Commodity Trader's Digest

Commitments of Traders - Is it a Useful Tool to Time Markets?

2008-08-21T19:37:00.000-07:00

Trading with insider information is an illegal practice in the financial markets, however the Commodity Futures Trading Commission issues a report each week that might come as close to legal insider information that one can get, at least for the U.S. futures markets. But is it useful as a tool or method to help the trader to be on the correct side of the markets?

Before attempting to answer that question it is best to explain what this report is and what it contains in the way of useful information. The Commitments of Traders data (which I'll simply call COT data from this point forward) is released each Friday (or Monday if Friday is a holiday) based on data collected the previous Tuesday. This delay in the release of data may be a factor for very short-term traders, but should not be a concern to the longer-term position trader. This data breaks down the number of contracts held long and short for commercial traders, large traders, and small traders.

Every U.S. futures market is represented that has at least 20 large traders holding a position. The current data is available in text format and can easily be importing into an Excel spreadsheet. Also, all the history data is available in both text and Excel format. Once the data is in Excel, it can be plotted along with price and various technical indicators using charting software such as TradeStation. There are also software programs that can help manage the data, as well as vendors that sell the data, however the data is free for anyone to download directly from the government CFTC website.

When looking at the raw data, you will notice many columns of numbers. Most of these columns are of little value in analysis. On the CFTC site there is a page that tells you what each column represents. The only columns useful for analysis are the long and short positions of the large, reporting traders, the commercial traders, and the non-reporting traders, and of course the date. The reporting level will vary by market. Also, there are many oddball markets that most traders will never trade. I just delete or ignore these. Some markets with low open interest will appear one week and then be gone the next if the level of large trader participation drops below 20, so it is best to stay with the liquid markets.

One more point on the available data is that there are two reports: one showing the futures contracts only, while the other shows the combined futures and corresponding options. In the past the futures data was released on Friday, while the combined futures and option data was not available until the following Monday. For this reason most traders would collect the futures only data. Now both reports are released on Friday. Also, it seemed in the past that the true price driver was the futures contract, with the option being of less importance as it was often used by small traders, or for various spread strategies. Now with the growth in volume and interest in the futures markets in general, and especially the increase in hedge fund volume, options may have more significance in the analysis. There is debate on this issue. Use your own judgment. You can easily try both and see which method seems better for the markets you trade. On some contracts the futures only and combined reports produce similar results, while in other markets there is a noticeable difference.

Once the data is imported and plotted, along with the weekly prices of the underlying market, the most common way to view the data is to plot three indicator lines representing the net position of each of the three trader groups. You simply subtract the number of short contracts from the long contracts for the large traders to get the large trader net position, and plot that line in one color. Then do the same thing for the commercials and plot on the same sub-graph with a different color. And then do the same thing for the smaller, non-reporting traders in another color. If you want a quick view of what this looks like without having to manage the data, there are many web sites that one can visit with charts already posted, although your ability to do further study on this data will be limited, and in some cases the data may not be as timely or accurate as you might like.

So are these three lines of any help in trying to determine the future course of prices? There is a saying on Wall Street (and LaSalle Street) to follow the smart money. But what is the smart money? It would seem that the insiders and therefore the smartest money would be the commercials. They have the inside knowledge of what is happening with their own market. If they are farmers, they would certainly know the condition of their crop, what the weather is doing, what the demand should be for their crop. If they are a flour mill they should know the condition of the wheat crop and what the likely supply should be and what their needs will be for buying in the future. Since the insiders know everything that can be known about their supply and demand situation, it seems that it should be an easy matter to simply follow the smart money and just trade in the direction of that smart money. But a quick look at the price action shows that the commercials are almost always on the wrong side of the market. How can this be?

To explain this discrepancy it is important to understand the different motivation and resources of the commercial trader from that of the speculative trader. It is said that commercials have deep pockets and staying power, so they can ride out large adverse price moves. The basic function of the commercial is to lock in, or hedge the price of an asset or the need of an asset at some point in the future. If a farmer has crops in the ground and he has expenses to meet, he often can't take a chance that the crops will decline in value, so it is wise to fix the price now by hedging in the futures market. The fact that the farmer actually owns the crop and can deliver if needed creates the sense of deep pockets and staying power. Even if the price goes into an uptrend the producer of the commodity will often stay with the hedge so he doesn't have to worry about price fluctuations. So the motivation of the commercial hedger or user is far different from that of the trader betting only on price direction. Often commercials will bias their hedges based on future assumptions about price direction and lift or increase their hedges based on their view of the market conditions. However they, as a group, still have a different reason for being in the markets, and price speculation is of secondary concern, at least in theory. The large trader is only interested in where the price is going and has no interest in owning or delivering the actual commodity.

When looking at the net positions of the large, reporting traders, it seems that their net position is almost always a mirror image to the commercials. So if the commercials are the smart money, but generally are on the wrong side of the trends, then it would seems that the large traders are really the smart money, as their net position usually grows in the direction of the trend. This seems odd since most of the large traders, which are mostly hedge funds and pools that often rely on technical trend following systems, can't possibly posses the inside knowledge and fundamental information of the commercials. Yet the charts speak for themselves.

Could the answer be in using the small, non-reporting data. It is said that it is a good idea to fade, or trade against, the dumb money, and small traders are often regarded as dumb money. This assumption could be misleading. The non-reporting category is made up of traders that fail to meet the reporting requirements of that particular market. Also, there is no distinction between commercial traders and speculators when they fall under the reporting requirement. This group isn't made up necessarily of one and two lot traders. They could still be hedge funds and professional advisors. Just because their position is under the reporting requirement doesn't make them dumb, or even that small. There are many good traders that trade large size, but just not large enough at times to require reporting. In some cases the reporting threshold is very high for an individual or a small hedge fund, producer, or user. Also, since the small trader category is made up of both hedgers and speculators, the line on the COT chart is often bouncing around the zero line, or net neutral position, therefore offering little in the way of patterns or clues.

So it seems that of the three groups of traders, the obvious group worth watching to stay of the correct side of a trade is that of the large trader. In a trending mode this would seem to be the correct assumption. It seems wise to follow the money going into a market with the group that is speculating on the direction that price seems to be moving, rather that betting with the group that has other reasons for being in the market. But there does come a point where the composition of traders becomes too one sided. That perhaps is the key to interpreting and successfully using the COT data. There is a point where the large traders, in the case of an extended uptrend, become too long, and that is usually the same point where the commercials have gotten too short. It is difficult to put a number on the net position of the large trader where that point occurs. It is different with each market and with each trend.

It is pointless to curve fit what was successful in the past, because each occurrence will be unique. Extremes can often be gauged from experience by watching the interaction of price and the COT data over longs spans of data and over many markets. An aid to help determine the relative overbought or oversold level of the net position of each group is the use of a stochastic type indicator applied to the net position value. If the input parameter of the stochastic is set sufficiently large, such as back 52 weeks or longer, a relative value between the current net position level and a range of past levels can be evaluated that might not be apparent by looking at the net value by itself. In fact some markets, such as silver, rarely have a net positive position for the commercials, and using the stochastic on the net position makes determining overbought and oversold levels relative to the past range readily apparent.

In many instances the turning point of a market will occur by an extreme reading in the large trader net position, and then a sudden reversal, indicating that the funds that have been fully invested are now heading for the exits. Most often there is a corresponding opposite extreme reading in the commercial net position with a quick uptick indicating that the commercials are beginning to cover their shorts. This is always very clear in hindsight, but in real time this can be deceptive. What can look like a top in the market can be nothing more than some profit taking with the large traders eventually moving back into the market in even larger in size, with prices pushing higher that what seems logical. One can often trade the resumption of a trend by keeping close watch on the large trader net figure as viewed by the stochastic. If the uptrend is still intact, often an oversold reading of the stochastic will produce a good entry point. But it is important to keep a watch on the pattern of new highs if accompanied by lower highs, or divergences, in the large trader net position, viewed either directly from the COT large trader net position line, or by the stochastic indicator of that line. If prices continue to edge higher, but accompanied by less and less large trader participation, the uptrend may be tired and coming to a conclusion. The same analysis can be applied to the commercial net position data, but one has to look upside down, which makes the divergences more difficult to spot.

