner and you’ve gone home to reflect on what you did right or wrong. Adapt a scientific approach. Keep records of what’s working and what’s not. Once you analyze the record you will be able to see what changes have the best likelihood of success. Especially if you’re doing badly, change something. Try another tack - change your bait. But be humble enough to know that there are many others better than you at the game and try to learn from these legends. Many of the greats offer seminars for “reasonable” fees and are happy to share their wisdom with you.

The cycles are always changing. Winning techniques for the morning are completely different from those at noon or the close.

At War with the Odds …

No one can argue against the successful investing strategies of Peter Lynch of Fidelity Funds. His compounded rate of return is one of the best Wall Street has seen and it extended over a decade. In Peter Lynch’s book on his investment strategy, he emphasizes that traders should learn the elements of the game of Poker to increase their understanding of investing. Since tournament poker is one of my hobbies, I thought we might check out what Peter Lynch was saying about this popular game of skill.

Poker, unlike nearly all casino games, requires skill to consistently win. The casino does not take a percentage in tournament poker, each player is trying to beat the other players in the hand and win the pot. Poker, like trading, is based on probability. Participants in the event must always be cognizant of the risk versus reward of each trade or hand. There is an old saying in Poker that goes something like this, “If you sit down at a poker table and don’t recognize who the sucker is, then you are the sucker.” The same is true of all neophyte traders who want to beat the Wall Street boys but have no knowledge or experience as they enter the world’s toughest business.

Program Trading

One subject that has received widespread publicity in recent years is program trading. Perhaps, never in the history of financial markets has there been more criticism about a trading approach that was less understood. I would venture a guess that less than one out of ten people opposed to program trading even know the definition of the term. One source of confusion is that program trading is used interchangeably to describe both the original activity and as a more general term encompassing various computer-supported trading strategies. (for example, portfolio insurance).

Program trading represents a classic abitrage activity in which one market is bought against an equal short sale in a closely related market in order to realise small, near risk-free profits, resulting from short-lived distortions in the price relationship between such markets.

Program traders buy or sell an actual basket of stocks against an equal dollar value position in stock index futures when they perceive the actual stocks to be underpriced or overpriced relative to futures. In effect, program trading tends to keep actual stock and stock index futures prices in line.

Insofar as every program-related sale of actual stocks is offset by a purchase at another time and most program trades are first initiated as long stock/short futures positions, arguments that program trading is responsible for stock market declines are highly tenuous.

Moreover, since the bulk of economic evidence indicates that arbitrage between related markets tends to reduce volatility, the relationship between increased volatility and program trading is questionable at best.

Portfolio Insurance

Portfolio insurance refers to the systematic sale of stock index futures as the value of a a stock portfolio declines in order to reduce risk exposure. Once reduced, the net long exposure is increased back towards a full position as the representation stock index price increases.

The theory underlying portfolio insurance presumes that market pries move smoothly. When prices witness an abrupt, huge move, the results of the strategy may differ substantially from the theory. This occurred on October 19, 1987, United States of America, when prices gapped beyond threshold portfolio insurance sell levels, triggering an avalanche of sell orders which were executed far below the theoretical levels.

Although portfolio insurance may have accelerated the decline on October 19, it could be reasonably be argued that the underlying forces would have resulted in a similar price decline over a greater span of days, in the absence of portfolio insurance. This is a question that can never be answered. (It is doubtful that program trading, as defined above, played much of a role in the crash of the week of October 19, since the severely delayed openings of individual stocks, tremendous confusion related to prevailing price levels, and exchange restrictions regarding the use of the automated order entry systems severely impeded this activity.)

Position Sizing is the part of the trading system that determines how large a position you will put on throughout the course of a trade

Professional gamblers have long claimed that there are two basic position-sizing strategies - martingale and anti-martingale. Martingale strategies increase one’s bet size when equity decreases (during a losing streak). Anti-martingale strategies, on the other hand, increase one’s bet size during winning streaks or when one’s equity increases.

