Why A Commodity Trading Plan Is Key
To maximise your chances of success you need a commodity trading plan. Just think about it a moment.
Would it be advisable to start a small business without having a well thought out business plan? The answer is obvious.
So just like a business, the successful commodity trader will have a well drawn up trading plan so that decisions are made automatically.
You can now subscribe to the free Commodity Universe Ezine below, and get the latest articles on the commodity sector . Just your first name and email. It's as easy as 1-2-3! All you need do is follow the plan and the short term emotional risks and distractions are factored out.
It pays to think carefully about your trading plan as this will be your compass to guide you in all situations, however volatile and uncertain.
If your plan approaches trading from the view that your objective is to protect capital then it may on occasions suggest you sit on the sidelines and not trade.
A trading system can consist of elements of different ideas or wholly based on one methodology by a single pioneer or guru. The key is to stick to your trading plan and monitor its progress over time.
As part of your plan you need to write down the methodology of your trading system.
It should be clear enough that another trader could pick up the manual, follow the instructions and begin to trade with success.
Or look at it this way. By writing down and following the rules in your system, you are taking responsibility for the whole process.
You cannot then say that an unusual move is the fault of the market. If you follow the framework guideline in your trading plan you are in a position to take responsible decisions based on what you see happening in the market.
Entering the Market
The commodity trader needs to look at all the potential commodities available to trade on the platform she is using, whether as a futures contract, and ETF or a contract for difference (CFD).
This could be a problem because you first have to decide what trading tools or indicators you are going to use to determine which commodity offers good profit potential with a limited risk.
This systematic approach is preferable to one where you have to use gut reaction, instinct, latest news items or punters tips.
What matters really is not so much where you enter a trade but rather where you plan to get out – the exit point – and your system for managing your capital.
Money Management
Too much emphasis on the entry point gives the commodity trader a false sense of control, whereas in fact it is the market that is in control.
When preparing your trading plan you have to think about more than just compare one system with another on the basis of winning trades.
So for example you don’t necessarily choose system A (7 out of 10 winning trades) over system B (6/10).
Ask these questions to build a proper money management framework into your system:
Choosing a sound money management approach, it is still possible for example to make money even when the market goes against you half the time.
It is essential to plan for a proper exit strategy. Not enough emphasis is placed on this important stage in the commodity trading process. In fact, the exit is considered more critical than the point of entering a trade. You should know where your exit points are before you enter a trade.
The first point is your stop loss (in the worst case scenario) if the price action goes against you. This point limits your losses to the amount represented by the price difference between the entry point and the stop loss price.
Second exit point is the target point, say twice or three times the size of the stop loss or a particular price level. Your decisions are likely to be informed in real time as various indicators suggest the market may turn against you sooner than expected and so you take the profits.
Contrast this with what often happens, when the trader starts to make a loss, and rather than cut the loss short, waits until they are stopped out. Or as soon as they make a profit, instead of letting the profits run, they take them immediately. So you get small profits and larger losses.
This all happens when psychology and emotions and lack of trading discipline take over from a structured trading plan.
|