It seems at first glance that using the COT data is a lot of trouble for a method that seems so imprecise. There is indeed an art to interpreting this data so the information can become useful rather than confusing. It seems unlikely one could devise a mechanical system using this data since what can be gained from the information is quite subjective. But it is useful to know how the larger traders that influence price and create trends are positioned. No one indicator is perfect. One cannot build a house with just a hammer. But it would be very difficult to build a house without a hammer. The COT data is just one more element to consider, or one piece of the puzzle in determining price direction and possible turning points.

Doug Tucker has a blog with daily commentary on stock indexes, precious metals, and other markets. There are many articles on technical analysis and indicator design and interpretation. To visit go to: http://tuckerreport.com

Article Source: http://EzineArticles.com/?expert=Doug_Tucker
http://EzineArticles.com/?Commitments-of-Traders---Is-it-a-Useful-Tool-to-Time-Markets?&id=1424117

How To Predict And Profit From Major Commodity Market Moves

2007-10-13T17:25:00.000-07:00

By Tony J Lorenzo

Trading systems for making money in the commodity markets are being created all the time. The only problem with this is that the newer or inexperienced traders don’t have the experience to weed out the bad systems from the good and end up loosing money instead. But by using a tried and true system of trading, you can be a profitable trader in the commodity markets.

A good commodity trading system has to be easy to manage, especially for newer traders. A good trading system doesn’t have to have you in the market all the time to make money. There are signals that indicate a market is about to make a big move. If you wait for the big moves, you can end up with some very large gains with fewer loses. And last but not least, you need a commodity trading system with predetermined entry and exit rules to help keep your emotions at bay. This article will walk you through the steps of setting up a commodity trading system like this.

This commodity trading system is easy to manage. You won’t be doing any short term trading, and you may only catch a few good moves a year in each market, but they will be larger moves and that means more profit. You won’t have to spend great amounts of time each day on this commodity trading system. Also, by having predefined rules for entering and exiting your trades, you should be able to let your trades practically run themselves, especially when you are riding a big move.

This commodity trading system is for catching big moves and the best way to do that is to find a price chart for a commodity and look for a price pattern called a sideways trend. This pattern is like a spring coil tightening up, and when the price breaks free, the move could be huge. The longer this pattern continues, the bigger the potential move is when the price breaks out. This pattern could last for weeks, months or more. When you see this pattern, you should be watching for your entry signal.

This commodity trading system has predefined entry and exit signals you should follow. A trade entry will be triggered when the price breaks free from this sideways pattern. If it breaks up, you buy. If it breaks down, you sell. A stop should be placed beneath the last price low made before a break up, or above the last price high with a break down. As the price continues to move and make corrections, move your stop along with these new highs and lows. This brings us to your exit rule.

The exit rule is simple. Let your stop get you out. As the price moves and you follow along with your stops, the price will eventually fall enough to stop you out. Stick to this rule. Don’t move your stop to try to stay in a trade longer than you should. And don’t try to chase the market by re-entering the trade. Follow the rules and you can make this a profitable commodity trading system.

Tony is an individual commodities trader and has a site called TheGrainTrader.com with tips and help for traders to learn to trade the grain commodity futures market. Visit his blog where he offers his very accurate predictions of the short to near term grain market direction.

Article Source: http://EzineArticles.com/?expert=Tony_J_Lorenzo
http://EzineArticles.com/?How-To-Predict-And-Profit-From-Major-Commodity-Market-Moves&id=756832

Commodity Futures Trading - Why It's Not For Average Investors

2007-09-14T17:34:00.000-07:00

By Charles Phelan

If you don't mind losing $5,000 in 10 minutes, you may enjoy trading commodity futures contracts. There's an old saying among commodity traders: "It's easy to make a small fortune in commodities. Just start with a large fortune!" This is not a business for people who are emotionally attached to their money, yet thousands of average "investors" get lured into the commodity markets year after year. Why? Because of the possibility of making high percentage gains using the built-in leverage that is available to commodity futures traders.

The commodity markets include wheat, corn, soybeans, pork-bellies, gold, silver, heating oil, lumber, and numerous other common trade items. The huge companies that operate in these markets use commodity "futures" contracts to lock in their selling prices for the product in advance of delivery. This practice is called "hedging." On the other side of that transaction is the trader, who speculates on whether the priced of the commodity will go up or down before the contract is due for delivery. Because futures contracts may be purchased using leverage, these financial instruments lend themselves to speculation.

For example, control of a corn contract worth $5,000 may only requrie $500 of actual cash, or 10% of the face value of the contract. If the corn goes up in value, and the contract becomes worth, say, $5,500, the speculator has made $500 on his or her original $500, for a 100% return. Compare this with the regular stock market, which limits leverage to 50%, so that $5,000 worth of stock requires a minimum of $2,500 of capital. If the stock goes up to $5,500 in value, the $500 gain is against $2,500 invested, for a return of "only" 20%. The 100% return sure looks a lot better, right?

You can easily see why investors in search of quick gains are hypnotized by the lure of big profits using maximum leverage in commodity futures trading. The real problem, however, is that the leverage works in BOTH DIRECTIONS. You can lose your entire investment in a matter of minutes due to the wild price gyrations that sometimes occur in these volatile markets. Let's say the $5,000 contract drops to $4,000 in value instead of increasing. You've not only lost the original $500 you put into the contract, but an additional $500. You can go broke quickly this way.

So why do people play this game? Average investors do not wake up in the morning and say to themselves, "Right, I think I'll start trading commodities." What happens is, they receive a sales pitch from a commodity trading "guru" claiming to have a "system" for generating sure-fire profits in these wild markets. These "systems" range in price from $25 all the way up to $5,000 or more, and are sold based on the promise of "huge profits" from a small starting investment.

Newsletter writers or commodity gurus regularly pitch the myth about turning $5,000 into a million bucks in less than a year. The typical commodity system pitch comes in a long sales letter or booklet that describes a method for winning on "9 out of 10" trades or similar inflated claims.

Of course, if it was possible to correctly trade 90% of the time, a person could easily amass millions of dollars in a very short period of time. So why are these guys so eager for you to spend $195 on their super-duper trading course? Because they probably aren't making any real money with their own trading program! There's much safer money to be made selling others on the idea of getting into commodity futures trading.

There is no sure-fire way to consistently make money in these markets, simply because the underlying commodity prices can swing wildly back and forth depending on a complex set of variables, many of which are totally unpredictable. That's why the only people consistently making money in the commodity markets are the brokers, who collect a commission for executing the trade regardless of whether it wins or loses. There are also a handful of successful professional traders who make a living in these markets. But the vast majority of people who dabble in commodity futures lose money.

Unfortunately, with the lure of huge returns and easy money, a fresh crop of innocent traders enters the market each year, only to be quickly fleeced out of their money. Don't be one of them! Leave commodity futures trading to the professionals and stick with the more boring forms of investment, such as mutual fund investing or stocks and bonds.

Charles J. Phelan has been helping consumers become debt-free without bankruptcy since 1997. A former senior executive with one of the nation's largest debt settlement firms, he is the author of the Debt Elimination Success Seminar™, a five-hour audio-CD course that teaches consumers how to choose between debt program options based on their financial situation. The course focuses on comprehensive instruction in do-it-yourself debt negotiation & settlement designed to save $1,000s. Personal coaching and follow-up support is included. Achieves the same results as professional firms for a tiny fraction of the cost. http://www.zipdebt.com

Article Source: http://EzineArticles.com/?expert=Charles_Phelan
http://EzineArticles.com/?Commodity-Futures-Trading---Why-Its-Not-For-Average-Investors&id=109331

Choosing The Right Trading Strategy For Your Commodity Forecast

2007-09-14T17:29:00.001-07:00

By Thomas Cathey

The first step to a profitable commodity trade is coming up with an accurate commodity futures forecast. Next is to select the right trading vehicle to turn the forecast into cash. There are countless option and futures strategy combinations to choose from. For a particular market forecast, some vehicles will work and some will not. Do I use options or futures contracts or a combination? Here's my tips to increase your odds with the overall trade selection process.

