5 ways to avoid losses in commodity market

Commodity markets have a tremendous impact on the economy and the life of people. Though demand-supply is the prime factor behind the price volatility, currency moves, geopolitical issues, economic growth and government policies are other factors influencing commodity prices. Typically, the commodities market is subject to rallies and crashes, so it is more susceptible to speculation than the stock markets.

Before participating in commodity futures, an investor or trader should be prepared and ready to learn how the market works. Futures contracts unlike stocks have different expiry periods. As the futures platforms are primarily intended for hedging with a view to reduce the risk in portfolio, those who are participating in the commodities segment without fully understanding the fundamentals of the contract will stand to lose their initial capital or a part thereof. Anyhow, if we follow certain guidelines before investing, it can reduce the threat of losses and maximise profits.

It is very essential to articulate the proportion of risk and reward. One must know in advance how much risk he can afford on his available capital while trading in futures. Also, never invest the whole money in a single commodity. The best option is to allocate the capital in different assets, so any wrong trade resulting in a loss can easily be halted. In addition, while facing any uncertain situation, the ideal strategy will be to remain patient until a clear picture is revealed. Executing a bad decision is worse than not trading at all. Compared to equities, a commodities futures contract provides greater flexibility to the participants, helps the hedgers to protect their physical position and attract more speculators. Hence, predetermining the risk reward is vital to overcome the large number of speculative traders.

Trading in commodity futures includes a certain degree of risk as it is influenced by various factors, it is essential to protect positions ourselves. Using a sell or buy contains losses at a comfortable level or through using hedging strategies are important. The main reason why traders give up trading is due to huge losses they suffer as they normally would not place a stop loss in their trading strategies. It has been noticed that maintaining appropriate stop losses helps minimising losses and maximise profits.

Every successful trader has his own system that helps them improve profits and keep losses at a minimum.

These techniques can be gained by constant market attention over a period of time. Avoiding common mistakes will help improve gains. Planning ahead of trading is also important. Any sudden price movement may not be a proper entry or exit point of your trade.

It has been noticed that traders with little experience rush to book profits on their winning strategies at the first instance, but hold on to the losing strategies to accumulate losses. It is very important not to close the winning trades too early. Always try to trail the market price by continuously revising stop losses and grab maximum profits in such trades. Fear and impatience will lead to unfair decisions; so avoid it.

A new trader in commodity should start with a small initial capital. Never go beyond rumours and invest the whole capital at a time in hopes of profiting quickly and easily.

A good futures trader can make profits in any market condition. A clear knowledge on world-related events which influence price fluctuations helps in taking the appropriate decisions. Application of fundamental and technical analysis will help the trader spot more opportunities. Attending seminars and understanding the mistake of other traders will help in identifying the pitfalls and avoiding the same.

Apart from the above strategies, it is very important to control one’s emotions.

Fear, anxiety and greed are the common traits of human beings, overcoming such emotions are a must for every winning trade. Confidence based on solid research helps overcome emotional trading decisions. However, real success in trading comes with discipline and experience.

The writer is a Senior Analyst/ Research Head at Geojit Comtrade Ltd. The views are personal.

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