Don't be afraid to be a sheep

  1. Follow the trends. This is probably some of the hardest advice for a trader to follow because the personality of the typical futures trader is not “one of the crowd.” Futures traders (and futures brokers) are highly individualistic; the markets seem to attract those who are. Very simply, it takes a special kind of person, not “one of the crowd,” to earn enough risk capital to get involved in the futures markets. So the typical trader and the typical broker must guard against their natural instincts to be highly individualistic, to buck the trend.
  2. Know why you are trading the commodity markets. To relieve boredom? To hit it big? When you can honestly answer this question, you may be on your way to successful futures trading.
  3. Use a trading system, any system, and stick to it.
  4. Apply money management techniques to your trading.
  5. Do not overtrade.
  6. Take a position only when you know where your profit goal is and where you are going to get out if the market goes against you.
  7. Trade with the trends, rather than trying to pick tops and bottoms.
  8. Don’t trade many markets with little capital.
  9. Don’t just trade the volatile contracts.
  10. Calculate the risk/reward ratio before putting a trade on, then guard against holding it too long.
  11. Establish your trading plans before the market opening to eliminate emotional reactions. Decide on entry points, exit points, and objectives. Subject your decisions to only minor changes during the session. Profits are for those who act, not react. Don’t change during the session unless you have a very good reason.
  12. Follow your plan. Once a position is established and stops are selected, do not get out unless the stop is reached or the fundamental reason for taking the position changes.
  13. Use technical signals (charts) to maintain discipline – the vast majority of traders are not emotionally equipped to stay disciplined without some technical tools.

Why System Trading Is Ultimately Discretionary

Successful system trading, in spite of the financial rewards, can be frustrating.  A quantified mechanical model will take many decisions off the table.  Yet, various issues, particularly the psychological approach to the issues, will always be in play.

Ed Seykota in the book, “Market Wizards,” writes, “Systems trading is ultimately discretionary.  The manager still has to decide how much risk to accept, which markets to play, and how aggressively to increase the trading base as a function of equity change.  These decisions are quite important, often more important than trade timing.”

It seems most sophisticated traders are aware of the fact that a system needs to be properly quantified and tested before trading. The sample size of the trades needs to be large. These traders are familiar with the terms of curve fitting and optimization. I wonder, however, how many traders continue to study the model as they trade their equity. How many understand the logic behind the entries, stops, exits, and money management techniques. How many are adjusting position size to meet expanding and contracting volatility and changes in market correlation. (more…)

Run against the crowd, not with it

This is one of the hardest things to do. It goes against every fiber of your being. We are wired as humans to look to the crowd for our cues just like an animal runs with the herd. In the animal kingdom, Penguins will run to the edge of an iceberg and stop to see if one of them actually jumps in and swims to safety without being eaten by predators. When they feel it is safe, the rest of them will make the swim with confidence.In trading, you cannot wait for a trade to “feel safe” before you take a chance with your hard earned money. You have to anticipate, listen to your gut and be willing to buy when others have lost patience or composure hitting the sell button into your waiting hands. Likewise you have to become a seller when the rest of the crowd feels safe and starts buying, only to repeat the process over and over. Going against your natural instincts will keep you safe by having better entries and exits. The rest pays for itself

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