If you are like most traders, you realize you’ve made plenty of mistakes in the past year and you have the ability to correct those errors in the coming year.

Experienced traders know that one of the best ways to improve their odds for trading success is to analyze what they are doing periodically. The end of the year and the start of a new one is a good time for that review so let’s do it in a time-honored manner: New Year’s resolutions. Some of these contradict each other, some are just lessons that need to be relearned again and again, and some may not fit you like they do me. Take stock of your own trading in 2006 and see if you recognize any resolutions that might fit you in 2007.

Getting Started
Resolution: Don’t compile a list of trading rules based on your last trade.
Right up front, we have to concede that making this list of resolutions below may seem like a violation of our very first resolution. But how many times have you said, after you’ve made a bad trade, “I’m not going to do that again,” or after a good trade, “That worked great so I’ll do the same thing again.” It is difficult not to be influenced by your experience with your most recent trade, but making a rule or developing a trading strategy on the basis of your last trade is a mistake because it is unlikely the market will act in the same manner time after time. This is not to say that you shouldn’t learn from your last trade, but you need to keep it in perspective with your other trades.

Resolution: Trade by what the market is doing and not your opinion about what it “has to do” or what it can’t possibly do.
Everyone knows the U.S. stock market usually goes down in September-October and that the conditions were all set up for the same pattern in 2006. How many times did you try to short the E-mini S&P 500 Index or E-mini Nasdaq last fall based on that premise, only to watch the market go up every time? Or how many times did you fail to buy the energy or metals contracts because you didn’t believe they could go much higher? Or when they reached new unexpected heights, how many times did you miss out on the opportunity to sell them because you had become convinced that they were going to go up forever? Or what happened to those long trends that were supposed to happen in currencies when I opened a cash forex account in the middle of the year? Some trading approaches may be able to predict what will happen to prices. I just haven’t found a reliable one yet.

How Does the Market React?
Resolution: Don’t look at fundamentals to drive markets—look at trader’s reactions to fundamentals.
We all know that mass psychology sets prices and that the same set of fundamentals may result in different price responses on different days. Yet, we all seem to look at our daily market summaries to find out what fundamental caused that day’s price move. Obviously, you cannot ignore market fundamentals. But the fundamentals may be in place for some time before traders – and, increasingly, the large funds in commodities – respond. All it may take is for some event or news to set off trader reaction. The grain rally in the fall of 2006 took off after reports of large declines in Australian wheat production. Glen Ring noted in his newsletter, View on Futures that the, “motivation for much of the buying may well have been the drought in Australia (but) prices soared because the buying power was much greater than the selling pressure.” He pointed out that the drought in Australia was a catalyst, not a cause of the rally, and that “the collective response of the marketplace is what causes prices to move. What is traded are opinions – whether seat-of-the-pants or well-founded – of the participants.” The market is people, not fundamentals. People leave their tracks on charts.

Stay The Course
Resolution: Trade your convictions.
This may seem to contradict the previous resolution, but sometimes you just have to commit to a trade based on what you think. Unlike my convictions about a stock market decline, lower T-note futures and a weaker dollar, none of which happened, I thought I saw a great trade in corn shaping up in June 2006. With fewer corn acres planted in 2006 and record energy prices likely to cause a huge increase in demand for corn usage in ethanol, it seemed like prices for December 2007 corn futures had to go up sharply by spring to draw more acres into corn, even as it appeared prices for 2006 crop corn had to remain rather weak. So I bought a December 2007 corn contract at $2.95 a bushel, thinking that any summer weather problems for the 2006 corn crop added to the likelihood that corn prices would be higher sometime during the next 18 months. This trade came out all right, although it took a few months for the move to materialize. But I didn’t go far enough.

Resolution: Capitalize on market opportunities when they are available.
Chances to make a home run trade don’t come along every day, so you have to jump on those opportunities when they seem to be available. Being long one December 2007 corn contract last June was a nice trade but not what it could have been, as the chart with comments illustrates (see Figure 1). Position sizing is the key to profitable trading and, if I want to improve my trading results in 2007, I have to do a better job of building my position when the market goes my way – without succumbing to the dangers of reverse pyramiding.


click image for larger view

The unusual harvest rally helped make this trade in December 2007 corn futures profitable, but it wasn’t a particularly well-managed trade. First, I could have taken a quick 20-cent ($1,000) profit at the July high (A) and bought again later at a lower level. But I held stubbornly, figuring the fundamentals were on my side and I could hold well into 2007 if I needed to. Second, I did not place a stop, as I normally do, and probably should have been stopped out at the August or September lows (B) for a loss. But, third, the real missed opportunity was not adding on to the position when the market moved above previous highs at $3.00 (C) and $3.18 (D). And I didn’t take advantage of similar opportunities in wheat and soybeans. How many other traders missed these trades? Now, the way I figure it, if high prices attract many more acres into corn and wheat instead of soybeans in 2007, prices for 2008 soybeans will follow a similar pattern. Anyone want to go long November 2008 soybean futures? They “have to go up,” don’t they? (See the second resolution.)

