Trading Commodity Futures Using Support and Resistance - Paper Trading

Setting Up a Paper Trading Account

Question:
I cannot trade with "real money" as yet; however, how do I go about setting up a paper trade account?

Answer:
You can paper trade various ways and it really does not require that you have anything more specialized than a notebook to track your trades and access to charts.

Begin by funding your paper trading account with the amount of money you think you will really begin with, whether it is $2000 or $20,000. I would suggest that you begin with no less than $5000 and $10,000 is even better.

Next you need to decide on which markets you are going to trade. The more money you have in your account, the more markets will be available to you. If you are trading with a $5000 account there is no point in becoming familiar with a market like Crude Oil that has a margin of $3000 per contract!

Assuming that you are a smaller trader, you will be most interested in the lower margin markets like the grains, some of the meats, maybe a metal and a currency or two. I would suggest you limit your scope to about 6 - 8 markets, as these will be enough to track on a daily basis.

Even real money traders rarely follow more than 8 markets...it just becomes too cumbersome, as I'm sure you will find when you've got more than one paper trade going at a time.

If you don't know which markets to choose from, maybe I could make a couple of suggestions:

* Corn, or wheat - these are good markets for traders of all levels, but especially the beginner. The margin is not too high and the markets normally act predictably and trend well. Corn and wheat have a tendency to move together (but not always), so watching both can be redundant.

* Cocoa - a good market to make money in as a small move can add up to good profits. Also can be a good market to lose money in for the same reason. I don't mind cocoa, although I know people who have sworn it off. This is the time to find out if it is for you...when it doesn't cost you real money.

* Sugar - used to be a good market because it is easy to get in with minimal risk; however the abundance of support and resistance can make it confusing to new traders. Lately the market has lacked direction which only adds to the confusion. Still it is low margin and relatively low risk market to trade.

* Live Cattle - a decent meat market. Some new traders avoid the meats entirely because of their ability to make huge ranges. Cattle is the "safest" of the meat markets.

* Cotton - can be a good market, but is capable of making large ranges. I used to avoid cotton like the plague, but have become fonder of it in recent years.

* Soybeans - the Pork Bellies of the Grain complex. If soybeans are too volatile for you consider trading one of the bean cousins, like soybean oil, or soybean meal. They tend to mirror soybeans, but are generally less margin and less volatile.

* Silver - I like the metals; however gold can be a little rich for the small trader. Silver mirrors gold - the poor man's gold. Some people like copper, but I consider it too thin and margins too high for small traders.

* Canadian Dollar/Australian Dollar - two of the more reasonable currency markets. The margins are lower, but there is excellent money making potential. Other markets like Swiss Franc, British Pound, and Japanese Yen are good markets too but require much more margin and risk. All the currencies have a tendency to move in the same direction anyway (opposite the US Dollar) so it doesn't really matter.

But don't stop here, this is the time to practice and refine your skills so include any other markets you are interested in, but avoid the exotics like lumber, rice, oats, palladium, etc. They are just too thin and too volatile for the small trader to be involved in.

Now that you have a paper account and a mix of markets to trade you need to search the markets to find trades to make. Once you have found a trade you like, write down your entry, your exit and your profit target - exactly.

If you are dealing with a broker, you can call and ask them if your paper order had been filled on a particular day. Alternatively you can just look at the charts and figure it out for yourself.

Sometimes you will need to see an intraday chart to know exactly when you got your fill. Barcharts.com offer free intraday charts. Just follow the commodity chart link and then click custom charts to alter the time frame displayed to a 5 or 10 minute interval.

Track your trades day by day keeping a journal of your profits and losses. A simple way to "journal" your trades is to put them on 3x5 index cards - one card per trade. Write down you reasons for taking the trade as well as exact entry and exits. Make sure to note what you did right and what you would do differently the next time. Allow an extra two ticks on your fills and exits as this will simulate slippage. Brokerage fees are usually $40 round turn per contract.

See how well you can do but be honest. Cheating here will not help you in the future. I'm sure you've heard it before, but nothing changes when you trade with real money. If you can't do it on paper, you won't make it for real. Trust me. I've been there.

If you don't already have it, you might want to consider using Gecko's Track 'n Trade Pro. As the name suggests the software not only provides charts but also "tracks your trades". You fund a fictional account, place your orders and the software will automatically update your position day by day.

It really is phenomenal software and if you are halfway serious about trading you should check it out. It is a legitimate tax deduction too. ;-) You can get a free 30 day trial by following this link: http://www.trackntrade.com/demo/?abbr=SENFT

There is also paper trading software out there and on the internet which is supposed to simulate trading; however in my opinion it is not realistic for most small traders.

Some of the simulators only allow you to trade the e-mini and others start you out with a $50,000 account. This is great if you want to trade the e-mini, or if you are trading with a $50,000 account, but this is not the case for most traders.

Anyway, that's paper trading in a nutshell. I hope it helps a little. Please do not hesitate to write back if you have more questions, of if you need me to elaborate on something.

Best of luck,
- Erich
erich@supportandresistance.com

PS. Don't skip this part of your education. Most traders hurry through paper trading only to get killed in the markets. Don't make this mistake.

U.S. Government Required Disclaimer - Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results.

CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

The commodity markets first captured Erich Senft's attention in the 1970's when the Hunt brother's made the news when they tried to corner the silver market. Ever since then he had a desire to learn more about what made the commodity markets tick.

After experiencing mild success trading futures with the limited strategies offered by Ken Roberts, he delved deeper into the study of the commodity markets and became particularly interested in the concepts markets.

Erich and partner Tom Loge' run http://www.supportandresistance.com and publish the hugely popular Traders Helping Traders Ezine 6 days a week. Erich and Tom have a daily blog at http://www.supportandresistance.com/blog/

Erich is a graduate of the University of Alberta business program and has a Bachelor of Commerce degree. He is also a registered Commodity Trading Advisor (CTA). He lives in the Pacific Northwest with his wife and three cats. When he's not talking or trading commodities you can usually find him on the golf course chasing a disobedient little white ball.