Links

Single Indicators are not the Complete Answer When Commodity Trading

Single Indicators are not the Complete Answer When Commodity Trading

Too many commodity traders search for these magic indicators that they think will lead them to their holy grail. Commodity traders speak about leading and lagging indicators. The leading indicators are those that “Predict”. These in my opinion are a complete waste of time. I have seen all too many times these indicators fail in their goal. For example I used to look at divergences in MACD. What I learned was that at times there were a divergence and a pull back in the trend but not an end to the trend. Big Difference!

When commodity trading & trend following I suggest you include groups of indicators in your plan. For example I use the MACD as a confirming indicator. Not predicting..just as a filter to confirm. In order for me to take a long trade, my methodology needs to see an increasing and above zero line MACD & vice versa. More so after years of trading prefer to use the break out strategy of Richard Donchian. Again…this is just an indicator and part of my entries to take a position. I offset the entry in order that my stops will not be openly hit and exposed. This is another slight measure. However all of these slight measures over time mitigate to some degree draw downs and enhance returns. I use other indicators in order to keep me in the trade such as ATR or Average true range. A trading plan is like pieces of a puzzle. The indicators are just part of the methodology. Risk allocations and sector allocations must also be taken into account. The trading plan has to be simple in design & robust. One must realize that any trade is 50/50 and many times the trades that one would not really want to take are the ones that really work. Bearing in mind that any trade is 50/50 strong risk measures must be put in place. Besides these strong risk measures I like taking low risk bets. I rarely risk more than 1.25% on one methodology and .75 basis points on another. This lets me have multiple small losing trades that are offset by both small winning trades & the rare big winning trades. Keeping losses small are a major point in order to stay in the game of commodity trading & trend following. Commodity trading & trend following is a marathon. It is not a get rich tomorrow idea nor retirement in a box. More so commodity trading is not for everyone as it is fraught with all types of risk.

You have a choice you can build your own methodologies…or have a commodity trading advisor trade for you. Either way patience & discipline must be maintained. Even if you build a very successful & robust methodology & you second guess it and do not take every trade religiously you are bound to fail. The same goes for allocating to a commodity trading advisor. You have to understand exactly they trade ( if they tell you), how they manage the risk & then you have to again have the discipline & patience to stay with them through the good times as well as bad times ( almost like a marriage). Too many investors in commodity trading advisors leave them at the first sign of a draw down. This is absolute stupidity and these investors should never have invested in the first place. Draw downs are as natural as breathing. I like to use draw downs as points of additional entry. I would like to point out though…as good as this sounds it is not perfect as your biggest draw down is always ahead of you not behind you.

The whole principle for trend following for me is the path to compound money over long periods of time. It is not easy but I can do it & when I started I really did not know all that much you can do it as well if you are committed, patient, disciplined & invest in a robust methodology. This is not retirement in a box!

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING COMMODITY FUTURES, OPTIONS, AND FOREIGN EXCHANGE (FOREX) IS SUBSTANTIAL