If you’ve ever played roulette or craps, the purest form of martingale strategy might have occurred to you. It simply amounts to doubling your bet size when you lose. For example, if you lose $1, you bet $2. If you lose $2 then you bet $4. If you lose $4, you bet $8. When you finally win, which you will eventually do, you will be ahead by your original bet size.

Casinos love people who play such martingale strategies. First, any game of chance will have losing streaks. And when the probability of winning is less than 50 percent, the losing streaks could be quite significant. Let’s assume that you have a streak of 10 consecutive losses. If you had started betting $1, then you will have lost $2,047 over the streak. You will now be betting $2048 to get your original dollar back. Thus, your win-loss ratio at this point - for less than a 50:50 bet - is 1 to 4,095. You will be risking over $4,000 to get $1 in profits. And to make matters worst, since some people might have unlimited bankrolls, the casinos have betting limits. At a table that allows a minimum bet of $1, you probably couldn’t risk more than $100. As a result, martingale betting strategies generally do not work - in the casinos or in the market.

If your risk continues to increase during a losing streak, you will eventually have abig enough streak to cause you to go bankrupt. And even if your bankroll was unlimited, you would be commiting yourself to risk-to-reward strategies that no human being could tolerate psychologically.

Anti-martingale strategies, which call for larger risk during a winning streak, do work - both in gambling arena and in the investment arena. Smart gamblers know to increase their bets, within certain limits, when they are winning. And the same is true for trading or investing. Position-sizing systems that work call for you to increase your position size when you make money. That holds for gambling, for trading, and for investing.

The purpose of postion-sizing is to tell you how many units (shares or contracts) you going to put on, given the size of your account. For example, a position-sizing decision might be that you don’t have enough money to put on any positions because the risk is too big. It allows you to determine your reward and risk characteristics by determining how many units you will risk on a given trade and in each trade in a portfolio. It also helps you equalize you trade exposure in the elements in your portfolio.

Some people believe they are “doing an adequate job of position sizing” by having a “money management stop.” Such a stop would be one in which you get out of your position when you lose a predetermined amount of money - say $1,000. However, this kind of stop does not tell you “how much” or “how many,” so it really as nothing to do with position sizing. Controlling risk by determining the amount of loss if you are stopped out is not the same as controlling risk through a position-sizing model that determines “how many” or if you can even afford to hold one position at all.

The Commodity and Currency Circle

If the global economy is slowing, and China is forced to work through excess inventory, demand for commodities will be impacted. I’m guessing crude oil prices, in particular, will suffer from the realities I just described.

And remember, commodity prices and currencies influence each other in a self-feeding circle.

For example, falling crude prices could be the one thing that allows U.K. and European central banks to begin lowering their interest rates.

If and when that happens, the dollar will become more attractive relative to those currencies.

It wouldn’t take a bold move on the part of the U.S. Federal Reserve, either (nor do I expect one).

A narrowing interest rate disadvantage between the dollar and euro - or the dollar and the pound - would be hugely supportive for the greenback.

In fact, this may very well be why the dollar HAS ALREADY been holding up given such incredibly dismal news day after day from the U.S. economy.

Take a look at this chart …

Over the last year or so almost everyone’s been pointing to the inverse relationship between the U.S. dollar and crude oil.

At the very left of the red rectangle on my chart, you can see where the tight inverse correlation began to break down. That’s when the dollar bounced higher from its all-time low. Crude soared well beyond its record high at the same time.

Crude rallying and the dollar drifting slowly higher simultaneously? That was certainly no inverse correlation.

But from the furthest right point of that red box is where the tight inverse correlation has resumed. Only this time, the direction is in favor of the dollar. And it comes exactly after a new all-time high for crude prices.

Translation: The buck could be back.

The dollar has been able to continue its rally this week, even amidst a blitzkrieg of central bank announcements. While it has a long way to go - and recovery may not be swift - I think it’s time to keep the dollar rally scenarios in clear sight. Especially now that other economies are catching the bug.

TRADING DISCIPLINE– What to do right now to make yourself a stronger person and a better trader.

