For most traders, commodity trading is a bad idea due to the risk involved. There are many different reasons that can see an investor lose money in this field; from initial margin to volatility market. However, most investors don’t dive deep into their reasons for losing money, some of which are due to avoidable mistakes.
The most important thing is to identify a mistake before entering into a trade and avoid it. Like other investments, commodity trading is full of risks but it also presents opportunities to make huge profits. Even with limited capital, you can enjoy significant returns provided that you avoid some of the most common investment mistakes. Here are some mistakes investors commonly make when venturing into commodity trading.
1. Poor Diversification Planning
Diversification is key to creating a balanced investment portfolio that spreads risks across various asset classes. In some cases, an investor will fail to diversify their portfolio and end up investing huge chunks in a single position. Ideally, you should divide your capital across different groups to mitigate loss in case one of them performs poorly.
However, overdiversification is also something you should watch out for. Over diversifying affects the performance of your portfolio. Your portfolio is likely to get stuck in a dilemma if you invest in many securities, all with different characteristics. This limits its growth.
2. Ignoring the Need for a Stop Loss Strategy
Commodity markets are extremely volatile. Each time you notice an opportunity to make a huge payday, you should also know that it presents an equally significant risk. You could end up losing large sums of money if the market turns out differently to what you expected.
That is why you need a stop loss strategy. This way, you can stick to making trades when your investment hits a preset cusp. For instance, you can instruct a system to sell units in a commodity class when it hits a specific price to avoid additional losses.
3. Making Decisions Based on Emotion
Where money is involved, every decision should depend entirely on logic. However, the opposite tends to happen when a lot of money is at stake. People make erratic decisions filled with emotions and this often proves costly.
When trading commodities, always put logic first. Make decisions based entirely on probability and analysis. You can work with analytic services companies like ArrowHead to understand commodity markets and uncertainties and streamline your decision making. Even when making losses, maintain a calm head to avoid emotional decisions.
4. Failing to Create a Trading Plan
Just like when buying crypto or investing in real estate, you need a plan when trading commodities. The commodity markets require detailed research and homework; similar to stock markets. A thorough trading plan should highlight guidelines for handling and managing current investments while providing a fallback option if things don’t go to plan. Rushing to make an investment without a proper plan will leave you stranded if the market takes a different course.
5. Not Taking Profits
It can be tempting to hold on to your positions hoping to land the big catch each time you make a trade. While this may work in your favor in some instances, it often results in losses as commodity tips often don’t pan out. The key to successful commodities trading is proper timing. Closing a position too early can also cause qualms down the line. If you have trailing positions, you may want to hold on a bit longer. It is a very dynamic market and you never know when things might change. The goal is to take the profits when possible.
6. Overtrading
Most investors mistake overtrading for more profits. However, overtrading will only lead you to more commission thus limiting your long-term profit. It is wise to limit your position since you will have to pay brokerage fees on every trade. The higher the number of trades the more you will have to pay in commodity costs. You can avoid this mistake by planning your trade when entering and having a clear exit time plan.
Endnote
Commodity markets present an opportunity to reap big if you are willing to stick to a plan, do some research, and avoid the mistakes detailed in this article. Make sure you have all the necessary information before you get started and only trade what you are comfortable losing.
