Psychological Pitfalls

Here are some additional psychological pitfalls to avoid. Be wary of
depending on others for your success. Most of the people you are
likely to trust are probably not effective traders. For instance:
brokers, gurus, advisors, friends. There are exceptions, but not
many. Depend on others only for clerical help or to support your
own decision-making process.
You may acquire trading methods or systems from others or from
books, but be sure to test them carefully yourself before trading.
Good systems that you can buy come with computer software that
allows comprehensive historical testing.
Don't blame others for your failures. This is an easy trap to fall into.
No matter what happens, you put yourself into the situation.
Therefore, you are responsible for the ultimate result. Until you
accept responsibility for everything, you will not be able to change
your incorrect behaviors.
Stay long-term oriented. Don't adjust your approach based solely on
short-term performance. Through luck, any horrible system can look
great, even for relatively long periods of time. Conversely, the best
systems have frequent losing periods. If you judge a system by

short-term performance, you are likely to reject the best systems
that exist.
Most traders have such an ego investment in their trading that they
cannot handle losses. Several losses in a row are devastating. This
causes them to evaluate trading methods and systems based on
very-short-term performance. Don't start trading a system based on
only a few trades, and don't lose confidence in one after only a few
losses. Evaluate performance based on many trades and multi-year
results.
Don't underestimate the psychological difficulty of successful
trading. Robert Rotella describes the trauma in The Elements of
Successful Trading: "Trading is one of the most stressful endeavors
imaginable. Taking losses day after day with a strategy that, just a
short while ago was working well, can be a terrible experience.
Trading performance can be consistently volatile with good and bad
times highly magnified. The market can batter your psyche and
gnaw at your soul. These bad experiences will never end as long as
you trade. The more successful you are as a trader, the more
money you will lose."
Keep trading in correct perspective and as part of a balanced life.
Trading is emotionally intensive no matter whether you are doing
well or going in the tank. It is easy to let the emotions of the moment
lead you into strategic and tactical blunders.
Don't become too elated during successful periods. One of the
biggest mistakes traders make is to increase their trading after an
especially successful period. This is the worst thing you can do
because good periods are invariably followed by awful periods. If
you increase your trading just before the awful periods, you will lose
money twice as fast as you made it.
Knowing how to increase trading in a growing account is perhaps
the most difficult problem for successful traders. Be cautious in
adding to your trading. The best times to add are after losses or
equity drawdowns.
Don't become too depressed during drawdowns. Trading is a lot like
golf. All golfers, regardless of their ability, have cycles of good play
and poor play. When a golfer is playing well, he assumes he has
found some secret in his swing and will never play poorly again.
When he is hitting the ball sideways, he despairs that he will never
come out of his slump.

Trading is much the same. When you are making money, you are
thinking about how wonderful trading is and how to expand your
trading to achieve immense wealth. When you are losing, you often
think about giving up trading completely. With a little practice, you
can control both emotional extremes. You'll probably never control
them completely, but at least don't let elation and despair cause you
to make unwarranted changes in your approach.
Other common themes of good traders are self-understanding,
balance and self-control. If you can master yourself, you can master
the futures markets.

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.

Elements of a Successful Trading Plan--Let Profits Run

The next part of the plan involves a more pleasant alternative: when
to exit a trade that is profitable. The cardinal principle involved is Let
Profits Run. In other words, stay with your profitable trades as long
as possible because the trend is likely to continue and make your
profits even larger.
Again, this is easy to understand but not so easy to do when real
money is involved. The difficulty is that although your profit may
become much larger if you stay with a trade, it may also decrease
and even disappear. Human nature is such that it values a sure
profit much more highly than the probability of a much higher profit.
Thus, traders are inclined to take their profits too soon. This can be
fatal to long-term success because big profits are necessary to
overcome the inevitable collection of small losses.
There is a good way to let profits run while still guarding against the
possibility that prices will turn around and take away much of your

accumulated profits before the trend actually reverses. It is called a
trailing stop. You include in your plan a method for moving an exit
point along some distance behind your trade. As long as the trend
keeps moving in your favor, you stay in the trade. If the market
reverses direction by the amount of your trailing stop, you exit the
trade at that point. You would also offset your trade and reverse
position if the trend reversed.
One way to set a trailing stop is to protect a certain percentage of
the accumulated profit. That will always insure that you keep some
profit on a good trade.

Elements of a Successful Trading Plan--Cut Losses Short

If you are following market trends rather than trying to anticipate
them, the next important part of the plan is how to exit trades that
don't work out. Here is where the second cardinal principle comes
in. It is Cut Losses Short.
This is another sensible-sounding concept that is much easier to
acknowledge than actually to execute when real money is on the
line. No one wants to exit a trade with a loss. They don't want to
lose money. More importantly, they don't want to admit they were
wrong. You can always think of many reasons to hold on to a losing
trade. You can hope that the market will suddenly turn around and
give you a profit instead of a loss.
This is another example where successful traders have learned to
do the hard thing. If there is one thing consistent in the stories of
how good traders turned themselves around from being bad traders,
it is their attitude about losses. Professional traders accept that
losses are part of the game. Since the markets are mostly random,
the best trading methods will always have numerous losses.
Professionals do not equate losses with being wrong.
It is precisely because correct trading methods invariably generate
many losses that it is important to keep the individual losses small in
relation to the overall size of the account. In order to keep trading,
you must preserve your capital. If you can keep trading in the
direction of the trend, the big profits will come. However, if you take
too many large losses, your capital will be wiped out before you can
enjoy the big profitable trades.
The laws of probability insure that regardless of your approach, you
will inevitably suffer some long strings of consecutive losses. If you

