Commodity trading is one of the most popular markets for traders across the globe. There are many unique features of the commodity market that make them more attractive to traders. However, just like in any other market, in the commodity market too, there are several traps awaiting beginners and careless traders. Here you can read about the three most important traps that can put an end to your trading career. Knowing them beforehand can help you prepare and avoid them in your trading journey.
Trap #1: The Leverage Trap
There is comparatively better leverage when it comes to futures trading in commodities. This entices most beginner to over-leverage himself. Though you might earn good margin in a couple of trades, a few losses one after the other is enough to wipe you out permanently from the market.
Greed is an inherent attribute of all human beings. Understanding this inherent limitation, take a firm decision not to get carried away by profits. Always focus on gaining consistent performance in the market rather than on gaining huge profits randomly. Stick to the basics at all times, especially immediately after you fetch a sizable profit. These simple steps will ensure that your feet are firmly placed on the ground.
Trap #2: The Analyzer Trap
Making a good analysis of the market situation is an essential prerequisite of decision making. But you are simply not going to make any progress in your trading journey if you stick to just one price chart, you will be missing the bigger picture! In order to get a broad picture of the market, you should analyse charts belonging to different time frames like hourly charts and daily charts.
However, during this process, many people fall for what is called the ‘analyser trap’ as well. They attach too much importance to analysis that they end up using more charts than what is necessary. The result? Utter confusion and loss of valuable time! The purpose is to get a broad view of what is happening in the market and its behaviour. For that, you need not analyse every chart from the minute chart to the monthly chart.
Be very clear in your mind about your preferred time frame. It varies from trader to trader depending on his style and type of trading. Once that is determined, choose 2 or 3 charts that are very relevant and go for a thorough time-bound analysis of those charts. As in a commando operation, you use only those charts that are just enough to arrive at the right decision.
Trap #3: The No-Limit Trap
If you look at how successful players trade, you will find that they all have many rules set in place for themselves. One such important rule is related to the limits that they set for themselves. For them, the sky is NOT the limit when it comes to taking trades. They are very clear about how far they should push themselves and when to call it a day.
However, this is not the case with beginners. When they find the market moving as expected, they push themselves far beyond the safe limit and in most cases, end up losing everything that they have gained until then. Or in some other cases, when they are not doing well in the market, they still continue to trade with the unhealthy determination of getting back the losses they incurred that day. Sadly, such strategies rarely work and more often than not, they backfire.
You have to be very disciplined when it comes to commodity trading. Never trade without setting your limits. Based on your capital and skills, you should set limits on at least two things –lot size and loss size (Lo-Lo).
Decide about the maximum lot size you will take while executing a trade – no matter how favourable the market is and how well your anticipation is turning out to be on that particular day. This way, you are preventing adverse or irrecoverable impact of any unexpected trading loss.
Next, determine the size of the loss that you will incur on any specific day. This means that if you set your maximum daily loss at $1000 dollars a day and you incur the loss with just 2 hours into trading, you will make a compulsory exit from the market irrespective of your confidence and determination to win the lost amount back from the market. Such firm decisions will go a long way to help you avoid falling into the beginner’s traps.
Arena Trade started out in providing IT solutions in financial trading, which mainly includes the development of institutional trading systems and services that can be used in futures, equities, precious metals and foreign exchange. Arena Trade holds an Australian Financial Services License (AFS Representative Number: 001284666) regulated by the Australian Securities and Investments Commission (ASIC), and is a member of the NFA (ID0539572) registered with the Commodity Futures Trading Commission of the United States.