Let's look at some methods.

First let's make up an UNBIASED two-month time-cycle forecast for each of the twenty-two major commodities. "Unbiased" means we try not to pay attention to the commodity name or media news, but rely only on the time cycle patterns. Also study the major trend, double and triple tops and other considerations. When in doubt, the forecast takes precedence over all other indicators.

The next step is to narrow down the twenty-two forecasts to ones that show promise. A time cycle forecast that shows a strong up-move or down-move gets put in the "possible" pile.

The time cycle forecast should be based on at least four combined individual time cycles that sometimes synchronize to produce big moves. The forecast gives time duration as well as direction. They may derived using spectral analysis and combined with a neural network, if one is so inclined; or a simple pair of dividers estimating lengths will do. The question is how strong the move will be. If all cycles are in synchronization, look for a strong, directional price move. If the cycles are conflicting, then a choppy range is more likely. Knowing when to expect a choppy market is valuable information for option writing strategies when collecting eroding option premiums.

Let's say our initial screening gives us three market candidates forecast to trend strongly up and three to go sharply down. We now have two categories with six markets. We want to eliminate the markets that are often redundant, like soybeans and soybean meal, or silver and gold, etc.

For the trending candidates, eliminate the markets that are approaching major tops or bottoms or may have problems getting through an obvious barrier. Trending bull or bear markets that look old and tired are also dropped.

We may want to sell high priced option premiums. Take a peek at the option premiums for each candidate to see if they are historically low. If so, eliminate them for option selling.

Finally, if you are left with more than three total candidates, narrow them down again using the raw time-cycle forecast. Remember that the cycles takes precedent over other methods.

We are now down to a few markets. Next, one market at a time, use a piece of option analysis software to search for the best strategies based on the expected market move. Compare these option to option combinations against futures to options combinations for trending markets. For selling options, we will look at option spreads. Generally, spreads are used only for risk reduction, if needed.

For each forecast, there can be many strategies to screen. The computer does all the grunt work. Screen the choices down to a strategy for each forecast that is a compromise between risk, profit and simplicity. Use your market experience and intuition to pick the very best one. In hindsight there is always a best strategy we could have used. Keep this is mind when narrowing down the choices. When finished, we want to have two to three potential trades to work with. We call the selected few, "high probability, low risk trades."

In the end you will have an optimized entry, exit and vehicle strategy for these selected market forecasts. This is the type of planning you want to do. If the trending trades work out well, you will want to implement other strategies that let you lock in profits while still holding for the big move. With the option selling strategies, you want to be able to make "adjustments" if things start out poorly. If thing go well, take profits and resell the options again if the premiums deflate quickly and leave the next strike or month series attractive. This assumes the time cycle forecast is still predicting a continued favorable move.

Remember there is more to planning a trade than just coming up with a forecast. The market may move as forecast but you can still lose by choosing the wrong trading vehicles. Pick the right vehicles and strategies that will allow you to stay in the market without excessive fear, but still carrying risk. You NEED to take on risk or the market will not pay you for your services. In addition, the vehicle has to move far enough to make a profit without letting the expense of protection eat it up. Protection can come in the form of option premiums, stop loss orders and spread strategies. Matching a forecast to a strategy is an important skill needed to succeed in trading commodities.

One last point. I often see traders making trades "just in case" the market goes up, or "just in case" the market goes down, etc. based on media news and general fears. Unless you have a strong conviction for market direction or lack of it, (a good forecast) just throwing money at good strategies will eat you up in expenses, in the end.

It's really back to the old tripod. You need three legs to stand. The forecast must be good and have a real reason behind it. Just because the news says so is not enough. Next you need the correct strategy and trading vehicle. Vehicles, risk and survival are part of the vehicle strategy. And finally, you need the faith and confidence to carry out the plan to completion. There is a fine line between stubbornness and sticking to a plan. That's why we need to know when to bend the rules. Rules need to be bent only when it involves matters of survival. Other matters are usually noise and our own demons attempting to unravel a well thought out program.

You don't have to be perfect. Just plan and execute your program better than the majority and you're well on your way.

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. http://www.thomascapitalmanagement.com/commodity/welcome.htm Main site: http://www.ThomasCapitalManagement.com

Article Source: http://EzineArticles.com/?expert=Thomas_Cathey
http://EzineArticles.com/?Choosing-The-Right-Trading-Strategy-For-Your-Commodity-Forecast&id=497580

Commodity Futures Trading - What Is YOUR Trading Edge? PART 3

2007-09-14T17:26:00.001-07:00

By Thomas Cathey

Finding your very own unique commodity trading edge is a worthwhile goal. Without one you are lost in the masses, struggling to push your head above the sea of expenses. Trading edges do exist, though for short periods of time. Psychological edges are more permanent. You need many. Read on to find how to go about finding yours.

It’s breathtaking to watch a certain trading method working well and then see the market find a way to destroy these same participants in one sharp move. An example is when commodity option traders are writing (selling) options over an extended period of time. They’re taking in premiums like fat cats. Happy. Quiet market. The percentages can be upwards of 90% accuracy selling way out-of-the-money futures options in a dull or choppy market. The profits are small, but consistent.

Then the day of reckoning arrives and a move way out of the standard deviation spikes like a lightning bolt. They drag some option writers out by their boots. A well known example was in 1998 when a famous money manager was selling thousands of out-of-the-money S&P 500 puts. The market took a free fall dive. He lost a big chunk of his $100 million+ managed commodity fund in a few days. I remember it well because a partner and I were long an eighty-lot of put options on the other side of his trade. We made the biggest score of our lives. But it had much to do with luck and being there at the right time. It happens at least once to everyone. Heck, just being born is the longest shot going.

Right now I love the S&P 500 futures contract (e-mini) day-trading game. I’ve traded it actively for the last twelve years. It pays to focus on one or two commodity futures markets and learn it well. This is the key to getting an edge when day-trading. Some day-traders can spread themselves out and apply similar techniques to many commodity markets. God bless them. But I find I need to learn all the patterns, habits, and idiosyncrasies of one market to be competitive. Just like doctors who specialize.

Can you imagine a heart surgeon trying brain surgery, or even doing plastic surgery? It’s the same with markets. The more you focus and specialize, the better job you can do competing against the best minds in the commodity world out there. I have some methods I will suggest in later articles to focus and better learn your favorite futures market. This doesn't mean you can't hold long-term positions of other commodities while day trading. You can do both, but for day trading itself, you should focus on only one or two markets.

As I’ve said before, it's so important to train your brain to intuitively and subconsciously identify likely turning points as they occur. With practice, you will find signals going off in your body. It’s different for everyone. Your body will let you know when it’s time to put on or take off a commodity trade. But, it takes training and looking at the right indications with a trained mind. More to come in future articles.

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 directs the managed futures division of Thomas Capital Management, LLC. Get FREE, his complete 44+ lesson, "Thomas Commodity Trading Course" and weekly TimeLine newletter by visiting: http://www.thomascapitalmanagement.com/commodity/welcome.htm The course is brand new and fun reading... a "street-wise" trading e-course. Visit the main Thomas Capital Management trading website at: http://www.ThomasCapitalManagement.com

Article Source: http://EzineArticles.com/?expert=Thomas_Cathey
http://EzineArticles.com/?Commodity-Futures-Trading---What-Is-YOUR-Trading-Edge?-PART-3&id=474683

Commodity Futures Trading - What Is YOUR Trading Edge? PART 2

2007-09-14T17:25:00.001-07:00

By Thomas Cathey

When talking about trading, I cringe when I hear the word, "system." It reeks of computer optimization - optimized mush, no flexibility. A better term is trading "method." A commodity trading method is something that is less rigid and has general rules that can be bent. We need to know when to bend the rules. This brings a method out of the mediocre class into one that has an edge - a human edge.

The best commodity futures and option traders in the world are usually discretionary types verses strict rule based optimization systems people. There are exceptions. To be a 100% intuitive, method trader is a tough row to hoe, agreed, but allows dynamic change to market conditions in a heartbeat.