are risking too high a percentage of your account on each trade,
before long one of these unavoidable losing streaks will blow you
away. Keeping losses to about one percent of your account size is
optimal. With smaller accounts, the percentage will have to be
larger. Five percent on one trade is probably the highest prudent
level of risk.
Because of the randomness in commodity price action, you must
allow the market a certain amount of leeway before giving up on a
trade. In general, you must be willing to risk between $500 and
$1,000 to trade most markets. For smaller accounts, the Mid
America Exchange offers trading with smaller sized contracts that
allow you to trade with lower risk.
While there are more sophisticated ways to decide when to exit a
losing trade, getting out after a loss of a predetermined dollar
amount is as good a way as any. The important thing is to respect
your plan. You can place a stop-loss order with your broker that
instructs him in advance to exit a trade if the market hits your loss
limit. You should always do this to guard against inattention or
changing your mind at the crucial moment.

Elements of a Successful Trading Plan--Trade With The Trend

Trading with the trend is hard to do because a logical give-up exit
point will be farther away, potentially causing a larger loss if you are
wrong. This is a good example of why so few traders are successful.
They can't bring themselves to trade in a psychologically difficult
way.
You can define the concept of trend only in relation to a particular
time frame. When you determine the trend, it must be, for example,
the two-week trend or the six-month trend or the hourly trend. So an
important part of a trading plan is deciding what time frame to use
for making these decisions.
Do you want to be a long-term trader, also called a position trader?
They hold positions for weeks or months. Do you want to be a short-
term trader who holds positions only for a few days? There are even
very short-term traders called day traders. They watch the markets
during the day and always enter and exit their positions on the same
day.
While it is perhaps easier psychologically to keep the time frame
short, the best results come from longer-term trading. The longer
you hold a trade, the greater your profit can be.
Day trading has great attraction because you can start each day
fresh and sleep comfortably every night with no open positions.
However, it is the most difficult kind of trading there is. Here's how
legendary trader Larry Williams describes it: "Day trading is so
stressful. You're going to end up frying your brain. All the day
traders I talk with are losing money. Besides, it's really hard to come
up with profitable day trading systems."
For the greatest chance of success, your time frame to measure
trends should be at least four weeks. Thus, you should only enter
trades in the direction of the price trend for the last four weeks or
more. A good example of a trend-following entry rule would be to
buy whenever today's closing price is higher than the closing price

of 25 market days ago, and sell whenever today's closing price is
lower than the closing price of 25 market days ago.
When you trade in the direction of this long a trend, you are truly
following the markets rather than predicting them. Most
unsuccessful traders spend their entire careers looking for better
ways to predict the markets.

Elements of a Successful Trading Plan--Getting Started

The first element of any trading plan is the amount of capital you
intend to invest. This is up to you, but you should understand that
there is a direct relationship between the amount of capital you
commit and your probability of success. The more you invest, the
greater is the likelihood that you will make money.
What is the minimum advisable amount to start with? Most
professionals agree that it takes a minimum of $10,000. If you try to
trade with anything less, what happens to you will be luck. You won't
have the capital necessary to apply proper risk management
principles.
An important thing to keep in mind when deciding how much to
commit initially to commodity trading is that the amount you invest
must be "risk capital." Risk capital is defined as money you can
afford to lose without affecting your standard of living. It should also
be money that you feel comfortable risking. Think of your commodity
account as an investment in a business. Many businesses fail.
That's life. Make sure you won't be so afraid of losing money that it
will affect your ability to make correct trading decisions.
The next part of your trading plan involves how you will make your
actual buying and selling decisions. Under what conditions will you
enter trades? When will you exit your trades? What markets will you
trade?
There are four cardinal principles which should be part of every
trading strategy. They are: 1) Trade with the trend, 2) Cut losses
short, 3) Let profits run, and 4) Manage risk. These building blocks
are so basic and important that I have written a whole book about

them. You should make sure your strategy includes each of these
requirements for success.

Learning To Trade Correctly

One way to learn how to trade correctly is to find a successful trader
and have him or her teach you exactly how they do it. However,
even if you could find such a person and even if they would be
willing to spend the time with you, it would not necessarily make you
a successful trader. You might not have the capital necessary to
trade the way they do. You would definitely not have the years of
experience they had developing their successful approach. You
might not have the personality profile necessary to execute their
style of trading.
Another way to learn is by trial and error. This is the method of
choice for most people although they probably don't realize it. The
trouble with trial and error in futures trading is that you don't always
take a loss when you trade incorrectly and you don't always make a
profit when you trade correctly. Some of the best methods generate
losses more than half the time. You can take many losses in row
applying a very effective system. On the other hand, if you are
lucky, you can makes tons of money trading quite stupidly.
Psychologists call this random reinforcement, and it makes good
trading impossible to learn through trial and error.
The most obvious and practical way to learn how to trade correctly
is to read books. Find the best books by the most respected authors
and the best traders and learn from them. While this may work in
other areas of life, it is more problematic in commodity trading.
One of the few real secrets in commodity trading is that most of
what you read in books about how to trade does not work in the real
world. Even books by respected authors are full of trading methods
that lose money when put to the test. You may find this shocking,
but almost no commodity authors demonstrate the effectiveness of
the methods they advocate. The best you can hope for are some
well-chosen examples or a few cursory tests.
Learning to trade is a combination of being exposed to ideas plus
practical experience watching the markets on a day-to-day basis.
This is not something that can happen in only a few weeks. On the
other hand, you can become a great trader even with only average
intelligence. Professional trader and money manager Russell Sands
describes the makeup of a successful trader: "Intelligence alone
does not make a great trader. Success is equal parts of intellect,

