Commodity market trading is something that demands a lot of practise. Just like how a sportsperson would train for success, in commodity market trading too, consistent knowledge building and dedication is important. It is an art that could take a long time to master, and your best guide is the mistakes others have made in the past. This will help you avoid the common pitfalls and learn without making the same mistake yourself. Let’s look at the top 5 trading mistakes you should avoid to become a successful trader.
What is commodity trading?
A commodity market is where primary economic sector commodities are traded, like how stocks are traded in a stock market. These commodities could include sugar, fruit and even mined goods such as gold, silver etc. The trades happen based on the price of these commodities, and both retail and institutional investors have access to the same.
Commodity markets often go in the opposite direction of stock markets, and hence, they receive a lot of attention from investors when stock markets face bears. Moreover, it is crucial to diversify your portfolio, and commodity markets give you a viable option for the same.
Now, let’s discuss some of the most common commodity trading mistakes to make sure you steer clear of them.
1. Trading without a plan
Commodity markets also demand proper research and homework like a stock market investment. This will help you formulate a plan essential for trading success. Your plan should contain guidelines for managing and handling your current investments and backup options if your calculations are proven wrong. Often, many investors will jump in without formulating a plan, leaving them stranded if the market goes against their plans. You might end up losing money on such occasions, making having a trading plan all the more critical.
2. Overdiversifying your portfolio too quickly
Diversification is often essential to create a balanced investment portfolio. But at the same time, you should also make sure you don’t over diversify, impacting the performance of your portfolio. Moreover, when you invest in many securities with different traits, your portfolio can be stuck in a dilemma, shunning its growth. Hence, it is always advisable to figure out your investment horizon and then find space in it to accommodate diversification. This way, your goals are met, and your capital is protected simultaneously.
3. Not using stop loss strategy
Commodity markets can be a very volatile place at times. While it gives you an option to earn big, there is a risk with similar potential. This could cause you to lose money when the market goes opposite to your forecasts. A stop-loss strategy is something that can help you here. It will help you make sure a trade is made when your investment hits a preset cusp. For instance, if you have set to sell your units in a commodity when it has hit a certain price threshold, the system will automatically conduct the trade, avoiding additional loss. Hence, not using a stop-loss strategy is often deemed a mistake.
4. Letting emotions impair your decisions
Your decisions should solely depend on logic, not emotions in any form of investment. When a lot of money is at stake, people could often make flawed decisions tainted by their feelings. This could prove to be costly at times. Hence, it is always advisable to put your logic first when making investment decisions. Make sure all your choices are based on analysis and probability. Keeping calm when you are losing money to quickly make a decision that is not affected by your emotion is a skill that you should practise and learn.
5. Lack of discipline
Discipline is one attribute that is essential for all investors. You should be able to stick to your plan at all times. Unfortunately, many new investors succumb to the pressure of losing money or the glory of gaining profit, and they start to move away from the plan. But this will prove to be wrong on most occasions. Just like how you should keep your emotions in check, it is critical to make sure you are not overconfident. Commodity markets are complex, and success is often for investors who respect this complexity and trade accordingly.
6. Not researching the markets properly
Some traders will open or close a position on a gut feeling, or because they have heard a tip. While this can sometimes yield results, it is important to back these feelings or tips up with evidence and market research before committing to opening or closing a position.
7. Overexposing a position
A trader will be overexposed if they commit too much capital to a particular market. Traders tend to increase their exposure if they believe that the market will continue to rise. However, while increased exposure might lead to larger profits, it also increases that position’s inherent risk.
Investing in one asset heavily is often seen as an unwise trading strategy. However, overdiversifying a portfolio can have its own problems, as explained below.
8. Overdiversifying a portfolio too quickly
While diversifying a trading portfolio can act as a hedge in case one asset’s value declines, it can be unwise to open too many positions in a short amount of time. While the potential for returns might be higher, having a diverse portfolio also requires a lot more work.
For instance, it will involve keeping an eye on more news and events that could cause the markets to move. This extra work may not be worth the reward, particularly if you don’t have much time, or are just starting out.
That being said, a diverse portfolio does increase your exposure to potential positive market movements, meaning that you could benefit from trends in a lot of markets, rather than relying on a single market to move favourably.
You can get market updates and news in one place with IG’s news and trade ideas section.
9. Not understanding leverage
Leverage is essentially a loan from a provider to open a position. Traders pay a deposit, called margin, and gain market exposure equal to as if they had opened the full value of that position. However, while it can increase gains, leverage can also amplify losses.
Trading with leverage can seem like an attractive prospect, but it is important to fully understand the implications of leveraged trading before opening a position. It is not unknown for traders with a limited knowledge of leverage to soon find that their losses have wiped out the entire value of their trading account.
To avoid this mistake, you should get up to speed with trading on leverage by using our what is leverage guide.
10. Not understanding the risk-to-reward ratio
The risk-to-reward ratio is something every trader should take into consideration, as it helps them decide whether the end profit is worth the possible risk of losing capital. For instance, if the initial position was £200, and the potential profit was £400, the risk-reward ratio is 1:2.
Typically, experienced traders tend to be more open to risk and have suitable trading strategies in place. Beginner traders may not have as much of an appetite for risk and could well want to steer clear of markets that can be highly volatile.
Learn forex trading strategies for beginners
Regardless of how open you are to risk, you should have a risk management strategy in place during your time on the markets.
Conclusion:
Every trader makes mistakes, and the examples covered in this article don’t need to be the end of your trading. However, they should be taken as opportunities to learn what works and what doesn’t work for you. The main points to remember are that you should make a trading plan based on your own analysis, and stick to it to prevent emotions from clouding your decision-making.
