Bear or Bull, Can You Run with the Pack?
Getting involved in commodity trading can be tough - as well as dealing with a fast changing market, you can have to live with the reality that one or two bad trades can really damage your investments. Compared to stocks and shares trading, or FOREX, commodity trading offers the appeal of material goods that can be analysed through a range of different factors, and can have their risk offset by using software systems. Whether the market’s going through a growth led bear phase, or a more typical era of bull recession, how can you run with the trading pack without taking on too much risk?
When trading with commodities, it’s important to understand the details of individual markets - metals trading has some key differences from, say, oil or recycled materials, and means that what might count as a risky trade for one market might not be as much the case for another. In this way, it’s crucial to research a commodities market in depth before making a serious investment, as well as keeping track of which commodities are going through particularly volatile periods.
The challenge of being a commodities trader is consequently about being able to adjust to the speed of the market, as well as knowing where you can stand to make the most significant profits. Alternatively, you can try to spread your risks out by investing in hedge funds that trade in commodities - straight out speculation on commodities can be addictive, especially when you can receive a high yield, but can also produce major losses.
As with any kind of trading, the commodities market can go through periods of volatility, and can be particularly affected by international trade - oil and raw materials are vulnerable to these kinds of problems, and can mean that what begins as a stable investment can quickly become difficult to hold onto if political circumstances suddenly change and you’re left with a market where the bottom’s dropped out.
To survive as a commodities trader, you need to be able to spend probably more on average than you would on stocks and shares in order to balance out volatility and losses; many traders choose to go through hedge funds, or trade on an index like S&P GSCI in order to get a more general overview of the commodities market, rather than just looking at particular commodities.
Risk management systems can similarly be used to enhance your trading strategies, and can help to reduce the risks involved - software can be used to provide real time market information, as well as projections over the future of commodities; large amounts of information can be inputted into these systems over previous trends, and can be combined with credit risk management, as well as index feeds and curve analysis to allow you to make more informed decisions over the trades you carry out.
Rob James has been trading in commodities for 4 years now, and recommends that new investors look into getting hold of a comprehensive Risk Management System if they want to avoid making mistakes with their trades.