Similar to every other asset class, commodity trading too, comes with its risks. As the prices of the commodities are established by the demand and supply forces, they fluctuate heavily in either direction. Furthermore, as environmental factors like weather and monsoon majorly affect the prices of such commodities, you need to be cautious with commodity trading.
Here are some of the best ways you can consider to avoid losses during commodity trading:
1. Financial Conditions:
As commodity trading demands investing money, you must invest an amount after a detailed analysis of your financial situation. It means that you should review your finances and invest an amount that does not create a financial burden on you if you lose your investment entirely. This action is called identifying your risk profile, i.e. how much risk you can afford to take while investing in commodities.
2. Preferred Commodity Class:
You must try the various commodity classes to identify the one most suitable to you. If you want to avoid losses during commodity trading, you must stick to a commodity class you have experience in and allocate your investment amount within the commodities of that class. In this way, the factors that result in losses become lower.
3. Create a Plan:
Planning is crucial to avoid losses during commodity trading. Ensure that you create a trading plan backed by a detailed analysis of the sector and the commodity class. Once you have made a trading plan, you should stick to it and not let your emotions get in the way.
4. Be Disciplined:
Discipline is one of the most important factors to avoid losses during commodity trading. You must not get carried away if you are making profits and invest all of your capital without analyzing your risk profile. The same goes when you are in losses; you should wait and not panic and only sell when your investing goals are achieved.
5. Monitor the Market:
In commodities, price movements happen in a matter of seconds. If you are not attentive towards the market, you can miss your price goals. Furthermore, if it moves downwards, you can lose your profits and even the capital amount. Hence, to avoid losses during commodity trading, you should always constantly monitor the market and your trades.
6. Take it Slow:
Traders who are not experienced tend to panic and sell their trades for booking profits as soon as possible. This forces them to miss out on achieving their trading goals and on potential future profits. The same happens with investors when they are making losses; they panic and sell to cut their losses, which makes them realize the losses in reality. Hence, you should take it slow, manage every factor well to avoid losses during commodity trading.
Along with the above ways to avoid losses during commodity trading, there are two other vital ways: Diversification and Stop Loss.