The 40 Rules of Consistently Profitable Commodity Futures and Options Traders, PART 6

Are You Following These Forty Commodity Trading Guidelines? Follow them all and you will have a better chance of becoming a consistently profitable commodity futures and options trader. Design your trading plan around these rules. Don’t underestimate its value to your success.

We all see the market through blurred glasses

34) Be completely willing to change your mind. A flexible mind is a sign that your ego is under control. Stay in the present moment and let the market unfold as it wills. You just have to be attentive to the clues to make a decision. The commodity futures market does not “have to” do anything. Remember that everyone sees the world through their own blurred, distorted, colored glasses. There is an enormous amount of information that we miss. It’s like trying to watch a football game live through a soda straw. We see only a little of what is really happening. However, we think we are seeing the whole picture, that is where we run into problems. The good news is that your competition is in the same boat. We have to be flexible and change our minds when necessary. Our information about the world is too little, biased and inaccurate to be correct most of the time.

Know your trading time frame and cut out the useless noise

35) Pay attention to the time frame that is larger than the one you are trading. If you are trading five minute bars, consider the 30 or 60 minute chart. If you are trading daily bars, look at what the weekly futures chart has done. We’re looking for clues. The balancing act is getting enough information that matters, but not too much.

Many futures and options traders have their charts loaded with too much stuff; redundant moving averages, momentum indicators, multiple time frames, etc. These pointers are fine as long as they each add important information and you can digest them. In reality, all you really need are some price bar chart time frames and some personally developed indicators that you trust to convey information you can’t see otherwise. The brain receives information serially, which means that we take in data in a single narrow stream, one idea at a time.

We should make our futures trading information unique and different, not redundant. Information overload is a big problem. Everybody goes through that. There should come a time when every good commodity trader cleans house and removes the useless junk accumulated on their charts. Keep your spartan charts with as few competitor indicators as possible.

Each must sing for their top and pull their own weight. Each one needs to tell you a story that cannot be seen in price bars alone. That’s what the computer is for. Having a moving average price of 10, 20, 40, 100 and 200 days is pure noise. There are much better things to put there. I’m sure you understand the image.

Beware of market “stages”

36) Be careful when hanging your hat solely on fundamental commodity futures information. These are news events, supply and demand figures, etc. I have seen the biggest losses as a result of traders looking at the news. Your trading becomes sloppy and a long-term stock investor mentality begins. What started out as a disciplined short-term trade turns into a long-term trade, once the loss begins.

Recently, gold has been in a bull market. Traders were lining up and pyramiding as prices surged on news of big buying from India and China. Many commodity traders did quite well for a while as gold quickly moved from $500 to $750 an ounce. But then came the correction. Many were prepared for a $30-50 nerve wrack. The gold gurus warned. It corrected as expected with many buying more gold and talking about the same bullish news. Buy unfortunately the gold market continued down to the $600 low area. This was a devastating correction for many. In reality, this was just a normal correction compared to many other commodity futures or stock markets.

For example, stocks often rise to 75 and correct to 62 (same percentage), as do pork belly and other staples. But because so many of these traders were fixated on the news and then the pyramid, they got caught bad. I heard stories of $100,000 accounts dropping below $10,000 even after the first $50 gold correction. Most were wiped out long before the full $200+ correction. Being vulnerable and inflexible is a dangerous game. Don’t swing on a single branch of a tree.

Part Seven of Seven, Coming Soon!

There is substantial risk of loss in futures and options trading and may not be suitable for all types of investors. Only risk capital should be used.