So, where do we find our trading edge? Is it in the latest software, book, mentor, webinar, or maybe right here? It can be found everywhere, pieces here, pieces there, but mostly, the edge is within you. Sounds mystical, but it’s the truth. You have to spend the time to develop your OWN unique edge that the majority do not have. And yours will change over time.

For example, at one point back in the late 60’s and early 70’s, few commodity futures traders had use of computers. It was found that even a simple exponential moving average worked well for the smooth trending markets of the era. Moving average commodity traders did well since the markets were trending nicely. As more traders caught on, the successful trending systems began to get diced. You will notice that many of the new and emerging foreign markets start out with smooth trends until they mature and then start the chop cycle as change moves in. It’s all part of the never-ending evolutionary commodity trading game and marketplace.

There are some effective, but simple, long-term trending methods out there. Almost any method will work at one time or another. The broadest, loosest trading methods will last the longest, while the most optimized last the shortest time. The famous “Turtles” used a break-out of the 40-day moving average for many years.

They added a filter called “n.” Two losers in a row = -2n. Two winners = +2n. A winner and loser = 0n. The more losing trades in a row, the more frustrated the masses and the more likely the next trade will be a winner. That is, if the break-out came three times in a row with a resulting false move and a stop out, (-3n) then the fourth signal will be more probable for success. Sometimes.

The commodity futures markets follow this general rule: They will bless some methods for a while, then turn in a heartbeat and take it all away. A good trader is always watching several methods at one time and will switch to the one currently performing...in a heartbeat!

Part Three of Three 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.

Article Source: http://EzineArticles.com/?expert=Thomas_Cathey
http://EzineArticles.com/?Commodity-Futures-Trading---What-Is-YOUR-Trading-Edge?-PART-2&id=474682

Commodity Futures Trading - What Is YOUR Trading Edge? PART 1

2007-09-14T17:23:00.001-07:00

By Thomas Cathey

First let's talk about a good market for day trading. Next, we'll talk about finding a trading "edge."

The S&P 500 Index futures contract market may be the best futures game around for day-trading. It’s liquid and the swings are usually large enough every day to make it worthwhile. The electronic e-mini futures market (the mini S&P 500) is lightning fast for executions that rival or even exceed the floor-trader advantage. However, it would be even better if someday they would make a big “e-maxi” equivalent to the e-mini to help keep the commissions and expenses lower.

After all, five e-minis are equivalent to one present "pit-maxi." But with the pit maxi, the price skids and delay of pit executions can easily add from ½ to a full point at times. This makes paying the extra commissions of five e-minis well worth it in the end. After all, a one-point skid is $250 for a maxi while the extra commissions for five e-minis are a fraction of that.

Price skids in electronic e-mini futures contracts happen sometimes, but are rare and simply due to heavy buying or selling, compared to illiquid “air pockets” that can occur in the pit at times. The day has come where you see big guns doing 500 to 1,500 e-mini lots electronically. It’s a beautiful thing.

A look at a simple bar chart of the S&P 500 futures contract can look like Jaws V to the person without a method. What's needed are custom technical indicators and recognized patterns to present this market information to your trained mind. On any time frame, from monthly to one-minute bars, the futures price action can look random and treacherous.

But if it was an easy, trending market all the time, everyone would be rich… or better said, there would be no market because everyone would be trend following – doing the same thing, thus an impossible scenario. There must be occasional trending, chopping, extreme volatility and dullness to keep everyone on their toes. We think we have discovered a “system” (edge) and then the futures market changes.

I think change is the most important concept for a commodity futures trader to accept. As hard as we may work to find and discover the perfect trading method, the market will then change to make it worthless at times. Then it will go through its changes and come back around again and the method will work. It must be this way or else everyone would eventually be using the same trading system or method over time.

Why is it when we check out the latest high-priced commodity futures trading “system” performance listings, every year there are different ones on top, and the previous winners are often at the bottom? This is because rigid optimization does not work. Well, not for long. It's “optimized mush” as one futures trader calls it.

The perfect trading system would be one that continuously changed in sync with the futures market. It’s not hard to design a great trend following method or one that cleans house during a choppy market. But there has never been a computer program designed that can anticipate WHEN to toggle on and off the various methods to match the changing market. It’s like trying to predict the next tick - up or down? And what happens if the market does a half trend and half chop? Or, what if it goes quiet and then has tremendous spikes cleaning out the stops in a classic “search and destroy” session?

The bottom line is highly optimized commodity futures trading systems are doomed to failure, or break-even results at best. It doesn’t matter how elaborate your software is, using fuzzy logic, neural nets or any of these high tech optimization methods; they are doomed to be a wash. A wash! That’s what happens when the majority is average. The commissions and spreads take their “rake” just like the casino.

The harsh reality: You need a UNIQUE edge of some kind to pull you above the average commodity trading crowd. And if you don’t know what your edge is, then you don't have one. Think about this, because it is important. I'll cover some interesting methods that you can explore in greater detail in future articles.

Part Two of Three Parts

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.

Article Source: http://EzineArticles.com/?expert=Thomas_Cathey
http://EzineArticles.com/?Commodity-Futures-Trading---What-Is-YOUR-Trading-Edge?-PART-1&id=474679

Commodity Trading - Be Different From The Crowd, PART 1 - Avoid These Novice Trading Mistakes

2007-09-14T17:21:00.001-07:00

By Thomas Cathey

It seems when most Novice commodity traders start out, they go through the same cycle. They start out reckless, then buy some books and courses, attend the trading seminars, etc. What if we could bypass all this expensive mess and go right for the jugular of learning? Here's the truth about the hype, fluff and great challenges of becoming a consistently profitable commodity trader.

If it was easy to make money trading commodity futures contracts and options, everyone would be doing it - long ago. If it was easy to become successful by buying the latest commodity trading software system, everyone would have done it long ago. If it was easy to become successful by subscribing to the latest commodity futures hot-guru newsletter, everyone would have done it long ago. If it was easy to become successful by attending the most expensive commodity futures trading seminar, everyone would have done it long ago.

If it was easy to become successful in the futures contract market by doing anything that is easy or available to the public, then the market would change and make the method worthless.

Do you see my point? I'm convinced that every futures trader at one time has believed the statements above. I did. Early on, I thought making money would be easy. I figured I could just buy the best system, or seminar, etc., to be successful. We tend to think that others haven't yet discovered what we are about to buy, learn or try.

The truth is the futures contract market is simply an organism that will do whatever it needs to make the majority losers. If too many are using a trending method, it will go into a chop. If too many are making money by writing options on futures in a tight trading range, the market will have a sharp spike and clean them out. If too many are loading up in a one-way vertical bull move, it will have a sharp sell-off that will rock the house. The futures market will sometimes take out many groups at once. The market is very clever. In reality, the market is you and me.

Remember when you first started looking at technical indicators? Remember the first trend lines you drew? Remember stochastics, moving averages, cycles, Gann, Elliot, channels, etc? Each time we thought we had something that would give us the edge. But after testing and using them for a while, we decided that we needed more. I wish I had a nickel for every time I've heard the comment, "I'm still working on my system - but I'm almost finished." I have news for you. If you're a newcomer, you will be saying that for a very long time.

Blessed art thou who finally arrive at a set of commodity trading methods they have used for a long time without modification. You will find that the "looser" the method is, the longer it will last before the market tears it up. The ups and downs will be milder. This is a good thing. Next: What things should we be focusing on?

