Are you following these forty commodity trading guidelines? Follow them all and you have a better chance of becoming a consistently profitable commodity futures and options trader. Design your trading plan around these rules. Don't underestimate their value for your success.
Survival Is Your Prime Directive
15) Ask any professional commodities or options trader to name his most important trading skill. He will probably tell you that “survival” is near the top of his list. Without the survival of your account, everything else is futile. Always trade in a defensive manner, but at the same time be aggressive when you have a high probability trade set up. Being defensive means you trust yourself to execute a set of rules that will keep you out of serious trouble.
Being aggressive means acting out your plan without hesitation and knowing when to step up to the plate in a big way. Not all futures contract and option trade set ups have the same probability. Learn to recognize the very best ones and take full advantage. And don’t be surprised if they don’t work out. Take the loss as like it's any other trade and move on. Avoid getting a scenario,
Design Your Own Method and Know It Well
16) Develop your own commodity trading method and know when to break the rules. There is no system that will work all the time. The account draw-downs of even the best systems can be devastating at times. Know your system or method well enough to recognize when it will perform its best and worst in a particular market. This can be done once you completely learn your method and the commodity futures contract market it trades. The market’s past habits are your clues.
Are You Risking Too Much On Each Trade?
17) Money management rules are possibly the most important part of our plan. Each losing trade should put only a tiny nick in our futures contract trading account. If we are gaining or losing a large percentage of our account in a few trades, we are out of control and need to rethink why we are trading. (For excitement? … or to survive and make money consistently?
Small, Leveraged Positions Go a Long Way
18) Trade small. Even after you become a consistently profitable futures trader, continue to trade small. It’s all relative, but the key to profits is to let small positions go a long way. A long way might mean two points or it might mean forty points. It all depends on the method used. Leverage is so great in commodity futures contracts, there’s no reason to load up on a few trades and put your survival on the line. In addition, your thinking will stay more clear trading small. One trade should have little effect on your account, win or lose.
Put Your Eggs In One Basket and Then Focus
19) Be careful about over-trading. It can take on many forms. Stick with a few markets you can master and specialize in. Get in and out of the futures market as few times as possible according to the rules of your method. Forget scalping if you are off the floor.
A futures contract day-trader should take no more than 2- 4 trades a day. A short-term intra-day trader might make 10-20 trades a month. A long-term commodity position trader should take maybe 3- 4 trades a month, depending on account size and method. Keep the positions small, no matter what method you use. A 5 - 7.5% account loss maximum is about right for a bad trade. See my article about suggested account size and activity.
Anticipate What A Good or Bad Trade Looks Like
20) Before a futures contract trade, have a general idea of where you want to get in, get out and what time frame you expect. Also, know what the particular futures or option market needs to do to make you exit at a loss. Prior market action along with your trade pattern's history will be your guidelines. The more intuitive a trader, the more leeway he can give the market in real time to let it unfold as it may.
Part Four of Seven, Coming Next!
There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.
