The Good, the Bad and the Ugly - Conclusion
...Continued From Part Four
If you are trading at 70% accuracy, then you can risk perhaps 10% on each commodity trade and survive the bad runs. But, even a 70% accurate commodity futures trader will have times when he is wrong 5-6 times in a row. The best traders risk less than 5% on each trade. Thatís what having a big bankroll is all about. Not to carry large positions, but to survive the bad times and still be able to trade another day.
Commodity futures pros do not have the luxury of blowing out their accounts like someone who has a day job and trades for a hobby. Itís like playing poker and having the most chips at the table. Probability smiles on those who can hang in there the longest to let the odds swing in their favor. Those who are under-capitalized, thus in for a short spell (e.g. - risk a lot on each trade), have to be lucky enough to catch a run before their chips disappear. That's why we need to have a method that attempts to identify high probability, low risk trades.
When In Doubt, Trade Smaller
If you have less commodity account money to trade with than you desire, you can also gain this "deep pockets" edge by reducing your trading size. Most commodity futures and options traders could easily reduce their normal position size by one-half and instantly become better traders. Reduced pressure and survivability are only two of the many reasons to trade smaller.
A Point About Losses
One more point about losses - whether you use a mental or actual stop loss, this exit point must be determined based on specific market conditions and not on how much money you feel you should risk that day. You should begin by deciding how far the market needs to move to negate your set up and make you wrong.
If price needs to go a long way to make you wrong, then this is not a low risk set up Once you determine this distance, then and only then can you decide how many futures contracts or options to buy. If your money management parameters tell you to risk $1000, and the distance to prove you wrong is $500 per contract, then you can hold only two futures contracts. Thatís it.
Many commodity futures traders do this backwards by first saying that they want to buy ten futures contracts. However, where do they put their stop to risk only $1000? The stop will probably be too close and they will essentially be giving money away. Itís just another form of over-trading. The commodity market doesnít care how much money you want to risk. The only concern for you is the point at which you are wrong. At that point, you want to throw in the towel for your predetermined loss.
With a small position you can let the market fight to get your money by traveling a long way, breaking through stubborn support/resistance or chopping nowhere for a period of time. Whatever you do, donít load up on a commodity position with more than your normal risk amount and then place a close stop and think "this time it will be different."
Playing For The Long Run
In order to play the game for the long run, you have to execute every trade as perfectly as you can. The best competition in the world is out there trying to get your money, so donít make it easy for them. Stay in the game, trade small, and execute your plan flawlessly every time. This will give you an edge over the vast majority of your competition.
Public speculators are generally poor traders with little discipline and poor planning. Be better than them and you have a chance of coming out ahead. Don't worry about the superstars. There will be times when you can eat their lunch as well. After all, nobody can win all of the time.
I focus so much on loss strategy because, if you can greatly reduce your losses, then the profits will take care of themselves. It may sound trivial, but we all must realize that losses are part of the commodity futures & options game and that no perfect trading system exists. Demanding trading perfection of yourself is futile and a sure road to failure. You donít have to be the best trader in the world to make money - you just have to be better than most!
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