Commodity Trading & Trend Following

Successful commodity traders and forex traders know there is a random distribution of results of winners and losers. The majority of commodity traders and forex traders use some type of mechanical trading systems. The reason they use a mechanical trading system is that they can test out their plan and see the historical back tests & results. This builds confidence in the mechanical trading systems for both commodity traders and forex traders.
However…and this is a Big However… lets say out of 20 trades… the traders know historically they will have approx 8 winning trades ( trades that work) and approx 12 trades that are losers ( trades that don’t work). These traders do not know…and need to understand if they want to be a long term successful trader, is they do not know which trades will be the big winners…( which are VERY Rare) and they don’t know the order of the trades. What I mean is very simply… I have seen commodity traders give up after having 3 losses in a row. They think the mechanical trading system does not work and they give up. There will be many times that commodity traders will experience multiple trades that do not work (losers) in a row. It will surely happen but as long as those losses are small it does not matter. It is really the price of being available to trade. Once commodity traders can think in probabilities and maintain small losses they have made tremendous progress.
Besides the fact commodity traders have no idea of which trades will work…they also do not know the order of the trades working… more so they don’t know the magnitude of when trades do work. The key is very simple ( yet hard to do)..temper expectations… realize you can have multitudes of trades that not working one right after another…and yes they are annoying…but that is reality..and commodity traders need to know that sometime in the future…they will stumble into very big winners. When the commodity trader does have the big winner….they did not do anything different..they made themselves available… they were patient…they were disciplined.. and the market just made them available to that rare large winning trade.

Personally I think fishing is a great analogy to commodity trading. You need to be patient.. you need to be disciplined…and if the fish are not out there( no trends) you will not make money. More so …once in a while… in rare times …a school of fish go by and you reel them in. This is really what commodity trading is…going through long periods of draw downs or periods of small profits and small loses…and then in some short periods having good returns…and then back again to the draw downs…or periods of nothing happening (like this year).
In order to be a successful commodity trader one needs to think in terms of probabilities…and understand commodity trading is a marathon of endurance. More so, to be successful ,strong risk measures must be in place. Anything can and will happen in trading. Make sure you are prepared ….have a plan.

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Andrew Abraham
www.myinvestorsplace.com

Futures trading involves risk. People can and do lose money