Commodity trading is one of those rare areas where limited capital is sufficient for an individual to derive substantial monetary benefits. Further, this monetary windfall is reaped in a relatively short period of time. While it is clear that profits are there for the making, commodities trading has earned a reputation for being too risky. Here’s a list of the 12 cardinal mistakes of commodity trading put together by Walter Bressert:
Lack of a game plan – 90% of traders have no game plan. Which means they have no inkling about what should be done if they are on the right or wrong path. Hence, the profit that seems phenomenal in print often turns into a huge loss because they do not when to get out. To ensure success, a trader need to create a strong game plan.
Lack of money management – Traders are also found lacking when it comes to money management. Money management is crucial as it helps control risks while balancing the potential for loss against the potential for profit.
Failure to use protective stop/loss orders – The stop/loss order especially in commodity trading makes a whole world of difference. To put it simply, it is an order placed with the broker to buy or sell the stock once it reaches a certain price. It is meant to minimise an investor’s loss on a security position.
Taking small profits and letting losses run – Due to the lack of a game plan a common mistake that futures traders make is taking small profits while letting losses run. Post one or two losing trades, traders are likely to only take a small profit on the next trade when it could have turned into a large winner that could have offset all their losses.
Overstaying the position – Another mistake that futures traders make is overstaying their position and failing to take their profits at a predetermined level. The market seems to operate on a natural law that there is only so much money you can make before it is taken back. Even though the market meets the price objective traders are still in the market in the hope of making the most out of the trade. Without a close stop/loss order traders are overstaying their position.
Averaging a loss – A five to ten percent margin, averaging a loss can be catastrophic to say the least. A usual approach is that after you have bought a future and it drops lower, a trader might figure that since it was a good buy then, it makes for a better deal now. The market might however continue to work against them, which is almost always the case, which means they end up losing twice as much.
Meeting margin calls – Margin calls are met because traders do not want to admit about being wrong and hence take a loss in the hope that the market will work for them. However, it means that they wrong in the market and that their position should be closed out.
Increasing commitment with success – A fatal mistake that most commodities traders make is increasing their risk exposure as they attain more success. This ruins more futures traders than a string of small losses.
Overtrading the account or risking a large percentage of equity on a single trade. This either by risking too large a dollar risk per contract or by trading too many contracts for a particular trade or by trading too many commodities. Traders should not risk more than a set percentage of their equity on any trade no matter how promising the market seems.
Failure to remove profits from the account – The commodities market will only allow a trader to make so much money and then they will have to start giving something back. Most often than not, traders leave profits in their accounts and opt for the big trade – the one that instead of helping them make a killing, kills their profits. This can be avoided by predetermining the equity level at which profits should be removed from their accounts.
Changing the strategy during market hours – Traders tend to modify their market strategy during the market hours as they operate on emotions such as fear and greed. The best approach is to develop the trading strategy before the market opens and not change it during the day.
Lack of patience or trading for the thrill, not the profit – The shelf life of a commodity trader can be anywhere between 5 minutes and nine months. Not all commodity traders trade for the money, they do it for the action. Traders hence need to evaluate their trading and gauge if they are trading for the money or for the thrill and excitement. To overcome this mistake, traders must learn to be more patient, do their homework and research markets for high probability trades.
Learn how Rain+ Trade can help smoothen your business processes while helping you stay competitive in a volatile market.