Trading in Futures and Commodities has advantages not found in more
traditional forms of investing. In fact, investing may be the wrong word
to use. Most who trade in Futures and Commodities are more like
speculators, because the time a trader will hold onto a position is
usually much shorter than the time investors tend to hold positions.
One
of the big advantages of trading Futures and Commodities is the
leverage. For a relatively small amount of money, the futures trader can
control many times that of the underlying product, may it be Wheat,
Crude Oil, Gold or one of the Currencies.
This type of leverage
provides the opportunity to make a lot of money from a small amount of
money. However, leverage is a two-edged sword, and that means you can
also lose a lot of money if you do not know what you are doing.
In
this article I will touch on 10 tips to help you avoid unnecessary
losses and give you a head start towards being profitable. But beware
that this is just the beginning. When it comes to training in futures,
there is no end to education.
TEN TIPS TO SUCCEED WITH FUTURES AND COMMODITIES
1.
Read all you can about how the Futures Markets work and get
familiarized with the products and their specifications. You can learn
much of this by visiting websites of the exchanges where these futures
are traded, such as the Commodities Merchantile Exchange (CME).
2.
Be sure to shop around for a good discount broker. These days you will
find more services being offered for much less than what it was just a
few years ago. Be sure they specialize in futures and provide good
electronic and phone trading support. You will not only want to pay as
little as possible for each "round-turn" in commissions, but you also
want to be sure you can get ahold of someone at anytime, day or night,
to get you out of a position in the event your Internet goes down or you
lose connection through your trading platform. If you are new to
trading, see if you can trade a dummy account with the brokerage to get
familiar with the platform they offer and to practice trading before you
use real money.
3. Be sure your trading account is well-funded.
Most traders who start with an account that is under-funded end up being
wiped out. The reason for this is that when you trade with a small
account, you will have the tendency to trade scared (fear). These days
where many of the markets have big daily ranges and often are volatile,
it is difficult to enter a trade with a tight stop-loss unless you day
trade using minute charts. This is one reason why many opt for
daytrading. But even if you decide to daytrade, you should not open an
account for anything less than $5000, although more is better.
4.
Trade with the trend. Let me say this again. Trade with the trend! It is
a statistical fact that you will have better odds of making profits
with less losses if you trend with the wind at your back. Learn methods
and indicators that will help you discover the trend and then take only
trades that are supported by that trend.
5. Always use a stop-loss
order at the same time you enter a trade. Never, ever enter a trade and
put off entering an opposing stop-loss order. Even if you are uncertain
as to the best place to put it, at the very least you should put it at a
price that works as an "emergency exit" in the event some news comes
out and causes the market to move violently against you. Whatever you
do, do not put your stop-loss beyond the day's maximum move threshold,
the limit price level. Futures markets have daily limits that if price
were to move to that limit that prices would not be allowed to go any
further. Often, the reason that prices went limit in the first place can
also cause prices to go LOCK LIMIT due to price pressure. If this
happens against your position, you may not be able to get out and could
face additional days of limit moves against you. This is a trader's
nightmare! So be sure you have your stop-loss at least at some price
level BEFORE that limit price to avoid being stuck in multiple limit
moves. There are several strategies for deciding on where to put your
stop-loss. Learn them to help you effectively use them.
6. Learn
about support and resistance, especially when it comes to trends and
retracements. If the trend is bullish, for example, the bullish waves
will usually be greater than the bearish retracements (moves against the
trend). According to W. D. Gann, prices tend to retrace in increments
of quarters and eights. The major levels are 38%, 50% and 62%,
especially in strong trends. These mark your support and resistance
levels, and they provide good levels to look for prices to enter trades
as well as places to put your stop-loss orders for protection.
7.
Learn Money-Management. This is very, very important. With a good
money-management system, even a trading method that has less than 50%
win/loss ratio can result in overall profits. The key is to determine
the right percentage of the total account to risk on any single trade
and to stick with that formula. W. D. Gann advocates 10%, although these
days it is suggested that you not risk more than 2-3%. This is another
reason why you need a well-funded account so that you will not end up
with stop-loss orders being too close to your entry or having to miss
lots of good trade setups due to the risk exposure exceeding your risk
allowance. If you spend enough time learning good money-management and
you stick with it religiously, you can do quite well even when your
timing skills are still lacking.
8. Learn Top-Down Analysis. This
is one of my favorite tips to give to traders. If you trade on a DAILY
time-frame, it would be to your advantage to view the WEEKLY, even the
MONTHLY charts to get a sense as to the longer-term direction of the
market. Focus on trading your chosen time-frame in the direction of the
longer-term time-frame. It is not difficult to get a sense of trend
direction. For example, you can simply apply a 20-bar and 50-bar moving
average and note the slope of the lines as to whether they are moving up
or down, and whether the 20 is above or below the 50. Whatever method
you use to determine trend, having the longer-term trend in mind is
extremely valuable when trading the lower-time frame.
9. Never
chase a trade and never move a stop-loss deeper into negative territory.
If you planned a trade and then missed the price area you wanted to
enter from, DO NOT chase it and enter at the worse price. This is a big
mistake and is usually motivated by emotion. The same for your stop-loss
price level. Suppose you decide a good place to put your initial
stop-loss. Once that order is placed, suppose the market starts moving
against you and now you see that your stop-loss order may get filled.
Whatever you do, DO NOT change your stop-loss order to allow for even
greater losses. This is how many traders become ex-traders. They do not
want to accept losses, and they get it in their head that if they just
give the market a little more room, and a little more, that they may not
have to experience a loss at all because the market should turn soon in
their favor. Bad bad emotional trading. Do not do this. You have
decided ahead of time what your risk will be, and if it reaches it, so
be it. This is what separates the winning traders from the losers.
10.
Keep learning to be better at TIMING. This is my speciality, timing the
market to the very day when a bottom or top is highly likely to occur.
There are many timing methods. Naturally, I am biased towards the FDates
timing method. However, I respect that many will want to try all kinds
of methods out, and that is fine. Keep working on this, because a good
timing method, such as FDates, allows you to trade with
less risk exposure. When you can keep your risk exposure down, this
enhances any money-management plan and allows for greater flexibility.
In addition, the less risk you are exposed to, the less effect your
emotion of fear will play in your trading.