applied psychology, practice, discipline, bankroll, self-understanding
and emotional control."
Furthermore, to be successful you don't have to invent some
complex approach that only a nuclear physicist could understand. In
fact, successful trading plans tend to be simple. They follow the
general principles of correct trading in a more or less unique way.

Separating the Winners and Losers

A very high percentage of those who try commodity trading
eventually lose money. The ratio of losers could be as high as
ninety-five percent. However, this does not necessarily mean that
your chance of failure is that high. If, before you begin, you identify
correctly the reasons most people lose, you can improve your odds
significantly.
There is a small percentage of full-time professionals and highly
skilled part-time traders who have learned how to trade correctly
and generate consistent profits year after year. It is not impossible
to determine what separates these people from the crowd.
Because trading well is not easy, you must approach the task very
seriously. This is not something to treat as a hobby. Perhaps, first
and foremost, this is what separates professionals from amateurs.
Professionals look at their trading as a business. There are
substantial profits to be made, and they will not just fall into your lap.

Another crucial difference between successful and unsuccessful
traders is that the successful ones have a plan and they follow it.
Considering the amount of money involved and the potential risks, it
is remarkable how few traders actually have any kind of plan for
their trading. They go from trade to trade applying various ideas
they have learned without any consistency and without any testing.
They make decisions based on hot tips, something they read,
today's news. They are acting from emotion rather than using a
proven methodology. While they may not want to admit it, they are
really gambling in the futures markets rather than trading
intelligently.
Trading by emotion in an unstructured way certainly adds fun and
entertainment to the enterprise. Taking positions on instinct is
exciting, especially when they work out . . . as they often do. But in
the end, this kind of trading will lose money.
Good trading is boring because you've thought out your strategy
and tactics in advance. You trade according to a carefully tested
system or method, not from what moves you emotionally that day.
Two psychological traits that separate winners from losers are
patience and discipline. It is not enough to have a carefully tested
trading plan. You must also be able to follow it religiously. This is
not as easy as you may think.
Every experienced trader knows how great the temptation is to stray
from the plan. There is always what seems to be a good reason.
The true professional can resist this temptation and stick to his plan.
He has the patience to wait for his method to signal a trade and not
take trades he may be emotionally attracted to that are outside his
plan. He has the discipline to follow his plan and take all the trades
that it signals even when there appear to be strong reasons to make
an exception.
This may sound easy, but when real money is on the line--your
money--nothing is more difficult. The kind of trading that really works
is emotionally demanding.
It is hard work to create a winning trading plan. It is hard
psychologically to follow the plan after you create it. This is why so
many people fail. Perhaps you have what it takes to be an
exception.

The Truth About the Commodity Markets

In order to be a successful trader, you must understand the true
realities of the markets. You must learn how the professionals make
money and what is possible. Most traders come into commodity
trading, lose a substantial portion of their capital and then leave
trading without ever having a correct perception of what good
trading is all about.
For many years college professors have argued that the markets
are both random and highly efficient. If this were true, it would be
impossible to gain an edge on other investors by having superior
knowledge or a superior approach.
Professional traders, who make their living trading rather than
studying the markets from afar, have always laughed at these ivory
tower theories. A good example is George Soros, who has made
billions of dollars from trading and is perhaps the greatest trader of
all time. Here is how he responds to these ivory tower academics:
"The [random walk] theory is manifestly false--I have disproved it by
consistently outperforming the averages over a period of twelve
years. Institutions may be well advised to invest in index funds
rather than making specific investment decisions, but the reason is
to be found in their substandard performance, not in the
impossibility of outperforming the averages."
Mathematicians have conclusively shown the financial markets to be
what are called non-linear, dynamic systems. Chaos theory is the
mathematics of analyzing such non-linear, dynamic systems. The
commodity markets are chaotic systems. Such systems can
produce random-looking results that are not truly random. Chaos
research has proved that the markets are not efficient, and they are
not forecastable. Commodity market price movement is highly
random with a small trend component.
Most beginning traders assume that the way to make money is to
learn how to predict where market prices are going next. As chaos
theory suggests, the truth is that the markets are not predictable
except in the most general way.

