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SCALETRADING - A Specialty of Crown
SCALE TRADING is a methodology that provides Crown clients a disciplined, mechanical approach for long-term investment on commodities, year after year. Scaletrading is VALUE INVESTING because it targets raw material when believed that fundamentals are shifting toward tighter supplyand/or higher demand. One begins buying the commodity at progressively lower prices until it stops declining. Once the decline stops the contracts are in turn sold at progressively higher prices. It uses a de-leveraged approach and taking of consistent small profits rather than attempting high-leveraged plays on flashy run-ups. This is a conservative trading plan within a high-risk arena and it may offer substantial opportunity and benefits for those seeking diversification into raw materials as part of a balanced portfolio allocation strategy. Hal Masover's book, Value Investing in Commodity Futures presents a full introduction to the Scale Trading methodology.
Benefits of Scale Trading
Rather than using heavy leverage to chase large market movements, scale trading provides the ability to de-leverage - creating a product much more compatible with traditional, conservative investment portfolios, including IRAs.
With scale trading, more of the equity in the account is committed to each trade and the volume of trading is much less - producing an additional benefit of less commission expense than with most futures accounts. The trading strategy involves taking consistent small profit, rather than riding big, flashy run-ups (followed by equally flashy run-downs).
The results, both in terms of returns and risk profile, tend to be quite different than the type of futures trading which causes most investors to leave futures out of their portfolios.
The Law of Supply and Demand
The law of supply and demand says that as the proce of a commodity, such as soybeans, falls then the demand for soybeans increases. As the soybean price approaches or even falls below its cost of production, producers will be inclined to cut back or switch to a more profitable crop, thereby reducing the available supply for the coming year. As supply shrinks, buyers competing for fewer and fewer soybeans eventually push prices higher in order to ration demand. This higher price in turn motivates producers to increase production, thereby increasing supply. This results in lower prices, and the process starts all over again.
It is this cycle which a Scale Trader utilizes. A scale investor enters the cycle when he feels soybean prices are about to rise from their lows. Along with factors such as decreased acreage in the United States, the investor also looks for global fundamentals indicating that prices could rise well above contract purchase prices as the supply/demand cycle continues.
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