Commodity trading, like any other type of stock and share trading, carries a certain element of risk. There will be no trader who has not experienced or will not experience a loss at some point. Losses are unavoidable, but they can be controlled to the point where the trader’s entire account is not wiped out with proper preparation.
Risk management is the process of anticipating and dealing with losses before they occur. It’s important to learn its basics, as well as get more knowledge about trading indicators to achieve success.
Why Is Risk Management Important?
Without taking risk management measures, traders might easily lose all of their accrued gains as a result of only one or two unsuccessful trades. However, losses can be handled and worked through, while large losses might wipe out your trading account and force you to start over. By the way, professional traders and novice ones choosing share-trading apps are subject to the same risks.
Starting on the path of online commodities trading is akin to taking off on a long-distance flight. You would not take off unless you were certain there was enough petrol in the tank. Not just enough fuel, but enough RESERVE fuel to get you through any unexpected issues or detours along the road. It is never safe to assume that a flight will go smoothly from takeoff to landing because numerous variables are beyond the pilot’s control. Online trading risk management will be your safety net to ensure you do not crash your trading account to zero, just as a flight without safety procedures could be a death trap.
What Can You Do To Minimize Risks?
Here are some general rules that will help you avoid reading risks:
- Don’t take any major risks. Many traders have committed trading suicide by incurring unnecessary and avoidable risks due to their excessive usage of leverage.
- Never be overly confident, overly emotional, or overly headstrong. Always expect that you will lose and ensure that you will be able to live with the defeat.
- Make a strategy and stick to it. Determine the price at which you can afford to acquire and sell. If the trade does not fall within your predetermined parameters, do not proceed.
Tips To Safeguard Your Funds When Trading
These four tips might become the backbone of your trading strategy:
1. THE ONE PERCENTAGE POINT RULE
The 1 percent rule is a strategy that many traders utilize and suggest. If you follow this rule, you should never invest more than 1% of your total capital in a single trade. This works for all situations since the value of the 1% will vary based on how much capital you hold, but you will always be protecting the rest of your capital.
2. ‘STOPPING LOSSES’ AND ‘TAKING PROFITS’ TECHNIQUE
Determine how much loss you can realistically endure ahead of time. When the stock reaches your cut-off point, sell it and accept the loss. Allow the emotion to take over and bury your head in the sand by believing yourself that it will rise again. Determine in advance how much the stock must grow before you sell it and profit. Do not become overconfident and tell yourself that the value will continue to rise. Sell at your cut-off point and be content with your profit. Waiting for more can and often does backfire.
If you choose to apply this strategy, you may calculate your expected return as [(Probability of Gain) x (Take Profit percent Gain)] + [(Probability of Loss) x (Stop-Loss percent Loss)]. This is quite useful in determining whether or not to purchase stock.
3. DIVERSIFICATION
Markets can be quite turbulent. It would be foolish to focus solely on one product because an unexpected drop in value would be disastrous for you. By investing in both international and domestic markets, portfolio holdings can be diversified across asset classes and within asset classes. Positive performance in one portion of a portfolio is assumed to outperform negative performance in another. If you diversify over numerous commodities, at least one of them will be able to compensate for the losses from the other.
4. LISTEN TO EXPERT ADVICE
Trading risk management may appear to be rocket science to new traders. Expert advice from experienced traders teaches new traders in a way that makes sense to them. Remember not to take off until all safety procedures are in place.
