05 jul 2013
Commodity Trading Is This Stuff Blocking Your Way To Trading Success Part 2
Commodity Trading – Is This Stuff Blocking Your Way To Trading Success? – Part 2
Even when trading conservatively and slowly there is a tremendous amount of money to be made in commodities. Most new traders try to rush it and swing for the fences. You can often control $100,000 worth of commodities with only $10,000 of margin money in your account. (5%-10% leverage) Here’s how to take advantage of this leverage and why those who abuse it lose their shirts.
Here’s some more stuff that can block your success in commodity trading:
Be alert to aggressive commodity brokers who may try to “load up” a new client quickly in an attempt to “lock in” their capital. This means putting love here all your money into the market right away. This tactic is sometimes used when buying options. Options can create a false sense of hope and safety. They claim there is plenty of time for a move since commodity options can have several months before expiration. Yes, lots of expensive time to sit and hope and wait. But if the futures market goes nowhere for a few months, the client is shocked to find his capital has not remained intact, but rather has eroded severely.
If the commodity broker fears his own poor trading record, it is easier to make full use of the client&25263; capital by loading him right in the beginning. In contrast, when committing to trades slowly and holding cash in reserve, a client is more apt to close his account if part of it erodes, before much damage is done. So, you can see the incentive for a commodity broker with a poor trading record to try to put most of the money into the market quickly. It&25263; sad, really. I have no problem with poor trading. There are times when I can&25264; trade out of a wet paper bag. We all have our bad times. But what bothers me is putting too much money at risk with an all-or-nothing attitude. Just be alert to this. It’s YOUR money at risk.
Money management is important no matter what style of commodity trading. Risking less than 10% on any one trade is the key to survival. Less than 5% is even better if you have the account equity. I&25254; not saying that futures contracts are better than commodity options. I&25254; saying buying way out-of the-money, far out in time commodity futures options can make us lazy in our market entries and risk analysis. The cry is, &25553; have plenty of TIME!!… I&25254; not worried.?But that expensive time passes quickly. Just look at the monthly chart of your favorite commodity (or stock) and notice how often the market will chop nowhere for six months at a time.
With futures contracts, you are “marked to the market” and are more apt to do something about a dead position. When buying options on futures, time can creep up while we&25262;e lying on the beach fat and happy waiting for something to happen. Once the commodity option premium declines sharply, the universal urge is to hold it and go down with the ship. The better solution is to take a partial loss and move on. (For a better overall solution, read my articles about protecting a futures contract using an option hedge)
If you are doing the long-term commodity option analysis for your own account, then do it like you are going to buy a house. You wouldn&25264; just jump into a new house purchase without doing as much homework as possible, right?&29171;ou would take your time. There&25263; no way a real estate agent could push you along into a fast deal, right? Then unless you know and trust your commodity broker and are confident in his abilities, be cautious if he wants you to commit more than 10% of your account to one trade.
Even &25593;iversification?can be a curse as well as a blessing. Diversification can be another way of saying, &25553; don&25264; know what&25263; going on, so I&25254; going to spread my money around.?From time to time, every one of us has a string of losses. You need to be able to withstand at least ten bad commodity trades in a row and still have capital to trade. Even if you &25593;iversify? there will be times when all trades go bad. Loading up an entire futures or options account equity into two or three ideas is a sure way to fail and fail quickly. Maybe not on this series of trades, but over time, probability will have its day. this website Diversification is OK when you get a cluster of high probability trades at once. To diversify www.monsterlegendshacktoolsz.xyz/monsterlegendshack/ for the sake of diversification may backfire.
Part Three of Four – Next!
There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.