Part Two of Three, 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 directs the managed futures division of Thomas Capital Management, LLC. Get FREE, the complete 44+ lesson, "Thomas Commodity Trading Course" by visiting: http://www.thomascapitalmanagement.com/commodity/welcome.htm It's brand new... a "street-wise" trading e-course. Get an edge trading futures, day trading e-mini's and selling options. Also learn how "TimeLine Trading" and rare "Ninja trades" can improve your trading results. For more helpful trading info, visit the main Thomas Capital Management trading website at: http://www.ThomasCapitalManagement.com

Article Source: http://EzineArticles.com/?expert=Thomas_Cathey
http://EzineArticles.com/?Commodity-Trading---Be-Different-From-The-Crowd,-PART-1----Avoid-These-Novice-Trading-Mistakes&id=464604

Commodity Trading - Be Different From The Crowd - PART 2 - Avoid These Novice Trading Mistakes

2007-09-14T17:20:00.001-07:00

By Thomas Cathey

You will find that the "looser" a trading method or system is, the longer it will last before the market tears it up. The ups and downs will be milder. For example, let's start with a simple 30 bar moving average. Most commodity futures traders would laugh at it, but this is one way to keep you on the right side of the market. Don’t get me wrong. It’s a poor indicator for buy and sell signals over time, giving close to break-even results. But if used with a shorter-term indicator that only takes trades in one direction as the moving average, it can be a good start to a larger method.

So what’s this have to do with being different from the crowd? The commodity futures market is a paradox. Simple is complex and complex is simple. A simple moving average is available to everyone. It’s as common as a bar chart. But when a futures trader uses his own unique combination to set himself apart from the crowd, magical things begin to happen.

For example, how many people are trading with a simple moving average? Probably many. You can tell by running a simple computer back test to see the mediocre results. This is also because it is not optimized and curve fitted, so the performance is generic. But now add in another indicator and you have selectively reduced the number of futures contract traders using the method. There are some interesting methods that can be put together with simple indicators.

The point I’m making is to think outside the box. The stuff you see for sale everywhere can give you good ideas sometimes. These can be good seeds for thought. But you need to develop your own custom method that becomes your own. And be ready and flexible to change it or toss it out if the futures contract markets change enough to make it a constant loser. Be ready to bring it back when the market favors it again. The commodity futures market is always changing. Remember that and reduce your pain.

We need several trading methods to handle different types of markets. This is assuming we want to trade more than one type of futures market action. We have chopping, bear and bull markets; so that makes at least three. Personally, I find the characteristics of a bull differ greatly from a bear. That’s why all my models are separate for bull or bear markets. I also have a chop market model. The words, “model” or “system” really mean the same thing. “Model” is cooler sounding and used by fund managers. “Systems” are the stuff you see for sale in the magazines ads… (smile) More coming...

Part Three of Three, 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.

Article Source: http://EzineArticles.com/?expert=Thomas_Cathey
http://EzineArticles.com/?Commodity-Trading---Be-Different-From-The-Crowd---PART-2---Avoid-These-Novice-Trading-Mistakes&id=464611

Commodity Trading - Be Different From The Crowd - PART 3 - Avoid These Novice Trading Mistakes

2007-09-14T17:18:00.001-07:00

By Thomas Cathey

Here’s a quick trading tip. I have a long-term “chopping” market model I use for writing commodity options for premium collection. It consists of two “sub-models” for each commodity, bull and bear. These are fairly complex models with a fair amount of computer code. Just today I started experimenting with a simple moving average that blocked signals if against the major trend. It made a measurable difference in the long term performance! I found the percentage of win/loss went up as well as the profit/loss ratio.

Just a little thing like a bull/bear filter can keep you out of some losers. Bucking the main trend is usually trouble. My point is, pay attention to the simple stuff too. We think things have to be complex, but remember, simple is complex and complex is simple in the commodity futures contract market. Another way to say this is optimization and curve fitting is complex and a loser. Loose, simple and flexible techniques are often winners.... at least for a while. Matching a simple method to the right market, at the right time, is the challenge.

I think Joe Granville said it right one night. I attended one of his free “performances” in 1981. Joe is a showman. He said something to the effect, paraphrased, “ I’m crazy! That’s what it takes. You must be different from the crowd to understand the market. Crazy people like me are successful for this reason….”

Being a trading maverick that tries everything and anything is the only way to discover what works for you. The surprising thing of all is what you are really doing is finding an interface to view the commodity futures market through your own eyes. For some folks, all it takes is a quote machine with prices flickering. Some can do it with a ticker tape. Others do it standing in a pit watching the crowd and flow of orders. Still, others find their edge watching chart patterns because they are good visual detectives. Others use Elliot Wave theory and cycles. It doesn’t matter!

There is some combination you must uncover that lets you see, hear, feel and touch the true ebb and flow of each individual commodity futures market. Every one of us has a false impression of what we think is happening. It’s just rose-colored glasses. You need to find what particular lenses work best for you. You will find the fit if you keep looking and trying things.

A mentor can help, but be sure he's not pushing what works best for him. He should expose you to many general techniques until he sees you click. Think about this before getting excited about buying the next “hot” system. To repeat, the Holy Grail is NOT in the next hot system for sale. Save your money.

The best thing a new commodity futures trader can do is find someone who has already been through this process and paid his dues. Study this trader and decide if his style suits you. If so, then stick with him and learn all you can.

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

Article Source: http://EzineArticles.com/?expert=Thomas_Cathey
http://EzineArticles.com/?Commodity-Trading---Be-Different-From-The-Crowd---PART-3---Avoid-These-Novice-Trading-Mistakes&id=464617

The 40 Rules Of Consistently Profitable Commodity Futures And Option Traders, Part 1

2007-09-14T17:03:00.001-07:00

By Thomas Cathey

Are you following these forty commodity trading guidelines? Follow them all and you have a better chance of becoming a consistently profitable commodity futures and options trader. Design your trading plan around these rules. Don't underestimate their value for your success.

Calculate “Pot Odds” For Each Trade

1) Before entering a commodity futures contract trade, have a good idea of the approximate risk/reward. This is the equivalent of "pot odds" when playing poker. Every futures contract or options trade is different and requires its own unique mental weighting that goes beyond a simple stop loss order and system objective. If the futures market acts poorly, some trades can be kicked out quickly while others may be good enough to average down once or twice. Be flexible and keep watching for clues as the market unfolds.

Have a General Target for Both Price and Time

2) Have a time frame and price area expectation for exiting a profitable trade. The futures market has time cycles that are always changing. Be aware of the current cycle pattern and look for it to continue until it actually changes.

Like Your Broker

3) Traders do better with a broker they like. Be sure you have a good relationship or find another broker. Finding a commodity broker with a compatible personality to yours and the skills you value is worth the search.

Patience To Wait For The Right Set Up

4) Be on guard to getting into a trade too early. This is a common problem plaguing even good traders. We recognize the trade set-up, but don’t let the pattern fully complete before entering. There is always time to buy another dip or sell another rally, so don't rush in thinking it's your last chance.

Trailing and Protective Stop Loss Orders

5) Unless you have well developed self control and discipline during chaotic times, use stop loss orders that are working in the commodity futures market. Even disciplined traders without close stops still need to put in far away catastrophic stops that get triggered in case of an emergency. Remember the 9-11 drop in the S&P 500 futures contract? It was a free fall that happened suddenly. Also remember that there is no guarantee that your futures contract stop will be executed at your price during an extreme market move. This also applies to stock trading.

Know When to Buck The Trend

6) Know the main trend of the futures market. Most of the time, it pays to look for set ups in this same direction. There are times to buck the trend to catch the crowd off balance. Tally up your trades to see if you are spending too much time on the wrong side. Taking trades with the trend is one of the few true market lore rules.

Trade Only When In The Zone

7) Long-term traders need to do their homework and decision-making while the market is closed. Day traders need to stay in the “now moment” and flow with the futures market in real time to succeed. Be sure you understand the difference as it applies to you.

Learn To Love Your Losses

8) Learn to take your losses with a smile. They should have little effect on you. Small losses are nice compared to large ones, of course. Know when to average down occasionally when the trade is of high probability. Know when to dump everything when averaging doesn't work after adding two additional positions. Averaging down can improve your bottom line if you do it only during exceptionally high probability trade setups.

Part Two of Seven - 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.

