Commodity Trading – Chapter 7: Risks of Commodities Trading

This is chapter number 7 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

Anyone who is planning to go for speculation ought to be totally aware of its pros and cons in commodity trading, as you’ve seen in the last few chapters. They should also be at ease with all the risks involved. Risk management is an important aspect of any key of success for a trader in commodities. Although risks can never be totally eliminated, they can be managed and hence reduced. Speculators earn high return only because this is their reward for shouldering the risk others avoid.

Theoretically speaking, a commodity trader only loses money when the price of the Futures contract he purchased drops. He only risks the price of the Futures contract dropping to zero. However when he sells, he will lose the potential profit which he might had gained when the price goes up. Then again, there is no actual ceiling as to how high a price can go and thus the risk, theoretically becomes unlimited. Uh-oh!

In reality, you can offset your position when the market current is against you to limit your losses. In most case, you can actually limit the extent of your losses to just a few hundred of the total amount of the Futures contract. It is only in extreme circumstances that your losses can swell uncontrollably and unexpectedly to thousands of dollars.

One of the most expensive markets to trade in is the S&P stock index. In fact those whose accounts are capitalized at less than $25,000 are not advised to trade in the S&P stock index. Consequently, if a once in a lifetime event does occur, it will most probably just eat up around 20% or less of a reasonably sized capitalized account.

Other kinds of catastrophic events to a commodity trader which can result in unforeseen losses include:

• Frost
• War
• Storms
• Floods
• Droughts
• Earthquakes
• Volcanic Eruption
• Government Intervention
• Adverse economic reports

 

Nevertheless, if one is to tread carefully, one can avoid the adverse effects of these events. The best way to go about this is to trade slowly and conservatively without greed taking hold of one’s investment decision.

If you are unable to handle the stress of losing, than you should not be venturing into commodity trading. Regard commodity trading as a business venture where you win sometime and lose sometimes. Do not take loss personally as to your ability to trade in commodities. Murphy’s law would state that if anything can go wrong, it will go wrong…even with the most well planned strategy. 

Read Commodity Trading – Chapter 8: 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