By Lamon Rutten

The Mindset for A Successful Futures Trader

Not everyone can be a successful commodity futures trader – or investor, or speculator, whatever you call it. But no one can be a successful commodity futures gambler. A lucky gambler, perhaps, but if you play the futures market like you would play the casino, the odds are against you.

So, what’s needed to be successful? There are a couple of general conditions. You need to be intelligent and willing to learn. You need to have a decent access to market information (normally, the trading app that your broker gives you will give you such access), and know how to use it. You need to have a broker who charges fees in a way that is optimal for your trading strategy – if you plan to trade with high frequency, you should consider becoming an exchange trading member, and just use a broker to clear your trades. But perhaps the most critical difference between a gambler and a trader is that the trader uses a system, and does so in a disciplined manner. A good trader does not hope to be lucky, and a good trader does not let himself drive by emotions.

How to Deal with Losses and Manage Portfolio as A Futures Trader

One self-discipline that all traders have to learn is to cut their losses and let their profits run. A good trader knows that he cannot build a trading strategy on the assumption that he knows better than the market where the market is going…  The prices shown on a futures market show the balance of opinions of many thousands of market players, and it would be pure hubris to believe one can systematically know better. In fact, successful traders have been shown to more often wrong than right – but they know how to really profit when they are right! 

A trading system, then, cannot be the trader simply trying to predict which way prices will move. Any good trading system, in fact, will have two main components: a signal that will lead to the trader opening or closing a position; and a portfolio management strategy.

There are many possible signals that traders can rely on, from technical indicators such as market momentum versus price movement, to fundamental indicators such as news on tensions in a critical market for the commodity that the trader has chosen to trade in. It is important that when the trader enters into the trade, he already knows what will make him exit the trade again. “Wait and see” is not a good trading method… 

Portfolio management has to do with how the trader wants to allocate his capital, and what risks he is willing to take in return for what rewards (Value at Risk is a valuable tool to improve capital allocation). How much leverage does he want to take in individual trades? High leverage means that less capital is allocated to the trade, so it may look cheaper; but at the same time, risk is higher: the trader has less staying power and may be forced out of his position involuntarily. How much of his capital does he want to be exposed in any single trade, in any single market? Traders will normally accumulate many small losses and then make a number of big gains – so they cannot risk too much of their capital in just a few trades as, if they lose, they may not be able to get back into the market again.

While trading systems have at least these two elements of “trigger signals” and “portfolio management” in common, they widely vary in the way these elements are applied. Does the trader wants to trade a few hours every day, or does he want to take a position from time to time and leave it open for longer periods? Does he want to trade entirely manually, or entirely through an automated trading algorithm (nowadays, these can be easily tailored from systems provided by many suppliers), or combining the two? Does he want to focus on outright prices, or on price differentials (arbitrage)? Does he want to focus on one or a few markets (often necessary if one decides to rely on fundamental analysis), or to trade on any market in which there is some action (easy if one uses technical analysis tools). To be successful, a futures trader has to match the scope of his trading with the time he has available, with his level of familiarity with mathematics and analytical tools, and with his personality – short-term, highly leveraged trading is highly enervating and not suitable to those without strong nerves.

An Easier Trick for A Successful Futures Trader

Sounds like a lot of work? It is. But if you do not have the time or energy to put in such an effort, no worry, you can still become a trader rather than a gambler in commodity futures market by adopting a “social trading” strategy. “Social trading” involves participation in an active discussion board where all participants can learn from each other, see what others are doing, and keep each other informed about what is happening in the market; ultimately, it can enable traders to adopt copy and mirror trading strategies. At the very least, social trading speeds up the learning curve for novice traders. But through mirror trading, it also makes it easier to build better diversified investment portfolio. In mirror trading, offered by many trading platforms, a trader can select another trader to follow, for part of their portfolio. For example, “invest 50% of my portfolio exactly like Trader XYZ”. The system will automatically execute the trades, there is no need for any human intervention. If one finds the right expert trader to follow, this is a cheap alternative to the expensive wealth management services traditionally available to rich investors.