Choose Your Commodity Trading System

For those keen to enter the exciting world of commodities, a key factor is choosing a commodity trading system that suits them.

Aspiring commodity traders can equip themselves with any number of trading systems which are actively promoted, some of which are remarkably simple in structure, while others are more complex.

So while each system of trading may draw on different principles and theories, the first important question that needs answering is:

“Why do you want to trade commodities?”

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This is a key question to consider.

Is it to create a secondary income or to help you build financial independence, as your primary income source?

You may have in your hands the best commodity trading system in the world, but unless you are motivated and have clear goals in mind, you will not succeed.

Attending seminars, watching videos and reading journals and books is fine, but you will need to have a defined goal, a target in mind, and then a good system will help you towards successful commodity trading.

Write down your key aim, keep a focus on it, as this is your driver and your key motivation.

It’s all in the mind

You could have the highest IQ in the world but still fail when it comes to trying to trade commodities.

Psychological preparation is so important, in fact it can play a greater role even than choosing the best commodity trading system.

One leading psychologist, Dr Van Tharp, is on record as saying that in your success, the trading system accounts for 10%, money management 30% and trading psychology 60%.

So how do you master this crucial aspect of trading in the commodity cauldron?

It seems the best way of achieving success is through acquiring good trading discipline.

So you’ve looked at your motivation for getting into trading commodities, your personal attitude (or psychology) and trading discipline.

Now it’s time to consider the best commodity trading system for you.

What methodology will you adopt?

After all, no two traders have the same personality, risk tolerance, capital, experience and time.

It could be a method created by one pioneer or a combination of systems.

Before finding the system that best fits your personality and objectives, it would help to outline your commodity trading plan.

Your trading system will contain sets of rules that tell you when to exit, when to enter and how to manage your capital.

A trading system can be based on a large database of price movements accumulated over decades which when looked at as a whole show up trends which tend to repeat themselves in the future.

One such system was that created by the great W D Gann in which he places significant emphasis on the Time Factor.

There are also many traders who use Elliott Wave Formations which form a chart based trading system indicating likely future moves in commodity prices, depending on which part of the cycle the price action is moving in at a given time.

But what about the tools you are going to use to help you spot trading opportunities and to know when you should exit a trade and lock in profits or perhaps minimise a loss?

One very straightforward trend based tool is the simple arithmetical daily moving average or DMA which accumulates the prices over a given range of time to give the mean, for example, 20 DMA means the 20-daily moving average.

Traders often supplement the DMA with horizontal lines indicating support and resistance, where previous prices did not go lower or higher respectively.

This could be say a 5 week low or a 5 week high.

Another important tool used by many commodity and stock traders is the candlestick or Japanese candlesticks.

These rectangular shapes (green for up, red for down) offer a very helpful visual aid to determining likely movements in price.

You will also find traders making use of a system invented by the Italian mathematician, Leonardo Fibonacci, over 700 years ago.

Not surprisingly the system is called Fibonacci or FIB based on a mathematical progression called the Fibonacci numbers.

The above systems are some of the more popular ones used by commodity traders, though there are others which can be included.

More importantly is the focus you can bring to the trading plan and applying the rules in your commodity trading system rigidly, removing emotional distractions from your decision making.

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