The final cardinal principle of trading overlays all the rest. It is Manage Risk. This is as crucial as the others because it is by managing risk that you limit losses and preserve your capital.
The most important element of managing risk is keeping losses small, which is already part of your trading plan. Never give in to fear or hope when it comes to keeping losses small. Preventing large individual losses is one of the easiest things a trader can do to maximize his chance of long-term success.
The biggest risks to commodity traders come from surprise events that move the markets too quickly to exit at their pre-determined give-up point. While you can never eliminate these risks entirely, you can guard against them by advance planning. Pay attention to the risk of surprise events such as crop reports, freezes, floods, currency interventions and wars. Most of the time there is some manifestation of the potential. Don't overtrade in markets where these kinds of events are possible.
Trade in correct proportion to your capital. Have realistic expectations. Don't overtrade your account. One of the most pernicious roadblocks to success is greed. Commodity trading is attractive precisely because it is possible to make big money in a short period of time. Paradoxically, the more you try to fulfill that expectation, the less likely you are to achieve anything.
The pervasive hype that permeates the industry leads people to believe that they can achieve spectacular returns if only they try hard enough. However, risk is always commensurate with reward. The bigger the return you pursue, the bigger the risk you must take. Even assuming you are using a method that gives you a statistical edge, which almost nobody is, you must still suffer through agonizing equity drawdowns on your way to eventual success.
It is better to shoot for smaller returns to begin with until you get the hang of staying with your system through the tough periods that everyone encounters. Professional money managers are generally satisfied with consistent annual returns of twenty percent. If talented professionals should be satisfied with that, what should you be satisfied with? Surprisingly, disciplined individuals can do better. It is realistic for a good mechanical system diversified in the best markets to expect annual returns in the twenty-five to fifty percent range.
Although the commodity markets appear complex from the outside, making money trading is quite simple. You use an historically proven plan that trades with the trend, cuts losses short and lets profits run. You trade your system in a carefully-selected group of markets. You start with sufficient capital and pay close attention to managing risk.
