It is absolutely essential to have a trading plan in writing before you begin trading commodities. Do not take this statement lightly. A sound trading plan is one of the most critical pieces to your success in trading commodities. Without a trading plan, you will be prone to inconsistent and erratic trading with a lack of confidence that might drain your trading account.
Creating a commodity trading plan can be done in as little as a day, but sometimes it can take months to complete a well-designed plan. It all depends on your experience, level of trading education and the sophistication of your trading strategies. Needless to say, you don’t have to make a trading plan a complicated process. If you include the main topics outlined below in your plan, you should be able to construct a simple set of rules to follow while you are trading commodities.
Markets to trade
First, decide which commodity markets you are going to trade. If you will be an active trader, I recommend concentrating on no more than three commodities. Long-term traders who want to be a little more diversified can look for opportunities in all the commodities.
Account size
There are a couple schools of thought here. Many believe you need to start with at least $25,000 to give yourself a fighting chance. There is a lot of truth to this, as many traders who start with less than $10,000 often struggle. I don’t necessarily believe it is the size of account that is the cause for losing, but having a $25,000+ account gives you more flexibility and opportunities. You can also trade multiple contracts and stagger profit objectives, which usually increases the odds of success over the long run. With a smaller account, a trader is often tenuous when trading and can miss good opportunities.
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 will not work. You might get lucky once in a while, but I can almost guarantee you will lose in the end. Watching the news for trading opportunities is not a trading strategy. You should have a logical and tested fundamental or technical strategy for trading commodities. Also, decide whether you want to be a long-term trader or a short-term trader. Bouncing from strategy to strategy is a common mistake. Thoroughly research and test strategies, so you know what to expect when you trade live.
Controlling Risk
You should know what your risk is on every trade before it is entered. Once you are filled on an order you should immediately place your stop loss order to limit your risk on every trade. One of the biggest mistakes new commodity traders make is failing to take a loss. Often, one or two big losses will destroy an account. If you can keep your losses small, you will be far ahead of most new traders.
THE PLACEMENT OF CONTINGENT ORDERS SUCH AS A “STOP–LOSS” OR “STOP–LIMIT” ORDER, WILL NOT NECESSARILY LIMIT YOUR LOSSES TO THE INTENDED AMOUNTS, SINCE MARKET CONDITIONS MAY MAKE IT IMPOSSIBLE TO EXECUTE SUCH ORDERS.
Keeping Records
Recording every trade you make and the reasons why you entered and exited the trade is one of the best educational tools you can use. Over time, you will learn which strategies work best and under what conditions. Keep track of the profit or loss on each trade. I like to print out a chart of each trade that shows where I entered and exited. Over time, you will begin to see patterns of how the markets work and how you can improve your trading strategies.
A trading plan is like a roadmap that tells you where you need to go and how you will get there. Without one, you are just driving blind.
