Commodity Futures Trading – How To Reduce Risk And Aim For Success

If you are reasonably new to commodity future trading then do keep in mind that there a number of things that can go terribly wrong – there is a large risk factor here. With this in mind its wise to risk only the capital you can afford to lose and nothing more. Do not borrow as I have done myself. Too much risk to take – believe me!

With commodities trading, in comparison to stocks and shares, there is a positive factor. There will never be a time when your investment is totally worthless. For example – gold, natural gas, corn will all have some financial value. It may well drop at times but it will never be worthless. Stocks and shares however can be worthless. Bankruptcy has hit many a company in the past’ months.

Keep your wits about you and do not get carried away with your successes. Do not either have the mentality of making up your losses as soon as possible. If you do then you end up gambling and this is not what commodity trading should be about.

Many commodity traders, particularly those that are fairly new to the business, try to utilize too much leverage. As an example of this lets take 100 ounces of gold as a contract with a value of $1000 an ounce. Total value is $100,000. The margin (deposit) will probably be around 10% of the value of the contract, thus $10,000.

Now this is where the problems begin to arise. A commodity trader who is being bullish on gold may think its a good time to buy into 10 gold contracts at a cost of $100,000 to their trading account. So if the price of gold were to move to $1100 an oz. then all is well and the money in the traders account doubles.

But if the price of gold were to reduce by that $100 an oz. and provide the trader with a value of $900 an oz. then the trader would be wiped out unless they were in a position to meet a margin call from their broker and place further funds into their account.

With this sort of exposure in the market we could end up with serious losses. Its all very well to see things very positively and continue to believe in profit after profit. But at the same time we need to be realistic and know that there will be times when we hit a few losses. As such we need to have the funds available to deal with the losses.

When trading in online commodity futures there are many advantages over the traditional method due to the ability of up to date information of the market. But this leads perhaps to an inexperienced trader being given a false sense of security leading to over exposure of available funds. Keep things in moderation and the chances are good that slowly and surely your trading account will flow with profits.

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