Elements of a Successful Trading Plan--Manage Risk

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. 

Elements of a Successful Trading Plan--Let Profits Run

The next part of the plan involves a more pleasant alternative: when to exit a trade that is profitable. The cardinal principle involved is Let Profits Run. In other words, stay with your profitable trades as long as possible because the trend is likely to continue and make your profits even larger.

Again, this is easy to understand but not so easy to do when real money is involved. The difficulty is that although your profit may become much larger if you stay with a trade, it may also decrease and even disappear. Human nature is such that it values a sure profit much more highly than the probability of a much higher profit. Thus, traders are inclined to take their profits too soon. This can be fatal to long-term success because big profits are necessary to overcome the inevitable collection of small losses.

There is a good way to let profits run while still guarding against the possibility that prices will turn around and take away much of your accumulated profits before the trend actually reverses. It is called a trailing stop. You include in your plan a method for moving an exit point along some distance behind your trade. As long as the trend keeps moving in your favor, you stay in the trade. If the market reverses direction by the amount of your trailing stop, you exit the trade at that point. You would also offset your trade and reverse position if the trend reversed.

One way to set a trailing stop is to protect a certain percentage of the accumulated profit. That will always insure that you keep some profit on a good trade.

Elements of a Successful Trading Plan--Cut Losses Short

If you are following market trends rather than trying to anticipate them, the next important part of the plan is how to exit trades that don't work out. Here is where the second cardinal principle comes in. It is Cut Losses Short.

This is another sensible-sounding concept that is much easier to acknowledge than actually to execute when real money is on the line. No one wants to exit a trade with a loss. They don't want to lose money. More importantly, they don't want to admit they were wrong. You can always think of many reasons to hold on to a losing trade. You can hope that the market will suddenly turn around and give you a profit instead of a loss.

This is another example where successful traders have learned to do the hard thing. If there is one thing consistent in the stories of how good traders turned themselves around from being bad traders, it is their attitude about losses. Professional traders accept that losses are part of the game. Since the markets are mostly random, the best trading methods will always have numerous losses. Professionals do not equate losses with being wrong.

It is precisely because correct trading methods invariably generate many losses that it is important to keep the individual losses small in relation to the overall size of the account. In order to keep trading, you must preserve your capital. If you can keep trading in the direction of the trend, the big profits will come. However, if you take too many large losses, your capital will be wiped out before you can enjoy the big profitable trades.

The laws of probability insure that regardless of your approach, you will inevitably suffer some long strings of consecutive losses. If you are risking too high a percentage of your account on each trade, before long one of these unavoidable losing streaks will blow you away. Keeping losses to about one percent of your account size is optimal. With smaller accounts, the percentage will have to be larger. Five percent on one trade is probably the highest prudent level of risk.

Because of the randomness in commodity price action, you must allow the market a certain amount of leeway before giving up on a trade. In general, you must be willing to risk between Rs 500 and Rs 1,000 to trade most markets.

 The important thing is to respect your plan. You can place a stop-loss order with your broker that instructs him in advance to exit a trade if the market hits your loss limit. You should always do this to guard against inattention or changing your mind at the crucial moment.

Elements of a Successful Trading Plan--Trade With The Trend

Trading with the trend is hard to do because a logical give-up exit point will be farther away, potentially causing a larger loss if you are wrong. This is a good example of why so few traders are successful. They can't bring themselves to trade in a psychologically difficult way.

You can define the concept of trend only in relation to a particular time frame. When you determine the trend, it must be, for example, the two-week trend or the six-month trend or the hourly trend. So an important part of a trading plan is deciding what time frame to use for making these decisions.

Do you want to be a long-term trader, also called a position trader? They hold positions for weeks or months. Do you want to be a short-term trader who holds positions only for a few days? There are even very short-term traders called day traders. They watch the markets during the day and always enter and exit their positions on the same day.

