Posted By: Ilan Levy-Mayer Vice President, Cannon Trading Futures Blog
5 Common Mistakes of Commodity Trading by Joe Easton Senior Commodity Broker with Cannon Trading
As a commodity broker who serves different types of clients with different backgrounds, risk capital and risk appetite, I have observed the following 5 common mistakes traders make when it comes to commodity trading, in hopes you can learn and avoid!
- Trading with lagging indicators. As a Broker, I get to see the whole range, from traders making their first trade, to traders making their last trade, and everything in between. The beginner traders almost always start along the same path. Using MACD, Williams %R, Stochastic, RSI and most other indicators you can find to predict price is a very common mistake. These indicators often follow price movement, not predict future price movement. Sure when looking at a chart in hindsight, they match up great, but in real time they are lagging. This style of trading will more than likely lead to losses.
- Trading Undercapitalized. This mistake should be placed in the premarket (before opening an account) because an account shouldn’t even be opened without proper capitalization. Assuming you did open an account for futures trading, trade within limits. Each Trader has different risk tolerance, but across the board, no one should be trading with funds they cannot afford to lose. When trading with limited funds or overleveraged 1 day can end your trading career before it began. Cannon offers aggressive day trading margins, as do our competitors, but by no means do we endorse taking advantage of all that leverage. In futures trading some markets are leveraged 100:1 or even more. Meaning you are leveraging a lot more capital then you may think. For example: The ES is trading at 1695 right now. You are holding 1695*50= $84,750.00 with a mere $500 or approximately 170:1 leverage. With all that leverage account balances can fluctuate rapidly. When Trader’s take losses psychology shifts, when a shift in psychology meets lack of funds or overleveraged trading decisions are affected. Trading on low balance or outside reasonable limits is a recipe for losses.
- Overtrading. This mistake is common among beginner and advanced traders, I think even more so when it comes to commodity futures trading because of the inherent leverage. Until it is overcame, significant profits will be lost to commissions. More importantly, your trading profit potential will be limited. Whether trading 1 lot or 1000 lots per order there is still only so many moves a market can make in a given trading period. Intraday trading typically results in three moves or less. Sure there are days that bounce between the high and the low all day, but that is one move, sideways. Other days include trend days (one direction), or 3 move days, which I believe to be most common. A 3 move day is up then down (usually a retracement) then up, or down then up then down. A two move day would be up then down or down then up. If most days fall under these formats, what reason would a 1 lot trader have to make 100 trades? Not a good one, I’ll tell you that.
- Losing Days. Almost every Trader has losing days, it is part of trading. The key is to limit losses. You should monitor your account balance like you monitor your trades. When you see it going the wrong way, you should become impatient and look to cut it short. There are infinite factors why you are having a losing day, the fact is you are and you need to know in advance where the bleeding stops. Many skilled and professional traders regularly take profits from the market day in and day out only to blow the account up the one day the market doesn’t react the way they expect. Often ego or anger can block rational thoughts and averaging in and reversing is all too easy. Having hard rules like maximum lot size and maximum daily loss can preserve your capital and prevent losing days from depleting your account.
- Chasing the market. There are so many mistakes, it is hard to only choose five, but chasing the market will conclude this list. Markets do not move in straight lines. Aside from major breaking news there are very few large moves without retracements. Depending on the market a “big” move can be calculated by taking the average daily range and multiplying by 2 or 3. Market conditions are constantly changing, but in all circumstances, when a market makes a big move, it is more likely to retrace or reverse before continuing. Traders that buy the ES after 15 points up or sell gold after a $50 move down are behind the ball and more times than not will be stopped out with a loss. Wait for the retracement or play the other side, this will help limit loses by chasing.
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An experienced commodities trading broker is not there to provide you with winning trades….Commodity brokers do NOT have a crystal ball, however an experienced commodity trading broker can help you review your futures trading, point out possible mistakes and be there as a service provider, second pair of eyes to help you.
Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.