Tips to Avoid Losses during Commodity Trading
Commodity markets have a considerable influence on a country’s economy. This is because these markets facilitate efficient price discovery as traders speculate on commodities’ buying and selling prices on the economic principles of supply and demand.
Due to its highly speculative nature, the commodity market is subject to high volatility. Any major economic events can cause major shifts in commodity prices, resulting in major gains or losses for investors and traders. So, investors and traders need to know specific methods to reduce the risk and minimise losses.
Here are some tips on how to avoid losses in the commodity market.
Diversifying Your Investments
As an investor or a trader, assessing the risks and returns associated with the commodity markets is vital. Also, knowing your risk appetite is a crucial factor in investing.
A great way by which you can mitigate losses incurred from commodity trading is by refraining from investing your entire capital into a single commodity. This is because, even if one asset underperforms, the other assets that perform well can compensate for the losses incurred.
Portfolio diversification is a great help in reducing risk. This applies to all types of trading, not only commodities. Also, it is essential to avoid panicking during short-term market fluctuations.
Commodity trading offers enormous flexibility and helps hedgers protect their assets while attracting speculations on market growth. Determining your risk tolerance is vital to overcome many speculative traders.
Maintaining a Stop Loss
Another way to avoid losses during commodity trading is to maintain a stop loss. A stop loss is an automatic order that regulates the buying and selling of an asset once it reaches a predetermined price.
This way, the risks associated with heavy market fluctuations can be mitigated using a stop-loss order. Stop losses are integral to commodity trading due to their inherent volatility. Unfortunately, one of the reasons many traders incur losses is that they fail to place a stop-loss order on their trades.
A helpful tactic in trading is trailing your stop loss to the break-even point as soon as the market seems favourable.
Paying Attention to Market Movements
Each trader has a unique trading strategy.
Before devising any trading strategy, you must monitor the market continuously and analyse the factors that affect commodity prices. In addition, you should avoid common mistakes, such as entering or leaving the market based on short-term price fluctuations. Impatience and panic usually lead to imprudent decisions.
Be Cautious of High Leverage
Commodity trading platforms provide high-leverage facilities. Leverage refers to borrowing funds for trading assets after paying a certain margin. In the case of commodity futures, the leverage can be as high as 16 times. In addition, it can be increased even beyond when a stop loss order is made.
The high-leverage facility seems convenient to many traders. However, it could backfire when not understood properly and lead to massive losses.
It can increase your profits significantly, if the market goes in the favourable direction. Similarly, it can also magnify your losses, if the market goes in the unfavourable direction. Therefore, traders must remain cautious of high leverage while trading in the commodity market.
Playing it Slow and Steady
Trading with sufficient market knowledge and with calm demeanour is crucial to avoid losses during commodity trading. Unfortunately, many traders end up trading hastily as they want the maximum profits as soon as possible.
In the run for quick profits, one may implement investment strategies which are ineffective. Therefore, it is essential to keep revising your target price and stop loss to increase your profits.
Identify Your Niche Commodity Class
While gaining experience in commodity trading, you must analyse various commodities and determine the most suitable one. Sticking to the particular commodity class in which you have significant experience helps reduce losses. Moreover, it lets you use your expertise to your advantage.
The last tip to avoid losses in commodity trading is always to be prepared. This means clearly understanding the basics of the commodity market and trading strategies.
For beginner traders, it is always advised to start trading with a small initial capital amount. Investing small amounts of money helps in reducing losses. You should also refrain from entering the commodity market based on the mindset of making enormous profits in a short time and with low effort.
A successful commodity trader can generate returns regardless of market conditions. In-depth knowledge and outstanding analytical skills are the keys to making sound trading choices. The above tips to avoid losses during commodity trading can be helpful for traders to spot unique opportunities while minimising the risks.
Frequently Asked Questions
What kind of risks are associated with commodity trading?
Numerous risks associated with commodity trading include market risks, counterparty risks, operational risks and legal risks, among others.
What differentiates commodities from goods?
Commodities are the raw materials used in the manufacture of more refined goods. Finished goods are ready for use and sold directly to consumers. In other words, commodities fall in the early part of production, while goods fall in the final stage. For instance, shirts (finished products) are produced after processing textiles (commodities) such as cotton.
Which exchanges offer commodity trading facilities?
The Two main commodities exchanges are the Multi Commodity Exchange (MCX) and National Commodity & Derivatives Exchange (NCDEX). Both of them facilitate futures contracts to conduct the trades. MCX is a popular place for trading gold and metals, while NCDEX focuses more on agri commodities. Apart from MCX and NCDEX, Indian Commodity Exchange (ICEX), National Stock Exchange (NSE), Bombay Stock Exchange (BSE) also facilitate commodity trading.
When are commodity markets open in India?
Commodity markets in India are open from 9 AM to 11:30 PM on trading days. The timing is comparatively longer than stock markets because it allows trading with the US and European markets.