This article discusses
learn commodity trading strategies tips.
The fundamental fact about commodities that all players must reckon
with: Incredible volatility. The fluctuation per day averages about 1 %.
Multiplied by a leverage factor of 20, the trader can anticipate at
least a 20% profit or loss per day. It's hard to have the stomach to
cope with these losses or gains in a businesslike fashion. But anyone
who actively trades tangibles (gold, diamonds, paintings, or antiques)
is probably a good candidate for commodities.
Comparison to the stock market: The aggregate value in
commodities is much larger than the stock market. And the dynamics are
much greater. Result: Money is made and lost faster. And there are many
more pitfalls.
In the stock market, you can lose money in bits and pieces. You don't
realize a loss until you sell out your position. Capital invested in the
commodities market is all at risk. You don't have to place a buy or sell
order to win or lose. Money is credited to your account if your position
is right. If it's wrong, the broker tells you how much you owe.
An old saying in the commodities market:
You never make money from the market; the market only lends you money
until it takes it back from you. It's probably true. And so is the
estimate that 95 % of the investors in commodities lose money. Although
the commodity exchanges have arbitrary limits governing how much prices
can rise and fall daily, investors can lose much more than they
initially put up.
For beginners: Brokerage houses will let you put up as
little as $50,000 for an individual commodities trading account. There
are also managed group accounts for people who are ready to put at risk
only $10,000-$20,000. Caution: A few of these groups have good records,
but most are only a couple of years old. Results are not sufficient to
evaluate them.
See
commodity trading
for more information.
Making an emotional move is the most common way speculators get hurt.
The market is so volatile and moves so fast that an investor is, in
effect, constantly making a buy or sell decision. And the leverage is so
great that a move of a few cents means a few thousand dollars.
Investors must: Expect to make wrong decisions that could cost a great
deal of money. Set a time horizon once a decision is made, and stick to
it.
General rule: With leverage so high, you may expect to win or lose 25%
of capital on any day.
Problem: When you are making and losing such large
sums you forget one of the basic principles of running a business:
Recognize the real costs.
The average holding in commodities is only four or five days. A $60
commission every time you make a move can mean thousands of dollars in
commissions a year that wipes out a good part of your gain.
The difference between the bid and asked prices for a commodity can run
three times the commission cost. Result: When you get into a commodity,
you are frequently already down 20%.
Human frailties are likely to emerge in commodities
trading. Reason: People get excited about making a lot of money, due to
the volatility. Professionals recognize that the chief effect of
volatility is to relieve the public of the maximum amount of money in
the minimum amount of time.
To
Learn Commodity Trading Strategies
Tips - Top
The psychology of trading:
• Movements during the day play on the emotions. If you are wrong, you
have to adopt a very unemotional attitude toward the loss. The worst
thing to do: Keep calling your broker all day.
• Have the moral fiber to stay with your conviction. The average trader
must increase the time horizon for holding a contract IS-fold before
getting the chance to make a profit. Example: Instead of trading every
three or four days, hold on to the contract for 50 days. That gives you
a saving on commissions and the bid/asked penalties.
• Worst mistake of all: Doubling up after a gain or loss. When you do
this just a small loss will wipe you out.
• Looking for bargains is a mistake in the commodities market. When
prices drop, don't buy. It is better to short when things start to look
cheap.
Strategy for outsiders: Don't convince yourself that you can read the
daily financial pages and get sufficient insight into commodities. You
are trading against experts who know the number of freight-car loadings
in Peru and the hourly temperatures in Russia. Whatever insight you have
probably won't be superior to theirs.
Exception: If you are in a business where you are sensitive to certain
trends (like the impact of a fall in sugar prices on the candy
business), your understanding may be of value in a long-term time frame.
Personal knowledge gives you a realistic outlook that
helps you invest in commodities. If this is the case: Consider at least
a six-month horizon in which you want to move. Don't put up a minimum
margin. Put up 15 % instead of the required 5 %. Plan on maintaining
your position.
