It is essential to have a trading plan in writing before you begin trading commodities. Without a coherent and logical plan, one takes a great deal of unnecessary risk. A sound trading plan is one of the most critical components of success in trading commodities. Without a trading plan, inconsistent and erratic results will cause losses that will eventually drain your trading account.
Creating a commodity trading plan can be accomplished in as little as a day, but it can also take months to complete a well-designed plan. The most successful trading strategies are iterative processes that improve over time. When one approaches the markets for the first time, trading experience, the level of market education and the sophistication of trading strategies will be basic. The construction of a trading plan does not have to be a complicated process. However, you will find that you will build your plan over time. Even the most successful and profitable traders in the world are always adjusting their basic approach to markets. Those changes are the results of mistakes made and things done that result in profits.
If you include the main topics outlined below, you should be able to construct a simple set of beginning rules to follow while you are trading commodities. The complexity all depends on trading experience, the level of market education and the sophistication of trading strategies. Needless to say, you do not have to make a trading plan a complicated process. If you include the main topics outlined below, you should be able to construct a simple set of rules to follow that will allow you to approach the market without fear and with confidence. The best traders follow rules and learn from mistakes.
Commodity Markets to Trade
First, decide which commodity markets you are going to trade in. If you will be an active trader, I recommend concentrating on no more than three commodities at one time. Long-term traders who want a little more diversification can look for opportunities in other commodities.
Starting Account Size
There are a couple of schools of thought here. Many believe you need to start a commodity trading account with a minimum of $50,000 to give yourself a fighting chance. There is a lot of truth to this, as many traders who start with less than $10,000 get wiped out fairly quickly. I do not necessarily believe it is the size of account that is the cause for losses; rather it is the way that small traders trade. You can open an account for $10,000 and trade one contract of a fairly stable commodity with excellent results
Commodity Trading Strategies
This is where many unsuccessful traders go wrong. They have no specific trading strategies for entering and exiting trades. The “wing-it” approach rarely works. While someone might get lucky once in a while, I can almost guarantee this is a losing way to approach markets. Watching the news for trading opportunities may not be an effective trading strategy. You should have a logical and tested fundamental or technical strategy for trading commodities. Additionally, you must decide whether you want to be a long-term trader or a short-term trader.
Controlling Trading Risk
You should know what your risk is on every trade before you enter any market. Once you are filled on a buy or sell order, you should immediately place a stop-loss order to limit risk on every trade. One of the biggest mistakes new commodity traders make is taking small profits and large losses. In every case, the loss you are willing to suffer should be equal to or smaller than the profit you seek. Often, one or two big losses will destroy an account. If you can keep your losses small, you will be far ahead of most other new traders.
Keeping Trading Records
Recording each and every trade you make, and the reasons why you entered and exited the trade is one of the best educational tools you can employ. Over time, a trader will learn which strategies work best and under what conditions, if documentation is available and studied. Keeping track of the profit or loss on each trade will help teach important and valuable lessons. I print out a chart of each trade that shows where I entered and exited. Using this method over time will help you see patterns of how the markets work and how you can improve your trading strategies and results.
A trading plan is like a roadmap or blueprint that tells you where you need to go and how you will get there. Without one, you will be lost and directions are almost impossible to find when the market goes against you.