5 Golden Rules of Commodity Trading
06/11/2013 8:00 am EST
If you're looking to trade commodities, you'll need to pay attention to more than just the weather, growing season, or supply stockpiles, and Michael Seery of SeeryFutures.com offers his five tips for success.
1. I will start with the number 1 answer first because if you follow this rule, you will have a chance of being successful over the course of time. If you don't follow this rule, you will be sure to lose your money quickly. This rule is simple Do Not OVERTRADE EVER, for this is an easy way to lose all your capital quickly. My definition of overtrading is risking too much money on any given trade, for example if you are trading a $100,000 dollar account and you place a gold trade today, you should limit your loses to 2% of the account value, which in this case is $2,000 which allows you to be wrong on many trades and still be around to play another day.
In futures and option trading, you will have losing trades that is for certain, so make sure you manage those losses and move on to another trade.
2. Trade with the short-term trend, as the saying goes in futures trading, the trend is your friend. Sometimes you will be in a market that is trending higher and then has a false breakout to the upside and then suddenly sells off causing you a 2% loss on your equity and you say to yourself that was a bad trade and should I do something different on my next trade. If it was up to me, I would continue to buy strength and sell weakness because in the long run, commodity trading is about percentages of success in the long run, and if you go with the path of least resistance, more often than not you will have the probabilities of success on your side.
I define a trend as a commodity hitting a 20-day high or low; if the market is in a consolidation, stay away from it and find something that is trending up or down and go in that direction remembering the money management rules of 2% maximum loss if you are wrong.
NEXT PAGE: 3 More Golden Rules for Commodity Trading
3. This rule is extremely important, and I witness it being abused constantly creating tremendous losses that are sometimes difficult to come back from. Never add to a losing position because if the position continues to go against you and now you have added even more contracts, which are all losing money, your account will suffer losses much more than 2%, and in some cases, adding positions and never getting out of a losing trade has wiped people's trading accounts down to zero because of one or two bad trades. Remember, always play for another day, you will have losing trades and good traders manage losses and move on to the next possible trade.
4. If you follow the first three rules, then this rule will never apply to you because you are not overtrading and risking more than 2% on any given trade. Never answer a margin call because you are probably overtrading, and most likely, the position is going against you and you probably have lost much more than 2% on that trade. Never allow this to happen to you because you always want to have sufficient margin in your trading account just in case the exchange raises margin as that will force you out of the position.
A great rule is to keep 50% of your total portfolio in cash and the other 50% in trades, that way if something crazy happens and it does sometimes, this helps in managing risk in a huge way.
5. The last rule is very simple and it states that one must have a game plan and use it consistently even during periods of losses, which will happen to you over the course of time. Do not suddenly start to risk 5-10% because you have to catch up and get your loses back quickly, stick with the game plan, and over the course of time, this will help improve your percentages of success.
If you have an unproven system that has not been tested, then I would look to paper trade the account until you see success and you are comfortable with loses and daily volatility.
By Michael Seery of SeeryFutures.com