In his book, Methods of a Wall Street Master, famous trader Vic
Sperandeo, whose nickname is "Trader Vic," warns: "Many people
make the mistake of thinking that market behavior is truly
predictable. Nonsense. Trading in the markets is an odds game,
and the object is always keep the odds in your favor."
Luckily, as Trader Vic suggests, successful trading does not require
effective prediction mechanisms. Good trading involves following
trends in a time frame where you can be profitable.
The trend is your edge. If you follow trends with proper risk
management methods and good market selection, you will make
money in the long run. Good market selection refers to trading in
good trending markets generally rather than selecting a particular
situation likely to result in an immediate trend.
There are three related hurdles for traders. The first is finding a
trading method that actually has a statistical edge. Second is
following it with consistency. Third is consistently following the
method long enough for the edge to manifest itself on the bottom
line.
This statistical edge is what separates speculating from gambling. In
fact, effective trading is actually like the gambling casino rather than
the gambling customer. Professional trader Peter Brandt explains
successful trading in just this way: "A successful commodity trading
program must be based on the simple premise that no one really
knows what the markets are going to do. We can guess, but we
don't know. The best a commodity trader can hope for is an
approach which provides a slight edge. Like a gambling casino, the
trader must earn his profits by exploiting that edge over an extended
series of trades. But on any given trade, like an individual casino
bet, the edge is pretty meaningless."
Unsuccessful and frustrated commodity traders want to believe
there is an order to the markets. They think prices move in
systematic ways that are highly disguised. They hope they can
somehow acquire the "secret" to the price system that will give them
an advantage. They think successful trading will result from highly
effective methods of predicting future price direction. These deluded
souls have been falling for crackpot methods and systems since the
markets started trading.
Prolific futures trading author Jake Bernstein describes how these
desperate traders are victimized: "Futures trading is ultimately very
simple. Any attempt to make trading complex is a smokescreen. Yet

for self-serving reasons an army of greed-motivated promoters try to
make things complicated. Too many market professionals consider
it their mission in life to obfuscate. Why? Because in so doing they
give the appearance that their efforts are scholarly and important.
They create a need for more information, and then they fill it!"
Books on how to trade commodities are famous for showing a few
well-chosen examples where a described prediction method
previously worked. They never show what would have happened if
you had applied the method religiously for many years in numerous
markets. Those who have tested these methods have found that in
the long run almost all of them don't work. Be wary of any trading
method unless you see a detailed demonstration showing that it has
worked for at least five to ten years in a variety of different markets
using exactly the same rules.
The job of the person who wants to trade commodities rationally and
prudently is to ignore the promises of those promoting pie-in-the-sky
prediction mechanisms and concentrate on finding and
implementing a proven, integrated methodology that follows market
trends.

Making A Trade

Assuming the trader has consulted his price charts, applied his
trading plan's decision-making criteria and decided to make a trade,
how does this actually take place? He will have a trading account
open with a broker. Believing, for example, that the price of Silver
will be going up in the near future, he calls his broker's trading desk,
and the following conversation might occur.

"XYZ Discount Brokerage.
"This is Bruce Babcock. For account number 22656,
buy one December Silver at the market."
"Buying one December Silver at the market. Please hold."
The broker may enter the order into a computer or she may call the
exchange floor directly. In either case, the order goes to the
exchange trading floor in New York City. Once at the broker's desk
on the edge of the trading floor, a runner may take the order to the
trading pit to be filled or a clerk may transmit it to the pit by hand
signals. In the trading pit, a floor broker executes the order with his
fellow floor traders by a combination of shouting and hand signals.
The process is then reversed as the trade price is communicated
back to the customer.
"Hello. You bought one December Silver at 550."
"I would like to enter my stop order. Good 'til cancelled,
sell one December Silver at 540 stop."
“For account number 22656, selling one December Silver
at 540 stop. Good 'til cancelled."
"Thank you."
The second sell order was an instruction to the broker to
automatically offset the trade if Silver declined in price by $500. This
was a prudent step to limit the loss in case price did not go up as
the trader expected. Placing the order with the broker means that
the trader will not have to monitor the market constantly to be sure
the loss does not get too big if price goes down instead of up. The
trader is not guaranteed to limit his loss to exactly $500, but he will
usually be able offset his position fairly close to the requested price.
The trader can offset his position any time before the Silver contract
expires in December. To the extent Silver's price is more than $5.50
an ounce when he offsets, the trader will profit by $50 for each cent.
To the extent Silver's price is less than $5.50 when he offsets, the
trader will lose $50 for each cent.
To do the same trade with less dollar risk, the trader could have
instructed the broker to place the orders at the Mid America
Exchange, where the Silver futures contract is only one-fifth the size
of the regular New York contract. That would have yielded profits
and losses of $10 for each cent rather than $50.

The History of Trading

Although the first recorded instance of futures trading occurred with
rice in 17th Century Japan, there is some evidence that there may
also have been rice futures traded in China as long as 6,000 years
ago.
Futures trading is a natural outgrowth of the problems of
maintaining a year-round supply of seasonal products like
agricultural crops. In Japan, merchants stored rice in warehouses
for future use. In order to raise cash, warehouse holders sold
receipts against the stored rice. These were known as "rice tickets."
Eventually, such rice tickets became accepted as a kind of general
commercial currency. Rules came into being to standardize the
trading in rice tickets. These rules were similar to the current rules
of American futures trading.
In the United States, futures trading started in the grain markets in
the middleof the 19th Century. The Chicago Board of Trade was
established in 1848. In the 1870s and 1880s the New York Coffee,
Cotton and Produce Exchanges were born. Today there are ten
commodity exchanges in the United States. The largest are the
Chicago Board of Trade, The Chicago Mercantile Exchange, the
New York Mercantile Exchange, the New York Commodity
Exchange and the New York Coffee, Sugar and Cocoa Exchange.
Worldwide there are major futures trading exchanges in over twenty
countries including Canada, England, France, Singapore, Japan,
Australia and New Zealand. The products traded range from
agricultural staples like Corn and Wheat to Red Beans and Rubber
traded in Japan.
The biggest increase in futures trading activity occurred in the
1970s when futures on financial instruments started trading in
Chicago. Foreign currencies such as the Swiss Franc and the
Japanese Yen were first. Also popular were interest rate
instruments such as United States Treasury Bonds and T-Bills. In
the 1980s futures began trading on stock market indexes such as
the S&P 500.
The various exchanges are constantly looking for new products on
which to trade futures. Very few of the new markets they try survive
and grow into viable trading vehicles. Some examples of less than
successful markets attempted in recent years are Tiger Shrimp and
Cheddar Cheese.
Futures trading is regulated by an agency of the Department of
Agriculture called the Commodity Futures Trading Commission. It

