Commodity Trading is Risky Business


Risk in Commodity Futures TradingDespite what you may have read in commodity trading books, magazines, or even heard on infomercials, trading options and futures entails substantial risks and is not suitable for everyone. 

On the other hand, trading in futures and options can be financially rewarding, but you must realize that where there is potential opportunity there is a corresponding amount of danger. 

For this reason, only risk capital (money that you can afford to lose without altering your lifestyle) should be allocated to a commodity trading account. 

The risk in trading futures stems from the leverage provided by the exchanges, combined with the speculative nature of the commodity markets.  Unlike an investment in stocks or bonds, futures traders aren't buying or selling assets.  Instead, they are buying and selling obligations to make or take delivery of the underlying commodity.  In other words, futures traders don't own anything other than a liability.  Further, commodities don't pay interest or dividends to buffer investment volatility.  As you can image, this sets the stage for a considerable amount of risk and reward.  

The ability to easily buy or sell futures and options contracts in any order creates opportunity, but it also breeds aggression; and this can sometimes be too much for beginning commodity traders to overcome.  We urge traders to live by the motto "less is more".

The leverage in commodity trading is created by the ability to share in the profits and losses of a substantial amount of the underlying asset for a relatively small good faith deposit.  Simply put, futures exchanges require a small margin deposit comparative to the total value of the commodity contract being traded, this allows a reasonably small move in the futures price to have a large impact on the value of your trading account.  It is not unlike the leverage most home buyers experience; they put a down payment of 5 to 20% but their capital gains and losses are determined by the full value of the property. 

With that said, please note that being a successful futures and options trader is challenging yet achievable.  In my experience as a commodity broker, I have found that the only way to "beat the market" is through the ability to overcome emotional and psychological barriers.  Unfortunately, this is something that can only come through practice...unless of course you were lucky enough to be born with the appropriate personality for trading.   

We at DeCarley Trading hope to play a part in your journey through the markets and insist that you consider both the sides of the coin before choosing to trading options and futures.  We look forward to hearing from you. 

 

Follow Carley Garner on Twitter