One of my favorite movies of all time is Trading Places with Eddie Murphy and Dan Aykroyd. It was a comedy that took place during the heyday of 1980s commodities trading.
Winthorpe (Aykroyd) and Valentine (Murphy) are the subjects of a $1 bet by the Duke Brothers, who own a commodity trading firm. The bet is that Valentine can’t change his ways as a scam artist and successfully step into Winthorpe’s shoes as a wealthy commodity broker.
While the elaborate bet takes shape, the Dukes try to steal a crop report that would allow them to corner the market on frozen orange juice concentrate. However, the victims of the bet find out about the plot and turn the Duke scheme around.
They create a fake report, which the Dukes use to bid up the price as they watch the action on the trading floor and smile smugly. But, just as the buying reaches a crescendo, Valentine and Winthorpe move into the trading pit and start selling.
With the real report released, the price of orange juice futures collapses.
When all is said and done, the Dukes are left destitute, owing $394 million, while Valentine and Winthorpe make a fortune!
Trading Places was originally released in 1983, just as I was finishing my B.S. in finance. That movie is why I got my license as a commodity broker.
But while it was fun to watch, I don’t consider making a fortune on illegal inside-information or market manipulation a great trade. Instead, you need to enter EVERY trade with a plan (preferably one that doesn’t involve stealing a crop report).
A trading plan can be simple, as long as it includes a scenario for what happens when things don’t go quite according to plan. The more that can be measured, the better. In other words, if you know when you’ll take profits or cut your losses, the less emotional the trade gets.
That’s really the key. No matter what type of system or approach you take, whether it’s a trend-following system or a snap-back (reversion to the mean) system like my Treasury Profits Accelerator, you need a plan to implement it.
At the minimum, you need to answer a few questions before you put any of your hard-earned money at risk:
- When do I buy (and then sell)? Specifically, what are the triggers? Is it a price? A technical measure? Something else entirely?Whatever your trigger might be, make sure it’s objective and unambiguous. Leave nothing to interpretation.
- How much should I trade and how much can I afford to risk on each trade? What works for one trader might not work for another, but position sizing is an important part of risk management, so really give this question some thought.If you are unsure, it’s always better to be conservative and start with smaller positions.
- Do I fully understand the strategy and the financial instruments used to execute the trade? Besides looking at a strategy’s track records, winning percentages, or average gains and losses, it also needs to make sense to you. Never trade anything – be it a stock, an options contract or anything else – if you don’t understand how it works and what your risks are.For example, in my Treasury Profits Accelerator strategy I use options on an ETF. So, you shouldn’t only understand what’s in the exchange-traded fund (stocks, bonds or derivatives) but also how options work. Having a good feel for how these instruments trade and how volume and liquidity affect pricing is helpful since those factors can sometimes move prices quickly and dramatically.
You should ask all of these questions before going into a trade.
But doing a good post-mortem is also important. Win or lose, every trade is an opportunity to learn and improve your system.
For example, in early 2015, I reviewed a losing trade within my strategy and determined that a tweak needed to be made.
I noticed that executing trades that were triggered during a low-volatility market weren’t likely to make big gains and, in fact, were more likely to lose money. After significant testing, I found a way to measure volatility and avoid periods of ultra-low volatility.
That small change keeps my subscribers out of potentially losing trades while we wait for higher volatility and profits!
I’ve had many great trades over the years. While running the Treasury Profits Accelerator strategy, I’ve recorded gains of 112% in five days, 98% in seven days, 85% in three days, and 76% in just one day, just to name a few!
All of them were executed following a solid plan.
So, next time you think about making a trade, ask yourself some questions and you could end up making the best trade ever!
Editor, Treasury Profits Accelerator