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A Two-Horse Race
A great view of commodity trading!!!

Provided by Bruce Gould, Author of
Bruce Goulds's Free Futures & Options
Newsletter™

E-mail Bruce at bmail@ncidata.com for more information.


There are two horses in a race. They are equal. Neither is favored to win the race. You have no idea which horse will cross the finish line first as you know nothing about either of them. You want to bet on horse (A) or horse (B). Just as you are about to decide, you are told that whichever horse you bet on, it can never be 10 feet behind the other horse once you have placed your bet, or you will lose your money. This is true even if the horse you select eventually wins the race. You are, however, allowed to place your bet at any time during the race up to the last fifty feet. You decide to bet on horse (A) and right out of the gate it falls 15 feet behind horse (B). Eventually your horse (A) wins the race by three lengths but you have lost your money. The furthest that horse (A) was ever behind horse (B) was the 15 feet at the start of the race.

You know that horses often fall behind at the start of a race and then catch up as the race continues. Is there any way you could have placed your bet so that you would have won the wager? Of course there is. You could have waited until your horse was 10 feet behind and then bet that horse (A) would never be 20 feet behind. Remember you are allowed to place your bet at any time. Why not wait until your horse is 10 feet back and then place your bet. There is one reason why not. Your horse may never be 10 feet back and thus the opportunity to bet on horse (A) may never arise. But is this a good reason? There will be another race shortly. If you miss betting on the first horse race of the day, then bet on the second. You know that this method of waiting to place your bet works best when the horses are of equal abilities and there are only two horses running in the race.

Gold futures are selling at $300.00 an ounce. You are not sure whether gold will advance or decline. You believe there is a 50/50 chance that either will happen. Should you go long gold and buy futures contracts or options or should you go short gold and sell futures contracts or options? You have no idea. To you it is a two horse race. (A) prices may advance or (B) prices may decline. Which should you pick? Should you bet on horse (A) or horse (B)? One thing you do know. You are willing to risk no more than $20 an ounce whichever way you bet. If you buy gold futures long at $300 then you plan to place a sell stop/loss order at $280. If you sell gold futures short at $300 then you plan to place a buy stop/loss order at $320. Unable to make a decision you flip a coin, heads you go long and tails you go short. It comes up tails and you decide to sell gold futures short at $300 an ounce. You lay out a plan to enter your orders so that if gold rises to $320 your stop/loss is hit and you are out for a loss. If gold declines to $280 you will buy back your short position for a profit. You feel it is certain that gold will do one or the other and a 50/50 probability that it will do either first. You are now in a two horse race and you have selected horse (B).




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CAUTION:

TRADING COMMODITIES, STOCKS AND/OR COMMODITY OR STOCK OPTIONS INVOLVES RISK. MONEY CAN BE LOST AND/OR MADE TRADING ANY SECURITY AND/OR OPTION. PAST PERFORMANCE OF A TRADING SYSTEM OR MARKET IS NOT NECESSARILY INDICATIVE OF THE FUTURE PERFORMANCE OF THAT SAME SYSTEM OR MARKET. MOCK TRADING AND ITS HYPOTHETICAL PERFORMANCE RESULTS ARE INHERENTLY LIMITED AND SHOULD ONLY BE USED AS A LEARNING TOOL AND NOT A MEASURE OF FUTURE PERFORMANCE. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED WITHIN THIS SITE, SUPPORT AND TEXTS. OUR COURSES SHOULD BE USED AS LEARNING AIDS ONLY AND SHOULD NOT BE USED TO INVEST REAL MONEY. IF YOU DECIDE TO INVEST REAL MONEY, ALL TRADING DECISIONS SHOULD BE YOUR OWN.


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