While it is perhaps easier psychologically to keep the time frame short, the best results come from longer-term trading. The longer you hold a trade, the greater your profit can be.

Day trading has great attraction because you can start each day fresh and sleep comfortably every night with no open positions. However, it is the most difficult kind of trading there is.  "Day trading is so stressful. You're going to end up frying your brain. All the day traders I talk with are losing money. Besides, it's really hard to come up with profitable day trading systems."

For the greatest chance of success, your time frame to measure trends should be at least four weeks. Thus, you should only enter trades in the direction of the price trend for the last four weeks or more. A good example of a trend-following entry rule would be to buy whenever today's closing price is higher than the closing price of 25 market days ago, and sell whenever today's closing price is lower than the closing price of 25 market days ago.

When you trade in the direction of this long a trend, you are truly following the markets rather than predicting them. Most unsuccessful traders spend their entire careers looking for better ways to predict the markets.

Elements of a Successful Trading Plan

The first element of any trading plan is the amount of capital you intend to invest. This is up to you, but you should understand that there is a direct relationship between the amount of capital you commit and your probability of success. The more you invest, the greater is the likelihood that you will make money.

What is the minimum advisable amount to start with? Most professionals agree that it takes a minimum of  Rs 50,000. If you try to trade with anything less, what happens to you will be luck. You won't have the capital necessary to apply proper risk management principles.

An important thing to keep in mind when deciding how much to commit initially to commodity trading is that the amount you invest must be "risk capital." Risk capital is defined as money you can afford to lose without affecting your standard of living.

It should also be money that you feel comfortable risking. Think of your commodity account as an investment in a business. Many businesses fail. That's life. Make sure you won't be so afraid of losing money that it will affect your ability to make correct trading decisions.

The next part of your trading plan involves how you will make your actual buying and selling decisions. Under what conditions will you enter trades? When will you exit your trades? What markets will you trade?

There are four cardinal principles which should be part of every trading strategy.
They are:

1) Trade with the trend,
2) Cut losses short,
3) Let profits run, and
4) Manage risk.
These building blocks are so basic and important that I have written a whole book about them. You should make sure your strategy includes each of these requirements for success.

Learning To Trade Correctly

One way to learn how to trade correctly is to find a successful trader and have him or her teach you exactly how they do it. However, even if you could find such a person and even if they would be willing to spend the time with you, it would not necessarily make you a successful trader.

You might not have the capital necessary to trade the way they do. You would definitely not have the years of experience they had developing their successful approach. You might not have the personality profile necessary to execute their style of trading.

Another way to learn is by trial and error. This is the method of choice for most people although they probably don't realize it. The trouble with trial and error in futures trading is that you don't always take a loss when you trade incorrectly and you don't always make a profit when you trade correctly.

Some of the best methods generate losses more than half the time. You can take many losses in row applying a very effective system. On the other hand, if you are lucky, you can makes tons of money trading quite stupidly. Psychologists call this random reinforcement, and it makes good trading impossible to learn through trial and error.

The most obvious and practical way to learn how to trade correctly is to read books. Find the best books by the most respected authors and the best traders and learn from them. While this may work in other areas of life, it is more problematic in commodity trading.

One of the few real secrets in commodity trading is that most of what you read in books about how to trade does not work in the real world. Even books by respected authors are full of trading methods that lose money when put to the test. You may find this shocking, but almost no commodity authors demonstrate the effectiveness of the methods they advocate. The best you can hope for are some well-chosen examples or a few cursory tests.

Learning to trade is a combination of being exposed to ideas plus practical experience watching the markets on a day-to-day basis. This is not something that can happen in only a few weeks. On the other hand, you can become a great trader even with only average intelligence.  "Intelligence alone does not make a great trader. Success is equal parts of intellect, applied psychology, practice, discipline, bankroll, self-understanding and emotional control."

Furthermore, to be successful you don't have to invent some complex approach that only a nuclear physicist could understand. In fact, successful trading plans tend to be simple. They follow the general principles of correct trading in a more or less unique way.

