Everyone wants to make money trading commodities and using a commodity trading system could be the way to get there. Many people make consistent profits using a good commodity trading system and others watch their commodity accounts sink into the abyss. So, how does one know whether they actually have a good commodity trading system that will make consistent returns into the future?
The answer is that you never know for sure, but here are some guidelines every trader should follow to increase the odds of a commodity trading system being successful.
Testing the System
Testing a commodity trading system is the best way to anticipate the probability of future returns. This can be done through backtesting and paper trading. Backtetsting is a means of using the trading signals from the system over the actual trading prices from a previous period. Five years is a common backtesting period, but some long-term systems should be tested for much longer periods. TradeStation has a good platform for backtesting systems and strategies.
Be aware that system developers can manipulate or optimize the trading parameters of a system to make past returns look spectacular. Then, they fail miserably when they are traded in real time. Therefore, it is often a good idea to paper trade the system for a period of time to monitor how well it performs in the real world.
All Commodity Systems Claim to Make Money
I’ve never seen a commodity trading system for sale that doesn’t claim to make money. Whether you develop a system or a professional does, the system should have a sound and understandable logic to it. For example, buying pullbacks on oversold readings in an uptrend makes sense to me. It is also important to know how the system has performed on live data after it was released to the public. FuturesTruth is a service that tests commodity trading systems with real time data.
Following the Rules
One of the ironic things about commodity trading systems is some people actually have a great system that works, but they do not follow the rules and the system turns to garbage. Discipline is one of the most difficult aspects of trading. Sticking with the entry and exit signals is a must when using a system. It makes no sense that someone would take a consistently profitable system and turn it into a losing system by changes the rules, but I have seen it many times.
