How a Commodity Futures Trading System Works
A trading system generates instructions of trading based on predetermined set of rules. These rules are derived from mathematical models that work on past market prices, the trends, the divergence and the momentum. Before a system can be adopted, it can be tested and researched to ascertain that it can perform effectively. There are many systems in the market and not all are able to perform diligently.
For that reason, you have to test the system to see that it is able to perform optimally. You can do this by carrying out a back testing exercise. This will help determine how the system could have performed in a previous period such as 6 years ago. A commodity trading system helps specify the correct capitalization levels and these instructions are based on simulated performance, the risks as well as drawdowns.
The rules of the systems help determine the right time when an order is executed or the time when a trader enters a position. In addition, the rules also determine when is the right time to exit or close a position. The commodity trading system shows the time when the market is uncertain and not convincing enough to determine the direct in which the prices are moving. The system will thus not show any signal for entry point.
One good thing with the system trading is that it works on a predetermined plan. It participates in multiple markets and sectors. It takes minutes to analyze the markets and prepare for the next trade. In addition, a system is adequately capitalized and this means that you do not suffer from margin calls especially when the markets move downwards.
Such call margins due to insufficient account capital leads to unexpected close of a trade position. It is not because that the prices will not move upwards but because the account cannot sustain any lost past that point. When the prices eventually come up, you have already excited and lost the position.
The system eliminates the stress which you have to go through when you are making market analysis. Through advanced computer technology tools, the systems are able to gather market information pretty fast and come up with the rules to be applied. Therefore, it saves you time and the emotions you would go through if you are to trade manually.
A trading system has a planned structure for trading and does not deviate based on anything but the market actions. The system has good money management features such as capitalization, stop loss executions and entry and exit points. It also leverages the losses and gains by trading in multiple futures contracts.
Last but not least, you should remain objective but not subjective. You must stay with your system and not shift goals unexpectedly. The problem begins when you start out-guessing the market and system you are using. The reason why you use a system is because you
believe that it works. It is a system you have chosen because it has demonstrated that it can trade profitably. You should remember that losses cannot be alleviated but they can be managed in commodity trading.