Getting Out
Resolution: Develop better exit techniques.
It’s easy to enter a trade but difficult to get out of a position at the right time and price. You know those familiar trading axioms, “Cut your losses short,” and, “Let your profits run.” But I suspect many traders are like me and need to have a more consistent approach to placing stops or exiting trades in addition to sizing positions. In many cases, it seems to be more advisable to set a profit target going into a trade and take profits too soon rather than become greedy as the market moves in your direction and wait too long. Traders sometimes treat trading like “Deal or No Deal” and open one suitcase too many.

Resolution: You have to be in the market to make money.
If you tend to be as risk-averse or over-cautious as I am, another problem in 2006 was pulling the trigger to get into a position. The markets offered plenty of opportunities, but we tend to study the market and never seem to have enough information as we stew around trying to make a decision. By the time we do decide what to do, the move has passed us by and we are chasing the market. “No play, no pay” or “Nothing ventured, nothing gained,” according to the axioms. Remember you are trading and not investing, and you need to become comfortable with taking a chance and then cutting losses (hopefully small ones) if you are wrong. One of the ironies of markets is that most people do not have the emotional makeup to be a trader, but they also do not have the patience required to be long-term investors.

Resolution: Stay within your comfort zone on what you trade and the amount of risk you will accept.
You have to be in the market to reap its rewards, but that doesn’t mean taking wild shots at anything that trades. A chart is a chart, some traders say, but I need to know something about the market I trade and the worst that can happen to me. No more flyers into that stock index options trade that I didn’t know how to “repair” in 2006. If you are long and the market is going up, enjoy the ride but always think like someone trying to short the market so you are prepared when the market does give signs of a turn. Vice versa for the trader who is short.

One of the lessons I relearned in 2006 is that markets can move very quickly. About the time everyone was getting excited about silver and thinking about the Hunt Brothers silver escapade in 1980, the market took some traders to school (see Figure 2). Because I am a small individual trader, large daily swings like those in silver and a few other markets such as copper have taken these markets off my trading list, at least for the time being, even though they have the potential to produce huge gains . . .if I have the right position.


click image for larger view

Don’t Be Swayed
Resolution: Don’t listen to every guru, pundit or expert.
This is not a new resolution for most traders. We’ve certainly heard it before. But, still, there is a tendency to be influenced by the flow of information and advice that you get every day from newsletters, special reports, websites and many other sources. Did you listen, as I did, to knowledgeable and well-respected analysts who predicted that stock indexes would decline in September-October, just as they always do? Well, stocks performed as abnormally as grains, climbing a wall of worry in an advance that many traders missed. How many analysts forecast that crude oil, having topped $80, would soon zoom up to $100 a barrel? Or sink to $40? How many analysts thought gold, after exceeding $700, would easily reach $1,000 and higher? And where were those hurricanes that the experts predicted in June?

You even need to be skeptical about what the news media reports. One day higher oil prices may be blamed for causing stock prices to fall, the next day they may be credited with helping to boost the stock indexes. Or a policy change by the Fed may be cited as the cause behind both rising and falling interest rates, stocks or the dollar. Remember, analysts will always be predicting – that’s what they get paid to do – and the media will always have space to fill every day and they have to come up with a cause for every price move, even when there is really nothing to talk about.

Become Educated
Resolution: Get good information from an advisor or mentor or another source you trust.
That may sound like a direct contradiction to the previous resolution, but it seems to be getting more difficult for any trader to stay on top of everything in today’s global markets. You can’t do it all, and it often pays to rely on outside sources who know much more than you do or a software program that can expedite your analysis and provide vital information to help you make trading decisions. That help may not come cheaply, but if it makes you a better trader, it’s worth it.

Resolution: Keep closer tabs on what the government or its agencies want.
We won’t go into conspiracy theories about how the government may have manipulated lower energy prices or higher stock markets heading into the mid-term elections. The markets do what they do, and you have to be prepared to deal with them. Politics or government activity may not appeal to you, but you have to recognize the effect their policies and goals can have on a wide range of markets. That starts with the Fed and its control on interest rates, which can make or break a housing market or drive the direction of currencies. Currently, for example, the hot button seems to be alternative energy sources, and the government seems to be behind anything that favors ethanol, which has ramifications for corn and energy prices. But political will can be quite fickle. Follow the money to see what the government is supporting and go with the action.

Resolution: Pay more attention to where prices might not go than to where they might go.
Most traders tend to be long or short, but the market often isn’t in a moving mode or has reached a point where it is likely to back away from current price levels. Specifically, for me that means focusing more on option selling strategies to collect premium and settling for smaller gains with defined risk in short-term trades rather than shooting for home run moves over a longer period.

Resolution: Expand ideas about intermarket relationships.
Traders are well aware that markets influence each other and have traded spreads based on this concept for years. But with the ongoing globalization of markets, traders have to be as aware of what affects the Japanese yen or euro as they do what moves the U.S. dollar. Grain traders who used to look at energy as only an expense item for producers now have to consider the relationship of oil prices to corn because of the growing interest in ethanol.

Add Your Own
You probably have other resolutions you can add to the list after reviewing your 2006 trading. Of course, after taking stock of our 2006 trades and resolving to correct our mistakes in 2007, you know what they say about resolutions. They are made to be broken, and undoubtedly a number of these will also be on our 2008 list. As long as people and not machines are doing the trading, that’s probably the way it will remain.