regulates the futures exchanges, brokerage firms, money managers
and commodity advisors.

Commodity Trading As An Investment Vehicle

There are many inherent advantages of commodity futures as an investment vehicle over other investment alternatives such as savings accounts, stocks, bonds, options, real estate and collectibles.

The primary attraction, of course, is the potential for large profits in a short period of time. The reason that futures trading can be so profitable isleverage.

For instance, if you had a $10,000 futures trading account, you could trade one S&P 500 stock index futures contract. If you were going to buy the equivalent amount of common stocks, you would currently need about $350,000, thirty-five times as much.

Let's say you decided that the stock market was going to go up. You could invest $350,000 and buy individual stocks equivalent to the S&P index, or you could buy one S&P futures contract. Buying a futures contract is the same as betting that the S&P index will go up.

If you had made your move on the first trading day of September, 1996 and held your position for two weeks, your common stock position would have been worth about $20,000 more than when you bought it, a gain of about six percent. Not bad for only two weeks. If you had taken the futures route, however, you would have made the same $20,000, which would have been a 200 percent gain on the $10,000 margin required in your futures trading account.

That is an actual example of the tremendous returns you can earn in a short period of time trading futures. Of course, you can lose money just as fast if you trade in the wrong direction. Suppose you had thought the stock market was about to go down and you had sold a futures contract instead of buying one. If you had valiantly held it for two weeks, you would have lost $20,000. That's a good example of why you must exit your trades quickly if they start to move against you.

Another advantage of futures trading is much lower relative commissions. Your commission on that $20,000 futures trading

profit would have been only about $30 to $50. Commissions on individual stocks are typically as much as one percent for both buying and selling. That could have been $7,000 to buy and sell a basket of stocks worth $350,000.

While profits can be large in commodity trading, it is not easy to make consistently correct decisions about what and when to buy and sell.

Commodity speculation offers an important advantage over such illiquid vehicles as real estate and collectibles. The balance in your account is always available. If you maintain sufficient margin, you can even spend your current profit on a trade without closing out the position. With stocks, bonds and real estate, you can't spend your gains until you actually sell the investment.

As you will see, commodity trading is not particularly complicated. Unlike the stock market where there are over ten thousand potential stocks and mutual funds, there are only about forty viable futures markets to trade. Those markets cover the gamut of market sectors, however, so you can diversify throughout all important segments of the world economy.

In futures trading, it is as easy to sell (also referred to as going short) as it is to buy (also referred to as going long). By choosing correctly, you can make money whether prices go up or down. Therefore, trading a diversified portfolio of futures markets offers the opportunity to profit from any potential economic scenario. Regardless of whether we have inflation or deflation, boom or depression, hurricanes, droughts, famines or freezes, there is always the potential for profit trading commodities.

There are even tax advantages to making your money from futures trading. Regardless of the actual holding period, commodity profits are automatically taxed as sixty percent long-term capital gains and forty percent short-term capital gains. The current maximum capital gains rate is thirty-three percent, somewhat less than the maximum rate for ordinary income. To the extent that capital gains tax rates are reduced in the future, commodity traders will benefit. If a distinction is re-established so that taxes on long-term gains are lower than on short-term gains, commodity traders will benefit.

Forex Trading: Currency Exchange Tutorial

The currency trading tutorial you're about to receive here will give you a basic idea of how things works. However, you must keep in mind that this tutorial is only scratching the surface. The Forex market is complex, fast-paced and requires serious further study if you wish to trade successfully.

Now that we have that disclaimer out of the way, let's begin by looking at the fundamental unit involved in every trade: the 'currency pair'.

What are currency pairs?

Currency pairs are units of 2 currencies involved in a foreign exchange trade. For example, if you want to sell U.S. dollars to buy Euros, you would look at the exchange rate quoted for the EUR/USD currency pair. Or, if you wanted to sell Euros to buy U.S. dollars, you would look at the exchange rate quoted for the USD/EUR currency pair.

You might thinking: “Aren't they the same thing?” Well, they almost are, but you must look at the correct pair, in the correct order, based on the currency being purchased.

There are two reasons for doing this:

First, it is easier to calculate the results of your exchange in terms of how much of the base currency you can purchase with your 'quote' currency. Your base currency is the currency you intend to buy, and the quote currency is the currency you intend to sell in exchange for the base.

When quoting an exchange rate, your broker will list the base currency first in the pair, and the quote currency second.

This means that when you see a pair like EUR/USD, you are seeing the cost of 1 Euro in U.S. Dollars. An exchange rate quote of EUR/USD = 1.4436 means that 1 Euro costs $1.4436 in U.S. Dollars.

