Elements of a Successful Trading Plan--Manage Risk

The final cardinal principle of trading overlays all the rest. It is
Manage Risk. This is as crucial as the others because it is by
managing risk that you limit losses and preserve your capital.
The most important element of managing risk is keeping losses
small, which is already part of your trading plan. Never give in to
fear or hope when it comes to keeping losses small. Preventing
large individual losses is one of the easiest things a trader can do to
maximize his chance of long-term success.
Another element of risk is the market you trade. Some markets are
more volatile and more risky than others. Some markets are
comparatively tame. If you have a small account, don't trade big-
money, wild-swinging contracts like the S&P 500 stock index. Don't
be above using the smaller-sized Mid-America contracts to keep
risk in proportion to your capital. Don't feel you have to trade any

market that might make a move. Emphasize risk control over
achieving big profits.
The biggest risks to commodity traders come from surprise events
that move the markets too quickly to exit at their pre-determined
give-up point. While you can never eliminate these risks entirely,
you can guard against them by advance planning. Pay attention to
the risk of surprise events such as crop reports, freezes, floods,
currency interventions and wars. Most of the time there is some
manifestation of the potential. Don't overtrade in markets where
these kinds of events are possible.
Trade in correct proportion to your capital. Have realistic
expectations. Don't overtrade your account. One of the most
pernicious roadblocks to success is greed. Commodity trading is
attractive precisely because it is possible to make big money in a
short period of time. Paradoxically, the more you try to fulfill that
expectation, the less likely you are to achieve anything.
The pervasive hype that permeates the industry leads people to
believe that they can achieve spectacular returns if only they try
hard enough. However, risk is always commensurate with reward.
The bigger the return you pursue, the bigger the risk you must take.
Even assuming you are using a method that gives you a statistical
edge, which almost nobody is, you must still suffer through
agonizing equity drawdowns on your way to eventual success.
It is better to shoot for smaller returns to begin with until you get the
hang of staying with your system through the tough periods that
everyone encounters. Professional money managers are generally
satisfied with consistent annual returns of twenty percent. If talented
professionals should be satisfied with that, what should you be
satisfied with? Surprisingly, disciplined individuals can do better. It is
realistic for a good mechanical system diversified in the best
markets to expect annual returns in the twenty-five to fifty percent
range.
One last thing about creating a trading plan. Don't be enticed into
trading options as a less risky alternative to futures. While the dollar
risk of buying puts and calls may appear lower and more certain, the
probability of long-term success is remote.
Experienced professional traders, such as Larry Williams, agree:
"Options are a very difficult game because you have to do two
things: You have to beat the market and beat the clock. Perhaps
some sophisticated people can trade options. I've been trading

stocks and commodities successfully for over thirty years, but I don't
trade options because it's too tough."
The best way to trade options is to sell them to small speculators.
That's what options professionals do. However, selling options has
more risk and is more difficult than trading futures. Unless you are
well-capitalized and committed to a full-time career as a
professional options player, stick to futures.
Although the commodity markets appear complex from the outside,
making money trading is quite simple. You use an historically
proven plan that trades with the trend, cuts losses short and lets
profits run. You trade your system in a carefully-selected group of
markets. You start with sufficient capital and pay close attention to
managing risk. Richard Dennis made his $200 million following
precisely this kind of trading approach.