Article Source: http://EzineArticles.com/?expert=Thomas_Cathey
http://EzineArticles.com/?The-40-Rules-Of-Consistently-Profitable-Commodity-Futures-And-Option-Traders,-Part-1&id=458455

The 40 Rules Of Consistently Profitable Commodity Futures and Option Traders, Part 2

2007-09-14T17:02:00.001-07:00

By Thomas Cathey

Switch Brokers If You're Not Happy

9) If you are not doing well with your commodity futures broker, instead of changing firms call the branch manager and ask to switch brokers. He will listen to your ideas and can usually match you up with someone more suited. You may ask to speak with several different brokers before making a decision. A commodity brokerage firm will always be happy to help you find a more suited broker rather than losing your account.

A Trading Loss is an Opportunity to Reposition Yourself

10) Look at a small loss as a new opportunity to reposition yourself at a better price. This assumes you still like the trade's probabilities.

Switch Brokers if Not Happy

A Trading Loss is an Opportunity to Reposition Yourself

10) Look at a small loss as a new opportunity to reposition yourself at a better price. This assumes you still like the trade's probabilities.

Learn To Sit On Your Hands

11) One of the most difficult things is to sit on your hands during a profitable trade. This is a critical skill to be developed. Many times we’re right-on with our analysis but we liquidate a profitable position during minor adversity. Remember that futures contract markets will always fluctuate and do everything they can to get us out of a good position. Our ego wants to be right on every trade in the short term.

To let profits run means we will have a lower win/loss ratio and the ego hates this. Faith and discipline will control the ego so that we take a longer protracted view of our commodity futures contracts and options trading. This point cannot be overstressed. Read this rule a second and third time.

The Bottom Line is Always The Bottom Line

12) The acid test for any trade is the profit or loss bottom line. It doesn’t matter how good the price action or fundamentals are. Unless the futures contract or options trade is making money after a reasonable period of time, consider getting out and wait for another opportunity. The best trades often take off immediately in our favor. Give them every chance to work and be patient, but know when time has run out and you are beating a dead horse. If you are disappointed, then probably others are too. These kinds of conditions create adverse moves against you that can be sharp and fast. Surprises and disappointments can cause panics.

Reversing Your Position is Usually a Mistake

13) Contrary to conventional commodity trading market lore, immediately reversing a position is usually a mistake if taken over a long series of trades. This practice often leads to bigger and worse trading habits that culminate in scalping. Reversing will work well occasionally, but the odds are better if you exit and calmly reevaluate the situation. If you decide to reverse and go short, wait for the next minor rally even if it is at a less favorable price. Always wait to sell a rally or buy a dip...always.

If you are very focused and an exceptional futures trader, you may even see a trade set up as a failure in the first place and then take this "reverse position" trade from the start. However, if this practice is done too often, it can lead to a worse habit; second-guessing yourself. The key is to consistently monitor yourself while being flexible. We all need course corrections once in a while. Commodity futures contract and options peak trading performance is all about flowing with the market with our techniques and psychology.

Keep a Trading Log And Read It Often

14) Keep a commodity futures trading log describing your reasons for entering and exiting. Make notes of what you've learned. Over time, transfer them to a master log and read them every month. Our memories are short and we need to be reminded of things we already know. A trading log is the key to consistency and becoming a professional. You need every edge you can get. This is one of them.

Part Three of Seven, Coming 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.

Article Source: http://EzineArticles.com/?expert=Thomas_Cathey
http://EzineArticles.com/?The-40-Rules-Of-Consistently-Profitable-Commodity-Futures-and-Option-Traders,-Part-2&id=458490

The 40 Rules Of Consistently Profitable Commodity Futures And Option Traders, PART 3

2007-09-14T17:00:00.000-07:00

By Thomas Cathey

Survival Is Your Prime Directive 15) Ask any professional commodities or options trader to name his most important trading skill. He will probably tell you that “survival” is near the top of his list. Without the survival of your account, everything else is futile. Always trade in a defensive manner, but at the same time be aggressive when you have a high probability trade set up. Being defensive means you trust yourself to execute a set of rules that will keep you out of serious trouble.

Being aggressive means acting out your plan without hesitation and knowing when to step up to the plate in a big way. Not all futures contract and option trade set ups have the same probability. Learn to recognize the very best ones and take full advantage. And don’t be surprised if they don’t work out. Take the loss as like it's any other trade and move on. Avoid getting a scenario,

Design Your Own Method and Know It Well 16) Develop your own commodity trading method and know when to break the rules. There is no system that will work all the time. The account draw-downs of even the best systems can be devastating at times. Know your system or method well enough to recognize when it will perform its best and worst in a particular market. This can be done once you completely learn your method and the commodity futures contract market it trades. The market’s past habits are your clues.

Are You Risking Too Much On Each Trade? 17) Money management rules are possibly the most important part of our plan. Each losing trade should put only a tiny nick in our futures contract trading account. If we are gaining or losing a large percentage of our account in a few trades, we are out of control and need to rethink why we are trading. (For excitement? … or to survive and make money consistently?

Small, Leveraged Positions Go a Long Way 18) Trade small. Even after you become a consistently profitable futures trader, continue to trade small. It’s all relative, but the key to profits is to let small positions go a long way. A long way might mean two points or it might mean forty points. It all depends on the method used. Leverage is so great in commodity futures contracts, there’s no reason to load up on a few trades and put your survival on the line. In addition, your thinking will stay more clear trading small. One trade should have little effect on your account, win or lose.

Put Your Eggs In One Basket and Then Focus 19) Be careful about over-trading. It can take on many forms. Stick with a few markets you can master and specialize in. Get in and out of the futures market as few times as possible according to the rules of your method. Forget scalping if you are off the floor.

A futures contract day-trader should take no more than 2- 4 trades a day. A short-term intra-day trader might make 10-20 trades a month. A long-term commodity position trader should take maybe 3- 4 trades a month, depending on account size and method. Keep the positions small, no matter what method you use. A 5 - 7.5% account loss maximum is about right for a bad trade. See my article about suggested account size and activity.

Anticipate What A Good or Bad Trade Looks Like 20) Before a futures contract trade, have a general idea of where you want to get in, get out and what time frame you expect. Also, know what the particular futures or option market needs to do to make you exit at a loss. Prior market action along with your trade pattern's history will be your guidelines. The more intuitive a trader, the more leeway he can give the market in real time to let it unfold as it may.

Part Four of Seven, Coming 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.

Article Source: http://EzineArticles.com/?expert=Thomas_Cathey
http://EzineArticles.com/?The-40-Rules-Of-Consistently-Profitable-Commodity-Futures-And-Option-Traders,-PART-3&id=458502

The 40 Rules Of Consistently Profitable Commodity Futures And Option Traders, PART 4

2007-09-14T16:59:00.001-07:00

By Thomas Cathey

Scale In and Out Like a Pro

21) Once you have a profit, it pays to scale out a portion of the position. Liquidate half into the first sharp profitable move and then hold the rest for the ride. This makes a trade easier to handle psychologically and will usually result in a small profit even if the futures contract market comes back later to your original entry point.

Recognize When You Are "On-Tilt" or Euphoric - Then Leave

22) It’s easy to get emotional when things go wrong - or even if they go right! We sometimes get on a vendetta looking to make back our loss quickly by loading up or taking the first marginal trade that comes along. Or we load up after a big profit thinking we are playing with the market’s money. Being steamed or euphoric is the road to big losses. Monitor your own temperament at all times.

The Short Side Is The Way To Go

23) Be just as willing to sell short as buy long. In fact, short sales can be faster and more reliable once the public gets loaded up. If for some reason you were restricted to trade the futures market long only or short only, the short side would be the way to go.

Wait For Panics To Buy and Sell - Let The Public Be Comfortable In The Middle

24) Avoid buying in the middle of a range. This is where the public buys and sells because it feels more comfortable. Actually, the risk is higher there because price can easily return to the edge of the range and break through. Learn to stick your hands in the fire with the large traders and do your positioning into buying or selling panics at the extremes. This gives a great price buffer in the short term due to a tendency for the market to bounce after a spike panic.

In addition, indicators tend to become fuzzy and worthless in middle ranges. Many futures indicators work better when pushed to extremes. The rule is, sit on your hands no matter how tempting it is to buy the middle of a range. Force yourself to initiate aggressive trades. You get paid for adding market liquidity, and penalized for taking it away. This is especially true in the commodity futures contract and options markets.

