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 backtesting 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.
How Can a Commodity Futures Trading System Help You
A commodity trading system provides a defined structure that is adopted by traders. The systems generate instructions that are derived from predetermined rules. It is important to test and research the trading system you use in the trade. The systems are able to specify capitalization levels and this is based on suggested performance, drawdowns and potential risks identified. The system also determines the right time to execute an order and also the time to exit a position.
One challenge with discretionary or manual trading without a system is that the trader rarely trades with a plan. The trader follows the “hot” market trend and spends many hours analyzing the market. There is a tendency to overexpose a single market using the manual trading mechanism.
However, a system has a predetermined plan. The system also has the capability to participate in multiple markets and sectors thus widening your scope of executing orders. In addition, less time is spent by the system analyzing markets and planning for the next day trading. The manual trading can lead to erratic trading results that can cost the trader a penny.
A commodity trading system eliminates the stress you have to go through when studying the market, and wondering when is the right time to execute an order and exit a position. The commodity trading is very entailing and it can occupy someone’s time to an extent that only a little time is spend in the actual trading. In addition, erroneous executions of orders can result to untimely losses.
By using commodity trading systems, traders are able to save the time they take in trading. In addition, markets can evaporate sharply and unexpectedly for some reason that you do not understand. What this means is that you can easily find yourself on the wrong side of the market trends and this may result to loss of money or be placed in a situation where you cannot make a decision.
There are traders who trade smartly for a long time and with only one adverse move, they lose all the profits they have gathered for a long period. These mistakes can easily occur when you are trading manually. This does not means that systems do not get into the wrong side. Often, systems will also lose in their positions. However, when you analyze the losing patterns that are recorded by the tested and proven systems, you will find that they are less than the winnings.
The end result is that you will most likely gain in a specific time when you are using the systems. In addition, these software programs are created with a lot of intelligence in market analysis and risk mitigation in commodity trading and therefore, they are also minimize the risks. This also does not imply that they alleviate losses. They will still get into risks challenges and this is where you find your systems recording losses. One important aspect you need to understand is that you need to follow the rules of the systems.
Tips on How to Develop a Commodity Futures Trading System
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.
Tips on How to Trade Correctly In Commodity Futures
Whereas there may be no intelligent and brighter strategies that may prove to produce excellent results in commodity trading, there are a few tips, which can help anybody trading
whether a neophyte, an experienced trader or a master of the trade. Trading in commodity market is likened with gambling. You can decide how much you want to risk in a bet in a casino and in the same way, you can decide how much you want to risk in a commodity trade.
Therefore, you have the power to manage your losses. Also in the commodity market, you cannot eliminate losses. They are part of the trading process. If you want to make more wins by trading with the market price movement, you have to remain constantly updated of the news and information about the commodities you are trading and how they are likely to be influenced by the external markets.
Things like weather, political aspects, and changes of the dollar are some of the aspects you have to stay well informed. However, the question is; what are the trading tips that can earn you reputation in this trade? One thing you need to ensure it that you have a properly capitalized trading account. You should be able to sustain a drawdown without incurring a margin loss call, which forces you to exit before the markets trade upwards.
This will leave your account losing. Therefore, you need to ensure that you have enough cash amount in the account to support the downward performance. You also need to have a plan and stick on the rules. You have to enter, exit and place stop losses when the system dictates so or if you are manually trading, you need to know the right time to do this. You should not hold back taking a trading position because you hope that prices will get better.
When you adhere to the predetermined formulae, you can succeed in the trade. You also need to define your risk. You have to set the risk which you can bear. If you are not willing to suffer risks either financially or emotionally, then you would better not trade.
Moreover, you have to diversify your commodity trading portfolio. This means that you do not have to restrict your commodity futures contract to only one item. There are plenty of commodities you can trade in the market. When you spread the contracts, this gives you a better position to manage the losses and profits. When multiple contracts are running, you can use those that are gaining to leverage your losses by liquidating the gains.
In addition, there are different systems on the market which use different rules. It is important you spread your investment in the different systems. When you are adopting a system, you should test its viability. There are different ways you can achieve this but the most common and probably the one that will give you a good evaluation is backtesting. This will show how the system could have performed using the same rules in a previous period such as 8 years ago. You also need to check the actual real-time trading results of the system.
How Does a Commodity Futures Trading System Work
A trading system generates instructions of trading based on predetermined set of rules. These rules are derived from mathematical models that work on past market prices, the trends, the divergence and the momentum. Before a system can be adopted, it can be tested and researched to ascertain that it can perform effectively. There are many systems in the market and not all are able to perform diligently.
For that reason, you have to test the system to see that it is able to perform optimally. You can do this by carrying out a backtesting exercise. This will help determine how the system could have performed in a previous period such as 6 years ago. A commodity trading system helps specify the correct capitalization levels and these instructions are based on simulated performance, the risks as well as drawdowns.
The rules of the systems help determine the right time when an order is executed or the time when a trader enters a position. In addition, the rules also determine when is the right time to exit or close a position. The commodity trading system shows the time when the market is uncertain and not convincing enough to determine the direct in which the prices are moving. The system will thus not show any signal for entry point.
One good thing with the system trading is that it works on a predetermined plan. It participates in multiple markets and sectors. It takes minutes to analyze the markets and prepare for the next trade. In addition, a system is adequately capitalized and this means that you do not suffer from margin calls especially when the markets move downwards.