Fundamental impact of interest rates on commodities: When rates are
high, everything else goes down. Investors lose sight of this, because
when rates are high everything is usually booming. They forget that a
disaster could just be around the corner. If you are long when interest
rates are high, you will get wiped out.
Rule: Go against short-term trends and with long-term trends. Example:
If soybeans have gone down 15 % in a month and up 3 % the last week,
don't buy. Sell short!
Now we will discuss mistakes commodity speculators make.
A famous commodity trader has achieved great success in maintaining a
highly profitable record. However, on the road to success, they made
numerous mistakes that they feel every speculator should guard against.
They are of three types:
Emotional errors:
Buying and selling on hope and fear, rather than on principle. Hope
springs eternal for commodities traders since there is so much upside
potential. Urge when you have a loss:
Give it a little more time. Pure human emotion prods traders to wait
"another half hour, until the price goes back up." When traders have a
profit, they think: Take the money and run. Best: Have a plan and follow
it.
Following the advice of a broker. They usually call when you have a
profit, which they encourage you to take. It seems sage to say: You can
never go broke taking a profit. But the truth is, you will always go
broke taking small profits. Speculators can only really win in
commodities by taking a very large profit. You must average the many
small losses against a few large gains.
Having a bullish bias. In the commodities market,
unlike the stock market, it is as easy to sell short as to buy long.
Many traders got into the market when gold was rising, and they got
stuck because they only knew how to go long and hold. On short positions
the tendency is to close out too soon.
News-jerking-taking action because of a breaking news
story. Example: Buying a metal because the prime interest rate has just
been lowered. Key: The market is too smart and varied for people to make
money by doing the obvious a few minutes before the herd. Lacking
perspective. One advantage average speculators do have over the instant
traders is distance from the market. They are not influenced by hourly
price gyrations. Once you start waking up in the morning wanting to know
the closing price of gold in Hong Kong or the morning opening in London,
you are on your way out. Reason: You wind up making trading decisions
based on international rumors, which represent temporary factors.
Example: Gold moved right back down when the Russians marched a few
miles away from Poland, and just a few hours later the Socialist party
won the election in France.
Capital management mistakes:
Taking a position so large it becomes impossible to offset if the market
moves against you. You're locked in.
Pyramiding. Adding to positions going in your favor. You can be wiped
out by a small move against you.
Having too much of your capital on one side of the market, either long
or short.
Trading in markets that are illiquid relative to the size of your
position. The risk: There are not enough floor brokers to bid against
your positions. You are exposed to poor executions and are locked in.
Short-term perspectives:
Not having a specific buy and sell rule in mind when opening a position.
Result: You hold on indefinitely.
Being over concerned about commissions and spreads. They really
represent a very small fraction of the potential return or uncertainty.
A related mistake is to try to buy at the bid and sell at the offer.
Relying too much on opening and closing calls. These
calls are only estimates based on transitory factors. They frequently
fool the public and even experienced floor brokers.
Trading during inactive periods, before holidays, near the close on
Fridays. Moves during these periods tend to be in the opposite direction
from the next big price change and are designed to relieve the
speculator of good positions.
Forgetting momentum. Trends in commodities reverse only for a day or two
and tend to continue for extended periods. Don't stand in the way of a
freight train.
Focusing on selling out at round numbers.
The way floor traders manipulate stop orders (usually at round numbers)
militates against being able to sell at round numbers.
Buying on the cheap. Never buy a commodity just because the price is
low. The longs have lost all their capital at these lows, and it will be
a long time before they have the courage to bull things up again.
Source: Consumer Information Center
Disclaimer: While every
effort is made to ensure that the content of this website is accurate,
the website is provided “as is” and Bizmove.com makes no representations
or warranties in relation to the accuracy or completeness of the
information found on it. While the content of this site is provided in
good faith, we do not warrant that the information will be kept up to
date, be true and not misleading, or that this site will always (or
ever) be available for use. Nothing on this website should be taken to
constitute professional advice or a formal recommendation and we exclude
all representations and warranties relating to the content and use of
this site.
