Staying Golden: 5 Rules for Successful Commodity Trading
Dec 10, 2018 10:32
Every successful forex or commodities trader will tell you that they have a set of rules they abide by strictly, and which have ultimately made their success possible. Many of them, of course, will have learnt of these rules through painful trial-and-error over time, but that is good news for beginner traders, as they can learn from the mistakes of their predecessors to make their path to trading profits that much easier.
We want to get into these rules so that you may benefit from the wisdom accumulated through the years. These aren’t specific, iron-clad rules, but a general guide distilled from the most commonly stated tips and suggestions from industry leaders and those who study markets - for a living or academically. There’s more to commodity trading success than keeping an eye on political climates, supply stockpile levels, trade deals in the making, growing seasons, natural calamities, and such. Here are some golden rules to help keep you in the green as you make your moves on the market scene.
When we say over-trading when it comes to commodity trading, we basically mean biting off more than you can chew. This might be the most important rule you will find on this list, because those who follow this principle faithfully will almost always achieve their long-term trading goals while those that fail to adhere to it are almost guaranteed to see their investment disappear quickly.
More closely defined, over-trading refers to placing too much money on a single trading position, meaning that should it fail to perform as you hoped, you will face a devastating loss to your financial position. A good rule of thumb here is to place you maximum level of exposure on a single stock, currency, or commodity at 2% of your total trading account. If you’re trading with a $10,000 war-chest, then your upper limit will be $200. As you can see, this will mean that you can absorb losses on your trades fairly comfortably and still have the finances to pick yourself up and trade on – hopefully wiser and more successfully.
Don’t Send Good Money After Bad
One of the biggest mistakes traders make is to spend more of their financial resources on losing commodities or stocks in the hopes of making their money back should a reversal or correction happen down the road. In plenty of cases, the anticipated change in fortune doesn’t happen, leaving the trader facing a loss even greater than the 2% over-trading limit they had set for themselves. There’s always another day to trade, so don’t place all your hopes on one horse.
The Trend is your Friend
This is a common adage in the commodity trading world, and it’s popular for a reason – because it’s true. By taking advantage of short-term trends in the market, traders can achieve their long-term profit objectives, which is the whole point of trading in the first place.
Do not let sudden reversals in what seemed to be upticks discourage you from placing your money behind certain holdings. Trust the trend, which could be considered any stretch of strong or weak performance lasting 20 days. Be sure to keep in mind what you’ve learned about over-trading to keep your finances safe from the capital-eroding effects of extreme market reversals.
Never Make Margin Calls
Should you be a prudent trader who has stayed faithful to the 2% rule mentioned earlier, then this will probably never be an issue for you. Margin call scenarios will usually present themselves when you are over-trading on a position that isn’t performing well for them. You always want to have some breathing room in your trading account to help you manage through a bad spell of market weather. Rainy days are real, and your margin spread is the extent of your umbrella.
Stick to the Plan
Don’t let the excitement of a strong run or the dread a run of bad luck brings about sway you from the plan you had set for your commodity trading activity. There is no room for those that allow their emotions to dictate their trades at the winner’s table. Stay consistent and you will see you plans work out over time. Any new and untested strategies should first be tried out on paper and proven to be effective before you put any real money behind your proposed plan of action.
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