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Traders Article of the Month
from the New International Commodities
Circular Progression Not Linear Progress,
all about commodity Trading Plans
Money Management, written by a CTCN Member...
It's been my general experience there's
a perception among commodity futures
traders there exists a linear progression
among the 3 requirements to be successful:
2. money management
3. sound trading plan
However, my own
experience as a (commodities futures)
trader suggests that the progression
through these three elements is not
linear, but instead is a circular spiral.
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Our careers as traders will be circular,
because we will continuously move around
the circle seeking to improve these
three elements, incorporating new ideas
and improving with the experience only
'hands on' commodity trading can bring.
In the words of T. S. Elliott, "We
shall not cease from our exploration
and the end of all our exploring will
be to arrive at where we started and
know the place for the first time."
As novice traders, we need to begin
by formulating a trading plan. Once
a commodity trading plan has been developed
to the best of our ability, then we
move on to money management and lastly
to the psychology of trading ... will
come back to money-management and psychology,
but meanwhile let's look more closely
at the trading plan.
The role of the commodity trading plan
is to provide a structure to work within
an environment perceived as unstructured.
This perception can give rise to the
"fear of the unknown." The trading plan
allows us to deal with this unknown.
Also, once we have begun trading our
plan, we need to have continued confidence
in our ability to deal with the commodity
market. Here we are dealing with the
efficacy of the plan to produce profits
and our state of mind as the plan interacts
with the market.
Our commodity futures
trading plan will need to have an edge.
In my (trading) experience, the commodity
plans that deliver an edge have the
following common elements:
Identification of moves of similar magnitudes.
This includes tools to identify probable
changes in trend. Once the trend is
identified, we can determine the appropriate
trading strategy (U.S. or international
risk entry. This includes: identifying
appropriate support and resistance areas;
setups or warnings that alert the trader
to a low risk opportunity; entry and
initial stop placement techniques.
Management. Once in the trade, we need
to be able to manage the trade. Trade
management includes trailing stop-loss
orders and where to take profits.
the trading plan needs some tool to
tell us when not to trade. For example,
when there is an increase in volatility
to the point that the our previous experience
is of no assistance.
point in the circle is the development
of a set of sound money-management rules.
I believe that money management comes
after the trading plan, because the
money management rules will depend to
a large degree upon the real-time trading
results of the traders plan. Also, you
will not truly appreciate the importance
of money management until you have experienced
for ourselves the erratic or disappointing
results that come from applying a promising
trading plan without a set of money
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The questions the money management
rules need to address are:
1. How much trading capital is needed
to finance one contract in a particular
market? For example, a trader may decide
he needs $40,000 (margin) to trade one
Treasury Bond contract and $30,000 to
trade one Japanese Yen contract (or
international commodity markets).
2. What percentage of capital is to
be risked on each commodity trade. For
example, is it 2% or 5%?
3. Are opportunities across competing
instruments treated as equal?
4. Are trading opportunities within
the some instrument treated as equal?
5. Are successive opportunities in
the same instrument treated as equal?
Once a commodity trading plan and
a set of good money management rules
have been developed, we need to take
the plan into the commodity market.
It is at this point that we will not
only discover more about our plan, but
more importantly we will discover more
about our own psychology. For instance,
we may discover we are unable to execute
the plan in the market, or we are unable
to execute it flawlessly.
Before we can progress, we must remedy
any problems which have arisen so far.
To overcome these problems, we may need
to adjust our trading plan and/or look
closely at our own psychological makeup.
For instance, the commodity trading
plan may need to be made simpler or
more robust so that we find it easier
to execute the trade.
Another trading situation could
be finding our psychology is such
that we are more suited to one type of
commodity trading other than the commodity
trading style of our trading plan, for example
long-term commodity trading vs daytrading.
Once we are able to execute the trading
plan flawlessly, then we can go to the
next step - that is, are we ready to
accept the rewards from the perfect
execution of our plan? We may suddenly
find ourselves unable to accept a steady
stream of money from the market. This
problem normally manifests itself with
having a series of wins only to give
back profits in one or two unplanned
trades finishing from where we started.
Again, we will have to go back and look
at our own psychology and try to remove
any blocks that are stopping us from
reaping the rewards of our efforts.
At the completion of this task, we
will be back at the beginning of the
loop - the trading plan. After completing
the loop traders will not only have new ideas
to test and incorporate, but also be
able to adjust the plan to better suit
our psychological development as a commodities
Once again quoting T. S. Elliot, "through
the unknown, remembered gate when the
last of earth left to discover is that
which is the beginning."