Commodity trading – Chapter 7: Risks associated with commodity trading

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Anyone considering entering into speculation should be well aware of its pros and cons in commodity trading, as you have seen in the last few chapters. They should also be comfortable with all the risks involved. Risk management is an important aspect of any key to success for a commodity trader. While risks can never be completely eliminated, they can be managed and therefore reduced. Speculators only earn a high return because it is their reward for taking the risk that others avoid.

In theory, a commodity trader only loses money when the price of the futures contract he has bought drops. There is only a risk that the price of the Futures contract will fall to zero. However, when he sells, he will lose the potential profit that he could have made when the price increases. Again, there is no real cap on the height of a price and therefore the risk becomes theoretically unlimited. Oh oh !

In reality, you can offset your position when the market is against you to limit your losses. In most cases, you can actually limit the extent of your losses to just a few hundred of the total amount of the futures contract. Only in extreme circumstances can your losses increase uncontrollably and unexpectedly to thousands of dollars.

One of the most expensive markets to trade is the S&P Stock Index. In fact, those with accounts capitalized below $ 25,000 are not encouraged to trade on the S&P Stock Index. Therefore, if a once-in-a-lifetime event occurs, it will likely only consume around 20% or less of a reasonably sized funded account.

Other types of catastrophic events for a commodity trader that can lead to unforeseen losses include:

  • Gel
  • War
  • Storms
  • Floods
  • Droughts
  • Earthquake
  • Volcanic eruption
  • Government intervention
  • Adverse economic reports

However, if one wants to proceed cautiously, one can avoid the harmful effects of these events. The best way to do this is to trade slowly and carefully without greed taking hold of your investment decision.

If you are unable to handle the stress of losing, you should not venture into commodity trading. Think of commodity trading as a business venture where you sometimes win and sometimes lose. Don’t personally lose your ability to negotiate commodities. Murphy’s Law would state that if anything can go wrong, it will go wrong… even with the best planned strategy.

Read Commodity Trading – Chapter 8: Risk Management
Read Commodities Trading – Chapter 9: Steps to Take When Trading Commodities
Read Commodity Trading – Chapter 10: Commodity Trading – A Losers Game?
Read Commodity Trading – Chapter 11: Learn to Trade Commodities
Read Commodity Trading – Chapter 12: Creating a Trading Plan
Read Commodity Trading – Chapter 13: Stress in Commodity Trading


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