Trading on the commodity market is something that requires a lot of practice. Just as an athlete will train to succeed, constant strengthening of knowledge and dedication are also important in trading in the commodity market. It’s an art that can take a long time to master, and your best guide is mistakes made by others in the past. This will help you avoid common mistakes and learn without making the same mistake yourself. Let’s look at the 5 main trading mistakes that you should avoid in order to become a successful trader.
What is commodity trading?
A commodity market is a place where commodities are traded in the primary sector of the economy, for example, as stocks are traded on the stock market. These products can include sugar, fruits, and even mining products such as gold, silver, and more. Transactions are carried out based on the prices of these goods, and both private and institutional investors have access to them.
Commodity markets often move in the opposite direction from stock markets, and therefore they receive a lot of attention from investors when stock markets face a fall. In addition, it is extremely important to diversify your portfolio, and commodity markets provide you with a viable option for the same.
Now let’s discuss some of the most common mistakes in commodity trading to make sure you avoid them.
- Trading without a plan
Commodity markets also require relevant research and responsibilities, such as investing in stocks. This will help you formulate the plan necessary for business success. Your plan should contain recommendations for managing and processing your current investments, as well as backup options if your calculations turn out to be incorrect. Often, many investors start work without formulating any plans, leaving them blocked if the market goes against their plans. In such cases, you may lose money, which makes it even more important to have a trading plan.
- Do not use a stop loss strategy
Commodity markets can sometimes be very volatile. Although this gives you the opportunity to earn big, there is a risk with similar potential. This can lead to you losing money when the market goes against your forecasts. A stop loss strategy is something that can help you. This will help you make sure that the exchange is carried out when your investment reaches the specified maximum. For example, if you set up the sale of your units in a product when it has reached a certain price threshold, the system will automatically execute the transaction, which will avoid additional losses. Therefore, the refusal to use a stop-loss strategy is often considered a mistake.
- Leave emotions to influence your decisions
Your decisions should depend only on logic, and not on emotions in any form of investment. When a lot of money is at stake, people can often make erroneous decisions that cloud their feelings. Sometimes it can be expensive. Therefore, it is always recommended to give priority to your logic when making investment decisions. Make sure that all your choices are based on analysis and probability. Staying calm when you lose money in order to make a quick decision that is not influenced by your emotions is a skill that you should practice and learn.
- Lack of discipline
Discipline is an important attribute for all investors. You should always be able to stick to your plan. Unfortunately, many new investors succumb to the pressure of losing money or the glory of making a profit, and they begin to deviate from the plan. But in most cases it will turn out to be wrong. Just as you need to control your emotions, it’s important to make sure you’re not overly confident. Commodity markets are complex, and success is often achieved by investors who respect this complexity and trade accordingly.
- Don’t look for markets properly
Some traders will open or close a position on instinct or because they have heard a tip. Although this can sometimes produce results, it is important to back up these feelings or tips with evidence and market research before making a position opening or closing.
It is very important that before opening a position you fully understand the market you are entering. Is it an over-the-counter market or is it on an exchange? Is there currently a high degree of volatility in this particular market or is it more stable? Here are some of the things you should learn before you get started.
- Overexpose yourself to the position
A trader will be overexposed if he raises too much capital in a certain market. Traders tend to increase their exposure if they believe the market will continue to grow. However, while an increase in risk may lead to an increase in profit, it also increases the risk inherent in this position.
Investing massively in an asset is often seen as a reckless trading strategy. However, excessive portfolio diversification can have its own problems, as described below.
- I don’t understand the levers
Leverage is, in fact, a loan from a supplier to open a position. Traders pay a deposit called margin and get access to the market equal to if they had opened the total value of this position. However, while this can increase profits, leverage can also increase losses.
Trading with leverage may seem like an attractive prospect, but it is important to fully understand the consequences of trading with leverage before opening a position. It is not unknown for traders with limited knowledge of leverage to quickly discover that their losses have wiped out the total value of their trading account.
To avoid this mistake, you need to familiarize yourself with leverage trading using our guide, what is leverage.
- Do not understand the risk/ return ratio
The risk-reward ratio is something that every trader should consider, as it helps them decide whether the final profit is worth the possible risk of capital loss. For example, if the initial position was 200 pounds and the potential profit was 400 pounds, the risk-to-return ratio was 1:2.
As a rule, experienced traders tend to be more open to risk and use appropriate trading strategies. Novice traders may not have as much appetite for risk and may want to avoid markets that can be very volatile.
Learn Forex trading strategies for beginners
No matter how open you are to risk, you must have a risk management strategy during your presence in the markets.
Every trader makes mistakes, and the examples described in this article do not necessarily have to be the end of your trade. However, they should be seen as an opportunity to find out what works and what doesn’t for you. The main conclusions are that you need to develop a trading plan based on your own analysis and stick to it so that emotions do not cloud your decision-making.