2010-02-16: Stick to your trading plan
These days we see many ups and downs in the energy market. In the midst of such an elusive and tremulous environment, it’s crucial for the trader to keep emotions in check and to stick to a set trading plan. By doing so, a long-term focus is more easily maintained and thus a more objective view of current price fluctuations can be assumed.

Recently there have been rough times in the energy markets. As market volatility increases, so does the potential for increased profits – and losses. One of the most vital parts for reaching your goals is to have a trading plan – it acts as a guide and offers a degree of protection. By sticking to a set of defined rules, you will be more likely to avoid emotional decisions that can derail your portfolio, and keep a more objective view even in the most demanding times. Knowing that your trading plan is well tested, you can trust the system to generate favourable results over time

The factors driving energy prices are too complex, fragmented and contradictory for a simple “up and down” correlation to apply. Some factors drive prices up while others push them down; sometimes the same variable can have contradictory results when measured against other variables. So we have a simultaneous and multifaceted interaction of forces working in all directions, with extremely and varied intensities.

All price movements have one thing in common; they are a reflection of the trend in the hopes, fears, knowledge, anticipation and hunger of market participants. The sum of these emotions is uttered in the price level, the level of what people think the traded entities are worth. The technical approach is by no means foolproof, but a cautious, enduring and objective use of the principles of technical analysis can put the odds of success very much in favour of the trader who incorporates these principles into an overall strategy.

Success in energy trading can come only at the expense of other traders’ failures, because there is a loser for every winner. Many factors, not the least of which is your own personality, will affect your success in the market. Setting realistic objectives and following them with persistence and consistency is definitely a key to success.

In volatile market conditions it is important to stick to your trading strategy. What ultimately separates winners from losers is discipline in its many and varied facets. To have a consistent schedule and then following through on it, is essential. This means staying up-to-date on the signals your systems generate.

During phases like these it may be an advantage to focus on a variety of strategies being active in different market modes. Whereas a short term strategy may be highly exposed to great price swings, the more long term strategies may filter out noise and take advantage of the major market trends. Placing trades can be a nerve wracking experience, but with the use of a long term trading plan, this may be a stress reducing tool that enables you to trade through hard times. The history of your trading system may give you relief in these days, moving your glance from a single trading session and over to a long term perspective. In the long run you will succeed

In practice, it is impossible to buy and sell consistently at exact turning points, but the enormous potential of the technical approach still leaves plenty of room for error, even when commission costs are included in the calculation. The rewards for identifying major market junctures and taking the suitable action can be considerable.

Volatility can often be sparked by a wide variety of events. Market participants may interpret fundamental data differently, and the market has a dissimilar interpretation and positions are violently reshaped and shifted. These tend to create possibilities for some and losses for others. The technical approach is by no means infallible, but a careful, patient and objective use of the principles of technical analysis can put the odds of success very much in favour of the trader who incorporates these principles into an overall strategy.

Even a good trading system can hit an environment that’s not conducive to its trading style. The system may get whipsawed and lose money for a time, but it is still a good system. When this happens it is advantageous to increase or decrease the number of MW traded to accommodate for a changing trading environment. In future articles we will take a closer look at how various strategies in various markets perform with the powerful tool of position sizing.
Methods to increase profits while reducing risk.