A New Look at an Old Futures Trading Topic
There are an unlimited number of ways to skin a cat, and trading is no different. Despite your futures trading strategy, risk tolerance or trading capital, having a plan is one of the most important components of achieving success in these treacherous commodity markets. However, we believe that the most important characteristic of a profitable futures and options trader is the ability to adapt to ever-changing market conditions. Assuming this, it seems logical to infer that a commodity trading plan should be established; nevertheless, just as rules are meant to be broken, futures trading plans should be flexible to accommodate altering environments and new events.
The premise of properly planning a commodity trade is similar in nature to a business plan. It is a relatively detailed outline of the structure of the futures and options speculation and the contingency plan, or plans, should the market go against the trade. Once again, I believe that trading plans should not necessarily be set in stone; behaving as if they are could lead to financial peril.
There are two primary components of a commodity trading plan: price prediction and risk management. Price prediction is simply the method used to signal the direction and timing of trade execution. This may involve fundamental or technical analysis, or both. Risk management specifies when to cut losses, when and how to adjust a position, or better yet when to take profits.
Commodity Futures Price Speculation (Hopefully Prediction)
The only way to make profitable futures and options trades is to buy low and sell high. This is true whether you are trading derivatives, or baseball cards. Although it is a simple concept in theory, in practice, it is much more difficult to implement than one may think. In order to successfully buy something at a low price and sell it at a higher price, the trader must first be accurate in his speculation.
Determining an opinion on where commodity market prices could, or should, go is only half the battle. Once you have done your homework in both fundamental and technical analysis, you must be able to construct a prospective commodity trade that will be profitable if you are correct and hopefully relatively painless if you are wrong.