COMMODITY TRADING – WHAT TO KNOW AS A FIRST TIME INVESTOR
Trading commodities can bring big returns for investors that know what they are doing but trading commodities is not for the faint hearted and most people who trade commodities lose money. If you want to enter the high-risk world of commodity trading you should bear in mind these simple rules to reduce your risk.
There are several reasons common to losing in commodities but with a little education and discipline in place, the commodities market can offer high returns.
Get Educated on the Commodities Market
One of the most common mistakes of the novice commodities trader is a lack of knowledge about the commodities market. You need to know more than just the basics to successfully trade commodities because you will be in direct competition with professional traders with vast experience who have benefitted from some of the best investor education available. Consider taking classes from a professional and also read and absorb as much as you can before you start risking your investment dollars.
Paper Trade Before you use Real Money
There are many trial-trading accounts available for commodities and these offer a valuable insight into the realities of the market. Open an account and paper trade for at least a few weeks to see how you would have done in the real market.
Do not use too Much Leverage
Leverage seems attractive to the novice commodity trader because of the extra returns that it promises but be aware that the more heavily leveraged you are, the quicker your investment will diminish if the market moves against you. Using too much leverage is one of the basic mistakes that new commodity traders make and is one of the easiest ways to get your fingers burnt. Start slowly and increase your leverage as you learn about the markets and risks.
Manage Your Funds Effectively
To give yourself the maximum chance of success do not put all your eggs in one basket. Your maximum individual trade size should not be more than 5% of your risk capital. Use stop orders to manage this.
Have a Trading Plan and Stick to it.
Before you start, make a trading plan and be prepared to stick to it. You should commit your plan to writing and review it on a regular basis. Your plan should include your strategy, money management rules and contingency plans for the event that you are losing money too quickly. If you trade without a plan you are much more likely to lose money.
In Conclusion – Only Invest Risk Capital
Any money that you invest in commodities should be seen as risk capital meaning that you could afford to lose part of or the entire amount invested if the markets move against you.
Commodity trading offers some of the largest profits available in the financial markets but anyone investing in this arena needs to keep their wits about them and expand their knowledge on an almost daily basis.
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