Perhaps the most important aspect of getting the right to trade is survival. That’s number one. Without surviving the bad times we went without hope. Money and risk management may seem like boring topics, but read on to see how exciting they can be once you learn the concrete reasons and logic to use them. You may never trade the same way again!
If you trade with 70% accuracy, you can risk maybe 10% on each commodity trade and survive bad flows. But, even a 70% accurate futures trader will have times when he is wrong 5-6 times in a row and more. The best traders risk less than 5% on each trade. That’s what getting great funding is all about. Not to hold large positions, but to survive bad times and be able to trade another day.
Commodity futures professionals do not have the luxury of blowing up their accounts like someone who has a day job and trades for a hobby. It is like playing poker and making use of the most chips on the table. Prospect smiles at those who can stay there longer to let the odds swing their way. Those who are under-capitalised, and therefore short-lived, (risking a lot on each trade) should be “lucky” to run before their chips are gone. That’s why we need a method that attempts to identify “high probability, low risk” trades. Remember this phrase: “High probability, low risk trades”
If you have less commodity account funds than you want to trade with, you can also get the “deep pockets” advantage by reducing your trading volume. Most commodity futures and options traders can easily reduce their regular position size in half to instantly become better traders. Low stress and staying power are just two of many reasons to trade smaller.
Another point about losses. Whether you use a mental or physical stop loss order, this exit point should be determined based on the specific market setup or conditions and not based on how much money you feel you have to risk that day. You should start by determining how far the market needs to go to undo your setup to make you wrong.
If the price needed to go a long way to get you wrong then this is not a low risk setup, now is it? Once you determine this distance, only then can you decide how many future contracts or options to buy. If your money management parameters suggest risking $1,000, and the distance to prove you wrong is $500 in the contract, that means you can only hold two futures contracts. That’s it.
Many commodity futures traders do this in reverse by saying they want to buy ten futures contracts – now where do they place their stop for only risking $1,000? The station will probably be very close and it will be like donating money. It’s just another form of over-trading. The commodity market does not care how much money you want to risk. The only concern for you is at what point you are wrong and that is the point you want to throw in the towel for your predetermined loss.
With a small position, you can let the market fight for your money by traveling long distances, breaking through stubborn support or resistance, or not bifurcating anywhere for a while. Whatever you do, don’t load a commodity position with more than the usual risk amount, and then put a tight stop and think, “This time is different”.
Play the game for the long term executing each trade as perfectly as possible. The toughest competition out there is trying to get your money’s worth by doing things right every time. Don’t make it easy for them. Stay in the game, trade small, and execute your plan flawlessly every time. This will give you an edge over the broad audience. General speculators are generally poor traders with little discipline and plans. Be better than them and you have a chance to come out ahead. Don’t worry about the stars. There will be times when you eat lunches, too. Nobody wins all the time.
I place a lot of emphasis on a loss strategy because if you can reduce it significantly, the profits will take care of themselves. I understand that losses are part of the commodity futures and options game and no trading system is perfect. Demanding commercial perfection for yourself is futile and a sure path to failure. To make money, you don’t have to be the best trader in the world – just better than most!
Good trading!
There is a significant risk of loss in futures and options contracts and may not be suitable for all types of investors. Only risk capital should be used.