There are
a number of reasons why successfully
trading commodity futures is achievable but not easy!
Unfortunately, the
vast majority of traders lose money ... there are many
reasons for this. That is the Bad News. However, the
Good News is once you manage to get in the small Winner's
Circle you too may achieve profitable trading. Then
you may reap the rewards with the money lost by the
many losing traders flowing to you and richly rewarding
you for being a winning trader!
Read the many reasons so many commodity
futures, stock market traders and options traders lose
money (so you can avoid these problems), starting right
under our related trader's website links list below:
This Free Special Report was originally written by
the Editor of CTCN some years ago. These typical and
common commodity futures, stock market, stock indices
and options trading problems are just as evident (perhaps
even more so now) as they were in the early 1990's when
this Special Report was first written. The main difference
after almost a decade is the fact the prices used as
examples may be different. Actually, the price levels
themselves make no real difference.
Also, we originally used Daily Bars
for time-frame examples, as applied to daily bar charts.
Since then daytrading is much more popular with commodity
futures, stock market and options traders.
Therefore, we have changed the word
"Days" to the term "Bars," as in
bar-charts. The Time Frames can by identified as
inter-day (daily) bars or even long term basis weekly
charts, or intra-day tick-bars, like 1-minute, 5-minute,
15-minute, 30-minute, 60-minute bars (bar-charts), etc.
It really makes little, if any difference, as the concepts
and theories are basically the same.
"The Truth
About Trading and Trading Systems"
Special Report
One reason for losing in the markets
is the commodities, futures, stocks or options trader
is not really sure which time-frame or trend he is trading,
or he is not matching his target objective price level
to the time frames' expected movement. Perhaps the trader
wants to capture a move which he expects to take about
4-bars (or 4-days).
However, the volatility increases
so the 4-bar (day) trend is actually over in 2 bars
and he does not realize it and stays with the trade
2-bars too long. Thus, he gives up all or most of his
profit, because he expected the move to last longer.
The opposite can occur ... this happens
when the volatility is low and after just 4 bars he
gets tired of waiting for the expected move and exits
the trade early, perhaps at a loss or small profit.
Suddenly, over the next 2 bars the trend and move he
anticipated happens; too late, as he is already out
of the trade.
Of course, the 4-bar example above
also occurs with traders expecting 2-bar moves which
may occur in 1-bar or vice versa. Also, 6-bar moves
which end-up occurring over perhaps 8 or 9 bars or vice
versa, etc., and various intra-day time periods.
Another common occurrence, is the
trader not using a specific stop-loss order. Thus, a
small loss ends up as a big loss. For example, a trader
believes a stop (loss) of $400 is reasonable, based
on either technical analysis or on money-management
rules. However, perhaps due to discipline problems the
trader has, it's not actually used.
Once out $400, he relies on HOPE
the market will go back in his direction, and he fails
to execute the planned exit point. Frequently, the market
fails to move back in a profitable position and the
trader is finally forced out of market with perhaps
a huge $2,000 loss, instead of the maximum $400 loss
anticipated.
Note: More often than not, it seems
once the trader who over-stayed the position finally
decides to get out, the market frequently reverses the
exact day (or next day) he got out! That seems to be
an uncanny and almost unwritten law!
The stop-loss order is used, but
the stop is not sufficiently precise. More frequently
than you can imagine, the stop is hit by just a very
small margin. For example, the market may be at 54.60
and a long position stop is placed to sell at 52.50.
The market goes down to 52.47 and then reverses back
to beyond 54.60 very quickly after stop was barely hit.
Sometimes the stop price of 52.50
may end up being the EXACT low price for that swing
. . . very frustrating and upsetting when this occurs!
For A Special Report on CTCN's Unique Method for calculating
amazingly accurate stop-loss prices Special Report 2
Click-Here
Why does this happen so often? Because
many times the stop-loss price level happens to be a
support area based on a trend line, gann angle, old
bottom or old top formation, Fibonacci numbers, a chart
price gap, or just simply an obvious natural stop-loss
area, such as a whole or even number.
Thus many other traders
use the same logic to place stops at or near the same
level. The market gets drawn to that area because that's
where orders are sitting that the market (and Floor
Traders) wants to get filled. Because of those orders
resting in that obvious place, the market price actually
moves to that area, almost like magic or magnetic attraction.
Failure to place a stop-loss order
with your broker (unless you are always closely following
the market using real-time intra-day data, when you
are in an open trade) will result in the great likelihood
of you losing all or most of your money (eventually)
due to one or a couple huge losses caused by the price
continuing to drop after going thru your stop-loss price.
Sooner or later (probably sooner) it's almost certain
to happen, if you don't use and place stop-loss orders
to you.
