Market Selection

"Just pick one or two commodities to trade
and specialize in them."

At first this may seem like a good idea. Select a couple of markets and learn as much as you can about them. You will then have a much better chance of predicting how they might behave than you otherwise would. Yes ‘know your markets thoroughly’ sounds very sensible.

But this is not what the successful traders recommend or do.

So aren’t they selective about commodity markets at all?

Yes, they select markets that are liquid and that behave normally.

‘Liquid’ is the same thing as heavily traded and markets which behave normally are those that are not excessively volatile or prone to erratic behaviour.

For example, index futures behave to some extent like the equities on which they are based. Equities are extremely volatile compared to commodities, and so index futures would not be considered suitable by many traders.

As well as containing the less popular markets, lightly traded markets includes new contracts which are not yet being fully traded and contracts running down to expiry.

But when all these ‘unsuitable’ markets have been eliminated there still remains a core of about 30 or 40 commodities ranging across several groups, such as grains, metals, currencies and energy.

Most traders will trade all or a selection of markets from these groups, depending on their volatility characteristics.

Choosing just one or two commodities would not give them the variation needed to avoid concentrating too much risk in a narrow area or to avoid invalidating their evaluation work by curve fitting.

The more general and less discriminating the trader’s system, the more likely it is to produce consistently better results. Professional traders would also regard selection of just one or two commodities as restricting opportunity far too much.

Copy what the successful traders do and make a full selection of liquid,
volatility-graded markets. Then trade all of these with exactly the same system and with as few rules as possible.

 

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Copyright David Bromley 2006
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