Commodity options trading game

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COMMODITY OR STOCK OPTIONS INVOLVES RISK. WITHIN THIS SITE, SUPPORT AND TEXTS. The premise of properly planning a commodity trade is similar in nature to a business plan. The ability to place a stop order or limit the risk of a futures trade through options and option spreads should eliminate some of the stress and emotion involved in trading. My perception of what constitutes reasonable timing of entry, and how much money and emotion to risk on a particular trade, is likely far different than yours. Even so, the double out rule should be part of the overall trading plan. Risk management specifies when to cut losses, when and how to adjust a position, or better yet when to take profits.

For example, a short option or futures position may be hedged by a one by two ratio write if the volatility and premium allows. In other words, they are often tempted enter a market prematurely and aggressively to make up for lost ground. Successful traders remember the good trades and the bad trades, but most importantly learn from all of them. This may involve fundamental or technical analysis, or both. The key is to find an approach that will provide you with a manageable risk profile, while still leaving the potential for a profit that you will be satisfied with. Each of these distorted perceptions of reality can have an adverse effect on your commodity trading.

Only a fine balance between the two will allow the trader the probability of a reward rather than the dream of one. In the long run, I believe blindly taking all buy and sell signals triggered by such indicators would yield similar results. Creativity can be a valuable tool in futures trading. However, on the flip side; if you find yourself counting on hope rather than rational logic, you have let it go too far. Likewise, a crude oil bear might opt for a limited risk option spread such as an iron butterfly or he be willing to accept large amounts of risk and volatility by choosing to short a futures contract outright. Anything other than this puts the odds greatly in favor of your competition. There are many areas of gray involving market conditions and characteristics as well as the personality, account funding and risk tolerance of the commodity trader. Once you have done your homework in both fundamental and technical analysis, you must be able to construct a prospective commodity trade that will be profitable if you are correct and hopefully relatively painless if you are wrong. Attempts at commodity price prediction can be based on technical oscillators, psychological barometers, supply and demand, or anything else that provides clues to price direction and timing.

An option seller must be savvy enough to prevent the small percentage of losing trades from wiping out months of profit. Nonetheless, in theory she may be a little more savvy, and that could have a positive impact on performance in spite of the slightly higher commission rate. There are an unlimited number of ways to skin a cat, and trading is no different. Only you will be able to determine what works for you; discovering what that is requires patience, discipline, and an open mind. Assuming this, it seems logical to infer that a commodity trading plan should be established; nevertheless, just as rules are meant to be broken, futures trading plans should be flexible to accommodate altering environments and new events. Once you have determined your speculative tool of choice and determined your conclusion on the direction, or lack of, it is time to construct a method that will benefit if your assessments are accurate and mitigate risk if you are wrong.

This is especially true in reference to computer generated oscillators such as the MACD and Slow Stochastics. Accordingly, the primary factors playing a part in whether a trader experiences profits or losses are likely the ability to avoid panic liquidation, properly placing commodity risk management techniques in place, and exiting option trades that have gone bad before it is too late. The premium collected from the short option not only produces income, but it provides a hedge against a price reversal. It outlines several commodity option spreads and even synthetic strategies in which futures and options are combined to construct a hedged position in the futures markets. The most important feedback on your progress will be your commodity account statements. If you are interested in exploring the endless possibilities in regard to futures trading management, and method creation, please visit our futures and options trading educational video archive.

Most beginners underestimate the value of psychology. Determining an opinion on where commodity market prices could, or should, go is only half the battle. If you are a beginning trader this may be a good argument in favor of using a full service commodity broker. This may include the use of options, futures or a combination of both. There are two primary components of a commodity trading plan: price prediction and risk management. An experienced commodity broker might be able to help you in constructing an option method to be used as an alternative in risk aversion. Sometimes the line is difficult to see until it has already been crossed but its times like this that make or break a trader. Failure to do so may convert a moderate loss of money into something much more. The use of options in place of stop loss of money orders provide traders with additional lasting power because it eliminates the possibility of being stopped out of a commodity market on a temporary price spike.

Because a stop order becomes a market order once the stated price is reached, there may be slippage; in rare cases, a substantial amount of slippage. This means for every naked short option, whether it is within an option spread method or sold individually, you should strongly consider buying it back at a loss of money if its value doubles from your entry point. Despite your futures trading method, risk tolerance or trading capital, having a plan is one of the most important components of achieving success in these treacherous commodity markets. When deciding how much risk you are willing to take in the commodity markets and setting your profit objectives, you must be realistic. Accepting reckless amounts of risk may pay off for a lucky few, but for the masses the results will be dismal. Some people tend to only remember the good trades and others only remember the bad. Although it is a simple concept in theory, in practice, it is much more difficult to implement than one may think.

Imagine being short a put option in a declining market that has reached the designated double out point, but the market is approaching significant support. This is true whether you are trading derivatives, or baseball cards. This is concerned with establishing thresholds of loss of money that you are capable and willing to accept in exchange for potential rewards. In order for stop orders to be effective, they must be properly placed. In order to successfully buy something at a low price and sell it at a higher price, the trader must first be accurate in his speculation. In futures and options trading, timing is everything. Price prediction is simply the method used to signal the direction and timing of trade execution. Once the balance is broken it is hard to regain logic and can lead to large losses. Risk and Reward: Give Yourself a Chance!

For instance, experienced futures traders might choose to incorporate selling option premium against a correctly speculated futures contract as a form of risk management. Futures traders often look to manage risk of loss of money through the use of stop loss of money orders. This seems to be relatively sound advice but might, or might not, be feasible for everyone. However, the drawback of an option selling method is the reality of accepting theoretically unlimited risk in exchange for limited profit potential. In other words, I believe that good instincts and experience are more valuable than any technical indicator, or supply and demand graph, that you will run across. In the game of commodity option selling, winning far more trades than you lose is only the beginning. This too is an art and not a science. For example, a risk averse trader may not be psychologically equipped to handle such a loss of money which can not difficult lead to irrational trading behavior. The method that you choose should be based on your risk tolerance, personality and risk capital.

Think beyond the traditional practice of using stop loss of money orders to manage risk, because there are an unlimited number of possibilities. At this point, a trader should strongly consider liquidating the position and moving to the next opportunity. Once again, I believe that trading plans should not necessarily be set in stone; behaving as if they are could lead to financial peril. It is a relatively detailed outline of the structure of the futures and options speculation and the contingency plan, or plans, should the market go against the trade. Anything less will result in either too much risk, or premature liquidation of a trade that may eventually go in favor of the position. However, keep in mind that a stop order can also be used to enter a market. The only way to make profitable futures and options trades is to buy low and sell high. Here are 10 board games traders are sure to love.

When you are ready to try your hand at placing trade orders, simply register for free access to to the CME simulation platform. Traders often think that an understanding of the stock market, currencies, and commodities markets means that a trader will be an immediate success in the futures market. The simulated environment offers access to our most widely traded products across asset classes and includes equity, interest rate, agricultural, metals and energy contracts. The futures markets are very much different from other markets including the stock market and currency markets, and any other spot markets. Even the smallest of units on the futures market, the mini contract, is still significantly larger than some of the biggest positions on the NYSE stock exchange. You can focus on one product group or all of them, whatever your interest.

Day trading requires practice. Learn to trade futures like a pro by doing what the pros do: trading futures on a professional platform, but in a live simulated trading environment. Because futures markets are based on prices in the future. Not only are the futures markets different in that they are centered primarily on the future prices of goods, but the size of each position is larger.