Historically, commodity trading has delivered the biggest fortunes worldwide. It originated centuries ago, even before the stock markets came into existence, albeit traded then in a different manner, than as seen today on electronic exchanges. I have often quoted that ” If trading in the speculative markets, then Stocks & Equities is for boys but Commodities & Forex is for men” (No gender bias intended). Wealth creation is not a matter of chance. It is a process that needs sharp analysis & a lot of work time. Plan your play and then play your plan. Happy investing!
The similarity in Stocks & Commodities begins & ends at the point that they are both speculative trade markets, but there are a lot many differences in both these markets. Unlike the stock markets where even a highly valued stock could eventually see all it’s commercial-value being eroded due to several reasons, the values of commodities may see corrections on a large supply but eventually will only increase again with time, as the inherent imbalance in the demand and supply ratio would always favor demand more than supply due to many influencing factors like growing populations, rising economies and better lifestyles to name a few. All adverse scenarios like geo-political tensions, wars, climatic imbalances, catastrophes and other man-made disasters, etc. which pull the stock markets down generally push the commodities up (especially Agro-Commodities & safe haven instruments like Gold), basically due to the differentiating factor that these commodities generally are also regular necessities to normal life and not simply investment instruments. Most Commodities are traded globally & the price rigging in these is next to impossible unlike, as seen in a lot of equity instruments where manipulation is a lot easier & occurrences of traders getting duped are rampant.
Massive wealth creation is possible through Commodity Trading & Investments if done the right way & with a lot of strict discipline. But if done the wrong way, which is generally the most followed path, there will be enormous losses also. You can start off equity trading or investment with smaller sums of money, but would require deeper pockets to be able to do some modest trading in the Commodity Exchanges & also to sustain the “Mark to Market” volatility in the Commodity Markets. The gains & losses in both also become proportionately big or small eventually. I would now like to highlight some basic Do’s & Don’ts for the most frequently seen habits & maybe unknowingly committed mistakes, which I have noticed in most traders & had to address to a number of times as a Market Analyst & a Commodity Market Trade Advisor.
1] Do not trade with hesitance, half heartedly or in over confidence. You may incur small but repeated losses if you are scared of the markets or heavier ones if you are overtly brave and foolhardy.
2] Be patient when your trade positions are moving in the right expected direction to extract maximum gains and ensure the gains by improvising the stop-loss level, time and again. Do not be pessimistic here or else you may book gains pre-maturely & may later repent on exiting early. This may lead to keeping on re-entering the same trade at further levels & repeatedly exit at small reversals in panic, which in turn would erode earlier small gains & also build losses. It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong & that makes all the difference between Winners & Losers.
3] Do not be over optimistic when trades have hit the suggested stop-loss levels and make sure you exit there. You may miss better and multiple opportunities on being stuck in deals gone wrong leading to higher and higher losses each day.
4] Do not discuss your open positions with one and all. This will lead you nowhere and confuse you more, as all would air their own views on the same (whether knowledgeable or not) and many a times, would make your trade decisions seem as foolishly and hastily taken. If only you would have consulted them earlier…
5] Do not develop a tendency of being a Bull or a Bear in these markets. There is only one side to the markets and that is neither the Bull side nor the Bear side – But ONLY the Right Side at the Right Time. Trend is King, so follow it at all times.
6] Realize that you are in a bad situation and exit fast when you need to pray for relief at each rise or fall in a trade which is leading you further in a deep pit towards heavier losses.
7] Follow ONLY one Analyst’s or Technical Advisor’s guideline at a time, as more guidelines will again create a lot of confusion. You can opt for or look out for an alternate guidance when the earlier guideline proves to be less productive or loss making, but not simultaneously.
8] Be honest to yourself as hoping or praying for something different, than the actual reality or situation is nothing less than fooling your own self.
9] There is NOTHING such as HUGE, mind-blowing and sky-high profit makings overnight, as assured by many to win a prospective client. YES, there are sizeable gains and high returns for a disciplined trader and may return exactly the opposite, if not worse, for the non-disciplined. Do not enter this trade market under any illusions of getting to be a Billionaire overnight. It will never happen. In fact all that you now possess may also be lost.
10] DO NOT BORROW or trade with funds that are not yours or pump in more funds by borrowing to hold on to loss making trades. Trade only with own funds that are spare-able and be prepared mentally in losing even that in totality, in the worst case.