1. Develop Consistency - You can create a mindset of consistency by developing beliefs that support you in obtaining this result. In order to develop consistency, there are a number of things, which you must do, including identifying your edges, defining the risk in each trade in advance, and accepting the risk to be able to exit a position when a defined loss level is realized. These and key mindsets help traders work through the issues they face in taking a trade, making the trade and executing their exit from the trade

2. Trading is a Probability Game - You can’t be a perfectionist and expect to be a great trader. Your losses (that you hope will return to breakeven) will kill you

3. Jumping In Too Soon or Getting In Too Late - These mistakes come from traders not having a well-defined plan of how they will enter the market. This positions the trader as a reactive trader instead of a proactive trader, which increase the level of emotion the trader will feel in reacting to market movements. A written plan helps make a trader more systematic and objective, and reduces the risk that emotions will cause the trader to deviate from his plan.

4. Not taking profits on winners and Letting winners turn to losers - Again this is a function of not having a properly thought-out plan. Entries are easy but exits are hard. You must have a plan for how you will exit the market, both on your winners and your losers. Then your job as a trader becomes to execute your plan precisely.

5. Great traders don’t place their own expectations on to the market’s behaviour, whereas poor traders expect the market to give them something. The market does not know who you are and owes you nothing. Period. When conditions change, a smart trader will recognize that, and take what the market gives.

6. Emotional pain comes from expectations not being realized - When you expect something, and it doesn’t deliver as expected, what occurs? Disappointment. By not having expectations of the market, you are not setting yourself up for this inner turmoil. The market doesn’t generate pain or pleasure inherently; the market only generates upticks and downticks. It is how you perceive and respond to these upticks and downticks that determine how you feel. This perception and feeling is a function of your beliefs. If you’re still feeling pain when taking a loss according to your plan, you are still experiencing a belief that your loss is somehow a negative reflection on you personally.

7. The Four Major Fears

• Fear of Losing Money
• Being Wrong
• Missing Out
• Leaving Money on the Table

All of these fears result from thinking you know what will happen next. Your trading plan must approach trading as a probabilities game, where you know in advance you will win some and lose some, but that the odds will be in your favor over time. If you approach trading thinking that you can’t take a loss, then take three losses in a row (which is to be expected in most trading methods), you will be emotionally devastated and will give up on your plan.

Why the Next Six Months Will Be Your Best Chance to Buy Resources Since 2003

The resource bears took a few swipes yesterday, reader. This morning we read that the commodity boom is over.

It’s articles like this that are making companies like BHP cheap. It’s down 25% in a couple of months. And bears will make investing in commodity-based equities a good idea in the second half of the year. It’ll probably be the best opportunity you have to buy mining and energy stocks since 2003.

But buying resources is not as clear (or easy) as it once was, as you’ve probably found. And that article above isn’t just pessimistic. It’s utterly dismal. We felt like a pallbearer as we read.

“Demand from China is softening….the CRB Commodity Index fell 10% last month…gold will slump to $650 an ounce…”

Hey…we’re still locked up in our room with some sort of allergic reaction. But we’re not that feverish. Let’s unpack those comments.

China Shifts Gears to a Domestic Boom

“Demand from China is softening.”

Quite possibly true. China’s annual GDP is running at a rate of about 10% this month. That’s about 1.8% down on the high it hit last year. That means consumption has probably fallen off too.

But so has every country. It’s what happens in a credit crisis. You can put the drop in economic growth so far down to the shockwaves from America…not a fundamental demolition of Asian demand.

If you think that fall is a reason for dropping your Chinese-related investments, you automatically make an assumption. You assume that American spending is more important to China’s growth than Chinese spending.

That may have been true in the past. It won’t be in the future. China hasn’t yet accumulated the same income levels as Uncle Sam. But for every spender in the US, there are four in China. Add in India, and it’s more like eight.

So we don’t see a slowing China as the end of the boom this month. It’s more of a correction. Who knows? Maybe China needed this. It’s possible to grow too fast.

And looking at the 10% drop in commodity prices…well, that depends on your view of China. If you think it’s going down the toilet, be our guest and sell everything. If you think it’ll keep growing, commodities aren’t dropping. They’re getting cheaper.