Four Ways To Minimize Risk With Commodities Trading

If you've made the decision to try your hand at commodities trading, you need to know what you're in for. This isn't something for the meek and mild, but it also isn't anything to get intimidated about, if you know what you're doing. Because you can lose more than what's sitting in your account, it's wise to go in with a game plan and implement these four strategies that can minimize the risks and maximize your profits.

If you don't understand it, stay away from it. Investing in commodities can be risky just as any investment can. Maybe not as risky as investing in stocks, according to a couple of researchers, but the process is different and requires a different level of understanding.

You see, just because you put sugar in your coffee and eat bacon and grits every morning for breakfast doesn't mean you should invest in these products. You really have to know what you're doing here.

For example, you might fully understand that the demand for livestock is pretty stable. It's not going anywhere anytime soon. But with commodities trading, it's vital to stay ahead of sudden crises like a widespread disease that ends up wiping out mass numbers of livestock. Situations like this will certainly affect the supply which will, in turn, affect your investment.

Keep your emotions out of the process. There simply isn't a place for emotions when it comes to trading and investing. Think about it. When have your emotions ever made great decisions? Maybe when legitimate fear caused you to run or when you finally settled down with the one you love, but that's about it.

The key to this is remembering your three biggest emotional enemies with trading: fear, greed, and hope. Fear can make you sell too fast. Greed can make you hold on for too long, keeping those fingers crossed for a bigger gain. And hope forces you to invest based on past behavior. None of these are conducive to making sound financial decisions.

When it comes to matters of the wallet, you have to rule with your brain. The financial market can fluctuate dramatically over the course of the day. And when you remain emotionally neutral, you're better equipped to look at those fluctuations objectively and make sound financial decisions about what's best for you.

Know your maximum loss ahead of time. Before going in, establish how much you're willing to lose, worst-case scenario. Then when looking at a potential trade, you'll need to determine the maximum possible loss if things go south. If that amount exceeds your limits, walk away. Many investors are okay with risking 5-7%, but only you can judge what you're comfortable with. When you've already established these numbers ahead of time, holding out for something better is much easier.

Placing a stop-loss order on your investment can be great for those who need some assistance in this department. With this tool, everything is automatic when it comes to loss prevention. You determine the most you're willing to lose, and once the value of your investment falls to a certain point, the trigger on the order gets pulled, and the commodity becomes a market order. So you won't have to sit there and watch your investment completely disappear right in front of you.

Avoid overtrading. According to Daryl Guppy, there are two main causes to overtrading: attempting to recuperate from losses and trying to stay busy.

The first one is easy to recognize, but the second one takes a little more self-awareness.

You see, there isn't a magical number of trades per day that you're supposed to stay below. But if you feel as though you haven't really put in a "hard day at the office" without having stared at the computer screen all day, trading like a madman, then you might be overtrading. If you get antsy while attempting to be patient, waiting for the best commodity to buy and sell, you might be at risk for overtrading.

When the amount of trading you do is based on meeting sound financial objectives, involves investing capital from previous trades, and leaves your emotions on the sidelines, you're probably making good choices. If you would like more information on how to invest wisely in commodities, then contact a commodities future broker from a company like SJB Futures, LLC.