Commodities – Tips And Techniques For Commodity Trading

Take 10 mins to peruse our tips below. This is not the page to find which stock is hot and which is not, but there are a lot of things beginners take for granted in their approach to trading, – this page sets out to address some of these.

A Bird In The Hand – Set Your ‘Take Profit’

Quitting while you are ahead is anathema to some newbie traders, and is in part what separates the successful traders from the gamblers. This is a bit of an impatience/self control issue. Set your Take profit, don’t set it too high, and stick to it. Remember, the more volatile the market is, the more important Take Profit is. A win can very quickly swing and turn into a loss. As you become more experienced you may consider strategically altering your take profit levels, but for the moment keep them low.

Know Your Commodity, And Stick To It

If you start trading in gold, stick to it – immerse yourself in the world of gold and the factors that effect its price. Do your research, become a gold expert, study the gold charts, as far as they go back. Don’t move to another commodity until you have got this one sussed. Sure, you may hear that oil is good today, but unless your prepared to dip in, profit then get out and back to gold, don’t bother switching. Its not just about gold or oil, its all about learning to trade, and by switching from one commodity to another you will be hampering your own learning process (unless your switching is part of some well-designed test strategy).

Use Your History Function

Those who choose to ignore past mistakes are condemned to repeat them (George Santayana). Use your Broker’s software history function, have a look through all your past transactions, it will help you look back and learn from previous mistakes and successes – you may see a pattern emerging. Additionally, when starting out, keep a trading diary, noting why you placed a trade, and what exactly happened.

Leverage/Risk Level – Implications

This is the same as leverage in currency trading on Forex. In There is no sure-fire formula for applying leverage (a.k.a. Risk Level), as everyone’s circumstances are different, however, consider the following. If you open a trade with $25 at 400:1 leverage, and the trade closes 50 pips up you win $49 (50 minus 1 pip spread) – 200% profit. Excellent.

If you open the same trade with $200 at 50:1, you get the same profit – $49. BUT, if the trade dips before it rises, there’s a good chance your $25 trade will be wiped out, whereas with a margin of $200, you are covering the dips. This is the difference between gambling with $25, and trading with $200. Sure, a 200% mark-up sounds impressive, but being wiped out in an hour doesn’t. (This example is based on a mini account).

Eyes Open!

Remember, with most brokers you can adjust your stop loss/take profit while the trade is still open. If you see a ‘substantial’ move, rethink your stop options, do some quick maths, and act accordingly. On the subject of maths, always have a calculator handy, don’t rely on software, it won’t be incorrect, but knowing where you are without having to rely on the software will help you trade more confidently

Accounted For Spread?

Some brokers can be a little bit cheeky. There will generally be a ‘live profit’ box that tracks how much profit your trade is realising in real time. Often this does not account for a deduction of the spread, but while its a small amount, pips add up! (A lot of new traders neglect to add the spread factor to their calculations)

Become A Sponge!

Soak up all the information you can, and go ‘out there’ and actively seek it. Forums are a great place for this, and besides information and advice, its good to talk to other traders – it can get lonely sat in front of a screen. Visit the Trading Game Forum.

Study Your Commodity Charts

For example, If you are trading in gold, have a look at at the past months graphs. You will notice that a trend is never in a straight line, there are peaks and troughs. Measure the difference between the two, and compare it with the distance between previous peaks and troughs. Try to observe any emerging patters on a weekly, daily, and monthly basis. This will not tell you what will happen in the future, however it will help you make decisions such as how long to keep a trade open, and, what level of stop loss to apply (whilst staying within your own money management regime).