Trading With the Commodity Trend

There are several principles which should be part of every futures trading strategy. They are:

1) Make commodity trades with the primary futures trend,
2) Liquidate your investment losers quickly,
3) Leave futures trading profits accumulate, and
4) Learn to control risk for any market trade.

The investor should make sure their trading strategy includes each of the above futures trading elements in order to be a successful trader.

Trade with the commodity trend relates to the decision of how to make a trade. It simply means always make commodity trades in the direction of the prevailing price direction.

Mathematical analysis of commodity price data has shown that price changes are primarily random with a small trend component. This observation is extremely important to investors wanting to pursue trading in a scientific manner. It means that an attempt to trade short-term futures patterns not based on the primary trend are going to fail.

Successful commodity traders use a futures analysis method that gives them an investment edge. This edge comes from the tendency of commodity prices to trend. In the long term you can make money trading with the trends. Thus, when prices are trending up, the trader should only buy. When prices are trending down, the trader should only sell a market.

While trading commodities with the primary futures trend is well-known, investors violate it often. Investors are looking for market bargains so the trader prefers to try to buy at the bottom or sell at the top of a commodity market before a new trend becomes established. Winning futures traders have learned to wait until a trend is confirmed, before taking a position with the primary trend.

The alternative to trend following is market predicting. This is not a recommended method to use to determine rather or not to enter a trade. Many traders have concluded that the way to be successful at futures trading is to learn how to predict where a market will move to in the future. There is an abundance of people willing to sell you their latest market predictions. Many futures traders want to believe that predicting market tops and bottoms is the best method to use for trading markets. Once a market is trending, then the trader can use commodity analysis to determine a probable price objective and the approximate time when the futures market will reach the probable price objective. Not until the market trend is actually determined!

Trading with the futures trend is hard to do because the commodity traders logical protective loss stop will be farther away, potentially causing a larger loss if the trader is wrong. This is a good example of why so few traders are successful. The trader simply will not be patient and wait til they have actually confirmed the markets trend.

Remember that the futures trader can define trend only in relation to a particular trading time frame. When you determine the trend, it must relate to the time frame you are trading the particular market in. If you are online day trading, you would not be using the weekly futures trend to determine the market trend for the next 16 hours. So an important part of any commodity trading plan is deciding what market time frame to use for making trend decisions.

When you trade in the direction of the trend, you are truly following the commodity markets rather than predicting the markets. Most unsuccessful investors spend their entire careers looking for better ways to predict the commodity markets before they have actually confirmed the trend. Developing the discipline to measure trends using intermediate to long-term time frames and trading in the direction of the futures trend, will provide the investor the very best opportunity to be a successful commodity and futures trader.

Source : azinearticles