How to Develop a Commodity
Futures Trading Systems
Due to the nature of commodity market trading, many traders are opting for system-based trades, which have grown to be successful. Not all systems have been tested and verified, and in order to ascertain that a system is working pretty well, you need to research on its performance. Developing a commodity trading system entails a number of things and the basics are the markets to trade, entry and exit rules. Other aspects are the management of cash, and stop losses aspects.
The time frame is a very important consideration in designing a trading system. There are long term traders and short term traders. If you can hold a trade for a long time, then you will most probably require a long term trading system. If you do not feel comfortable holding trades for several days, weeks or months, then a short term system would do well. When you design the system, you also need to check on the markets to trade in.
There are markets which carry a lot of money to trade. Therefore, if you are not willing to risk a big amount of money, then you need to stick to a market that allows a small risk edging. The systems indicators show you when to enter and exit positions and this is the technical part of the system. These are very important features and should be based on variables. You may have a break above 15-day high that would trigger a buy order.
You can have another indicator like RSI which can help measure the market futures trading trends such as when commodity is overbought and when it is over sold. Another aspect which you have to check on is money management. In commodity trading, you have to manage your money. The most threatening thing in this trading is how to manage losses.
When losses are persistent and uncontrollable, they can lead to overall loss in the trading. Losses are a common feature in the trading and therefore they cannot be eliminated. However, they can be managed appropriately. The amount you are trading with, in any particular position, is the sum you want to risk.
Therefore, you have to create a system which can control what you are willing to risk. Stop losses are some of the most important things, which you want to optimize in your system. A stop loss entry will help you not suffer immense losses when the market goes against you due to some reason. This can often and unexpectedly happen and you need to be prepared for the eventuality.
Another thing which is important when designing a commodity trading system is back testing. This process provides you with a good idea on the viability of using your system. What you do is put your trading rules and then run them on a previous period for example, about 5 years ago. The system will give you results that it would have produced if it was trading at that time. You have to examine the drawdown during that period. You also have to check the largest loss in equity.