Futures trading can turn into an utter failure or a ravishing success depending on how you go about it. There are some things that a person should keep in mind before embarking upon the risky business of trading in futures:
1)Prices are set by the forces of demand and supply. Futures markets are nothing but the clearing place for this demand and supply data. Originally they were created as a way for farmers to get some price stability and hedge against fluxuations. These are people who actually had or wanted the goods. You don’t, so keep that in mind!
2)Commodities are from things like petroleum products to agricultural goods. Futures are on things like currencies. Trading in these things can be tricky since these markets can be unpredictable to those who do not live in that world. Even then, the big guys use these mainly to get some price predictability, not as short term investments – unless they see what they think is an obvious move. You won’t know those!
3)Due to the instability of these markets, it is better to have a futures trading system to deal with the risk element. In any type of investing you should have a system based on principals, history, and behavioral beliefs. Unless you are an oracle, you’ll be dangling in the wind without a system. Below I have a simple system that historically wins more than it looses.Futures trading systems can help you in earning a lot of money in the futures market and also reduce the time that you spend in investigating the market trends. Although futures trading is laden with its own risks, using a trading systems and sticking to it statistically increases your ability to make money. A futures and commodity system can ensure that you enter and exit from the market at the right time while limiting your losses. It provides you with indicators calculated using certain mathematical formulas about the flow of the market and many of them can be quite complicated. Not mine.
So what’s my suggestion? Unless you are going to make it your life, you won’t be able to keep up with the many influences on the market. So here is my simple system that I have learned.
A. Test your system by paper trading. This means you mark down a real purchase price and a real sell price. Do this for at least a month or 10 trades, whichever es first.
B. Resistance trade. Look for historic highs and lowes on commodities and look for them to break out of that pattern. Usually when a commodity breakes out, it will make what’s called a 1 2 3 pattern. Say that oil drops to $10 which is a historic low. Normally it will come back up and make a rally attempt. Usually this rally will be tested. If it breaks out of that point it will usually continue in that direction until it gets close to 50% of the change. As an example, lets say Oil started to go up and hit $12. Usually it will maybe drop a bit, and then if it broke past that $12 mark it would continue to rise until it hit about 50% of where the drop started from. That’s it! Give it a shot – ON PAPER FIRST! If it works for you, go with it!