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The “Managing Commodity Trading Risk" article examines and elaborates upon on how to m inimize losses and mange risk Comparing the Effectiveness of Commodity Trading Strategies s and the factors to always keep in mind while trading the commodities and futures markets in order to avoid mistakes and ensure success.
Anyone contemplating buying or selling a commodities and futures contract should clearly understand that there is a risk that any particular transaction may result in a loss. Because of the structure in trading rules in markets, that loss can not only entirely eliminate the margin placed for the transaction, it could theoretically even wipe out all the funds in the account. There are actions that can be taken that can limit losses. It is always best to be safe, rather than sorry.
The only constant is change
Prices in markets change. When, how, and why they change are topics of much discussion. The fact that they do change can produce profits or losses for an investor. Past behavior is no guarantee of future direction. It is a good indicator. No matter how astute and competent an individual is, he should always be prepared for the worst. According to Murphy's Law, "Whatever can go wrong, will go wrong."
Diversifying away risk
One of the primary ways in managing commodity trading risk is portfolio diversification. The more and varied markets you are participating in, the less likely you will have concomitant losing trades. Your portfolio should be composed of individual commodities in various groups. Even if some trades are losing, it is highly unlikely that they would be all falling at the same time. Improper diversification with concentrations in market groups defeats the purpose of the principle behind portfolio diversification. The reason for this is that most product groups move in tandem.
Each trade should be treated equally
Notwithstanding the above, each transaction should be viewed on an individual basis. The loss any individual should be willing to accept on each trade should be a very small percentage of the total capital available to him to invest. Every transaction should have a stop loss order implemented once the trade has begun.
Managing the timing
Timing is critical for success in the commodities and futures markets. All trades should be well planned out for optimal and proper entry. An investor may have properly analyzed the market but lose money because of too early of an entrance into his position. A market correction materializes, stopping him out of his position at a loss, but then proceeds in the anticipated way. When in a winning transaction never exit prematurely, always allow your profits to rise. Limit loss of profits by utilizing trailing stops.
Practice money management constantly
General money management principles should always be in place. Investment funds at risk should never be an excessive percentage of total funds available. Any exposure to an individual market should be a small percentage of all investment funds at risk.
The best way to limit risk is the trade successfully. This entails never trading against the market trend. In up trends, buy the corrections. In downturns, sell the bounce is up. Don't be a gambler – always have a well thought out strategy before entering any transaction. Never put good money after bad trades. Only add positions if you're in a winning trade.
All risks can be managed. With proper diversification, no undue concentration and exposure, and proper money management techniques, an individual can successfully trade commodities and futures with profitable results. The people who lose in these markets are the ones who are the least prepared. They become emotional and distraught which usually results in mistakes and losses. Stay calm, be prepared and your portfolio will thank you.
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