If there are thirty people bidding for something and only one willing to sell, and you come in bidding, you are taking away liquidity. If you step in and join the lonely seller to satisfy the crowd, you are adding liquidity. Think about it.

Divergence Contains Many Clues

25) Divergence patterns can be a powerful indication in many areas. Look for two similar markets making different bottoms. Or identify a pet indicator making higher bottoms while price is not, etc. There are many ways to use divergent variations in your trading. Give this area some thought.

Faith Gives Us Confidence - Confidence Kills Fear

26) Develop a positive trading attitude to create faith in your trading outcomes. Faith is what gives us confidence. Confidence is needed to kill fear. A confident person who is in the “now moment” has little time to think about his fears. Anytime we make a decision when fearful, the probability is high we are going to make the wrong choice. Read this rule again.

Your Edge is Knowing When The Market is Changing

27) Unless you have designed your computer's commodity futures trading program yourself, do not blindly follow it. Even if it is composed of your own ideas, remember that the market will always change and render the program useless for periods of time. Your edge comes from developing a feel for when to use it and when not. Charting a system's performance and trading this performance is a very effective way to refine this feel. Trade the method's performance!

Part Five of Seven, Coming 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.

Article Source: http://EzineArticles.com/?expert=Thomas_Cathey
http://EzineArticles.com/?The-40-Rules-Of-Consistently-Profitable-Commodity-Futures-And-Option-Traders,-PART-4&id=458506

The 40 Rules Of Consistently Profitable Commodity Futures And Option Traders, Part 5

2007-09-14T16:57:00.001-07:00

By Thomas Cathey

If You Don't Know What Your Market Edge Is, You Don't Have One

30) Treat commodity futures and commodity options speculation as a serious business. Otherwise it’s no different than betting at the casinos. You have to be better than MOST of the traders out there to make money. The consistently profitable futures traders ALL have trading plans and are disciplined.

Notice I said “ALL” consistently successful traders have plans. It’s virtually impossible to randomly trade without a plan using rumors and hot tips and still make money over time. The law of probability will not allow it, simple as that. The only way to win this way would be to make one big bet and then walk away; then the odds are at their best. But by trading over and over without a disciplined method and plan, there is a 100% chance you will fail.

Of course it's more like 99.9%, since infinity and the universe allow for everything, given enough time. (grin) Over time, commodity commissions, slippage, errors and simple bad luck will take your money away unless you have a decided edge that gives you an odds advantage on every trade. The bottom line is if you are new to trading, find a good mentor and/or work with an experienced commodity futures and options broker who has your interest at heart.

Have The Most Money At The Table - Ways To Do This

31) Have the most money at the table. You need to be able to make sloppy entry mistakes from time to time and still have enough reserve funds to hold on until your trade set ups work as probability suggests. This is accomplished by trading small positions relative to your account size. Figure how far the futures market must move to REALLY make you wrong and then determine how big a position to put on.

Most novices incorrectly do it the other way around. They figure, "how many contracts can I load up into my account?" Then they place a stop loss order too close, trying to limit the loss. It's like giving money away.

Scaling in and scaling out positions is another excellent way to be humble and admit you don’t have all the answers. Don’t expect to trade perfectly. To make money, we don’t need to trade perfectly - just trade better than most.

Trading Is a Probability-Numbers Game

32) The commodity futures and options market is a probability-numbers game. Don’t “expect” it to do anything but move around. Your edge either works this time or it doesn’t. There is nothing terrible about having a losing futures or options trade. It’s just the price you pay to find out if your set up (pattern or edge) is going to work this time or not.

Top and Bottom Picking Requires Lots of Evidence

33) Contrary to popular market lore, there is nothing wrong with picking tops and bottoms. It’s just that you need a lot of evidence to indicate that THIS particular top or bottom is real. The price buffer that a timely entry gives into a panic is hard to beat. Don’t expect a panic spike to turn around without a double bottom or top test first. The test (second bottom) is usually the best place to enter. If you DO buy the first spike, usually the futures market will bounce off this first spike and give you a chance to see more action without loss. If the futures market then continues against you, you can often get out near break-even.

Over time, carefully probing these kinds of panic commodity futures trades can pay off. This is a good trade to sell out half the position on the first favorable move and then hold the balance for the ride. (or dump the second half on a return to the entry point) If futures contract price action indicates this is a big bottom, you will need all the mental strength you can get to hold on as the market makes sharp corrections to shake you out.

Don’t take profits until the futures market boils and stops everyone out on the opposite side. Holding onto these kinds of trades to fruition is what separates the men from the boys. You have arrived once you master the skills needed to identify and buy a spike bottom - and then sell out at the opposite extreme at a spike with a profit. It takes many different trading skills and tremendous confidence to pull this off. Also, remember to take your share of trades with the trend - but always selling minor rallies and buying minor dips to enter.

Part Six of Seven, 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.

Article Source: http://EzineArticles.com/?expert=Thomas_Cathey
http://EzineArticles.com/?The-40-Rules-Of-Consistently-Profitable-Commodity-Futures-And-Option-Traders,-Part-5&id=458512

The 40 Rules Of Consistently Profitable Commodity Futures And Option Traders, PART 6

2007-09-14T16:56:00.001-07:00

By Thomas Cathey

We All View The Market Through Fuzzy Glasses

34) Be fully willing to change your mind. A flexible mind is a sign that your ego is under control. Stay in the now moment and let the market unfold as it may. You should be simply watching for clues to make a decision. The commodity futures contract market doesn’t “have to” do anything. Remember that everyone views the world through their very own fuzzy, distorted and colored glasses. There is a tremendous amount of information we miss. It’s like trying to watch a live football game through a soda straw. We see just a tiny bit of what’s really happening. However, we think we are seeing the whole picture – that’s where we run into trouble. The good news is your competition is in the same boat. We need to be flexible and change our minds when we must. Our input of the world is too small, biased and inaccurate to be correct most of the time.

Know Your Trading Time Frame and Eliminate the Useless Noise

35) Pay attention to the time frame that is larger than the one you are trading. If you are trading five-minute bars, be aware of the 30 or 60-minute chart. If you are trading daily bars, then watch what the weekly futures chart has done. We are looking for clues. The balancing act is to take in just enough information that is important, but not too much.

Many futures and options traders have their charts loaded with too many things; redundant moving averages, momentum indicators, multi time frames, etc. These indicators are fine as long as they each add important information and you can digest them. In reality, all you really need is a few price bar chart time frames and a few personally developed indicators you trust to convey information that you cannot see otherwise. The brain receives information in a serial manner, meaning we take in data in a single, narrow stream, one idea at a time.

We should make our futures contract trading information unique and different, not redundant. Information overload is a big problem. Everyone goes though it. There should come a time when every good commodity trader cleans house and removes the useless accumulated junk on his charts. Keep your charts Spartan lean with as few competing indicators as possible.

Each one should sing for its supper and pull its own weight. Each one needs to tell you a story that cannot be seen in the price bars alone. That’s what the computer is for. To have a 10-day, 20-day, 40-day, 100-day and 200-day moving price average is pure noise. There's much better stuff to put up there. I'm sure you get the picture.

Watch Out For Market "Scenarios"

36) Be careful when hanging your hat purely on fundamental commodity futures information. These are news events, supply and demand figures, etc. I’ve seen the biggest losses taken as a result of traders getting fixated on news. Their trading gets sloppy and a long haul stock investor mentality begins. What started out as a disciplined short term trade turns into a long haul trade, once the loss begins.

Recently, gold has been in a bull market. Traders were lining up and pyramiding as prices went higher from news of big India and China buying. Many commodity traders did quite well for a while as gold quickly moved from $500 to $750 an ounce. But then the correction came. Many were prepared for a nerve racking $30-50 slam. The gold gurus were warning of it. It corrected as expected and many bought more gold and talked about the same bullish news. Buy alas, the gold market continued down into the low $600 area. This was a devastating correction for many. In reality, this was just a normal correction when compared to many other commodity futures or stock markets.

