Commodity Trading – Chapter 8: Risk Management

This is chapter number 8 out of 13. Read the rest:

Read Commodity Trading – Chapter 1: History of Commodity Trading
Read Commodity Trading – Chapter 2: Commodities Trading
Read Commodity Trading – Chapter 3: What is traded?
Read Commodity Trading – Chapter 4: Using Commodity Trading as an Investment Vehicle
Read Commodity Trading – Chapter 5: Advantages of commodity trading
Read Commodity Trading – Chapter 6: Disadvantages of commodity trading
Read Commodity Trading – Chapter 7: Risks of Commodities Trading

Risk management is one of the most important parts of minimizing losses. To maximize your return long term, all you have to do is prevent yourself from incurring large losses and you will be on your way to success. Another risk factor to take into consideration is the market sector that you are trading in. Not all markets has the same level of volatility. Some are more volatile than others. Thus, if you are a small time trader, it is advisable not to trade large sums of money on precarious rollercoaster contracts like the S&P stock indices. Do not trade based on emotions, gut feelings or instinct. Practice risk management over greed.

The biggest element of risk actually comes from areas that we have no warning or control over. Usually this refers to acts of God. When such events occur and affect the market, and believe me they do, usually these events overtake any prior planning that you might have. Although risk can never be eliminated in its entirety, you can still protect yourself by pre-planning. Always take note of crop reports, news about adverse weather conditions, natural disasters, Government policy change and wars. Don’t overexpose yourself in markets which are susceptible to these kinds of events.

 You should only expose yourself only to what you are able to afford to lose in term of risk capital. Always have a tight leash on greed. Although we venture into commodity trading because the rewards are great, sometimes if we let the green eyed monster control us, we will lose all sense of proportion.

It is a wiser move to just aim for smaller but realistic returns until you are familiar with your trading system. Most professional money market managers are normally content with 20% steady returns. Therefore, if professionals are content with a return of 20%, you should also be as a novice trader.

Options trading on the other hand, is riskier and more problematic than futures trading. In addition, you must be well capitalized and committed to trading full time in options. If you cannot meet these two main criteria, you should only involve yourself in Futures trading. Professional option traders usually deal with small speculators thus you have to be prepared to be involved in a more restricted market.

For anyone looking in from the outside, the commodity market might seem complicated. In actual fact, to profit from commodity trading is relatively simple. You trade with a proven trading plan. You have tools to help you minimize losses and maximize profits. And lastly, you only venture into a selected group of markets which you have more information on. All that is required for any trader to be successful is sufficient working capital and proper risk management.

Read Commodity Trading – Chapter 9: Steps To Undertake While Trading In Commodity
Read Commodity Trading – Chapter 10: Commodity Trading – a losers Game?
Read Commodity Trading – Chapter 11: Learning to Trade Commodities
Read Commodity Trading – Chapter 12: Creating a Trading Plan
Read Commodity Trading – Chapter 13: Stress of Commodity Trading