In my opinion, to have a chance at being a successful commodity trader over time, you have to manage your trades as if operating your own company.
Commodities traders that I have seen to be successful tend to have the following attributes:
- They have a consistent trading approach to the markets. These traders have a plan that they can easily follow.
- They have the discipline to stick to the plan.
- They take profits along the way of a trend going their way.
- They don’t let losses continue to grow on the losing trades.
In my years of experience, those are some of key elements of the successful traders. They take partial profits as trades go their way, and they don’t hang on to the losing trades. They just get out and take the loss and move on to the next idea.
Traders that lose money do just the opposite. The losing traders don’t have a clear plan on what they are doing; rather, they shoot from the hip like they are at the “OK Corral” hoping they will hit on this trade or that. Then, as the losing traders put on a trade and by some chance it goes their way, they have no plan or discipline on how to take profits and get out of the trade. And heaven forbid that they put on a losing trade. Without a plan, the losing traders constantly convince themselves that the market will come back their way, and just like what happens many times, it doesn’t; the trade loss continues to grow and grow until they are out of money to send in for margin calls.
I have had a similar experience with day traders. They typically don’t have a plan or discipline. In my career, I have never seen anyone make money over the long run day trading. The problem that I have with day trading is that you have to monitor that particular market constantly, which I have no time for. I am sitting in front of the trade screen all day long and I certainly don’t have the time to monitor day trades because I am helping other customers in other markets. Therefore, I have no idea how a client who may be a doctor, lawyer, teacher or salesperson would have time to day trade either. That doesn’t sound like shooting from the hip. That sounds like shooting in the dark! That type of trading is no way to manage a business and expect to have a good outcome.
David Hall Commodities likes to recommend trades thinking that the trader needs to preserve capital. We like to bring in profits and build up equity that way. In baseball terms, we like to hit singles and doubles and score many runs, rather than to try to swing for the fences all the time. Batters that swing for the fences all the time, also strike out a lot. One of the big ingredients to a trader’s success is how well he (she) can manage their own emotions.
One suggestion that David Hall Commodities has is to try to eliminate emotional trading decisions and always be cynical! Being cynical means that you don’t listen to talk radio or TV and just take what is said as the gospel. Listen to what they have to say; seek out the other side of the story, and then decide whether they are right or not. The loudest voice is not always right! Don’t be a zombie. You have your own brain, so don’t jump off the building just because some “talking head” tells you to. Being cynical means that you look at a problem from every angle possible to determine the best solution. Finally, being cynical means that you are also a contrarian by nature. If everyone believes that an event is going to happen, many times that event won’t happen. It is when no one is looking for events to happen, when they actually happen.
A WORD ABOUT FUTURES TRADING RISK
Let’s get this out of the way right up front. Commodities futures and commodities futures options trading involves UNLIMITED RISK in general. You can lose more money than you deposit and are responsible to meet that obligation. There are some option related strategies that can limit your risk. This is assuming that you enter that limited risk type of trade and when you do, that you keep that position on until expiration. For example, just because you can buy a call option and you know what your maximum risk on that trade is, that doesn’t mean that you won’t buy another and another and lose on every trade. This could add up to huge losses. We have seen that done before.
Commodities trading is like driving a car. If you don’t drive responsibly, you may get hurt in an accident, and there are some times when you are driving carefully that bad accidents can still happen. Please, don’t open a commodity account thinking that you can make money quickly, especially if you are trying to cover a loss in your business or the stock market. If you do, you will be making 100% emotional decisions in your desperation to cover the other loss quickly. This is always a prescription for disaster and we have personally witnessed people who have tried to do that. Also, please be honest about your financial situation with your broker, whether it is with me or anyone else. Update your broker if you have an important financial event that happens to you along the way, whether it is good news or not. Your broker needs to know, so they can help you manage your risk and their firm’s risk.
How much you should risk overall, or how much you should risk on any particular trade is up to you. There is no magical formula. You have to have a strategy for how much you are willing to risk based on the risk capital you have on deposit. There are theories on not risking more than this or that amount on a trade, but the bottom line is what you think. We would suggest not putting all of your money into one trade. It is like the old saying, “don’t put all your eggs into one basket”. The trades that we recommend either have a defined risk stated, or we will mention what we would do if certain things happen with the price. The recommendation would depend on what type of trade is on, futures, options or both. If it is a futures position, we usually use a chart point of support or resistance to determine my risk. If that point is too far away, then we may not do the trade or we may recommend a covered write idea.
So, the bottom line is, you should not attempt to trade a commodity futures account unless you have substantial assets to back you up. Our opinion is that you should have a high annual income and at least a multiple hundred thousand dollar net worth that has a lot of liquid net worth included.
The other very important thing is that you need to have the temperament to handle the emotion of taking a loss or riding through a losing period. You may have plenty of money, but not the temperament. Many times people open accounts with me, letting me know that they are ready and won’t be bothered by market swings against them. Sometimes, these same people experience the first swing and find out that they really can’t handle the pressure. You have to ask yourself honestly if you can handle the pressure. This really is true of any investment like commodities that is leveraged. The definition of leverage is that you deposit a small amount of money to control a much larger amount of something.
The daily price swings of your equity will be as if you own the entire amount of that commodity.
For example, let’s say that the margin requirement for December Crude Oil is $5400 and you buy it at $74.36 per barrel. Crude Oil trades in 1000 barrel increments, so you are controlling $74,360 worth of crude oil with only $5400 on deposit. What if prices fall ½ of one percent? That means that the price dropped about 37 cents which is only $370, but as a percentage of what you deposited, that is a 6.8% loss in equity. It is not uncommon for crude oil prices to move over $1.00 per barrel in a day, so the equity exposure to your margin deposit can be disastrous unless you have a plan in place to manage that risk. It can be scary if you are not accustomed to this type of trading. So, if you are a novice to commodities trading, take time to learn a lot about the subject first, then paper trade second and imagine what those equity swings would feel like if that was really your money.
Finally, you need to decide whether you have both the temperament and the money to be able to handle the risk of trading a leveraged product like commodities. If you are a small investor with limited financial means, but have enough money to have a regular stock account, there are investments out there that resemble the movement of many commodities, like crude oil or gold, that you could participate in, that don’t have the leveraged aspect that futures trading has. Now, you won’t have the potential to make a lot of money quickly as in futures, but you will at least be able to participate in the movement of commodities indirectly.