For example, stocks often run up to 75 and correct to 62 (same percentage) as well as pork bellies, and other commodities. But because many of these traders were fixated on the news and then pyramided, they got caught badly. I heard stories of $100,000 accounts going to less than $10,000 even after the first $50 gold correction. Most were wiped out way before the full $200+ correction. Being vulnerable and inflexible is a dangerous game. Don’t swing on just one branch of a tree.

Part Seven of Seven, Coming 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.

Get FREE, the complete 44+ lesson, "Thomas Commodity Trading Course" by visiting: http://www.thomascapitalmanagement.com/commodity/welcome.htm It's brand new... a "street-wise" trading e-course. Get an edge trading futures, day trading e-mini's and selling options. Also learn how "TimeLine Trading" and rare "Ninja trades" can improve your trading results. For more helpful trading info, visit the main Thomas Capital Management trading website at: http://www.ThomasCapitalManagement.com

Article Source: http://EzineArticles.com/?expert=Thomas_Cathey
http://EzineArticles.com/?The-40-Rules-Of-Consistently-Profitable-Commodity-Futures-And-Option-Traders,-PART-6&id=458515

The 40 Rules Of Consistently Profitable Commodity Futures And Option Traders, Part 7

2007-09-14T16:54:00.000-07:00

By Thomas Cathey

Avoid Commodity Blow-Offs Like The Plague

37) Stay away from commodity futures markets that are in a blow-off stage. For example, copper recently ran up from below 70 to over 400. This was a move that is far out of the norm. Once it moved above 300, the futures contract size became huge and the margin was equally high. Daily swings that were once less than $700 were now $3,000-$4,000. The futures options were so inflated that it was near to impossible to make money buying them no matter what copper did. To write (sell) copper futures options meant tremendous risk and high margin as well. There were even a few brokerage firms that permitted liquidation only, not wanting to take on the potential risk of reckless clients.

Maybe once or twice a year some futures contract market will make a big move like this. Once "the cat is out of the bag" and volatility has soared, it is a good idea to stay clear. Over the years I’ve heard of many who have lost money in these types of futures markets and precious few who have made out. Stick to normal markets that have normal moves most of the time. Remember that survival is the key to commodity futures trading. You can always add a zero to the number of futures contracts you trade in a normal market, if you need more action…. (grin)

Broad Diversification Is For Wimps

38) Be careful about diversifying in futures contract markets. Conventional market lore says to diversify, but what they are really saying is they don’t know what they're doing. Taking a shotgun approach is a cop-out and lowers returns dramatically. It pays to focus on a few and the best commodity futures markets – ones you know well and then stick with them.

If there’s no action, then stay out until there is. After all, you are competing against futures contract traders who are specialized. Why give them an advantage by spreading yourself thin? They will eat your lunch. Rather, put all your eggs in a few baskets, know them intimately, and be ready to bail out if they don’t work out. If need be, switch over to a futures market that has already proven it is starting to trend. Trade like a Spartan who knows his game well.

Get Out The Microscope and Practice

39) Practice every day. After the commodity market closes, review the trading day to help program your mind. Go over what you should have done. Study every turning point. This will help to develop your powerful trading intuition.

We Need To Be Reminded Of Things We Already Know

40) A few more things to help you...Read over and over these forty trading rules to make them second nature to your trading philosophy. Find my entire series of commodity trading articles on the web and read them - there's going to be several hundred out there eventually. There's more good stuff on my website including the commodity trading course...all free.

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.

Article Source: http://EzineArticles.com/?expert=Thomas_Cathey
http://EzineArticles.com/?The-40-Rules-Of-Consistently-Profitable-Commodity-Futures-And-Option-Traders,-Part-7&id=458519

Commodity Trading With The B-U-C-K-S Method - Method to Identify and Enter Tops or Bottoms

2007-09-14T16:44:00.000-07:00

By Thomas Cathey

Entering a commodity futures market correctly keeps the risk of loss to a minimum when wrong. Exiting a market correctly gives you the maximum profit when right. If we can keep the times we are wrong to small losses, we have won half the battle. Here's a classic entry method that can be applied across all time frames.

A very smart and famous commodity futures trader once said you can make a living just selling double and triple tops or buying double and triple bottoms. I would agree with him. I’d like to show you a commodity trading technique that takes this idea a step further for better confirmation.

Take a look at this S&P 500 stock index futures weekly chart by going to the link at the bottom of this page.

You will see a big bear market bottom in the middle of the chart followed by a big triple bottom and then a big rally up. Most bear markets don’t end with a sudden single spike and then start going straight up. Instead, they make a series of bottoms at or near the same level. This is where the big commodity futures traders start accumulating their lines. The BUCKS method attempts to label this triple bottom and give it a structured pattern for you to use.

It’s a mistake to expect the same pattern scenario every time. Any commodity futures market will make a different style top or bottom each time to fool the majority. It’s the Elliott rule of alternation at work. The pattern alternates even though the general results are the same. I like to label this pattern with the five letters from the word, “B-U-C-K-S”. We use this acronym because this formation can often signal a high probability trade generating substantial bucks - if it works out. Many experienced commodity futures traders have their own version and name for it.

The B-U-C-K-S method can be used for any time frame. It obeys the rules of fractals, meaning it appears in big or small time frames, from one minute to weekly commodity futures charts. In fact, if we took the time scale off this chart, you could not tell if the BUCKS formation was from a one-minute or monthly bar chart.

Take a look again at the chart. The “B” label is the panic spike. Look for the panic clean-out where the last long holders throw in the towel to sell. The “U” is the first rally. It usually has some good buying but is often just a sharp short-covering rally. The “C” is the sharp decline that sometimes takes out the previous low, but quickly recovers in a wide range. A classic key reversal may occur here along with some serious quality buying. The “K” marks the first good rally that will often take out the previous “U” rally high. Then comes the “S” decline.

The “S” move is very critical to watch. The ideal futures price action is to see an anemic decline to support onto the previous highs of the “U” rally. This is a good indication that the selling has dried up and the market has finally tipped its hand for a big bull market to come. Buy into this “S” dip with confidence. Pick up your position into whatever weakness you can get. You might even average down a little. If the futures market keeps declining and takes out the lowest low from the previous B or C declines, then look to liquidate your position on a small rally back to these old lows. This should keep the loss reasonable.

However, if things work out, look for an explosive move up that will often carry the futures market a long way. Then use a cycles forecast to estimate the time frame of this bull move. If the market cooperates and produces clean swings, you can also start hedging the rallies to help hold on for the big swing. Having a flexible but structured plan like this is important to your success. You need to identify the market’s current pattern and use the right tools.

The B-U-C-K-S Method can be used with commodity futures TOPS too. Simply reverse the description above. Generally, commodity tops can be much more volatile than bottoms, so you usually need to give the market more leeway when using stops.

The overall idea here is to identify low risk opportunities and let the market come to you. Sometimes the formation will skip the "K" or "S" swings making a double bottom instead of a triple. Stay flexible and have no rigid scenarios. By making the market prove itself first through a series of tests and bottoms, you are stalking your commodity trades like a professional.

If you look back over futures chart history, you will find that to support a major move of any time frame often requires a B-U-C-K-S formation that has at LEAST as much time invested as the duration of the next move. On a weekly chart like this, a B-U-C-K-S formation can sometimes forecast a multi-year move. This method can be the foundation for any commodity futures trading campaign.

To summarize the pattern: Look for the final panic drop, the fast short covering rally, the second bottom decline test, the next rally and then the the last anemic, labored correction into a third higher bottom. The structure is never exactly the same each time, but the general concept is what's important. This method can be applied to any time frame and any type of market, commodities or stocks.

Here's the S&P 500 weekly chart used for the B-U-C-K-S reference:

http://www.thomascapitalmanagement.com/course2/27-TheThomasBUCKSMethod-883352.htm

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.

Main site: http://www.ThomasCapitalManagement.com

Article Source: http://EzineArticles.com/?expert=Thomas_Cathey
http://EzineArticles.com/?Commodity-Trading-With-The-B-U-C-K-S-Method---Method-to-Identify-and-Enter-Tops-or-Bottoms&id=588975