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The “Comparing the Effectiveness of Commodity Trading Strategies " article examines and elaborates upon on how to compare and devise strategies and the factors to always keep in mind while trading the commodities and futures markets in order to avoid mistakes and ensure success.
Choosing the appropriate trading strategies, along with comparing their effectiveness against other strategies, is a subjective process. The strategies and variations are extremely great in number. No one in good conscience can say that one technique is superior to another. What works for one individual may not work for someone else. Only through careful research can you find a methodology that works, given the goals that you have set for yourself.
Capitalize on the trading strategy tools
In developing a trading strategy that matches your market temperament, it is important to capitalize upon all of the tools available. With the onset of computer technology, this does not become a daunting task. The basic procedure would be the same, regardless if you are predisposed to fundamental analysis or technical analysis.
The value of back-testing your strategy
Basically, you have to acquire a database and then test your theories. For example, let's suppose you find moving averages an attractive indicator for taking positions in the commodities and futures markets. For the markets that you have chosen to invest in, you should perform a regression analysis and see what the actual results would have been had you traded a particular moving average over a certain timeframe.
It is recommended that all strategies be tested at least for the previous five years. In our moving averages example, you might want to examine the results during this five year period for five, 10, 20, and 50 day moving averages. How many successful and unsuccessful trades did each average produce? Were there times when one average worked better than another? You may discover that during relatively calm trading periods, the shorter moving averages produce better results than the longer ones. This would further lead you to perhaps examine moving averages in conjunction with certain volatility measures. You may find that when volatility is in a certain range, it would be preferable to use a shorter term moving average to make trades. When that volatility measure moves into a different range, you may discover that, at least historically, it would be better to use a different moving average. Slowly by analyzing the different indicators over a historical period, you should be able to develop a matrix of indicators that you feel confident in to produce successful results.
Testing both technical and fundamental analysis
This technique is not limited to simply technical analysis. One can also use the same method in a fundamental fashion. For example, by looking at historical crop report releases and the subsequent movement in prices for those underlying crops, one can determine a fundamentally based indicator system to use in making buying or selling positions in the commodities and futures markets.
The most successful traders will analyze all the indicators that are available to them, regardless of their fundamental or technical nature, and develop an array of signals they have found to produce successful results for differing market conditions.
No one can do this for you. You can only do it for yourself. Commodities and futures markets will give you what you deserve. Those who have taken the time to study and prepare are the ones that the markets reward.
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