There is an exception for day-traders
who are using real-time quotes and watching their real-time
quotes and price charts continuously. Sometimes a daytrader
may achieve better trading success by using so called
mental stops vs. actually placing the stop-loss orders
with his broker.
Another reason for failure, is you
may be right on a trade, but don't know when to exit
the position and take your profits. More often than
you would believe, a trader has excellent profits, but
ends up giving back all or most of the open equity profits
because of not knowing when to get out!
For example, a trader is long at
62.40 and the price moves to 63.90 for a huge open equity
profit of say $1,800. He has held the position for a
few bars, but after looking at the chart and the powerful
up-move, he decides the market should easily go to 64.40
within the next day or two. That way his profit will
be $2,500, much more than the current profits of $1,800.
Perhaps the next day the market goes
to 64.30 (just slightly under his objective) but ends
up closing "weak" because it's "over-bought," and closes
for the day at 63.92. The trader is mad about giving
up some open profits so hopes it goes back to at least
64.30 again the next day. Unfortunately, some bad news
comes out overnight and the market "gaps" down on the
next opening and opens at much lower at 63.00.
The trader still hopes for an intra-day
rally to get back some of his lost open profits, instead
it goes lower all day and the trader finally gives up
hope and gets out at a break-even price of 62.40. Because
the market was "over-sold," over the next couple bars
it eventually recovers back up to the anticipated 64.40
price, but the trader is now out of the market with
no profit! This type of scenario is all too common an
occurrence. To varying degrees, this happens more often
than you would believe!
One solution to this problem is for
the trader to take small profits or not use specific
targets and place very tight trailing stops just under
the market. This is poor practice because you will end
up getting stopped out with very small profits most
of the time. That will result in your average winning
trade being quite small compared to your average losing
trade, resulting in poor results.
The best alternative is to use targets
scientifically based on the market's volatility. Unfortunately,
not many trading systems do that. Ideally, a system
should have each and every trade uses a specific and
dynamic target price based on the market's actual recent
volatility. With a dynamic approach based on volatility
and past bar size, the market itself will reveal how
far a move should progress, based on actual movement
and recent volatility.
Still another reason many traders
lose, is because they are using a methodology or trading
system which is NOT in actuality fully mechanical, but
its trading track-record does not reveal it's not mechanical.
For example, a system's advertisement
may claim 60%, 70%, 80%, or perhaps even 90% winning
trades. However, these promotional claims are usually
based on 20-20 hindsight and subjectivity, and not on
real-time actual trades. Perhaps the system says buy/sell
when there is divergence between the price and a Stochastics
or RSI Study. That divergence is very difficult to recognize
in real-time trading, but easy to see with 20-20 hindsight
looking at an old chart.
Another popular but subjective approach
is to watch for turning points at certain times, also
known as time-windows. This approach may say to enter
or liquidate the trade after an obvious pivot-low or
pivot-high occurs, and providing it's during the projected
time-window. It's mostly subjective and easy to do by
looking at the past, but hard to do in actual real trading.
However, some system developers have in fact used hindsight
or subjectivity to arrive at their ridiculous percentage
of winning trade claims.
Another popular and no doubt over-rated
method are Elliott-Wave approaches. Elliott-Wave
methods are popular, because there are obviously waves
in the markets and the idea of using market-waves to
predict market turning-points and also riding these
waves, is naturally very appealing to traders.
What I am about to say may upset
some proponents of Elliott Waves, but the plain truth
is Elliott-Waves used by themselves are allegedly of
little value in actual trading.
If you want evidence to back-up that
statement of their questionable value, just do the following:
Show the SAME identical chart to 5 traders (make it
a mystery chart - rather than a widely published chart
the trader may recall).
Next, ask the 5 traders to specifically
define the number of waves they see on the chart. You
you will likely end up with 5 different (frequently
widely diverse) wave-counts. The chances of even 2 of
the traders seeing the same exact elliott-wave-counts
are extremely unlikely.
Why is this so? There are in fact
"waves" in the markets. However, defining what constitutes
a "wave" is near impossible, because a wave is largely
a matter of visual interpretation and judgment and is
highly subjective. It's difficult for a mostly subjective
technical analysis method like Elliott-Wave Counts to
be used successfully in trading?
Is there a way to overcome these
basically of little, if any value subjective approaches?
Yes! Use a Trading System, which
does not rely exclusively on Elliott Waves and other
subjective approaches. However, using Elliott Waves
as part of a trading plan in conjunction with another
time-tested methodology may work for you.
Still another reason traders lose,
many follow Time Cycles. Cycles do in fact exist in
the markets. For example, Live Cattle may have a reliable
long term cycle of 9 to 11-months, low to low. The Stock
Market, Wheat or T-Bonds may have a short-term cycle
averaging 28 to 30-bars, low-to-low.
