Sunday, September 23, 2007

Surviving The Commodity Markets, PART 1 - Trading Guidelines For Different Account Sizes

Of all the important skills in trading, survival is number one. For unless we make it through the inevitable bad times, we won't be around to capitalize on the good. I've laid out some trading account guidelines that specify the account size required to conduct various commodity futures and option trading activities. Stick within these guidelines and you will have an edge on most of the commodity trading public.

The most important factor to success in commodity futures trading is our ability to survive the bad times. The second most important factor is our ability to identify and then take low risk, high probability commodity trades. Conquer these two and you are well on our way to trading success.

Yes, taking low risk, high probability commodity trade recommendations isn't enough. It's up to you to take the next step and follow the account survival guidelines discussed here. By surviving, you will be ready and able to participate in the favorable commodity trades that eventually come along, like buses in the night.

The commodity markets always change from trending to choppy and back again. There will be tough markets. You can count on this. We need to have several methods to cope with this uncertainty. We can never be sure of each individual trades outcome, so we need to put probability on our side to prepare for a losing string of trades.

One way is to have more chips at the table than our competition. A way to simulate this is by trading small breaking our account equity into ten to twenty parts (or more) and never risking more than 7.5% maximum on any one trade or idea. Many professionals with large accounts risk even less, like well under 5% a trade.

The problem with this plan is when we are dealing with smaller accounts. When the commodity trading account is under $20,000, to comply with 5% to 7.5% risk can mean taking on very small positions. Some commodity traders tend to get restless for bigger action and start breaking the rules. For example, with a $10,000 account, we should look to risk no more than $1,000 on each trade. (10%) Even this figure is too high.

If we risk less, like, 5% ($500), then the bad times are more survivable. The thing to remember is you can do all the in and out trading you want. You can grant options, spread options, hedge, buy dips, sell rallies day trade, etc - do whatever suits you. Just keep the risk for each trade down below 10% and preferably at 5% and you increase your chances of success markedly over the reckless plunger.

Next we will talk about actual account sizes and suggested activity.

Part Two of Six Parts - Next

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

Thomas Cathey - 27-year trading veteran heads the managed futures division of Thomas Capital Management, LLC. View his TimeLine Trading market predictions and get his complete, free 44+ lesson, "Thomas Commodity Trading Course".

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