Commodity Selection

"Selecting a few commodities
to spread your risk is enough."

Provided they are suitable, the more commodities on your trading list the better, as this enables you to engage in a more varied assortment of trades and automatically introduces a degree of safety.

However, control needs to be exercised over both the commodities you select as suitable for trading and the trades accepted at any particular time.

Deliberately selecting just a few commodities, without regard to their suitability in terms of liquidity and character, is not recommended.

Your list of suitable commodities should first of all include only heavily traded markets, as these are much less likely to suffer from erratic price movements caused by unexpected events.

Then out of these heavily traded markets, an assortment from different market groups should be chosen, avoiding those that are too volatile in nature in relation to your personal attitude to risk.

Professional traders have methods for compiling their commodity universes, as they are called.

An appropriate and well balanced commodity list will greatly assist creation of a system that is capable of meeting your own goals for annual return % and level of risk.

Even though they may be well founded, not all trades that are signaled by your system should be taken. There will be times when your 'equity capital' is already fully committed on the trades that are currently in progress.

Any trades that occur during these times will be refused by your trade management systems, if you are using 'best practice' methods. Your software will look after all of this once you have set it up.

The approach taken to preparing your commodity list should be cautious and well thought out and an arbitrary limited selection is quite unacceptable.

 

Modus Trading
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Copyright David Bromley 2006
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