Separating the Winners and Losers

A very high percentage of those who try commodity trading eventually lose money. The ratio of losers could be as high as ninety-five percent. However, this does not necessarily mean that your chance of failure is that high. If, before you begin, you identify correctly the reasons most people lose, you can improve your odds significantly.

There is a small percentage of full-time professionals and highly skilled part-time traders who have learned how to trade correctly and generate consistent profits year after year. It is not impossible to determine what separates these people from the crowd.

Because trading well is not easy, you must approach the task very seriously. This is not something to treat as a hobby. Perhaps, first and foremost, this is what separates professionals from amateurs. Professionals look at their trading as a business. There are substantial profits to be made, and they will not just fall into your lap.

Another crucial difference between successful and unsuccessful traders is that the successful ones have a plan and they follow it. Considering the amount of money involved and the potential risks, it is remarkable how few traders actually have any kind of plan for their trading. They go from trade to trade applying various ideas they have learned without any consistency and without any testing. They make decisions based on hot tips, something they read, today's news. They are acting from emotion rather than using a proven methodology. While they may not want to admit it, they are really gambling in the futures markets rather than trading intelligently.

Trading by emotion in an unstructured way certainly adds fun and entertainment to the enterprise. Taking positions on instinct is exciting, especially when they work out . . . as they often do. But in the end, this kind of trading will lose money.

Good trading is boring because you've thought out your strategy and tactics in advance. You trade according to a carefully tested system or method, not from what moves you emotionally that day.

Two psychological traits that separate winners from losers are patience and discipline. It is not enough to have a carefully tested trading plan. You must also be able to follow it religiously. This is not as easy as you may think.

Every experienced trader knows how great the temptation is to stray from the plan. There is always what seems to be a good reason. The true professional can resist this temptation and stick to his plan. He has the patience to wait for his method to signal a trade and not take trades he may be emotionally attracted to that are outside his plan. He has the discipline to follow his plan and take all the trades that it signals even when there appear to be strong reasons to make an exception.

This may sound easy, but when real money is on the line--your money--nothing is more difficult. The kind of trading that really works is emotionally demanding.

It is hard work to create a winning trading plan. It is hard psychologically to follow the plan after you create it. This is why so many people fail. Perhaps you have what it takes to be an exception.

The Risks of Trading

 "Trading is a business of making and losing money. Any trade, no matter how well thought out, has a chance of becoming a loser. Many people think the best traders don't lose any money and have only winning trades. This is absolutely not true. The best traders lose a lot of money, but they eventually make even more over time."

Before becoming too excited about the substantial returns possible from commodity trading, it is a good idea to take a long, sober look at the risks. Reward and risk are always related. It is unrealistic to expect to be able to earn above-average investment returns without taking above-average risks as well.

Most people are naturally risk averse. They don't like to take big risks, especially financial risks. Perhaps you can relate to the point of view of humorist Will Rogers: "I am not as concerned about the return on my money as I am about the return of my money."

Commodity trading has the reputation of being a highly risky endeavor. It is true that a high percentage of traders eventually lose money. Many people have lost substantial sums. There is a famous old line about the best way to make a small fortune trading commodities . . . start with a big one.

About trading comes from trading psychology expert .,  As he points out, most of us are not as willing to take financial risks as we think: "Most people like to think of themselves as risk takers, but what they really want is a guaranteed outcome with some momentary suspense to make them feel as if the outcome had been in doubt. The momentary suspense adds the thrill factor necessary to keep our lives from getting too boring."

Anyone who is going to try speculation should be fully aware of and be comfortable with the risks involved. Managing the risks of trading is a very important part of any trader's success. Although the risks can be managed, they can never be eliminated. Remember that the high returns successful speculators can earn are available only because the speculator is being paid to take risk away from others.

