Not Knowing Rule for Commodity Trading
Many new traders do not educate themselves on how to trade commodities properly. This goes beyond learning the ticker symbols, futures margins and contract sizes of a variety of commodities. You are competing against other traders who have had the best training in the business and have been trading professionally for many years. Believe me, they will not take it easy on you. You keep score with money in this business and everyone is trying to score as many points as possible – no charity here.
Over Leveraged Commodity Trading
Almost every small trader who ventures into commodities falls into this trap. There is huge leverage when trading commodity futures and a couple bad trades can wipeout the over leveraged trader. Fortunately, there is a simple rule you can follow to take care of this problem – do not risk your whole account on one trade. Also, do not trade a contract that is too large for your account size. For example, you shouldn’t trade more than 2 futures contracts when you have a 100,000 INR in your trading account.
Money Management/Risk Management
Do not risk more than 5 percent on any one trade. Most professional money managers risk less than 2 percent on any one trade. This is tougher if you start trading commodities with only a 100,000 account. In this case you should risk no more 5000 on a trade. If you want to risk no more than 5000 on a trade, all you have to do is place a stop loss order 5000 away from you entry. It doesn’t guarantee you won’t lose more than 5000, but it is as close as you can get.
Having a Trading Plan for Commodity Trading
I cannot stress enough how important it is to have a trading plan in place before you begin trading commodity futures. A trading plan is your guide to how you will control your trading. It should be in writing and reviewed regularly. The trading plan should include the markets you will trade, your trading strategy, money management and even a plan to stop trading for a period of time if your account equity drops to a certain level. Trading without a plan will lead to erratic an undisciplined trading, which ultimately leads to painful losses. Have trading levels depending on your time frame, Example can be seen here.
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