How Did a Trader Lost His Money in Commodity Trading

Equity markets have been volatile in the year 2012 and gave returns of ~8.5% till July, 2012. The equity markets are affected by delay in policy reforms from government, high inflation costs, slowing GDP growth, rising interest rates to borrow from bank for capex, sharp depreciation of rupee against dollar, slowdown in Europe is also affecting equity markets in India and other countries. The performance of equity market had been deteriorating from 2009 onwards. Interest of retail investors to trade in equity market has also declined in these years. On the other hand, commodity market in India has been outperforming with hefty returns from 2010 onwards. The prices of gold and silver for an example had increased sharply (refer to image given below). Similarly, prices of agro products (cotton, soya bean, copra, etc) and metals (steel, copper, etc) had increased in these years. The interest of retail investors is now diverted to trading in commodity market in India. The inflow of money and contracts/volumes has increased in commodity trading when we analyze last 3 to 4 years

 What is Commodity Trading

Lets assume, you feel that the prices of silver would go up in the near future and you want to earn some quick bucks from the uptrend in silver prices. Now you have the option to buy silver physically but you won’t be sure whether the silver you would buy physically would be 100% pure or not and secondly you would have to pay exactly the same amount, the amount which would be similar to the current actual price of silver at that point of time.

Now the other option to take advantage of uptrend in commodity prices like of silver in this case is by buying silver futures from the commodity exchanges like MCX and you need to pay around 5-10% of the actual price of the silver as margin money. This is what is commodity trading all about

Source: Bloomberg

Commodity Trading Basics in India

The commodity market in India is operated on the basis of demand and supply scenario of products. So, it’s easy to analyze market and enter into contract for commodity trading. But keep in mind it’s the game of high risk and high returns for traders, investors and speculators in commodity market. There are instances when investors registered heavy losses while trading in commodity markets and caught in debt trap. One must understand gold trading basics before entering any trade.

In this article will discuss 10 common mistakes you (as an investor) need to avoid while trading in commodities i.e silver trading or gold trading in India. We will explain each mistake done by an investor/trader Miss Aanchal while trading in commodity market and how did she overcome to it or lessons learnt from her mistakes.

10 Common Mistakes You Need to Avoid

Mistake # 1 Lack of Trading Strategy – Trading on Commodity Trading Tips

Aanchal had entered into commodities trading with investment of Rs 2.5 lakhs in the year 2010. It’s the time when gold and silver started trading like hot cakes in the market and expected 20% to 30% within a year. However, the bull run of gold and silver too has been volatile where timing to enter the contract is vital. Initially, she made quick gains on free commodity tips from internet and traded in metals, agro products or gold/silver/crude but over the time there were continuous losses of Rs 5000, 3000 or 2000 on a daily basis and research calls were also missing the targets due to increasing volatility. In three months her losses mounted to Rs 75,000 from gold commodity trading and she feared to loss whole investment amount within a year if keeps trading blindly in such a manner from so called “commodity trading tips”

Henceforth, she trades in commodity market with a strategy as follows:

ü  Study commodity trading basics

ü  Study the technical chart of commodity you intend to trade/invest.

ü  Analyze economic scenarios (global/macro), geographical news if it’s influencing the future price of a commodity you are trading.

ü  Know the price to enter and exit in the future market with profits.

ü  Incase market does the unexpected be ready to exit with a loss.

ü  Identify your risk taking capability for each trade/contract you enter.

ü  Strictly follow a stop loss while trading in commodity market.

ü  Keep a time period (approx) to meet the objective/target of this trade if it’s not moving in that direction then take an exit from contract.

ü  Transfer the profits regularly from your account so you don’t take a risk with profits you booked in your next transaction.

