The first step towards successful commodity trading is awareness. Yes, there are some trading habits that you can develop, especially if you are new to this world, which will do more harm than good. Therefore, you must stay aware of the mistakes and try not to repeat them. But, what are these mistakes? We shall discuss them in this article. But, first, let’s take a look at what commodity trading is.
The most basic aspect of today’s economy, a commodity can be defined as goods that can be interchanged with other similar types of goods. Historically, commodity trading is quite an ancient line of work, even before the birth of bonds and stocks.
Here is a list of common commodity trading mistakes that you need to keep an eye out for:
Poor money management
You will be surprised to learn that most commodity brokers and traders have absolutely no concept of money management. If you are adept at money management, you will be able to reduce the risk of loss while also increasing the profit potential.
In terms of good money management, you need to know and understand your profit objective. Based on whether your predictions are right or wrong, you need to make the stops. Of course, this mistake can only be rectified by learning and testing different types of strategies.
Lack of diversification
As a trader, you need to know how much risk you can afford on your capital while trading. This way, you will learn to articulate the proportion of risk and reward. Additionally, experts suggest that it is folly to invest your entire capital in a single commodity.
Instead, you can choose to allocate the capital in separate assets. This way, if you see a loss in any of the assets, you can immediately halt the operation. Diversifying your capital will help you predetermine the risk-reward proportion.
Not using protective measures
Protective measures refer to protective stop-loss orders in commodity trading. These protective measures are not mental stops, and rather they are ‘real’ stops that cannot be removed in any way.
Before you enter the market, you need to determine the stop-loss order. This means that if your analysis has not panned out, your game plan will not work out. On the other hand, a mental stop will do exactly the opposite. You will stop thinking rationally and make informed decisions based on emotions like hope and fear.
If you are undercapitalized, you should not even open an account. Even if you do, it is advised that you trade within its limits. While the level of risk tolerance varies from one trader to another, the common aspect here is that they cannot trade with funds that they cannot lose. If you are trading with an overleveraged trading margin or limited funds, there is always a risk that can end your trading career. Trading on a low balance is definitely a big no!
Chasing the market
Chasing the market is one of the major mistakes you can make. The market is always fluctuating. Hence, you will not notice a lot of large moves without any signs of retracement. Even if you want to make a big move, you will have to consider the average of the daily range. While market conditions are always changing, it will either reverse or retrace before continuing. As traders, it is recommended that you wait for the retracement to limit losses.
Most investors tend to overtrade to earn some profit. However, trading more than your share will lead to handing more commission and reducing your long-term profit as well. Handing more commission means that you will have to pay brokerage for every trade you make. This means you will end up spending more money on brokerage than you can earn back as profit. Therefore, it is advisable that you plan your trading timetable and not overdo it. You can either create this plan on your own or get help from a registered investment advisor.
Averaging a loss
If you have had a long investment history, averaging a loss may work out. However, if you are trading with volatile securities, this could lead to fraud. In fact, most of the significant losses in the world of trading have taken place because the trader kept averaging losses. Due to this, the entire position of the loss magnitude was forced to cut down.
Additionally, traders also tend to go short more than conservative investors since security is advancing at a fast pace. However, this is also a mistake that needs to be avoided.
Not removing profits
After a while, commodity markets will start earning you profits, out of which you have to give back. However, some novice traders leave profits into their accounts and opt for the ‘big trade’; this is a move that will surely kill their profits.
To overcome this problem, you need to take out some amount of the profit and put it somewhere else. The market is always in flux. While you will definitely earn some profit, there will also be losses. By removing profits, you will be saved from potential losses when the market is down.
Using lagging indicators
A lagging indicator is a type of indicator that reaches price changes slowly. This means that while you, as a trader, will have better accuracy, you may get late in entering the market. Lagging indicators are mostly used to remove the noise from short-term market movements. However, lagging indicators may also give off false reports since they react more slowly.
Lack of patience
They say that patience is a virtue. In the world of commodity trading, it is true. You may certainly face a loss sometime or the other. To make up for the losses, do not try to make a big gamble; who knows, this gamble may cost you your trading career. Instead, try to look at things from a different perspective and make your decisions based on research.
Commodity trading is not an easy task. However, it does not mean you have to bang your head on the table to understand how it works. As a novice trader, you need to learn from your mistakes and try not to repeat them.