11] Never trade or enter / exit positions in panic. Volatility is a non-separable component of this trade market and will be present most of the times.
12] Do not be a party to rumors or be guided or misled by these. Verify & double-check on the source for genuineness.
13] Stay away from the people who have a habit of saying “I had told you – See now?”. These are the very same people who would never put anything on paper or ever trade on their own views- with their own funds, as in reality they do not have any concrete views or knowledge. They are mere sponges on an ego trip, who keep soaking or gathering tidbits of information from anywhere available irrespective of their reliability, put all together and spread the newly formed news. If what they say goes wrong, they would disappear and would be seen nowhere or if found, might now have some stronger views and reasons for why the wrong happened as generally these kind of people are very good convincers & are blessed with the gift of gab. Listening to these characters and their views is very dangerous. As the wise always said: – “Half knowledge is always the most dangerous”, “Ignorance is Bliss” and “Blessed are the fully knowledgeable”.
14] DO NOT TRY to be the TREND SETTER or the first one to know where a particular trade will turn from. No one can possibly be, except by a sheer matter of chance, the best seller or the best buyer – so why try it? You might end up losing a lot of money and also becoming the laughing-stock for all. Follow the trend and make respectable gains, “Quietly”.
15] Do not enter the Commodity Markets with Stock Market trading ideas. Though both are speculative trade markets, there is a substantial difference in both and generally have opposite trading patterns and thumb rules, as elaborated earlier.
16] Providing past performance records is not a mandatory rule for Analysts or Advisors, and the same info (wherever posted) can be misleading, as the same can be manufactured by the end of day to dupe prospective clients. Do not try to look for something that can misguide you & lead you on the wrong path, ending up in losses – money-wise & also confidence-wise. Upon subscription by the trader, the same people showing fantastic results on their websites, but performing poorly in real-time, may later not be available even for a discussion or may later say that “Past performances are not an assurance of any future success”. So take a Trial for a fortnight or a month (not for a day or two), do some live paper trading & only trust the live performances. Judge the genuineness of the research quality and real-time trading support only on the basis of live experience and not by past performance records. Most of these records could be fakes. Better to pay for the Trial & come to the right conclusion, rather than loose a lot of capital by trading on faith generated by looking at & getting impressed by the past performances.
17] “Trading without a Stop-Loss & yet making gains is sheer Talent – Not trying such stunts is Intelligence”. The stop-loss practice is for your own benefit as this provision has utmost importance and is not provided on each trading ticket by the exchanges, just for the heck of it. If the trades turn & move in the opposite directions beyond entry levels, they might further move very fast in a volatile manner & the losses accrued, in the absence of a stop-loss, can be un-imaginable. There are several things happening across the globe constantly, which affect the price movement, direction & volumes in commodity trading, as basically they move in accordance with demand and supply situations & are also greatly affected by the Geo-political scenarios all over. It is not humanly possible to track each & every occurrence, watch out for economic data’s released all around the globe and understand the level of their impacts on the trade movement & direction of all commodities, though you may be constantly updated on most of the developments, most of the time. Many times the reaction or the impact of these developments is so quick & enormous, that large & rapid movements in rates are instantly triggered with high volatility, even before the news on these developments reach all over the world. In such a scenario, you may never know as to what level these trades could go to & the losses (though sustainable by a few) may be very large. These losses are not the only losses that you incur if caught in such a situation – you also miss out on the opportunity, the same commodity is offering, in the opposite direction and also by other trades as most of your attention and funds will now be concentrated and caught up on this particular trade gone wrong. Remember – Growing wealth is important, but safe guarding seed capital is even more important. It’s easier to resist & also absorb losses at the beginning than later.
18] Averaging in loss making positions is a practice which is most commonly seen & generally leads to more dangerous losses. This is also recommended by a number of advisors, but I certainly do not recommend it. In fact I strongly oppose it. Remember – YOU are incurring the loss & not your advisor.
19] Putting all your eggs in one or a couple of baskets could prove to be more dangerous for the day trader. Having a wider investment or a trading spectrum would be more effective. All entered trades may never go wrong simultaneously but a stray one or two could and what, if you have traded in only those? It may also happen that the 1 or 2 trades that you have entered into, have moved in the right direction, but have not achieved the expected high results or gains in comparison to the ones you have left out. So it is only advised and not stressed upon – that the trader should take positions in a wider range of trading / investment opportunities to achieve better results.