Mistake # 2 Trading on Borrowed Funds in Commodity Market

Strictly say, “NO” to trade on borrowed funds in commodities trading. Aanchal shared an experience, where risks could be doubled if traded with borrowed amount. For instance, if you borrow amount Rs 2 lakhs to enter a commodity trading contract. Your approx cost would increase by 14% p.a. (approx) due to interest component on borrowed funds. Now, while trading you intend to book profits and cost of borrowing which will keep your exit price point much higher. In case, market does not move as per your calculations then you will register losses and end up paying borrowing cost from your own pocket in such situation

Mistake # 3 Avoiding Stop Loss Orders/Triggers

Earlier, Aanchal used to keep a mental stop loss like other commodity traders expecting market to move in her direction after sometime if it gets triggered. It’s important to understand that when stop loss is triggered it means your time to exit from a contract is due and don’t overstay in contract just on hope of returns or fear of losses. In past, Aanchal had overstayed in couple of positions after triggering of stop loss on hope of turnaround but contract continued to register losses which had a hefty impact on her performance. Understand; when stop loss order is triggered accept that your calculations, strategy and assumptions have gone wrong while entering in a futures contract. Don’t widen your losses by ignoring the stop loss. A lesson to be learnt is while, trading in commodity market have a real stop loss ready in system not a mental stop loss to revive on hope

 Mistake # 4 Overstaying The Position

In few commodity trades, Aanchal had overstayed in the position due to greed of booking higher profits. But, there have been instances with her wherein, the profits had turned into heavy losses in sometime due to greed. It’s important to set the profit amount (per cent) you intend to achieve in a trade while entering in a contract. Don’t overstay in the position on expectation of higher and higher profits in the Bull Run. Exit at the price point you have decided on timely manner by booking profits from a contract

Mistake # 5 Averaging Out Losses

In equity market, investors apply strategy of averaging out losses by buying stocks at lower prices. Similar, strategy Aanchal had applied in commodity market which is vulnerable when price of commodity is declining. Applying average out loss strategy in commodity market led to double her losses with prices declining further. Investors tend to forget that they are applying average out losses in cash market of equities whereas in commodity they will be applying average out losses in future market which has higher risks with further decline in prices.

Mistake # 6 Changing Your Commodity Trading Strategy During Market Hours

There are instances shared by Aanchal wherein, in the past she would sit and make a strategy to trade in commodity market for next few days by doing some analysis. But, on next trading day she would not follow her plan due to fear and greed. She would enter into contracts/trade which was not planned by her leading to losses in such transactions. It is advisable; to strictly follow your own strategy and analysis during market hours. You shall change the strategy during market hours on rare cases like unexpected news event or market reaction impacting your trade/contract. Follow a discipline approach of not changing the strategy while trading in market hours.

Mistake # 7 Trading in Commodities Market By Intuition

There are many commodity traders/investors enter into a contract based on intuition and end up with heavy losses at end of expiry. It’s important to do your own homework (analysis) in advance while entering into a contract and stay connected with the news when contract is open. You can refer to periodical magazines, daily newspaper or Bloomberg/Reuters portal to stay updated with commodity news in the global markets. The prices of commodity are linked with global demand and supply so it plays vital role in influencing the price movement.

Mistake # 8 Greed Over Success While Trading + OverTrading in Your Account

There are instances wherein, investors overtrade in their account in greed to book higher profits especially in Gold commodity trading. It’s important to take a timely exit from a contract after achieving your objective (profit) returns. However, in greed don’t trade in too many commodities at a time. You may not able to give 100% attention to one transaction in such scenario and will end up incurring losses in your portfolio

Mistake # 9 Lack of Patience While Trading in Market

Trading in commodity should not be a day trading approach for five minutes or taking a position for a week then an exit. A commodity investor/trader needs to develop patience while trading in commodity market. They shall enter into a transaction in which there are high probabilities of return based on your analysis/strategy. Such, probabilities don’t come often so they need to have patience to wait for right timing then register good profit percentage in such transaction

Mistake # 10 Fail to Transfer Profits from Account

Aanchal shared an instance wherein, initially she kept her profits in the trading account to accumulate for long time. Then one day she entered into “big trade” risking her returns over the period. At expiry of contract, she registered losses in this gold commodity trading and all the profits accumulated over the time had vanished in one such transaction. A lesson to learn out here is, transfer your profits regularly from a trading account to safe investment product or savings account. So, you don’t trade with profits you have achieved and risk yourself for higher returns due to greed. Trading in commodities analyzing your risk taking capability is the right approach.

Conclusion

You must have seen yourself doing such mistakes while trading in commodities market. So, it’s recommended to overcome these mistakes as Aanchal did smartly and shared her instances / learning’s with us through this article. You should evaluate your own trading habits and follow your strategy by doing analysis and understand commodity trading basics while entering into a transaction. This will give you pleasant sleep at night since you will have a transaction with high probability of returns with your hard work behind it. Have a safe investment ride in commodities market