The MODUS Method : Steps 1 and 2
Trading Background
There is a great deal of money to be made trading commodities. The professional traders know this and they take very large profits from the commodity markets all the time.
Generally speaking, trading commodities is more risky than trading stocks but the potential rewards are very much greater too.
Another difference between the two is that commodities are heavily influenced by economic and political factors and this gives rise to price movement trends that often last for long periods of time. On the other hand, stocks at the individual level, are small and their prices tend to move unpredictably according to the whims and fancies of investors. They are much more volatile than commodities.
Trading the Trends
The trending tendency of commodity markets is exploited by traders to their advantage. Unlike stocks, it is natural and commonplace to ‘short trade’ commodities and downward trends are just as desirable and profitable as upward trends, from a trader’s point of view.
This all adds up to the fact that trading commodities offers a good opportunity to make large profits. If this is the case, you may wonder why you have heard that most commodity traders lose money.
The difference between professional traders and the rest
Most commodity traders do lose money and the reason is because they do not trade correctly. To make money trading commodities, you must trade the right way and this is where the professional traders score. They know the right way and they practice it all the time – with considerable success.
The professional trader selects a system and tests it thoroughly in order to get to know how it is likely to perform. Then he follows it in every detail to allow it to operate in accordance with its tested characteristics.
All professional traders do the same things. They may have their own variations and personal foibles but they all add up the same processes. I have put all of these methods together into one comprehensive procedure I call the MODUS Method.
The Six Steps of the MODUS Method
In this course, the following six steps of the MODUS Method of evaluating system rules will be explained in more detail:
STEP 1 Market Selection : Identify a Population of Liquid Markets
You will only wish to trade markets that behave normally without excessive jumps and gaps. Liquid markets are traded heavily and are much less wayward than the lightly traded ones.
About 70 different commodity markets are offered by the major exchanges.
Volatility
All of these markets are volatile to some degree. That means the prices jump around according to the buying and selling pressure on them. This volatility varies all the time, of course.
Volatility is a sign that something is happening – and of course you want to trade markets where something is happening, otherwise you will be wasting your efforts. So you are looking for markets that move but do not behave in an excessively volatile manner, which would imply excessive risk.
The markets to choose
Markets which are comparatively heavily traded i.e. where buying and selling volume is high, react more steadily and slowly and are less risky to trade.
The first step you need to take is therefore to compile the list of markets you will trade, leaving out the ones which are ‘lightly traded’.
You will thereby reduce the number of markets by between 50 and 60 percent, but that still leaves enough markets for you to trade with sufficient diversification.
[The MODUS course suggests a population of 26 liquid markets which were listed in Part 1.]
STEP 2 Personal Risk Assessment : Set Your Goals for Risk and Return
Now that you have identified the liquid markets suitable for trading, it doesn’t mean that you will trade them all.
Depending on your attitude to risk, you will select those that are most suitable for you measured against your own personal goals for risk and % return. You will later want to test your proposed trading system against these goals, to confirm that it is capable of producing satisfactory results.
Trade profitably but most of all be comfortable
So far, we have talked about nothing but risk - isn’t trading all about making profits?
Of course profits are the reason you are trading but it is essential to be comfortable trading your system, otherwise you will not follow it. Following your system exactly as you tested it, is the thing you must do above all, if you are to succeed. If you use a system which is too risky for your liking, you will not follow it all the time and that is bad news.
This subject is explained more fully in:
The First Commandment For Trading.
You will do this only once!
Setting goals for risk and return involves a one-off self assessment of your attitude to risk, so that you can specify your own limits for them. All professional traders recognize how vital it is to do this and their operations are centred on the interaction of risk and return.
Having recognized whether you are a cautious or a bold trader, or perhaps somewhere in between, you can then select the most suitable commodities to trade from the list of liquid commodities.
By defining your attitude to risk, you can select from recommended ranges of related risk and return parameters offered in the MODUS Course, which are then incorporated into the trading software as your goals.
The MODUS Commodity Trading Course explains in detail a method that you can use and test thoroughly, so that you will understand the importance of this information.
These first two steps of the MODUS Method are personal to you and remain ‘fixed’ unless and until you ever wish to alter them.
Modus Commodity Trading Course
Modus Trading
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Copyright David Bromley 2005
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David Bromley
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