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Basic Principles are Crucial for Trading
in Volatile Commodity Markets
A multitude of investors have been put off by the stock market in the past two years for a variety of expected reasons. Volatility followed by sideways motions due to market uncertainty can easily weigh on one’s mental approach to the market, leading to boredom and thoughts of greener pastures in some other investment vehicle. Many have found a new home in the commodity and futures markets where nearly everything from basic commodities to currencies is traded at will.
For the curious trader, trading commodities follows many of the tried-and-true principles that must be applied to any investing activity. Yes, the way to make money is buy low and sell high, but the keys to success remain knowledge, experience and the ability to exert emotional control. Patience and discipline are paramount when executing your detailed trading plan to the letter. Impatience and intuitive trading, more attuned with gambling than true speculating, are your enemies to be avoided at all costs.
If you have chosen the commodity market and read articles and books on the topic, then you have most likely answered the question of “Why” and have accumulated a basic knowledge foundation from which to build. The “When”, “Where”, and “How” are the next hurdles to clear:
- “When”: As with other actively traded markets like forex, your first task is to select a trading time frame. Typically, it is best to choose a time frame that meshes well with your personality style. Day trading, where all positions are opened and closed in one day, can be highly stressful and frenetic. Unless you are drawn to this type of trading, most advise to deal in longer time periods, if only for the reason that few successful day traders exist. Short-term traders can focus on trends that last for a few days, while “position” traders may elect to ride trends for weeks at a time. If there is a consensus for beginners, it appears to be four weeks, a reasonable blend of long and short-term perspectives;
- “Where”: You want to choose and broker and exchange that permits contract sizes in your price range and trading software that suits your tastes. Capital requirements to start may be as high as $10,000 to be successful, but in any event, investing in commodities involves high risk, and the capital you allocate to this pursuit should be money that you can comfortably live without if you run into problems. As for what commodities, it is best to trade in a few markets so that your probability of catching favorable trends is enhanced. The objective is to ride winning waves in order to offset the inevitable small losses that will occur if you play your cards correctly. A good mix would include currencies (the Euro or the Pound), interest rate futures, crude oil, gold, coffee, and soybeans. Trends tend to be more pronounced in these product arenas;
- “How”: You will undoubtedly encounter many trading schemes that claim outstanding results, but the conventional wisdom is that most plans are inconsistent over time. Use technical indicators to confirm that trends have commenced. Enter a position AND place a stop-loss order 1-2% below your entry point. You want to minimize your losses immediately. If you connect with a winning trend, be sure to place a trailing stop-loss order to lock in your gain and to let your winner run, your primary objective.
Sounds fairly simple, and it is. Those that recommend complex-trading systems generally want to sell their proprietary plan to you. “Keep it simple stupid” works well in this trading regimen.