The 5 Common Mistakes Of Commodity Trading

01 Mar in Blog, commodity rules

  5 Common Mistakes Of Commodity Trading—I will start with the number 1 answer first because if you follow this rule you will have a chance of being successful over the course of time, if you don’t follow this rule you will be sure to lose your money quickly. This rule is simple Do Not OVERTRADE EVER for this is an easy way to lose all your capital quickly. My definition of over trading is risking too much money on any given trade, for example if you are trading a $100,000 dollar account and you place a gold trade today you should limit your loses to 2% of the account value which in this case is $2,000 which allows you to be wrong on many trades and still be around to play another day. In futures and option trading you will have losing trades that is for certain so make sure you manage those loses and move on to another trade.

 

2—Trade with the short term trend, as the saying goes in futures trading that the trend is your friend. Sometimes you will be a market that is trending higher and then has a false breakout to the upside and then suddenly sells off causing you a 2% loss on your equity and you say to yourself that was a bad trade and should I do something different on my next trade. If it was up to me I would continue to buy strength and sell weakness because in the long run commodity trading is about percentages of success in the long run, and if you go with the path of least resistance more often than not you will have the probabilities of success on your side. I define a trend as a commodity hitting a 20 day high or low as a trendy market, if the market is in a consolidation stay away from it and find something that is trending up or down and go in that direction remembering the money management rule of 2% maximum loss you are wrong.

 

3—The next rule is extremely important and I witness it being abused constantly creating tremendous loses that are sometimes difficult to come back from. Never add to a losing position because if the position continues to go against you and now you have added even more contracts which are all losing money your account will suffer loses much more than 2% and in some case adding positions and never getting out of a losing trade has wiped peoples trading accounts down to zero because of 1 or 2 bad trades. Remember always play for another day you will have losing trades and the good traders manage loses and move on to the next possible trade.

 

4—If you follow the first 3 rules than this rule will never apply to you because you were not over trading and risking more than 2% on any given trade. Never answer a margin call because you are probably overtrading and most likely the position is going against you and probably have lost much more than 2% on that trade. Never allow this to happen to you always have sufficient margin in your trading account just in case the exchange raises margin and that will not force you out of the position. A great rule is to keep 50% of your total portfolio in cash and the other 50% in trades that way if something crazy happens and it does sometimes this helps in managing risk in a huge way.

5—The last rule is very simple and it states that one must have a game plan and use it consistently even during periods of loses which will happen to you over the course of time. Do not suddenly start to risk 5-10% because you have to catch up and get your loses back quickly, stick with the game plan and over the course of time this will help improve your percentages of success. If you have an unproven system that has not been tested then I would look to paper trade the account until you see success and you are comfortable with loses and daily volatility.

 

 

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