Are you looking to start commodity trading? Check out these common mistakes made by beginner investors new to commodities and avoid these major pitfalls.
In India, apart from the two primary stock exchanges, there are two main commodity exchanges, the Multi Commodity Exchange (MCX) and the National Commodity and Derivatives Exchange (NCDEX). The Multi Commodity Exchange is the primary exchange for non-agriculture products like crude oil, bullion, industrial metals, and others, while the National Commodity and Derivatives Exchange is the leader in agricultural commodities trading.
Commodity Trading is Different from Stock Trading
The commodity markets have a closer and larger impact on our daily lives. Though the primary factors affecting price is demand and supply, there are several other factors to consider like geopolitical issues, price volatility, government policies, economic growth and more. The commodity market is more susceptible to crashes and rallies compared to equity markets.
Before you start trading in commodity markets like the NCDEX; you need to have a clear understanding of how it works. Unlike stocks, futures contracts have varying expiry periods. Here are a few mistakes that most investors make while trading on commodity markets. Learn from these mistakes and avoid them to reduce losses and maximise profits.
Mistake #1: Failing to Diversity Capital
Before you start investing in commodities, you must identify the risk you can afford on your available capital. Never make the mistake of investing your entire capital in a single commodity. The smart option here to diversify the capital in various assets, so even if you incur a loss, it isn’t huge.
Mistake #2: Not Making Use of Stop Loss
Trading in commodities, just like equities, comes with a certain degree of risk. To protect yourself from significant losses, you must protect your positions. One of the main reasons why beginner investors give up on trading is that they face high initial losses.
To avoid such scenarios, you need to make use of stop loss. A stop loss is the point up to which you are willing to take risks. With the right stop loss, you can cut down on your losses, while maximising profits.
Mistake #3: Not Paying Attention to the Market
All successful commodity traders have their own mechanism for monitoring and tracking the market. Try out different tools and techniques that help you track the market over a period. Only when you try different tools, you can pick the ones that work for you.
Make sure to plan your trades ahead of time and avoid impulse decisions. Sudden price fluctuations may not be the proper entry or exit points.
Mistake #4: Rushing In
Very often, novice traders rush in to initiate trades to increase profits. On the other hand, they continue holding on to losing commodities, thereby accumulating their losses. Fear of missing out and impatience are the two reasons why most traders make bad decisions.
The best strategy here is to play it slow. Don’t close winning trades ahead of time — monitor market price by revising stop losses continuously and enjoy maximum profits.
Mistake #5: Trading just for the Sake of Doing Something
Making a bad decision is always worse than doing nothing at all. When compared with stocks, commodities trading offers more flexibility. So, make sure that you remain patient until you get a clear idea of the situation, and then take a decision that suits your investment portfolio.
Start Small and Plan Ahead
As a new commodity trader, make sure that you start with a small capital that you can afford to lose. Clear knowledge of what’s happening in the market, will help you make profits in any condition. Additionally, you can learn from the mistakes of other traders and avoid the common pitfalls. With discipline and practice, you can easily make profits in the commodities market.