Friday, September 21, 2007

The Truth - Computerized Commodity Trading Systems, Part 4 - Include The Basic Human Fears!

To get a computerized system edge, you need to figure out the basic human trading weaknesses and include them in your software. Anyone can buy a trading system these days, but it will have little value unless it is unique and different from the crowd. Here's some easy-to-understand ideas I use that add in the human fears!

To develop a catastrophic exit plan, we need to look back over the history of trading for the e-mini futures contract market. A computer can easily do this. Figure out after the initial sell-off, over the last X period of time, what price swing has the futures very rarely reached? Is this ten points, fifteen points or what? You need to come up with a super panic number that will get touched maybe once every three months or so for day trading.

So whats this equate to in dollars? If you are trading small e-mini futures lots like you should be, it will be equivalent to a good day or twos day-trading profits. This is a small price to pay to enable you to survive many trades that start out real bad but end up to near break-even. The key here is that you need to be positioned in the market at a manageable risk for as long as possible. If fact, if you could be in the market ALL the time with probability on your side and tiny risk if wrong, that would be the ultimate.

In contrast, what happens when we get stopped out right away? We give up the opportunity to be positioned for the move. How many times have we said, If I only had my original position, or, I got stopped out at the exact low again! If we can train ourselves to be more humble and accept that we do NOT know where the exact bottom will be and that its OK to be wrong for a while, we will evolve to the next level.

Let the e-mini futures market be what it really is a roller coaster that keeps moving up and down. You want to keep buying this coaster on the dips and selling it on the peaks as it flows. Yes, try to stay with the main trend, but dont worry about your current profit and loss until the computer says to get out on the next favorable rally whether profitable or not.

Getting stopped out too early in panics will eventually eat up your commodity trading account, or make you a break-even trader at best. By scaling in and scaling out you will be doing the opposite of the crowd. When the crowd is getting stopped out you will be excited to see another opportunity to average for a better price. But always execute your uncle point after one or two averages and no rebound occurs.

You want to make the odds work for you by letting more bad market time work for you, while your competition only takes advantage of the more rare good times. Like any risky technique, averaging down must be used sparingly. Ideally, if you are an intuitive fuzzy logic e-mini futures trader rather than a rigid system player, you can make a choice to average more aggressively when high probability set ups appear. Profitable trading IS an art.

Remember that there are special times when the e-mini futures market can go one way for days at a time. If you are witnessing a huge move like this, give the market some time to play its energy out before standing in its way. Or simply stay with your one-way trending model on this big days.

After a couple of days these one-way markets end and the e-mini market gets back to its normal choppy self. These one-way moves can do a lot of damage if you fight them. Probability will allow the market to clean out every method known to man, given enough time. Scaling in and being humble also applies to your general trading methods. Know when to lay off for a while when your models stop working and then later start up - slowly.

Small improvements every day make huge differences at year end. Work hard to find new and unique ways to make your trading even better!

Good Trading!

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 44+ lesson, "Thomas Commodity Trading Course" - they're all free. Main site: