All of us like to buy a bargain — the opportunity to get something we want before prices get back to “normal.”  That’s the premise behind the trading approach known as “scale trading.”

Like most methods, scale trading is not a cut-and-dried, easy way to trade. For one thing, you might decide the price is already low and just can’t go any lower. And, then, it goes lower — much lower, as traders in energy, hogs, sugar, copper, soybeans and other markets can attest. Or, it might be that, even though everyone recognizes the price is unusually low, not enough buyers step in, so the market just sits at the low end of its historic range for an extended period of time until buyers give up.

In a nutshell, scale trading is for those who are very patient and have very deep pockets. Normally, one or two markets may be candidates for scale trading each year, but, in a rare instance in 1999, virtually every commodity offered scale traders the potential for substantial rewards.

In addition to patience and money, a combination of the following three things is what you need for scale trading:

Physical commodities only — something that is grown or mined and is consumed, therefore subject to supply and demand forces.

Historically low prices — you can determine that several ways, but, basically, all you have to do is look at a long-term price chart for the last 20 – 25 years and divide the price range from low to high in thirds. A market in the lower third is a candidate for scale trading although you may not want to implement such a plan unless prices fall into, say, the bottom 10% of the total range or a more recent range of, say, the last 10 – 15 years.

Strategy — If you are Warren Buffett buying cheap silver or stocks, you can just hold on for a price increase that will inevitably come although it may take years. Futures trading, however, requires something more than just buy and hold to capitalize on low prices.

Soybeans provide a good example of both the promise and problem that scale trading offers. As of 1999, soybean prices had been below $5.25 a bushel only a few times since the early 1970s, so, when prices continued a long slide to new lows in early 1999, it looked like a good scale trading opportunity. With $5.25 as a starting point, let’s say that, at that time, you decided to buy one contract every time prices declined 25 cents and sell that contract when it rallied 25 cents.

When prices hit $5, you then bought one contract — after all, prices couldn’t go much lower. You rode out a further decline, and, when prices rallied at the end of that March, you sold the contract. You made 25 cents (or $1,250). Scale trading looked very promising.

Then, prices fell, and you bought at $5 again. This time, the rally didn’t go high enough to trigger your sell signal, so you were left holding one contract. As prices hit the skids, you bought another contract at $4.75, another at $4.50 and another at $4.25 (red lines). At the low around $4.05 in July, your four-contract position was down almost $21,000, counting all margins, trading losses and commissions. Now, scale trading looked a little scary. If prices lingered at the lows, and you were to have to roll positions over to the next contract month, that would have introduced another element of uncertainty.

The wildly erratic action that followed was a challenge for any trading style. We don’t have enough space to detail every trade, but assuming you bought around the points indicated by the red lines and sold at the blue lines, you would have gained approximately $8,000. That would have made scale trading a little more attractive.

This is only one simple approach to scale trading. Some traders will trade larger sizes the more prices decline. Others use a combination of call options and futures. Others sell put options. However you do it, the basic premise of scale trading is that, eventually, supply-demand will drive prices back to normal, and a sound plan can position you to participate in that move.