Designing Commodity Futures Trading System

A commodity futures trading system is an essential element for every trader. Without a proper trading system planned, designed and constructed, a commodity futures trader is merely shooting in the dark. He doesn’t know when he should get out of a trade, he doesn’t have a profit objective and most importantly, he doesn’t have a stop loss. While traders may still get away with minimal losses in the stock market, they cannot afford to trade in such way when it comes to the commodity futures market. As each trade is leveraged, traders stand to lose a great portion of their capital within a short span of time especially when they fail to cut losses.

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Trend Following System

The first step in designing a system is to identify the type of system to be used. The most common commodity futures system is a trend following system which visually displays the current trend of the market. One of the more common trend following systems utilizes the Moving Average indicator which is a tabulation of the average price of a commodity futures counter over a period of time. Moving average of several timeframes are drawn on the same chart, and crossovers between long term and short term moving averages are considered as entry or exit points for trading.

Breakout System

Another way a system can be designed is to use breakout systems. These are particularly useful for sideways markets where prices are fluctuating between support and resistance levels. The peaks and troughs of prices are usually used to chart these support and resistance lines. Whenever a price breaks out of a support level, it is likely to breakout into a downtrend. Conversely, whenever a price breaks out of a resistance level, it is likely to breakout into an uptrend. Other than using peak and troughs, Bollinger Bands are also often used as breakout indicators. With this indicator, breakouts are indicated when the price line cuts the upper or lower line of the Bollinger bands.

There are many other indicators that can be used to design your trading system, and it’s easy to research on them through books or via a mentor. However, each trading system has its own advantages and disadvantages, which is why traders need to test them out first before putting them into action. Some systems may be prone to whipsaws in the market, while other indicators may trigger entry and exit points a little too late. Thus, a commodity trader who designs his system may need to make adjustments to overcome these shortcomings.

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Once a commodity futures trading system has been designed, charting software can then be used to construct your system. These applications allow users to enter formulas, develop constraints and specify timeframes for analysis. Price data is used as input for tabulation, and indicators can be drawn on top of price charts to provide a visual output to the commodity futures trader. In order to acquire updated daily data streams, the trader would often need to subscribe to data providers. 

With the trading system in place, it is then entirely up to the trader to make decisions based on what he sees on his charts. Of course, it is always good to back test a system and paper trade for a period of time before putting the system into actual use. This is when the commodity trader can see his system work in real life and start making money from trading.

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