Commodity market trading is a skill that takes a lot of practice to master. Consistent knowledge building and dedication are essential in commodity market trading, just as they are in sports. It’s an art that can take a long time to master, and the mistakes made by others in the past are your finest guide. This will assist you in avoiding typical traps and allowing you to learn without repeating the same mistakes. Let’s have a look at the top 5 trading blunders to avoid if you want to be a great trader.
What is commodity trading?
A commodity market is similar to a stock market in that it is where major economic sector commodities are traded. Sugar, fruit, and even mined items like gold and silver are examples of these commodities. The trades are based on the price of these commodities, which are available to both individual and institutional investors.
Commodity markets frequently move in the opposite direction of stock markets, so they attract a lot of investor attention when stock markets are down. Furthermore, diversifying your portfolio is critical, and commodity markets provide a feasible opportunity for doing so.
Now, let’s go over some of the most common commodity trading blunders so you can avoid them.
1. Trading without a plan
Commodity markets, like stock markets, necessitate thorough research and homework. This will assist you in developing a plan that is necessary for trading success. Your strategy should include recommendations for managing and addressing your current investments, as well as backup solutions in the event that your calculations prove to be incorrect. Many investors rush in without planning ahead of time, leaving them trapped if the market goes against their expectations. On such occasions, you may lose money, making having a trading plan all the more important.
2. Overdiversifying your portfolio too quickly
Diversification is frequently required to build a well-balanced investing portfolio. However, you must be careful not to over-diversify, as this can negatively effect your portfolio’s performance. Furthermore, if you invest in a variety of securities with diverse characteristics, your portfolio may become locked in a bind, preventing growth. As a result, it’s always a good idea to figure out your investing horizon and then make room for diversity within it. Your objectives will be realized, and your assets will be safeguarded at the same time.
3. Not using stop loss strategy
Commodity markets may be a tumultuous environment at times. While it gives you the opportunity to make a lot of money, it also comes with a risk. This could result in you losing money if the market moves in the opposite direction of your predictions. A stop-loss plan can assist you in this situation. It will assist you in ensuring that a deal is executed when your investment reaches a preset cusp. For example, if you have set a price threshold for selling your units in a commodity, the system will automatically execute the trade, preventing further loss. As a result, failing to use a stop-loss technique is frequently regarded as a mistake.
4. Letting emotions impair your decisions
In any type of investment, you should make selections based completely on logic, not emotions. When a large sum of money is at stake, people are prone to making poor decisions influenced by their emotions. This could be costly in the long run. As a result, while making investing decisions, it is always a good idea to start with reasoning. Make certain that all of your decisions are founded on research and likelihood. It is a talent that you should practice and learn to keep calm while you are losing money in order to make a rapid decision that is not influenced by your emotions.
5. Lack of discipline
Discipline is a quality that all investors should possess. At all times, you should be able to keep to your plan. Unfortunately, many new investors succumb to the pressure of losing money or the glory of making a profit, and they abandon the scheme. However, in the vast majority of cases, this is incorrect. It’s just as important to keep your emotions in check as it is to avoid being overconfident. Commodity markets are complicated, and investors who recognize this complexity and trade accordingly are generally successful.
6. Not researching the markets properly
Some traders will enter or terminate a position based on a gut feeling or a tip they have received. While intuition can sometimes provide results, it is critical to back up these sentiments or ideas with data and market research before committing to a trade.
Before you establish a position, you must have a thorough understanding of the market you are joining. Is it an over-the-counter or an exchange market? Is there a lot of volatility in that market right now, or is it very stable? These are some of the things you should look at before taking a job.
7. Overexposing a position
If a trader invests too much money in a single market, they will become overexposed. If traders anticipate the market will continue to climb, they will increase their exposure. While increasing exposure may result in higher earnings, it also raises the inherent risk of the investment.
Investing substantially in a single asset is frequently regarded as a risky trading approach. Overdiversifying a portfolio, on the other hand, has its own set of issues, as detailed below.
8. Overdiversifying a portfolio too quickly
While diversifying a trading portfolio might operate as a hedge in the event that the value of one asset falls, opening too many positions in a short period of time can be risky. While the potential for profit is higher, maintaining a broad portfolio necessitates a lot more effort.
For example, it will include keeping a closer eye on more news and events that could affect the markets. If you don’t have a lot of time or are just starting off, this extra work might not be worth it.
A varied portfolio, on the other hand, increases your exposure to potential positive market moves, allowing you to profit from trends in a variety of markets rather of relying on a single market to move in your favor.
With IG’s news and trading ideas area, you can obtain market updates and news in one spot.
9. Not understanding leverage
A borrowing from a supplier to open a position is known as leverage. Traders pay a margin deposit and obtain market exposure equal to what they would have gotten if they had opened the full value of the position. However, while leverage can raise profits, it can also magnify losses.
Trading with leverage may appear appealing at first, but it is critical to thoroughly comprehend the risks of leveraged trading before taking a position. Traders with a limited understanding of leverage are not uncommon to realize that their losses have wiped out the whole worth of their trading account.
To prevent making this error, familiarize yourself with leverage trading by reading our what is leverage tutorial.
10. Not understanding the risk-to-reward ratio
Every trader should examine the risk-to-reward ratio since it helps them determine whether the potential benefit is worth the danger of losing money. The risk-reward ratio is 1:2 if the original position was £200 and the potential profit was £400.
Experienced traders, on the whole, are more receptive to risk and have better trading methods in place. Beginner traders may not have a strong appetite for risk and may prefer to avoid highly turbulent markets.
For novices, learn forex trading tactics.
You should have a risk management strategy in place during your time on the markets, regardless of how open you are to risk.
Every trader makes mistakes, and the ones in this article don’t have to spell the end of your trading career. They should, however, be used as opportunities to figure out what works and what doesn’t for you. The most important thing to remember is to create a trading plan based on your own analysis and stick to it to avoid letting emotions influence your decisions.