Likewise, the USD/EUR pair indicates the cost of 1 U.S. Dollar in terms of Euros. An exchange rate of USD/EUR = 0.6834 would mean that 1 U.S Dollar costs 0.6834 Euro.

The second reason for looking at the correct buy/sell ordered pair is that you'll want to know the difference between the 'bid price' (exchange rate) and the 'ask price' (what the market makers want for the currency).

The difference between bid price and ask price make up what is known as 'the spread'. Forex traders are subject to spreads when opening or closing trades in the buying position.

A Guide to Desiphering Forex Quotes

Learning to read forex quotes can be a challenge. They present different information than the standard common stock quotes with which most folks are familiar. Should you determine, after spending plenty of time building a forex trading strategy, that you are ready to enter the forex trading market, then you need to make sure that you know how to properly read the foreign exchange trading quotes.

The first part of the quote lets the forex trader know which currency is involved. The nation listed first is referred to as the base currency. This means the trader currently holds that currency and he is using it to buy the quote currency, sometimes called the trade currency. For example, a quote that reads USD/JPY means that the forex trader currently holds United States Dollars and wants to trade them for Japanese Yen. Forex quotes always begin this way, with the two currencies involved forming what's called the cross.

Quick fact : The Forex market is by far the largest financial market in the world, and includes trading between large banks,central banks, currency speculators,multinational corporations, governments, and other financial markets and institutions.

The second part of forex quotes that a person needs to pay attention to is the pricing portion of the quote. To continue the example from above, if the quote reads USD/JPY=117.57, then the trader knows that for every $1 (USD) he trades, he will get 117.57 Japanese Yen (JPY) in return. While that may seem really simple, there are a few more details of these quotes that a forex trader needs to take note of before making the trade.

Did you know that the average daily trade in the global forex markets currently exceeds US$ 2-2.5 trillion !

Following the initial line of the quote, which contains the two currencies that form the cross and the exchange rate, is another line of information. This is probably more familiar to common stock traders. Bid prices and ask prices, which make up an integral part of forex quotes, function in forex much the same way. The bid price is the price at which a trader can sell the currency or in other words, that is the price that people are willing to pay for it. The buy price is what a trader will have to pay if he wants to buy the currency. There is usually a difference between the bid and the buy numbers, but it is seldom substantial.

Making Sense of Forex Quotes and Pips

Forex quotes are always listed in pairs, these quotes reflect the exchange rates of the currencies. These pairs look like this: GBP/USD = 1.9714. The currency listed first is known as the base currency (being the base of the trade), the second is called the counter, or quote currency.

All well and good, but what do these numbers mean? The value of the pair is a ratio of one unit of the base currency to it's equivalent in the quote currency. Supposing that you expect the value of the base to rise against the quote, buy the base currency and sell the quote currency, and vice versa. As an illustration, say that the value of the Euro (EUR) is expected to rise against that of the US Dollar (USD). In this case, buying Euros and selling US Dollars at the same time is what you would normally do. This is called going long.

Further, take the Forex quote CHF/USD = 0.8944 as an example. Say that the Swiss Franc (CHF) is expected to fall as compared to the US Dollar (USD). You would sell US Dollars and buy Swiss Francs - this would be going short.

Now, in an actual Forex trading situation, the exchange quotes will be listed at two slightly differing prices, for instance: EUR/USD = 1.7420/1.7425. The left quote is the Bid price, the right is the Asking price. The difference between these is call a Bid/Ask spread, or just Spread for short. The Bid price is the price you can sell your currency for, while the Ask price is the price at which you can purchase the currency.

This spread means that if you were to buy a great deal of currency, then sell it before there had been any change in the relative values of the two currencies, you would lose money on the trade, but the dealer would make money from the trade. A Forex dealer makes their money from the Ask/Bid Spread. They are in a good position, as they stand to make money whether or not you do well with your trade.

Forex quotes are typically quoted to four decimal places - for example:

USD/EUR = 0.6793
EUR/GBP = 0.7468
GBP/CHF = 2.2041
CHF/AUD = 1.0095

The exception to this rule, at least among the major currencies, is the Japanese Yen (JPY) . If the Yen is being quoted, then the Forex quotes are just to two decimal places, as in these examples:

USD/JPY = 109.32
EUR/JPY = 160.95

This is due to the value of the Japanese Yen being only about one hundredth of the value of one U.S. dollar.

A change of 1 in the last decimal place in a quote is named a Pip. this is the smallest amount by which the relative values of two currencies will change. Normally, a Forex brokers commission (the Ask/Bid Spread) will be somewhere between 2 and 5 Pips.

A movement of 20 to 50 Pips is a typical shift in the value of a quoted pair on any given day of Forex trading. The market can sometimes experience greater volatility though, with much larger movements being seen. In November 2007, there were some bigger shifts in the relative values of the US Dollar (USD) and the UK Pound (GBP), when the change in relative value of the two currencies was as much as 200 Pips on some days.

Usually, the daily changes in the Forex market are very small - so trading with very large amounts of money is the way to go if you are to make a sizable profit.

Let's say that the Euro (EUR) is expected to rise against the U.S. Dollar (USD). Based on this, you buy 100 Euros at a quote of EUR/USD = 1.4720/1.4725. A hundred Euros would cost you $147.25. If the Euro rises fifty Pips against the dollar the quote is now EUR/USD = 1.4770/1.4775.