Another thing to understand about risk in trading is that you cannot avoid losses by careful planning or brilliant strategy. Numerous losses are part of the process. In The Elements of Successful Trading, 

There is no point trading commodities if you cannot handle the psychological discomfort of making losing trades. While people tend to take losses personally as a sign of failure, good traders shrug them off. The best trading plans result in many losses. Because of the amount of randomness in market price action, such losses are inevitable.

If I haven't scared you away so far, let's take a closer look at what successful commodity trading is all about.

The Truth About the Commodity Markets

In order to be a successful trader, you must understand the true realities of the markets. You must learn how the professionals make money and what is possible. Most traders come into commodity trading, lose a substantial portion of their capital and then leave trading without ever having a correct perception of what good trading is all about.


Mathematicians have conclusively shown the financial markets to be what are called non-linear, dynamic systems. Chaos theory is the mathematics of analyzing such non-linear, dynamic systems. The commodity markets are chaotic systems. Such systems can produce random-looking results that are not truly random. Chaos research has proved that the markets are not efficient, and they are not forecastable. Commodity market price movement is highly random with a small trend component.

Most beginning traders assume that the way to make money is to learn how to predict where market prices are going next. As chaos theory suggests, the truth is that the markets are not predictable except in the most general way.

"Many people make the mistake of thinking that market behavior is truly predictable. Nonsense. Trading in the markets is an odds game, and the object is always keep the odds in your favor."

Luckily, successful trading does not require effective prediction mechanisms. Good trading involves following trends in a time frame where you can be profitable.

The trend is your edge. If you follow trends with proper risk management methods and good market selection, you will make money in the long run. Good market selection refers to trading in good trending markets generally rather than selecting a particular situation likely to result in an immediate trend.

There are three related hurdles for traders.

1. The first is finding a trading method that actually has a statistical edge.
2. Second is following it with consistency.
3. Third is consistently following the method long enough for the edge to manifest itself on the bottom line.

This statistical edge is what separates speculating from gambling. In fact, effective trading is actually like the gambling casino rather than the gambling customer.  "A successful commodity trading program must be based on the simple premise that no one really knows what the markets are going to do.

We can guess, but we don't know. The best a commodity trader can hope for is an approach which provides a slight edge. Like a gambling casino, the trader must earn his profits by exploiting that edge over an extended series of trades. But on any given trade, like an individual casino bet, the edge is pretty meaningless."

Unsuccessful and frustrated commodity traders want to believe there is an order to the markets. They think prices move in systematic ways that are highly disguised. They hope they can somehow acquire the "secret" to the price system that will give them an advantage. They think successful trading will result from highly effective methods of predicting future price direction. These deluded souls have been falling for crackpot methods and systems since the markets started trading.

 How these desperate traders are victimized: "Futures trading is ultimately very simple. Any attempt to make trading complex is a smokescreen. Yet for self-serving reasons an army of greed-motivated promoters try to make things complicated. Too many market professionals consider it their mission in life to obfuscate. Why? Because in so doing they give the appearance that their efforts are scholarly and important. They create a need for more information, and then they fill it!"

The job of the person who wants to trade commodities rationally and prudently is to ignore the promises of those promoting pie-in-the-sky prediction mechanisms and concentrate on finding and implementing a proven, integrated methodology that follows market trends.

Sharing my trades with proper trade setups

As a technical analyst and believe that there is everything in price and volume.

Hope you will also enjoy with me while trading the trades posted by me here. I will try my level best to find best trades with proper setups.

Thanks for reading my introduction.

I will try to post my trade setups here but it doesn't mean that I will take them blindly on the day it occurs. Many times I don't trade them. It basically depends on many criteria's like volume behavior on the trade setup day, price behavior near resistance or support or entry level, overall market behavior, sector's behavior etc. Sometimes I postpone the trade and sometimes I cancel it also. On weekends I try to locate the trades for the coming week and then trade them on weekdays.

