Commodity Trading

So many times I hear clients when in a draw down say,”There are changes going on in commodity trading and trend following.” The commodity markets are changing. They are not like what they used to be. Trend following is dead. This draw down proves trend following is dead.

Well I will give you my 15 years plus of experience and counter these thoughts. First of all, nothing ever changes. You need to really know what trend following is, what causes it. Not trying to be funny, but commodity trading has been going on since the times of Joseph in Egypt selling wheat. If you read your bible, he cornered the wheat market and there was a trend in wheat. The price went up. There will always be shortages, panics, fears and hedgers and for this reason there will be trends. One can look back at charts from the 1800s and look at wheat or even cotton. What do you think happened to the price of cotton during the US civil war. Do you I need to remind you what happened to crude in the first gulf war. Human nature never changes…fear and greed don’t ever seem to change…so there are trends. If you want to consider making money in commodities one of the ways I feel most strongly about is trend following. No predicting…just reacting and trying to catch a trend or as a surfer tries to catch a wave. Not too much different.

Now if you believe there are trends, then you need to realize they do not happen when we want them. There can be years at a time…NOTHING HAPPENS. At this point most non professional investors give up and claim trend following is dead and commodity trading advisors stink. Well, so many times after this trend following comes back from the dead and commodity trading advisors hit new record trading peaks. This brings me back to my holy grail word “PATIENCE”. If you can be patient, disciplined, have a sound trading methodology based on risk management and money management, you stand the potential overtime to grind out some decent returns.

Next thought… again those same inexperienced commodity traders say, “The commodity markets are changing. I need to change my system or my methodology.” Again with years of experience watching what has the chance to work and seeing all that did not. The only things that can work over time are simple ideas based on with strong risk and money management.

To give you example, Richard Donchian used a very simple idea. Buy the 22 day high…sell the 14 day low. This is the basis… not too complicated, but needs more risk and money management filters. Not sure if it was John Henry from JWH or Dunn Capital…either of them stated all rules of our system can be written on the back of an envelope. Pretty funny since both at them at various points of their careers were managing in excess of $1 Billion US Dollars. If you want to be a winner in the commodity trading arena realize this takes time, discipline and patience. This is not a get rich quick. This is a compound your way to wealth if you follow the rules of risk management & money management. All of this is easy to say, but when you are down either in your trading account or when your commodity trading advisor is down 20% or greater and you want to quit, Remember: Do you want to be a winner or a loser.

Understand exactly how your mechanical trading system works. Don’t think you will buy a black box and make money. Ask questions to your commodity trading advisor… what gets you in a trade..out of a trade… with a loss or a profit.. How much risk per trade.. how much risk per sector… how much portfolio open trade risk…or margin to equity. If you do not do your homework ahead of time, don’t even think about commodity trading. These are the hard truths about commodity trading. This is not easy. Futures and commodity trading involve substantial risk. People can and do lose money trading.

Author: Andrew Abraham
Article Source: EzineArticles.com
Provided by: Smart cooker

One of the biggest differences in trading is that many successful commodity trading advisors use trend following mechanical systems. Of course there are other commodity trading advisors that use pattern recognition …counter trend as well as basic fundamental analysis to base their decisions. However in my opinion, when a commodity futures trader uses a mechanical trend following system they put themselves in a position to capture rare large moves. The success of commodity trading comes from capturing these rare large moves with proper risk management. This is the key to compound money over long periods of time.

Trend Following trading advisors over the years have programmed their ideas into mechanical systems that detail trade potentials (entry and exit) as well as position sizing. There is no real thinking. Trend Following commodity trading advisors are looking for price to move. They do not predict, rather react. The goal is to catch a new trend. Commodity trading advisors look to take pieces out of the trend. Only liars catch bottoms and tops. There is no holy grail in trend following unlike buy and hold (pray). It all boils down to making yourself available for those rare large moves (not losing too much money when they are not occurring).

Virtually everything is pre thought out with an exact plan (yes an exact plan with successful Commodity trading advisors). The markets trade are thought out. The amount of correlation between similar markets are planned. Risk per trade is planned. What constitutes an entry signal.. How to exit a trade with a profit as well as a loss. What is the total open trade equity that is acceptable. This is like a well trained army or football team. Everyone knows what to do. There is no gut thinking.. I will x number of contracts today because I think this or that.. With successful commodity trading advisors, what will make them buy is that there is a price move beyond a certain threshold that in their model possibly signifies a beginning of a potential trend. The successful commodity trader asks himself/herself.. how much is this going to cost me to see if this trade works. Commodity trend followers know that any trade is 50/50. There is nothing about being right. It is very simply…the trade is going to work or not..If there is a trend..it is working.. Pretty simple and clear. The huge difference between successful commodity futures traders and others is in their trend following mechanical system there is not just focus on entering …but rather ..how many contracts can I put on for my predetermined risk tolerance.. (R). Successful trend followers know it does not matter to be right..actually, most trades don’t work. Lets say the win/loss ratio can be 30% wins and 70% and the commodity trading advisor can be extremely successful Simple.. small losses..rare..large gains.. and position sizing (when the trade works..if the commodity trading advisor has numerous contracts based on his/her risk model). Look at it this way..lets say the JY goes from 100 to 108 and you have 1 contract…you make x.. but for the same risk per trade you were able to put on 2 contracts for the same risk..you have made much more money. Forget about all the nonsense of snake oil advertisements like 80% winners. It is the surest way to be a loser.

There are key questions the trend following mechanical system needs to answer

1. Which markets to trade based on my equity
2. What signifies a buy or sell
3. How do exit with a profit or a loss
4. How many contracts do you put on..(risk per trade.. risk per sector..total open trade risk)

Of course there are other issues..More so don’t think for one minute this is easy.. Even when you have a trend following mechanical system or a commodity trading advisor you need the discipline and patience to follow the system/commodity trading advisor for at least 4-5 years.. Otherwise really don’t start.. I have seen more people quit at the first sign of a draw down and run to another system or commodity trading advisor. More so.. keep it simple..but not simpler..

Author: Andrew Abraham
Article Source: EzineArticles.com
Provided by: Pressure cooker