Currency Quote

ADVERSE CURRENCY FLUCTUATIONS

Don't run the risk of fluctuations! Currency Brokers, can, by fixing a rate for your currency requirements today for a purchase in the future (up to 6 months).

Currency Example... The Pound against the Euro... 16 months ago was ¬1.48/ £1.00; 6 months later it was ¬1.32/ £1.00. On a £100,000 transfer the difference in those 6 months is £12,000

Currency Example... Again the Pound against the Euro... in February 2008 the exchange rate was ¬1.32/ £1.00; in July 2008 it is ¬1.26/ £1.00. On a transfer of £200,000 the difference in those 6 months have been ¬8,000 (approx £6,000)

When getting a currency quote the Currency Broker can give you a quote by using a fixed rate that is valid for 6 months. Using the Euro against the pound is, and has been a good example of two currencies on the move with fluctuations daily

Trading Currencies and Buying Property Abroad are the two major reasons for changing currency. A close third is when regular payments are made to a different country and subsequent different currency. However a casual approach which is taken by many when buying property abroad can be the single most expensive part of buying abroad.

Getting a 'Currency Quote' when buying property abroad is obviously an important process, but more importantly is getting at least two quotes, possibly three. At the end of the day it is a competitive market and we should compare quotes.

To conclude; where I started about currency fluctuations... When buying property abroad, remember this process... When you first have an offer accepted it is wise to get a currency quote and ask about getting a fixed rate quote which will be valid for 6 months. Plus get the advice of the currency broker as they deal within currencies 24/7. Many experts have suggested the Euro has hit its peak against the Pound and perhaps over the next 6 months the pound may gain some ground lost over the last year.

Forex Robots - 6 X Facts That Cause Most to Lose Equity

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If you want to buy a forex robot, you should consider the facts enclosed because if you understand them you can avoid the losing majority of automated forex trading software and find the small minority that win...

Here are your forex robot facts - make sure you understand all of them before buying one.

Fact 1: Most Do Not Have Real Track Records

They claim to have made money but a quick look at the disclaimer shows they are simply paper simulations going backwards and you see the words in hindsight and simulated in the disclaimer. See this and pass it by, it probably won't make you any money for the next reason.

Fact 2: Most Robots are Curve Fitted

This means when the simulation is done, the rules are simply bent until they fit the data segment being tested shows a profit and this is pointless. Why?

Because the same price history will never repeat itself again exactly as before and you cant bend the rules going forward!

Fact 3: You Can't Win on 100 investment

The fact that anyone says you can is relying on you being very, very lucky, or knows nothing about forex trading.

The minimum you should consider is a $1,000 and preferably $3,000, to ride out any drawdown periods.

Fact 4: Any Trading System will have Long Losing Periods

Forget the statement you can make a regular income - you can't.

Even the best traders have losing periods that can last for many weeks or months. This doesn't mean you can't win long term you can but beware, you will face long periods of losses.

Fact 5: Most Vendors are NOT Successful forex traders

If they were, they wouldn't be selling you a forex robot for $100 and claiming it makes $100,000, they would be to busy making money to bother you.

Ever wonder why everyone in the world isn't trading?

Well the answer is - only the naïve or greedy trader buys a forex robot thinking he can get rich for $100.00 or so.

Fact 6: The Minority that Win

Have real track records and cost a few thousand dollars but they are a great investment and can make the investment in them back many times over but be aware, even the best ones have periods of losses ( normally 20 - 50%) and these can last for weeks, so you need discipline to trade them.

You can win with a forex robot but it's a fact that most sold will simply destroy your equity and do it quickly. So cut through the hype, be realistic and go for one which has at least been proven in the real world of trading and is not just made up in hindsight!

Forex Trading Software - Use The Best For Successful Trades by JON ARNOLD

You have heard about the vast sums of money that can be made with smart forex trades, but what forex trading software is best and gives you the greatest advantage? If you have been searching for some forex trading software for any amount of time, you probably already realize that there are many of them out there, and it seems like the claims of one are only superseded by the claims of the next one.

To determine which one is best, you first need to get some understanding of what the forex market is, since any software that devotes its time to teaching you what forex actually is will probably have lesser capabilities in other areas, like doing a very thorough analysis of the vast amounts of data that needs to be considered when making a trade decision.

Forex is also known as foreign exchange or foreign currency exchange. This is the task of exchanging one country's currency for another country's currency and then re-selling it again, perhaps in the same country or another country to make a profit based on the constantly changing currency exchange rates. The total forex market is probably the largest market on the planet, doing more than $3.8 trillion (USD) a day when considering it from a worldwide perspective.

It is difficult to determine which forex trading software is best so one of the first things you need to do is determine what you need the software to do for you. And in order to do that, you need to gain some understanding of the forex market so that you can determine which aspects of forex trading can be done by software, and which parts really should be left to you for the final trading decisions.

One of the problems of just going to a search engine like Google and entering search times for the software package and the word "review" is that those can be toyed with. The author of a software package might have a dozen blogs or web pages setup that provide a favorable review of his software, but they were all created by him, so the person looking for a review of that forex trading software would find a high number of favorable reviews.

