Tips on How to Evaluate a Commodity Futures Trading System
The proliferation of commodity trading systems in the market makes it difficult for the aspiring traders to know exactly, which the right system to use is. Whereas it is true that many people make consistent profits by using commodity trading systems, on the other hand, there are people who watch their accounts sink as a result of choosing an inappropriate system that promises to deliver results but it does not.
Everyone wants to make money in commodity trading by using systems. However, this is not always the case. There are systems in the market that purpose they have achieved gains in a specific period. This may be true. However, a reliable system is that which has been tested. Testing a commodity trading system is the best way you can know that is the right tool for you.
There are a number of ways you can achieve this testing aspect. The most prominent way you can evaluate the performance of the system is by doing a thorough back testing and paper testing. By back testing, it simply implies using trading signals from a system and applying the actual trading prices used in a previous period. A five or more year period could be substantial but then against this will depend on other factors such as long-term systems.
If you are testing long-term systems, then it should be tested for longer periods. There are systems you can get online that can help you carry out a back testing exercise. As a trader, you also need to understand that some systems developers can be tricky. They can manipulate the system to show trading parameters that are exaggerated. This means that they can optimize the systems parameters to make the previous returns look so impressive.
This could be a trap that can plunge you into commodity future trading pit holes. In most cases, these systems show very interesting past returns but when they are applied in real time, the results are devastating. You can easily lose your money through these systems. Therefore, paper trading a system for a certain period of time can help in further understanding how reliable it is.
This helps you monitor how the system performs in real situations other than relying on the previous performance, which may be using imposed parameters to give false performance impression. Once you have ascertained that a system really works, you have the task of utilizing it properly.
Apparently, some people have very reliable systems at their disposal but they do not utilize them properly. A commodity trading system utilizes predetermined parameters and you need to follow the rules. The systems provide mathematical models that are based on past market prices, trends, momentum, divergence and many other key indicators.
Many people using commodity systems do not stick to the rules. You need to stick to the entry and exit signals positions when trading with these systems. Even when a loss is earned, do not change the rules. This only complicates the trading and the end result will be loss of more money.