Published : February 13, 2021
Commodity trading has a tremendous impact on our economy and people’s life. At times, commodity trading tends to have an adverse impact on the economic life of ordinary people.
A commodity market is a market for buying, selling, and trading primary or raw products, referred to as commodities, rather than trading manufactured products. Commodity trading is affected primarily by demand-supply. However, price volatility, geographical issues, government policies, and economic scenarios within the country are other factors that affect commodity prices.
Traders involved in commodity trading are well aware of the probability of incurring huge profits or suffering massive losses. Massive gains resulting from commodity trading come paired with an adverse risk of losing the entire money.
The commodities market is more susceptible to speculations than the stock market due to a higher risk of rallies and crashes. Thus, before participating in commodity trading, a trader or an investor should be ready to learn and be prepared to incur losses in case of adversities.
Commodity futures, unlike stocks, come with an expiry period. The futures platforms are primarily used for hedging to reduce the portfolio risk. Thus those participating in commodity trading without completely understanding the fundamentals of the contract are likely to lose the capital invested or a part of it.
Though online commodityies trading involves a higher degree of risk, following some basic guidelines can help you prevent losses and maximize your commodity portfolio returns.
Follow these simple commodity trading tips to avoid the risk of losing your hard-earned money:
Diversify Your Capital: When it comes to succeeding in commodity trading, traders and investors need to articulate the risks and returns. An investor should know in advance the risk he/she can bear on the amount of capital he/she is investing.
The best way to prevent commodity trading losses is to refrain from investing your entire capital in a single commodity. To minimize losses, it is always advisable to invest your capital in different assets. This helps in reducing the losses by halting a trade gone wrong.
Furthermore, it is always advisable for traders to remain patient and not panic during uncertainty, which also happens to be the ideal commodity trading strategy.
Commodity Trading offers greater flexibility to the participants, helps hedgers protect their physical position, and attracts more speculators. Thus, predetermining the risk-reward profile of a commodity portfolio is important to overcome many speculative traders.
Maintain a Stop Loss: If you are not aware, stop-loss is an automatic order that facilitates buying and selling shares once the share price reaches the pre-determined price. By now, we know that commodity trading is influenced by many factors and involves a specific risk.
However, the risk involved can be minimized using the stop-loss order. The prime reason why most of the traders quit trading is huge losses when they fail to place the stop-loss order on their trades.
When talking about commodity trading, one of the winning strategies is trailing your stop-loss to break-even point as soon as you find the market in your favor. Always remember, placing a stop-loss plays an integral part of your commodity trading strategy. Putting the right stop-loss order helps you minimize your losses and maximize your gains.
Paying Attention to Market: Every trader has his unique strategy and system of investing in the market. These individual systems help traders in enhancing their profits and reducing their losses to the minimum.
However, to gain these unique techniques and strategies, it is vital for the traders to pay constant attention to the market for a period. Also, avoiding some of the common mistakes is the best way to improve one’s gains from the market. Always remember that a sudden price fluctuation should not form the basis of your decision to enter or leave the market.
Play Slow When in Market: Traders who lack knowledge about how the markets perform tend to panic and book profits as soon as possible. In contrast, they hold on to the losing strategy, accumulating more losses in turn.
Thus, it is vital for you not to close the winning trade too early. Try to gain maximum profits through such trades by continuously revising your stop-losses. Avoid fear and impatience as it will only lead to unfair decisions and maximum losses.
Stay Prepared: The last yet another important commodity trading strategy is always to be prepared. If you are new to commodity trading, the rule is to start with an initial amount of capital.
Refrain from believing in rumors and investing your entire pool of funds expecting quick profits. Always remember that earning gigantic profits from commodity trading in a short span is nothing but a myth. Thus, it is always advisable to minimize your losses by investing small sums of money. Furthermore, keep your emotions in control while trading in commodities.
A good commodity trader can easily make profits irrespective of the market condition. In-depth knowledge of the world events which influence commodity prices is the key to making informed decisions. Further application of fundamental and technical analysis will help traders in spotting more opportunities. Fear, anxiety, and greed are common human traits, and overcoming these emotions is the best way to avoid losses.
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