Its now the time for posting my trade setup for DLF.

Yesterday's (i.e. on 27.09.2013) closing price of DLF = 132.85

Low of DLF on 4th Feb 2009 was 124.05

DLF touched those lows FOUR TIMES on 6th August 2013, 8th August 2013, 28th August 2013 and 4th September 2013. Its lowest point was 120.05. It meant DLF broke the low of 124.05 by just 4 points.

Hence the above points suggests that there is a constant Demand between 120 and 124. Volume on 5th August was 89 lacs 79 thousands but on 6th August it rose to 1cr 22 lacs around 30 percent more. Same happened to next three occasions also.

I can bore you by giving you the relative figures of DLF with Nifty and Realty sector and also with UNITECH, RELIANCE(I use it as a bench mark stock) and with many other stocks.

So the probability of going DLF up from that point is very very high.

Now the trade setup.

One can take the opportunity by taking poisition in DLF's cash, futures or options. Cash and Futures is easily understood so for the sake of saving time for you I am giving the setup for October call options of 130

Yesterday's (i.e. on 27.09.2013) DLF's Call October 130 closed at 12.50 (Low-12.40)

Buy DLF's 130 October Call when DLF reaches between 124 and 118.

Theoretical value of DLF 130 call is 4.80 if DLF's cash price reaches 118.

Theoretical value of DLF 130 call is 6.30 if DLF's cash price reaches 122.

Theoretical value of DLF 130 call is 7.20 if DLF's cash price reaches 124.

HENCE BUY DLF's 130 October Call between Rs 7.20 to Rs 4.80.

LOT size of DLF is 1000 so total expected investment is Rs 4,800 to 7,200 and return is more than three times.

One should know that stock market is a game of speculation and no one can be hundred percent correct in this. Even the greatest traders of all times were wrong many times every month after month so I will advise all fellow members to use the STOP LOSS. This is the only way to get out from loosing trades otherwise during market hours one will keep hanging to the loosing trades and keep praying instead of getting out. But one should know that market is a ruthless machine and it doesn't work with prayers.

I have seen that mostly people just post the trades without proper giving reasons or sharing their setups. I have strong believe that no one can copy other trades or setups. I am posting here my this trade setup honestly but I know that no two people can use or trade it in the same manner. Leaving this topic for future discussion if anyone interested.

Last point to be noted is that I am just sharing my trades with you and I don't claim that I am always right. So please use your judgement while trading my trades with me.

(Courtesy - Traderji.com)

MCX Market Closure on Saturdays

Currently, the domestic commodity futures market functions from 10.00 AM to 5.00 PM for agricultural commodities and from 10.00 AM to 11.30/11.55 PM for the internationally referenceable non-agricultural commodities on all working days and from 10.00AM to 2.00PM for all commodities on Saturdays.

In this regard, the Commission has received the following feedback from the Exchanges, members of exchanges and the physical market participants:-

• As the international commodities futures markets remain closed on Saturdays, the rationale for keeping the domestic futures markets for the non-agricultural commodities open on Saturdays does not hold good,

• The domestic physical markets for agricultural commodities usually remain open on Saturdays

• Saturday may be declared closed for trading so as to allow the exchanges and their members to utilise the day exclusively for housekeeping, maintenance of record, attend to compliance matters etc  .Keeping the aforesaid in view, the Commission has decided that all the commodities exchanges shall keep their trading platform closed for non- agricultural commodities futures on Saturdays with immediate effect. However trading in futures of agricultural commodities will continue on Saturdays as per the existing trading hours for the time being and the matter shall be reviewed after three months.

• 3. A compliance report certifying the closure of trading in non-agricultural commodities futures on Saturdays may be communicated by all the exchanges to the Commission by 23rd September 2013.

Character of the Commodity Market

Before enter to the market, first understand the character of the market is very important. because market always has a special character.

Up and Down is the main character. Continuous buying pressure and selling pressure exists for every small up and down.

