Buy Signal on Live Nickel Trade on 11.10.13

Psychological Pitfalls of Commodity Trading

Here are some additional psychological pitfalls to avoid. Be wary of depending on others for your success. Most of the people you are likely to trust are probably not effective traders. For instance: brokers, gurus, advisors, friends. There are exceptions, but not many. Depend on others only for clerical help or to support your own decision-making process.

You may acquire trading methods or systems from others or from books, but be sure to test them carefully yourself before trading. Good systems that you can buy come with computer software that allows comprehensive historical testing.

Don't blame others for your failures. This is an easy trap to fall into. No matter what happens, you put yourself into the situation. Therefore, you are responsible for the ultimate result. Until you accept responsibility for everything, you will not be able to change your incorrect behaviors.

Stay long-term oriented. Don't adjust your approach based solely on short-term performance. Through luck, any horrible system can look great, even for relatively long periods of time. Conversely, the best systems have frequent losing periods. If you judge a system by short-term performance, you are likely to reject the best systems that exist.

Most traders have such an ego investment in their trading that they cannot handle losses. Several losses in a row are devastating. This causes them to evaluate trading methods and systems based on very-short-term performance. Don't start trading a system based on only a few trades, and don't lose confidence in one after only a few losses. Evaluate performance based on many trades and multi-year results.

Don't underestimate the psychological difficulty of successful trading. The Elements of Successful Trading: "Trading is one of the most stressful endeavors imaginable. Taking losses day after day with a strategy that, just a short while ago was working well, can be a terrible experience. Trading performance can be consistently volatile with good and bad times highly magnified. The market can batter your psyche and gnaw at your soul. These bad experiences will never end as long as you trade. The more successful you are as a trader, the more money you will lose."

Keep trading in correct perspective and as part of a balanced life. Trading is emotionally intensive no matter whether you are doing well or going in the tank. It is easy to let the emotions of the moment lead you into strategic and tactical blunders.

Don't become too elated during successful periods. One of the biggest mistakes traders make is to increase their trading after an especially successful period. This is the worst thing you can do because good periods are invariably followed by awful periods. If you increase your trading just before the awful periods, you will lose money twice as fast as you made it.

Knowing how to increase trading in a growing account is perhaps the most difficult problem for successful traders. Be cautious in adding to your trading. The best times to add are after losses or equity drawdowns.

Don't become too depressed during drawdowns. Trading is a lot like golf. All golfers, regardless of their ability, have cycles of good play and poor play. When a golfer is playing well, he assumes he has found some secret in his swing and will never play poorly again. When he is hitting the ball sideways, he despairs that he will never come out of his slump.

Trading is much the same. When you are making money, you are thinking about how wonderful trading is and how to expand your trading to achieve immense wealth. When you are losing, you often think about giving up trading completely. With a little practice, you can control both emotional extremes. You'll probably never control them completely, but at least don't let elation and despair cause you to make unwarranted changes in your approach.

Other common themes of good traders are self-understanding, balance and self-control. If you can master yourself, you can master the futures markets.

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.