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Commodities-Trading InsightsSince commodities-trading as we know it began in 18th Japan with the trading of rice and silk, for over 200 years there has been the quest to realize extraordinary futures trading profit through the use of various theories and techniques.
Their contention is that there is no relationship between the past and future. In their eyes commodities-trading is like flipping a coin. Heads gives you a winning trade and tails means a loss. Since you must always pay commissions on every trade, if you played for any length of time you would be almost guaranteed to lose. The profits and losses from trading would cancel each other out, and you would have to pay all the commissions. However, if prices are really random, in the long run no one could expect to make money by trading commodities. Your only chance for profit would be a short-term lucky streak after which you had sense enough to quit. The realistic chance for continued success would be as hopeless as gambling in a casino. Since there are a number of traders who consistently earn large amounts of money from their trading, the “Random-Walk” theory is called into question. Many of these traders have careers lasting 20 years and more. Mystics on the other hand believe there is a perfect order behind the markets. If one could only break the market’s code, you would always be able to tell precisely what will happen next. To date no one has found a method of predicting commodity prices. Trend There is, however, one non-random characteristic of commodities-market price movement that astute traders such as Bruce Babcock and Dr. Bruce Gould have been able to exploit consistently. That characteristic is based on the theory that markets tend to trend. These trends can be followed using technical analyses and various mechanical trading systems. There is greater probability that a market will continue its current trend than reverse it. In commodities-trading these secular trends are based on long term fundamental forces that are likely to persist. Short-term trends are caused by shifts in market psychology. Such shifts are usually caused by news events relevant to the particular market. The commodities trader will do the best when he positions himself in the direction of a strong trend and stays with the trade as long as the trend persists. All trends are not created equal. There are strong trends in which price moves steadily in one direction for an extended period. There are weaker trends, where the market’s main movement is inconsistent, slow and displays periodic countertrend reversals. The trend for the last year, the last week, and the last day may have been up. At the same time trend for the last month, the last day, and the last hour may have been down. In the course of commodities-trading often there may not be any significant trend in a certain time frame. So this is not as easy as it sounds because one can never be sure when the periodic countertrend begins. In addition, each trader must work within the time frame that matches his personality. There are traders who trade sparingly and over periods of weeks and months. Then, there are those who are impatient and seek the excitement of numerous trades within a short time frame. Known as “day traders,” they enter and exit their trades on the same day, often within an hour or even less. This kind of trading generates a large number of trades that result in relatively small individual profits and losses. As we have seen, in commodities-trading each trade you make has a cost. The smaller your average profit per trade, the larger will be the percentage of those profits offset by that cost. The more often you trade, the greater will be the likelihood that your trading profits will not be large enough to surmount the costs of trading. You have the greatest chance to overcome the costs of trading if you trade infrequently and shoot for long- term trades and large profits. This means watching trends on weekly and daily charts. Ideally, one should think about maximizing your average profit per trade. You want to maximize your average profit on profitable trades and minimize your average loss on losing trades as much as possible. Thus, for members of the public who trade off the floor, the greatest chance of success is with longer-term trading. Synopsis --Everything that market participants currently know about supply and demand – empirical statistics, official reports and rumors - is reflected in the price. Examine the Price History and the Current Price Level and follow rather than trying to anticipate trends. Therefore, to determine whether to buy or sell, you do not need to make inspired predictions about future supply and demand or anticipate the market’s reaction to the latest political news. All you have to do is determine the current price trend and position yourself accordingly. If the trend is up, you always buy. If the trend is down, you always sell. -- The essential principles of successful commodities-trading are well-known, but few can implement them consistently. The reason is that natural human emotions interfere and are difficult to overcome without a guide path to follow. Keys to Technical Analysis 1 Find trends in highly volatile markets. 2 Use workable mechanical trading systems based on your personality traits. 3 Apply an intelligent money management protocol.
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Besides commodities-trading, learn more about commodity-futures.
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