TREAT TRADING AS YOUR BUSINESS

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Any endeavor one chooses to engage in should be pursued with intensity and proper planning. Many traders assume that commodity trading is simple and imagine that great riches can be attained with little risk. Nothing could be further from the truth.

Commodity trading should be treated the way you run your business. Money management (or budgeting in a business) is absolutely essential to achieve success. New clients often ask me how I plan to help them make money trading futures. My answer is always the same: “My goal is not to help you make money; my goal is to help you preserve your capital”. Some like it, some don’t. The following rules should be followed to minimize risk exposure and to maximize profits:

-    Capitalization: Probably the biggest challenge to the small trader is not having enough risk capital to handle volatility in the markets. One or two bad trades can wipe out the small trader who will then swear that the markets conspired to clean him/her out and who will surely tell everyone around him that he lost his shirt trading commodities. Typically most CTA’s will risk anywhere from 1% to 3% of the total equity on a trade. A $10,000 account would have to take considerably more risk than a $50,000 account and face the reality that winning on 3 or 4 out of 10 trades is not uncommon. For smaller accounts, as much as 10% may have to be risked to achieve reasonable returns while preserving capital which should always be your priority if you want to be able to place one more trade.

-    Plan the Trade and Trade the Plan: Never enter a trade without a predetermined risk and target. How much you risk will determine how long you will stay in the game. No matter what style of trading methodology you follow (breakout, trend following, volatility, channel surfing), you’re always attempting to get in the direction of the trend (short to long term). Find support and resistance lines, determine current volatility (daily price swings), place stops and have an initial target. If your first target is reached, re-examine the trade as if it were a new position and again find new support/resistance/volatility and decide on a new stop and target.

-          Maintain Accounting of Trades: Always be learning. Analyze each trade: was the plan followed; could any parameter be improved upon for the next trade and be applied to any market without over-optimizing it to fit this one trade; was the risk taken adequate? All these questions should be answered after each trade.

-          Losing is for Winners: Psychologically no one is trained to lose. We are ingrained with the belief that losing is “bad”. The reality is that losing is an essential, integral and inherent part of trading. Learn to accept losses before they become very big losses. If you’ve done your homework prior to taking a position then you’ve already agreed that the trade may not go in your favor and that you could lose. Stop losses will get you out of bad trades before hope tries to convince you that “this market might turn around”; it might, but when. Move on and look for another trade that could (or not) make up for your loss. Another way to limit damages is to purchase an option on the underlying in the opposite direction of your trade.

-          Diversify: Don’t fall in or out of love with any market or group of commodities such as metals or grains. Take positions in markets that do not necessarily move together such as Wheat and the Japanese Yen.

-          Never Add to a Losing Position: If you’ve taken a trade, adding more positions when it’s going against you to “average down” is a serious mistake. If anything you should add positions to a winning trade. Take the attitude that prices move in the direction of the strength of the trend.

-          Protect Profits: Once a trade becomes profitable, move your stops to lock in a portion of your profits. Again, assume that you’ve just taken a new position; where would you place your stop? Look again at Support/Resistance/Volatility and determine your stop accordingly.

Good Trading,

 

Chad Geraigiri

Optimus Trading Group

1-800-771-6748

 

YOU SHOULD BE AWARE THAT THERE IS A RISK OF LOSS IN FUTURES TRADING.  PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. FUTURES TRADING IS NOT SUITABLE FOR ALL INVESTORS.