Look for what kind of support the software offers. Do they have a phone number to call? Probably not, since forex trading happens 24x7 worldwide, and having a support center open 24x7 is an expensive proposition. Do they have an online forum where members can post questions and get answers from either the author or other members? Can you email questions and get answers in a reasonable amount of time? There are very few things worse than owning a piece of software and being stuck with something you don't know how to do, knowing that while you are spinning your wheels, successful forex trades are going on all around you.

Look for a money back guarantee. If the author is willing to back up his clams with this kind of guarantee, then you should feel a lot better about giving that forex trading software a try and putting it through its paces. One of the best forex trading software programs is shown at our web site.

Developing A Successful Forex Market Strategy

Forex is probably the largest market on the planet and it is always changing, worldwide, 24x7. This aspect is one of the things that makes forex so exciting. With that kind of activity, it is not always accurately predictable, but you need to understand the market so that you can jump on profitable trades and minimize your losses in losing trades, which is all based on the strategy that you utilize.

Nobody in their right mind would just jump into the forex market blindly. That would be even worse than attempting to pilot a 747 jet if you have never had flying lessons. Jumping in without a good understanding of the forex market is reckless at best, and you would save yourself a lot of time by simply lighting a match under your money. the ins and outs of forex currency trading, and the various factors that go into making an informed and intelligent trade decision.



You must understand that forex trading is a gamble, and like the advice offered to those who enter a typical Vegas hotel, never play with money you cannot afford to lose. There are no guarantees in the forex market, which means that you need to utilize all the tools at your disposal to ensure you have considered all factors that will impact a currency's value, both now and in the future. The forex strategy that you use needs to allow for the possibility that you will make losing trades. Every forex trader on the planet makes an occasional losing trade, this is part and parcel of this market, but your strategy needs to protect your assets in that way to minimize your losses and maximize your wins.


Many forex traders simply follow other forex traders. While this could be a strategy, can you see how and why it is not a good one? Other traders are not likely to share with you what they intend to do until after they have done it, and with the rapidly changing market, it is unlikely you could get in at the same forex rate that they did, which will minimize your income. The much bigger money is in doing the analysis and making your own trades, not by following others who have no incentive to tell you what they are going to do anyway.

Take the time to learn the forex market, since the financial rewards are huge, but make sure you also protect yourself by allowing for a potential loss. For more insights and additional information about a Forex Market Strategy as well as reviewing one of the best forex software systems available anywhere, please visit our web site at http://www.forexcurrencysystems.com


One component of any good forex trading strategy is to avoid putting all of your investments in one currency. Do you remember the old saying about not putting all your eggs in one basket? This is the same thing and there is a lot of wisdom there. If you spread out your investment amongst many different currencies, it is far less likely that your investment would be wiped out in a single unsuccessful transaction.

There are many moving parts involved with successful forex trading, as well as a virtual mountain of data that needs to be analyzed, interpreted, and forecast as to how that will affect a particular currency that you may want to trade. The most successful traders use a forex trading software package that can help them do the required analysis. Such software would do the lower level work of doing the intensive and gut-wrenching analysis. Based on the number of elements that should be considered that can affect a currency's value, trying to do work manually yourself is going to almost definitely be a losing proposition.

Forex Trading Advice -

If you want forex trading advice and want to win at forex trading, you can get all the advice you need to build a forex trading strategy for big profits for free and here we will show you how to find it...

Most of the so called experts online are anything but and in most cases there not even traders. They sell dubious forex robots and sure fire predictive systems with paper simulations and look for naïve or greedy traders to buy them and plenty of traders do.

In forex trading you need to learn and understand what you do, so you can trade with confidence and you can do that for free.

Before we look at good advice, let's look at avoiding the bad and here are some prime examples.

Forex trading forums

If you want to find a bunch of losers, there are plenty in forex forums.

The guys here who spout forex advice, are normally traders who can't make money, so it makes them feel better to give you their wisdom or vendors, looking for people to buy their product.

I don't know any successful traders who hang around forums, so avoid them.

Broker Advice

Lots of brokers give research and advice but if brokers were good traders they wouldn't be brokers! Most are market makers and make money when you lose, so it is a conflict of interest too.

Forex News

CNBC, CNN etc great reporting but it won't help you trade and all the experts you see tell good stories but that's all they are stories and normally news reflects the herd and keep in mind, the herd losses.

Never trade news or expert opinion from it. If it were that easy to make money a lot more people would be successful!

Good Advice and Where to Find it

Let's stress some basics First.

The best way to win at forex trading is to use forex charts and technical analysis and lock into forex trends. There is free information online that gives you everything you need to know about technical analysis and lots of free chart services as well.

These are the keywords you should really understand and study

Support and Resistance.

You need to of course know everything about this.

Breakout Methodology

If there is one method you should start with is trading breakouts so look them up.

It's a fact that if you trade breakouts, you will be in on every major move as most big trends start from new market highs or lows.

Momentum Oscillators

If you want to trade breakouts you need to confirm them and a through understanding of momentum indicators is needed, as they can confirm the move.

If you look up the above you will have the basics of a simple system you can use to trade breakouts and have a sound simple forex trading strategy.

The Key to Trading Success

You should then look up and study everything you can on money management, volatility and standard deviation and the important trait of trading discipline.

You can get it all for free you can get the knowledge and confidence you need to trade your system.

Does that sound too simple?

Well forex trading is based around a simple strategy, you understand and can have confidence in and can execute with discipline.