Stay on Top of the Minimum Point Value and Tick Value

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Stay on Top of the Minimum Point Value and Tick Value

This is a self-explanatory step, but you would be surprised at the number of futures and commodities traders who are clueless as to how they actually make and lose money in a trade. It is important that you stay on top of the minimum point value movement and the minimum tick value. The two do not always match.

By knowing these numbers, you can calculate your potential losses or potential gains before you ever commit a dime. Planning ahead is the greatest gift you can give yourself in transitioning from investor to speculator, speculator to Hawaii.

For example:

«British pound» market has a minimum point value of $625.»»British pound» market has a minimum tick value of $6.25.

Determine Average True Range to Choose Acceptable Volatility

Now you have narrowed down a few markets you are interested in, but you are still not sure if the market you picked will have an unacceptable amount of volatility for you. Volatility is what makes commodities prone to gaps up and lock limit moves. Often, there is a fundamental shift in the underlying factors that are keeping the actual buyers and sellers at a happy equilibrium.

A limit move occurs when a commodity opens up or down its maximum allowed move and does not trade again until the next session.

The way I prefer to measure volatility is through J. Welles Wilder’s average true range (ATR) indicator. ATR does an excellent job of measuring volatility. It factors in gaps, limit moves, and small high/low ranges. By measuring volatility for yourself you may realize that the market you were eyeballing with the super-small margin just doesn’t fit your risk-reward profile.

The worst thing you can do is get into a new trade not knowing what the fluctuations are. Some markets may have an ATR, the distance from its high to its low, of a few thousand dollars; others may be a few hundred dollars. Ideally, what you are looking for is how much you would risk if you were 100% completely wrong on the trade. You accidentally buy the top and sell it at the bottom, or vice versa.

Organize «Short-Listed» Markets from Least to Most Volatile

Now comes the organizing. Basically, your infamous short list is developing. Your list may or not be shared by other traders. Most likely, your short list will carry your thumbprint of experiences and how you see the world. This gives you a realistic assessment of what markets you can trade and the level of confidence you will trade them with.

So what do you do with the markets that have a high volatility rating?

You paper trade them, of course!

While you may not feel comfortable trading them with real cash because the potential loss exceeds 10% or greater of your account value, you can demo trade with various strategies to your heart’s content. This gives you trading practice and helps build up your tolerance levels to risk as you boost your confidence.

Now with your short list, you can fully customize your trading plan and focus your energy where you can get the most results. You also solidify your foray into the world of fundamental analysis. You have a narrow set of markets that you have to view and follow up on. This puts you one step closer to being a professional trader.

Check the «Open Interest» for Each Market to Find the Most Liquid

The seventh and final tool you put your short list through is open interest. Open interest can be viewed several ways. The secret to open interest is that it represents liquidity. In much the same way that stocks are observed along with their volume, the open interest gives us clear insight into the actual number of contracts outstanding, both long and short.

When we approach open interest, we are looking to discover the answers to three questions:

1. Am I trading the right month?

2. Is the corresponding option market liquid?

3. What is the momentum of this market?

We will address two out of the three questions first.

When it comes to futures and options trading particularly, you need concentrate your efforts in the months where you can get out. It is easy to get into to trades; you just want to make sure there is enough liquidity. You will typically want to trade in the front months. You will purchase your risk management tools, options, around key front-month prices that have enough liquidity to exit.

There are a few different ways to determine the open interest. I prefer using the Commitments of Traders report. This report is released weekly by the Commodities Futures Trading Commission. In it, they document the number of outstanding long-short positions based on multiple categories: large speculators, small speculators, and hedgers. It gives insight into what their motivations are and how long they have been accumulating or distributing their inventory.

A second way to view open interest is to overlay it on the charts. What you would be looking for are declining and inclining slopes on the open interest and how they affect or do not affect pricing. It’s a little more art than science when interpreting the open interest slope, but it can be done.

Regardless of the level of open interest and volume for these markets, the declining and inclining slopes are used in the same way.

There are two demons that are constantly nipping at the heels of every potentially successful trader: fear and greed. My job is to use education as a way to cut a path between these demons to help lead you toward your investment and trading goals.

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