So anyone cannot control the market. This is what we should understand first.

Then how to make money? Control yourself is the answer.

To control ourself, We need Money Management, Risk Management, Strategy Management, Time Management. If we are ready to manage these things, automatically we will become a disciplined trader

In Market, No need to believe Luck, No Need to believe God.

Money Makes Money.

For newbies, if the price goes opposite to their trade for little movement, immediately they think that trend is changed and wants to reverse the trade. This is not the right one. No need to be nervous at every price movement. Peaceful mind in trading is very important to make money. because this is not gambling. this is our main business and our profession too. . 

How to analyse the trend of market movement?

Open interest Clearly indicates the trend

The simple analysis for newbies to find the trend by watching the open interest.

1. If open interest increases, and price increases- This is a strong Buy trend

2. If open interest increases, and price decreases- This is a strong Sell trend

3. If open interest decreases, and price increases- Weak Buy Trend

4. If open interest decreases, and price decrease- Weak Sell Trend

Every newbies are trading with some simple concept by seeing total buyers and total sellers., ratio

If the buyers are high, immediately they will buy the Script (Because Short covering order is also shown in the buyers list. then, how do you decide to go long?)

if the sellers are high, immediately they will sell the Script ( Because Profit booking order is also shown in the sellers list. then, how do you decide to go short?)

but there is no use of watching the total number of buyers and sellers quantity

So, If you are watching the total number of buyers and sellers, and decide to trade on that basis, you cannot always win in the trading. 

Golden Rules Commodity Trading Rules

Golden Rules on Commodity Trading

•  Book profit as price comes close to your target, don't wait for exact rate.
•  Taking quick action is the key of success in day trading.
•  Stop trading for the day, if already got good profit for the day, don't be over confident 
•  Don't trade in a particular scrip/index if you are not confident about the move. It's better not to trade  rather than trading wrong. 
•  Don't trade if risk reward ratio is not favorable.
•  Ready with your trading action plan in advance. Market timings are for action not for planning, one  miss can be a big opportunity loss/trading loss.
•  Move with the market & don’t expect the market to move with you.
•  Fear & Greed, both are psychological weakness, play with it and don’t get played by it.

•  Keep a stop loss or a close watch, if your trade move confirmed in negative direction, take exit immediately. 
•  Focus on trade, opportunity can come at any time, don't miss trading opportunity, even a small opportunity can pay you big.
•  Don't regret if you miss the opportunity, wait for the right one to enter.
• Trade patiently, quality of trade matters not the frequency/numbers.
•  Stop trading for the day,if your most of trades are resulting negative for you. Remember, everyday is not your day.
• Trade with your independent due diligence,learning & thoughts, don't get influenced.Trading on someone else tips is like crossing the road as a blind man.
• Believe in results, it is only the result that matters.
•  Don’t target the Market as you are always on the target of Market, play defensive & play safe.
•  The longer the duration your trade remains in negative direction, the higher is the risk in that trade. Good “Day Trades” turn into profits mostly in short duration.
• Market moves opposite to most of the signs which actually making clearly visible to all.   

Who can be a smart trader?

1. Why market always exist? But why does not trader always exist in the market?

Markets always exist at the same place.  Traders are continiously trading in market for 24 hours around the world.

2. But why does not trader always exist in the market?

Its because they loose money by different ways in trading

3. Who can be a smart trader?

Intraday Traders
Positional Traders
Scalpers.

4. Who takes money from trader?


Brokers, Taxes, Service Providers ( ISP, MSP, Signal sellers, Softwares etc ) , and other winners (less than 5 % of total trading population )

5. How much scope is there in the market for the winners?

Depends on liquidity, you can trade till there is liquidity crisis.

6. Why is market not able understand the pain of the small traders?

Market is neutral and common place, there is no room there for big or small in biased manners, say even banks or hedge funds can go bankrupt if they hold wrong side of market