If you have not heard by now, most people who trade commodities lose money. Most of the estimates range in the 80 to 95 percent range of those who have lost or who are losing in the world of trading commodities. Those statistics are dismal for someone who wants to venture into trading commodities. Fortunately, many of the losers have common traits that contribute to their losing and they can serve to help others become successful.
Here are four of the most common reasons why commodity traders lose money. If you can have the discipline to consistently overcome these common mistakes, you will put the odds much more in your favor.
Lack of Education on Commodity Trading
Many new traders do not educate themselves on how to trade commodities properly. This goes beyond learning the ticker symbols, futures margins
and contract sizes
of a variety of commodities. You are competing against other traders who have had the best training in the business and have been trading professionally for many years. Believe me, they will not take it easy on you. You keep score with money in this business and everyone is trying to score as many points as possible – no charity here.
At the very least, I recommend reading several good books on trading, starting with Trading By The Book by Joe Ross and Come Into My Trading Room by Dr. Alexander Elder. Don’t just read the books – implement their trading philosophies. I would also suggest learning how to trade from a successful trader. There are many professional traders available for instructing or you can take classes specifically devoted to trading commodities.
Over Leveraged Commodity Trading
Almost every small trader who ventures into commodities falls into this trap. There is huge leverage when trading commodity futures and a couple bad trades can wipeout the over leveraged trader. Fortunately, there is a simple rule you can follow to take care of this problem - do not risk your whole account on one trade. Also, do not trade a contract that is too large for your account size
. For example, you shouldn’t trade three futures contracts that average a $2,000 move a day when you have a $10,000 account.
Do not risk more than 5 percent on any one trade. Most professional money managers risk less than 2 percent on any one trade. This is tougher if you start trading commodities with only a $10,000 account. In this case you should risk no more $500 on a trade. If you want to risk no more than $500 on a trade, all you have to do is place a stop loss order
$500 away from you entry. It doesn’t guarantee you won’t lose more than $500, but it is as close as you can get.
Commodity Trading Plan
I cannot stress enough how important it is to have a trading plan in place before you begin trading commodity futures. A trading plan is your guide to how you will control your trading. It should be in writing and reviewed regularly. The trading plan should include the markets you will trade, your trading strategy, money management and even a plan to stop trading for a period of time if your account equity drops to a certain level. Trading without a plan will lead to erratic an undisciplined trading, which ultimately leads to painful losses.