Welcome to Commodity Futures University
LOW RISK TRADING & ALWAYS USING A STOP
LOSS ORDER ARE KEY TO TRADERS SUCCESS & MAKING MONEYA good time to begin trading commodity futures and other markets with substantial profit potential, combined with a lower risk trading style and reduced risk trades is by starting today . There are a number of trading systems and methods available for a commodity futures trader to use for possibly making money by trading in commodities, stock indices, forex and futures markets. Some trading systems may be good, or not so good.
When looking for a good trading method it's quite important the issue of trading risk being acceptable to you. It's always a good idea to read about trading risk disclosure and the ongoing risk-of-loss being acceptable to you. Not every trader can or wishes to trade methods which exposes the trader to excessively high risk. Traders with small equity accounts are just trying to get on the winning-side without losing their discount commodity broker account equity. There are other traders with a budget and psyche finding exposure to big losses unacceptable, regardless of how deep their pockets may or may not be.
Some approaches to trade entry, such as many trend following systems expose the commodity futures trader to potential losses which can be large on average. If you couple this with the low win-to-loss ratios of many of these commodity systems, you could find yourself in some high equity drawdowns that can be alarming. So it's important the method or trading system exposes the trader to reasonably low losses if the trade does not turn out as anticipated.
Having a low risk trade entry method of course is not all that is important for overall trading success. For example, a method could basically suggest that your stop-loss be no more than x amount of dollars away from your entry to keep the initial entry risk low. But then if the method has a poor timing model for entry to begin with, you may find that your stop-loss orders get hit more often than not. Lots of low losses can add up to one big loss if the win/loss ratio of such a method is low.
It's common knowledge that the lowest risk entry location with the greatest potential for profits happens to be within points of a new major top or bottom. However, in an attempt to enter from a major top or bottom early enough requires many to guess. This type of approach is considered to be 'top or bottom picking' and very dangerous to do. This is because the market has yet to show that it intends to form a top or bottom at that time.
Now there exists commodity futures trading methods to isolate the day or week where a daily or weekly market top or bottom will likely occur. But note the word 'likely' used here. A high probability turn is just that, a high probability. No trader knows with 100% certainty it will indeed occur, even if he attends a university for futures or forex trading. The wise commodity futures trader will recognize this with whatever method is used for anticipating these tops and bottoms and realize that steps should be taken to at least 'confirm' the traders expectation before entering the trade.
With my preferred trading method of anticipating market tops and bottoms, isolating these futures market tops and bottoms are done on a regular basis. Because of the nature of market cycles, a future top or bottom can be isolated with a high degree of accuracy. Once a particular top or bottom is expected to form, the commodity trader with insight will then look for some indication that the anticipated top or bottom is occurring as suspected. It would be at that time that the commodity trader can plan his entry with the least amount of risk exposure.
The basis of my work is on market cycles analysis, not of the fixed duration variety you may see advertised by some big name cycle gurus. Individual time cycles may be of fixed intervals between tops and bottoms, but the market patterns we see on price charts are the 'composition' of several cycles. The resulting cycle pattern will not be fixed. To learn more about this phenomena, consider the works of J M Hurst. Electronic Engineers are well aware of the effects of combining two or more Sine waves (cycles) together. The result looks just like your price charts.
So with my particular method of isolating high probability future tops or bottoms, the next task is to keep the risk low when entering the trade in the event that the turn does not materialize. By studying thousands of charts over the last 13 years, I've noticed a very consistent pattern that helps in keeping the risk low upon entry. This pattern is based on the very fact that EVERY NEW TREND starts with first the extreme (i.e. top or bottom) and is soon followed by a correction of some kind. This correction can be simply a one-day affair or take several days to unfold. But regardless of the duration or magnitude, a correction WILL occur.
Noting this consistent pattern, it became obvious that if the method can isolate the high probable time period for a major top or bottom, confirming this as early as possible could be done by determining the next short-term correction using the same method of timing and allowing the market to fill you into the trade if indeed it occurs. If the anticipation is not correct or too early, the likelihood of having your order filled is extremely low. Additionally, upon having the order filled because the anticipated turn does indeed occur, the risk exposure would only be the difference between the fill and extreme of the correction, normally only a range of 1-price bar on the bar chart.
Obviously, if it is a weekly bottom that is anticipated for a particular time period, the commodity traders would look for a new weekly low to form within the expected time period. From there, the commodity trader would note that price will start to move higher as that is the only way a weekly bottom or new bullish trend could possibly start. Viewing this from a daily price chart, at some point price will start to drop again (correct). If a new bull trend is to actually form, this correction should fall short of moving lower than the original weekly low that started this possible new bull trend. Where it stops correcting is the LOWEST risk entry location to go long if you are anticipating a weekly bottom is being formed and the trend is turning up.
Of course, during the correction phase following a new weekly low, for example, the commodity trader would need to use his timing method to anticipate where this correction may likely end. He knows that it must end before moving lower than the current weekly low if his expectations are initially correct. This may be done by looking for corrections of 38%, 50%, or 62% of the initial move off the weekly low. Or as done with my cycle timing method, to simply look for the correcting bar to enter the daily cycle turn time frame before considering entering the trade.
Upon entering that daily time period, an entry order in the way of a BUY STOP above that price bar's high would fill me only if price starts higher the next day. To be filled this way allows the market to make that correction low price bar now a bottom itself, and most importantly, a bottom that is higher than the weekly bottom you anticipated early on to be the beginning of a new bullish trend. The range of that new correction bottom is your initial risk exposure, so you know in advance how much you need to risk for the trade. If acceptable, you'll know this up front.
In addition to waiting for the correcting price bar via the daily price chart to move into my cycle turn time period, following a new weekly bottom, I like to note if that particular price bar reaches some pre-calculated support value. For example, more often than not a correcting price bar that is destined to become a new daily bottom itself will usually occur not only within a certain time period as discovered via my trading website, but will fall on support as well. Such support can be calculated using various methods available today, such as the Fibonacci ratios I provided in the previous paragraph, time and price squaring, geometric gann angles, or simple trend lines, for example.
To stay in this business of trading for the long-term requires that we keep our risk exposure low and plan to enter trades with the best potential for profit. I've provided the approach that I've found to be low-risk by letting the market prove our expectations as correct before our order is filled, and to allow us to know in advance what our initial risk exposure will be. Whatever timing model or system you choose to use, always keep in mind bull trends and bear trends have certain patterns that persist over time. New bull market trends will tend to form higher correcting bottoms and new bear market trends will form lower correcting tops. Know this and trade well. Reprint permission from Webrading, ProfitMaxTrading.com & Rick Ratchford