Managing a commodity trading portfolio requires some techniques that a stock trader normally doesn’t have to be concerned with. Many investors will buy stocks or mutual funds and hold them for many years with an occasional look at some quotes. Commodities traders rarely use a buy and hold strategy since commodity prices rise and fall over time without the normal trend higher that stocks accomplished throughout the last 100 years.
Manage Your Risk
So, at the top of your checklist should be controlling your portfolio risk. If you are stressed every minute while you are in a trade, chances are that you have on too many positions. Many who manage large futures funds, will risk no more than 1 –2% on any given trade. Small investors aren’t really offered that luxury, but you should still use some money management skills.
I have seen too many traders open an account, buy options in 3 different commodities and let them sit for 3 months. If they're lucky, maybe one position will show a small profit and the others were losers. They take what is left and buy some more options on another market and three months later their account is history. Sound familiar to anyone?
If that sounds familiar or unpleasant, let's look at some more desirable strategies. First, I do not recommend investing your whole account on day one. Be patient and build a comfort level. Many new traders will start out trading with a $5,000 or $10,000 account. I think that is too small, but this may be the group that needs the most help. I would suggest trading no more than 2 markets at a time with this size of account. Wait for the trades to come to you at a good entry point. Do not chase the markets just for the sake of getting in.
You may want to risk no more than maybe $500 per trade on a small account. The most important thing you should pull out of this is to be disciplined and never let one trade ruin your account. A $3,000 loss on a single position on a $5,000 account is something you probably won’t recover from.
Trade Commodities with the Trend
The best place to start with any strategy or system, especially for newbies, is to follow the trend. This has been one of the tried and true marks of successful trading for many decades. You will want to look at a chart and determine whether the market is in an uptrend or downtrend. If it is in an uptrend, you can implement one of two strategies – buy breakouts to new highs or buy on pullbacks. You obviously reverse this process for commodity markets in downtrends. You will be amazed how following this simple strategy will dramatically increase your chances for success.
Commodity Portfolio Returns
A well managed commodity trading account might look something like this over time:
20 Trades
11 winners
9 losers
Average Win: $600
Average Loss: $500
P/L: + $2,100
Return on $10,000 Initial Account: 21%
11 winners
9 losers
Average Win: $600
Average Loss: $500
P/L: + $2,100
Return on $10,000 Initial Account: 21%
If your account does not look like this in 6-12 months, do not be discouraged. If you are breaking even after a year, consider yourself doing well. The statistics state that most new commodity traders will not last more than 6 months. It normally takes many successful commodity traders at least a year before they start making money. I have probably made almost every trading mistake known to man, but I am a better trader because of those experiences.
