Wednesday, September 26, 2012

10 Tips to Succeed With Futures and Commodities

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.
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.