Before you ever consider stepping into real markets with your real jingle, youd better know exactly what you want to do in there.
I am talking about having a solid strategy here. But, there are almost as many market startegies for playing the commodity martkets as there are speculators, and thats not an over-statement.
So it is best to adopt your own style, one you feel comfortable with when you trade. Many traders attempt to take the best from a variety of trading techniques and use them together. Others follow the advice of professional market-letter writers. Still others – those who follow the contrary opinion approach – go counter to the prevailing majority opinion as expressed by the leading market letters.
You may want to base your trading decisions solely upon technical analysis. Or you may want to take the fundamental approach or wed these funnymentals with technical analysis. Whatever.
Regardless of which approach you use, you will want to use a trading plan – one that you develop yourself and with which you feel comfortable.
I am not about to attempt to name all the factors you should take into account when developing your own trading plan. That would be far too lengthy and chances are, I sure would miss a lot of aspects anyway, those which are vitally important for some and at the same time dont mean a damn thing for others.
But one thing which is (or should be I should say) universal for all of us, is this; never ever enter into a commodity trade unless the profit potential is several times the possible risk. Stop losses will help you limit risk for one. A knowledge of trend lines, support and resistance zones, chart patterns, and general price behavior can also provide valuable clues pointing to strong and weak areas within a market.
As a rule, risk is proportionate to potential gain. You will often have to take sizable risks to make even more sizeable profits. I am trying to teach all my students not to even think of shooting for the (real) trades where the risk vs reward is only 1:2 or poorer. To keep the risk/reward ratio in balance, it is necessary to understand what you are trying to accomplish when you enter a trade.
A day trader, for instance, who may make six or seven round-turns within a single trading session has significantly different goals from the position trader, who may stay on board with his open position for six or seven months. The point is to know what kind of profits you are looking for WHEN ENTERING the trade.
Of course, you will never know EXACTLY what to expect. Often, the market itself will let you know when it gets into its kinky mood, and if that will be the case, you will have to do the only sensible thing and liquidate your position when this occurs. In other markets you will realize you did the wrong thing right at the start and that you will have to take quick, appropriate action.
Profit objectives are important because they give you a realistic goal to shoot for.
If the objectives are not reached, you should have a contingency plan to exit the market.
If, on the other hand, the goals are reached, you should use trailing stops or some other method to get out of the market with your profits intact.
Just some innocent food for thoughts.
Tom