Everybody planning to trade commodity futures should have a trading plan.It's estimated that 80 to 90% of traders fail within their first six months. ...
Everybody planning to trade commodity futures should have a trading plan.
It's estimated that 80 to 90% of traders fail within their first six months. One reason for this is undercapitilization. It is hard to compete when your available funds are wiped out by one losing trade.
Another is the influence of the emotions of fear and greed. One way is to practice emotional self-control,
in both times of winning and losing.
Also, you must practice good capital preservation and risk management techniques. Do not overtrade your account. Even veteran traders sometimes let prior successes make them overconfident, so they put too much money on one trade. When it goes against them, they're out of the game.
In fact, it's quite possible that emotional control and risk management is the real key to winning as a trading.
Assume that you cannot consistently predict whether a given commodity is going to rise or fall in price. Therefore, your odds of getting a trade right, just by chance, are one in two. That is, you have a 50% chance of buying before it goes up (or selling before it goes down) and buying before it goes down (or selling before it goes up).
If you have the self-control to stop a wrong trade before you lose too much money, and the self-control to let winners ride until you've made a lot of money, that by itself may be the way winning traders operate.
Usual trading plans have provisions for the conditions necessary to entering a market, and when to exit the trade. They should also allow for contingency planning. What to do if the trade immediately goes in the wrong direction. Set a stop loss order? Let it go a little, because volatility is normal and you can't expect to enter a trade at the perfect point to do so. Or you may choose to use options to hedge and lock in current profits, or to limit a loss. Many traders use mental stop loss orders -- they don't give them to a broker, because many floor traders try to take people out of the market early -- but they pay close attention to the markets and sell (or buy) when the positions reaches a predetermined point. This requires a lot of self-discipline.
When do you use an option to hedge the risk? If your trade goes up, do you sell at certain point? Or put in a stop loss order to lock in profits but get out before the market goes down so much?
You must also plan your overall risk management. Many of the traders interviewed by Jack Schwager said they never allowed any one trade to account for more than 1-5% of their account balance. Yet that's probably not possible for beginning traders.
Some traders buy software that automates their trading. The system monitors the data feeds of a a market's prices and can enter the order with your brokerage account automatically.
Yet many of these systems are probably derived from what's called "data mining" through back testing. Other software is programmed to go through past market daily prices to locate variables that seem to correlate with winning trades. However, correlation is not causation, and there's no guarantee that when a given technical pattern occurs next week, the market will repeat itself.
Commodity markets, in fact, don't repeat themselves. Many of these systems use moving averages, stochastics and oscillators and indicators of various kinds. However, they reflect what happened to markets in the past, not what they'll do under different market conditions.
Timing is extremely important. It's not enough to be right. There's an old Wall Street saying that the graveyards are full of traders who were right too soon.