Such call margins due to insufficient account capital leads to unexpected close of a trade position. It is not because that the prices will not move upwards but because the account cannot sustain any lost past that point. When the prices eventually come up, you have already excited and lost the position.
The system eliminates the stress which you have to go through when you are making market analysis. Through advanced computer technology tools, the systems are able to gather market information pretty fast and come up with the rules to be applied. Therefore, it saves you time and the emotions you would go through if you are to trade manually.
A trading system has a planned structure for trading and does not deviate based on anything but the market actions. The system has good money management features such as capitalization, stop loss executions and entry and exit points. It also leverages the losses and gains by trading in multiple futures contracts.
Last but not least, you should remain objective but not subjective. You must stay with your system and not shift goals unexpectedly. The problem begins when you start out-guessing the market and system you are using. The reason why you use a system is because you
believe that it works. It is a system you have chosen because it has demonstrated that it can trade profitably. You should remember that losses cannot be alleviated but they can be managed in commodity trading.
Which Should You Opt for ... Commodity Futures Trading System or a Broker?
Commodity trading can be done through discretionary ways or use of systems. If you do not have the basics to trade in commodity markets, you would better use a system or a broker. The question as to whether you should use a system or a broker depends on personal preferences and also from the experts’ point of view. Brokers can perform just as good as the systems. Therefore, which should you go for?
One aspect traders need to learn is that the systems are created by people who are experienced and advanced in commodity trading. Brokers on the other hand have mastered the techniques of trading profitably. If you choose a broker, you should ascertain that the trading patterns that have been recorded in the past years show good performance. A revered commodity trading broker is one who has been in the market for a many years.
There are brokers who have been there for more than 15 years. These have survived in the trade by excellent and not by chance. Therefore, you have to scrutinize the past performance of the broker. You also have to check on the liquidity demands. There are brokers who ask for extremely huge sums of money, which many traders on commodity market may not be willing to risk.
One thing with commodity futures trading is that losses are part of the process. They cannot be eliminated but they can be minimized. You should also learn the worst drawdowns that the broker has ever witnessed and how they affected the liquidity. If you gather this information, then you can make a decision on whether to use a broker in trading.
You must trust the broker in order to be able to engage in this trading. Similarly, if you are using a system in trading, you need to test and evaluate its worthiness. There are many systems in the market and not all can offer good results. You also have to back test the system. This helps demonstrate the hypothetical history performance of the system.
The system might only have been created a few months ago, but it can show how it could have performed if it was created 20years ago. This gives the past performance of the system and helps determines if it is a viable trading program to adopt. In addition, you also need to stick to the rules of the system.
With a system, you have to follow the rules. With a broker, you have to entrust the broker to do the trading and therefore, you can count on the expertise of the professional trader. A system is more or less the same as a broker only that you take some responsibility. Although there are systems, which can even execute and close a position for you, there are others which you have to enter and exit the market by yourself.
Therefore, the use of commodity trading systems and brokers may be more of personal preference, a thorough research as well as advice from the experts. Brokers are humans and they can still record erratic trading results that can lead to untimely losses. Systems on the other hand can still suffer from unexpected market changes though these happen rarely such as during wars and therefore, they can be mitigated.
Do Commodity Futures Trading Systems Guarantee Risk-Free Trading?
Trading in commodity market is not new and it is something that has been done for many years. However, there are realities that prospective traders in this market platform need to understand. Not all traders make money in commodity markets. The few professionals who profit from the trade form a small percentage as most of the people carry out the trading without clear cut strategies and knowledge on how to go about.
The end result is that the few traders benefit and the others lose. In commodity futures trading, losses are part of the trade and they can only be managed by minimizing them. Systems are designed with complex analytical features, which create the rules to be applied. The instructions that are given by trading systems to the traders are derived from the rules.
Through an analysis of market parameters like risks, past commodity market prices, and drawdowns, the systems tools are structured into a plan made up of rules. Not all systems can guarantee good performance. There are many systems in the market and traders are advised to choose their system wisely.
The system you choose to trade with should demonstrate that it can really perform. You can evaluate the system by back testing to ensure that it can work across a long trading period. This back testing is done by taking the rules and then applying them in a previous period. You may choose a certain period more than 10 years from present date.
The system will extract data and show how it could have performed during that time. This shows whether the system moves with the trends or not. The commodity trading systems also incur losses. You need however ascertain that the system does not experience abnormal drawdowns. This will help determine how your money is safe when using the system.
In addition, you should check on the number of futures contracts, which are supported by the system. It is always good to have a system that supports multiple commodity future contract trades. This will help leverage the gains and losses in the trade. While the best rules and features can be applied in a system, there is no a risk-free system.
Every system suffers losses and the only way this can be mitigated is by adopting loss minimization strategies. These include things like the stop losses and knowing when to enter and exit a position. In addition, a trader should know when not to trade. Discipline is very essential when using systems. In fact many traders who use systems mess up with the trading by not following the rules.
They change the rules of the systems. They start to dictate the system by deciding when they should enter and exit positions. This is where things go wrong when using these highly intensive data analysis and instruction-giving programs. If you do not follow a system that has been tested and verified, then you are deemed to fail in your trade by recording more losses than other traders. You have to stick to the rules when using the system.