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The “10 Commodity Market Truths" article examines and elaborates upon fundamental factors to always keep in mind in the commodities and futures markets in order to avoid mistakes and ensure success.
Trading commodities can be a lucrative, stable investment. However, just like any other financial market, there are certain elements that will determine if your portfolio grows or falls by the end of the trading session.
Forecast . Before entering any position, the investor should have a clear expectation as to the direction the market will go. Bears make money. Bulls make money. Unless you've properly identified the market, no matter what you do, you will inevitably lose.
Timing . You have to clearly find the entry point at which you want to make your trade. Timing is critical. You may have correctly identified the market and still produce a losing trade by entering at the wrong place. Based on that entry, you should have precisely defined what your profit is will be. By the same token, you must have an exact, lost limiting exit strategy in the event that you are wrong.
Funds allocation . Never trade more than 50% of your investment funds committed to the markets. Even the most successful traders usually only have a success rate of roughly 40%. He or she must at all times have the wherewithal to withstand adverse market conditions.
Limit market exposure . As the saying goes," never put all your eggs in one basket." A prudent investor should never put more than 10% to 20% of available funds in any single market.
Limit risk . The total amount of funds an individual investor is willing to risk on any individual trade should never be more than 5% of that investor's available equity.
Limit related exposure . No more than 25% of capital should be exposed to any group of related commodities or futures. Even though there are many individual grain agricultural commodities futures markets, investing all of one's funds solely in this type of group exposes one to unnecessary market concentration risks. Though the intensity of the movement may vary, most individual markets within a group tend to move in tandem.
Learn from your mistakes . Carefully analyze losing trades! You lost because you made a mistake. At the same time, on the other side of the trade, someone else won. Try to figure out what he did right in what you did wrong.
Learn from your successes . Always let your profits run. You should always liquidate losing positions before ending profitable trades.
Trend . Always trade in the direction of the established trend. No one can pick precise market highs or lows.
Be your own boss . If everybody's talking about the “news,” that means it's already too late to act upon it. Those who follow the herd wind up in the slaughterhouse.
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