Trading with the Commodity Trend

There are several principles which should be part of every futures trading strategy. They are: 1)  Make commodity trades with the primary futures trend, 2) Liquidate your commodity market losers quickly, 3) Leave commodity profits accumulate, and 4) Learn to control commodity futures risk for any commodity market trade. The futures trader should make sure their commodity trading strategy includes each of the above futures trading elements in order to be a  successful commodity trader.

Trade with the commodity trend relates to the decision of how to make a commodity futures trade. It simply means always make commodity trades in the direction of the prevailing futures price direction.
Mathematical analysis of commodity price data has shown that futures price changes are primarily random with a small commodity trend component. This observation is extremely important to commodity traders wanting to pursue commodity trading in a scientific manner. It means that an attempt to trade short-term futures patterns not based on the primary commodity trend are going to fail.

Successful commodity traders use a futures analysis method that gives them a trading edge. This trading edge comes from the tendency of commodity prices to trend. In the long term you can make money trading commodities and futures only by trading in synch with the trends. Thus, when commodity prices are trending up, the commodity trader should only buy. When commodity prices are trending down, the commodity trader should only sell commodities or futures.
While trading commodities with the primary futures trend is well-known, commodity traders violate it often. Commodity traders are looking for market bargains so the trader prefers to try to buy at the bottom or sell at the top of a commodity market before a new trend becomes established. Winning futures and commodity traders have learned to wait until a commodity trend is confirmed before taking a position with the primary futures trend.

The alternative to commodity trend following is commodity market predicting. This is not a recommended method to use to determine rather or not to enter a commodity market trade. Many commodity traders have concluded that the way to be successful at futures trading is to learn how to predict where commodity markets will move to in the future. There is an abundance of people willing to sell you their latest commodity predictions.  Many commodity and futures traders want to believe that predicting market tops and bottoms is the best method to use for trading commodity markets.  Once a commodity market is trending, then the futures trader can use commodity analysis to determine a probable commodity price objective and the approximate time when the futures market will reach the probable commodity price objective.  Not until the commodity market trend is actually determined!

Trading with the futures trend is hard to do because the commodity traders logical protective loss stop will be farther away, potentially causing a larger loss if the commodity trader is wrong. This is a good example of why so few commodity and futures traders are successful. The commodity trader simply will not be patient and wait til they have actually confirmed the commodity trend.

Remember that the futures trader can define trend only in relation to a particular futures trading time frame. When you determine the trend, it must relate to the time frame you are trading the commodity market in.  If you are online commodity daytrading, you would not be using the weekly futures trend to determine the commodity market trend for the next 16 hours.  So an important part of any commodity trading plan is deciding what commodity market time frame to use for making market trend decisions.
When you trade in the direction of the trend, you are truly following the commodity markets rather than predicting the futures markets. 

 

Most unsuccessful traders spend their entire careers looking for better ways to predict the commodity markets before they have actually confirmed the commodity market trend.  Developing the discipline to measure trends using intermediate to long-term commodity time frames and trading in the direction of the commodity market trend, will provide the futures trader the very best opportunity to be a successful commodity and futures trader.