Market Matters Blog

The Value of Vigilance

After suffering heavy losses in World War I, France built the Maginot Line in the early-1930's as a way of protecting themselves from the threat of another German assault. The Maginot Line was named after Andre Maginot, France's Minister of War from 1922 to 1924, and was made up of a series of fortifications along France's border with Germany. In its time, the Maginot Line was seen as an impressive system of defense, praised by visitors from around the world.*

The unfortunate flaw in France's plan was that it was based largely on the lessons of World War I. Hitler took advantage of the immobility of France's new defense and struck quickly through Belgium, beyond the reach of the Line. The German attack that began on May 10th of 1940 was over by June 22nd. France surrendered. The Maginot Line had failed.

What does this story of World War II France have to do with making grain pricing decisions in 2013? Plenty. Many participants in the grain markets today, typically categorized as non-commercial traders by the CFTC, are making trades based on algorithmic formulas. Different traders will design different formulas to trade by, but the overall strategy is an attempt to come up with specific set of rules, based on what would have succeeded in the past. In the world of trading futures, this is the modern version of the Maginot Line. These trading plans may succeed for a while (every method works some of the time), but most will eventually fail as the market adapts to a new future.

As DTN's new Grain Analyst, I want our readers to know that trying to distill the market down to a strict mathematical model is not a good idea -- the markets are much too rich for that. One of the things that I like most about DTN’s Six Factors Strategy is that it provides a meaningful structure for understanding today's markets without blinding ourselves to the challenges of a changing future. Yes, understanding the past is important, but the past is never the whole story -- there is no substitute for vigilance.

After 13 years as a commodities broker, I've researched various ways of looking at the markets and have worked through many of the common mistakes, like the one above. There are no magic formulas or crystal balls, but the market is full of valuable clues, if you know what to watch for. The best lessons from my experience have come from understanding how and why price trends develop and I look forward to sharing more about that with you in the days ahead as I comment on the grain markets here at DTN.

Todd Hultman can be reached at todd.hultman@telventdtn.com

* http://www.historylearningsite.co.uk/…

(ES/CZ)

Comments

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JONATHAN HOOK 4/2/2013 | 9:35 AM CDT
Welcome to the DTN family and I am looking forward to you comments, ideas and thoughts on the markets.