2009-03-13: Structure in an unstructured environment
Energy trading may be characterized as a highly unstructured environment. There is no given set of rules to guide your behaviour. Still, within this unstructured setting, various conventions, measures, systems exist which, if learned and applied, can help you achieve success. The fact that considerable amounts of money is at stake can cause traders to abandon their discipline and to disregard their rules. But without rules and discipline, profits hardly ever follow.

If you think of the energy markets as a venture with unlimited possibilities, you may begin to see the need for creating rules to guide your behaviour above and beyond the existing structure. You need to create your own as an adjunctive structure. This will require you to define the risk you are willing to assume. Systematic trading, if followed properly, will help you to define risk and develop the rules to manage it.

Successful traders are willing to assume responsibility. To be responsible you must make a commitment to manage your risk and be willing to learn from your losses. Many trades in the power markets are closed out as losses, hence we must use losses as a learning tool. The market, however, is not a patient teacher. Its inconsistency may be hard to deal with. Sometimes the market rewards you for doing the incorrect thing, and sometimes it punishes you for doing things correctly. The marketplace is a tricky and random environment in which to learn.

There are some guidelines to follow. It is beneficial to keep a detailed record of every trade. The record should include entry and exit dates and prices. With many trading systems you will take as many as six to eight losses out of every ten trades due to the nature of trading systems. Once you have mastered the record-keeping aspect, you should study the record regularly. It is also important to learn from your profits. A profit will let you know when you have done something correctly. At times the market will generate a profit whether or not you acted correctly. The market is not entirely consistent. If you find that your application of trading rules and principles result in profits over time, then you are on the right track and you should stay on it!

Having a stop loss order and keeping it in place are two different things. Sometimes, one may place a stop loss order in the market, only to terminate when the market gets close to the order. This may be hazardous and can lead to vast losses. Getting into the custom of using stop loss orders will protect your equity and keep you disciplined.

One of the pitfalls that even the skilled and practised traders fall into is overtrading. The tendency to get caught up in the emotion of the market, especially after a series of winning trades, can make it tempting to take on larger positions, or more positions than you should. Remember that consistency in applying rules governing risk is of utmost importance. When you forget this fact, your emotions take over and losses will begin to accumulate. Plan your trade and trade your plan!

Managing risk involves more than using stop loss procedures. A trader may benefit from not letting his ego compete with the market or with any other trader. By keeping the ego under control, traders can stick to a structure that defines what loss is acceptable and signals when to preserve capital.