The problem is sometimes the cycles
may come early or late, or skip a beat entirely. For
example, you buy on day number 30 at a price of say
3100, thinking the low is now at hand because the average
is 28 to 30-bars and the market closed near its high
on Bar (Day) 30.
However, because of either fundamental
or technical reasons the market's cycle this time will
run 35-bars (a common occurrence). During those 5 extra
bars, the market goes down sharply to 2900 and below
your stop-loss point forcing you out of the trade at
a large $1,000.00 loss. Shortly thereafter, the cycle
bottoms and the expected move occurs . . . but too late
for you because you are out of the market by then!
Alternatively, you buy on day number
30, but you did not realize the low ALREADY happened
(4-bars earlier) and at a lower price. You actually
ended up buying (without knowing it) 4-bars into the
NEW cycle, and at a higher price. Because of it, the
market goes up only slightly higher for just 1-bar and
then drops sharply because a 12-bar cycle (you perhaps
were not aware of or not tracking) is now coming into
play, and effecting the 30-bar cycle you are trading.
The 12-bar cycle makes the 30-bar one drop down and
form a double bottom pattern.
This forces you out of the market
because of the sudden loss, your stop-loss being hit,
or lack of discipline, etc. If your thinking why not
trade the 12-bar cycle, forget it, because there's likely
a 6-bar cycle effecting the 12-bar cycle, and a 3-bar
cycle effecting the 6-bar, etc. Note: Many traders are
not aware of the fact there are usually one-half (50%)
time-cycles within every cycle.
Still another all too common happening
is the cycle "skips a beat" and simply disappears for
one repetition. The next cyclic repetition works perfectly,
but by then you are out of the market with a loss and
disgusted and not even following the now working well
cycle!
Is there a way to solve these problems
with cycles? Yes, don't use cycles at all, or perhaps
use them in conjunction with other sound trading methods
or technical analysis.
Still another reason many traders
lose, they follow SEASONAL TENDENCIES or subscribe to
Seasonal Newsletters, or use seasonally based Trading
Systems. There is no question seasonals exist in the
markets. This is particularly true in Agricultural where
seasonals are very well documented. Seasonals also appear
in financial's, but not as reliable as agricultural.
Seasonals work mostly because of fundamental reasons,
frequently tied to the growing season or the weather.
However, it's real difficult to make
money using seasonal data, regardless of the history
of the seasonal tendency. This is because like market
time-cycles, sometimes seasonals can be early or late,
or worse yet not work at all, also known as a "contra-seasonal
move."
A perfect example of a contra-seasonal
move, are major bear markets in the grains occurring
several times during the 1990's. According to extensive
and well-documented research going back to the 1800's,
the grains should move up during late Spring and early
Summer. However, at certain times in the 1990's they
trended sharply down, when they should have been trending
steadily higher according to the seasonals.
Unfortunately, the seasonal experts
will be mad about this, but probably the best way to
deal with seasonals are to ignore them, especially in
markets other than Agricultural markets. Note: Occasionally
Seasonal characteristics may be used successfully as
a way to enhance or compliment other methodologies.
There is no doubt the commercials can tell if the seasonals
are early, late or contra-seasonal, but they keep that
information to themselves!
Another major problem is you or your
system can trade good, but selects the wrong market
to trade!
A very common happening. If the market
is either far too volatile, or on the opposite extreme
too dull or flat and sideways, the best system in the
world will have lots of difficulty.
Commonly a system or trader gets
"married" to a particular market or market group. For
example, perhaps the system is advertised to trade only
Coffee or S&P, etc. The trading system may do well
if that particular market is acting good or trending
well or steadily. However, once that market gets either
too choppy or flat, that system, no matter how valid
the algorithm will very likely lose money or not make
money.
What can be done about that problem?
Figure out a way to trade only good trending markets.
Use software which has a built-in Portfolio Manager
and Automatic Trend Ranking Module which selects based
on proven scientific methodology, the best markets to
trade.
One requirement to do that effectively is to have
a trading system
which uses the same methodology (patterns) to trade
all markets. Still another requirement is the system
should be able to select from widely diverse markets.
By tracking a number of diverse markets, you can expect
about one-quarter to one-third to be trending well.
After reading this Special Report "The Truth About
Trading and Trading Systems" Special Report, you may
visit the following trading and investment related
links for more specific trading and investing knowledge
covering all aspects of commodity futures, stocks,
options trading and financial issues for all traders
& investors.
We are in the process of adding additional websites
to this list, including links covering financial planning,
public stock offerings, financial accounting, corporate
communications, emerging markets, bonds and savings,
estate planning, insurance and other financial subjects
to help you with free financial knowledge.
|
