One prevalent issue in the trading community is biased information. As the saying goes, “if a lie spills long enough, it becomes the truth.” Many traders tend to act on false information when it comes to commodities. Public notions of the commodity market being a red-zone area discourage a lot of amateur traders from attempting trading commodities.
However, the truth is that people can make a decent income trading commodities. The thrilling part is that not all of the traders who profit from commodity trading are professionals. Many of them are amateur traders who know how the market works.
Traders who want to take home substantial gains from trading commodities should be aware of the following myths that can colour their view of the markets.
Myth 1: “The leverage factor is high in commodities”
Leverage is, by far, the most significant factor when investing in commodities. Stocks require up to 50% margin, while a commodity single futures contract requires a measly 3 to 15% of the total value.
Unfortunately, amateur traders sometimes abuse this double-edged sword advantage and get wiped out. Practically, traders realise that commodities as an asset class are not different from stocks in terms of volatility once they subtract the leverage factor.
A good example can be seen when commodity traders try to use a small account as a big one when buying contracts. For example, they invest $30,000 into their account and treat it like a $300,000 account by acquiring more than 10 contracts using the leverage factor. In such cases, if the commodities move up a little in value, it doubles their investment. However, the opposite is true when it drops. If the commodities drop slightly in value, the total investments get wiped out.
The point here is for traders to plan for fewer contracts than the margin allows. In the example above, traders should opt for one or two futures contracts. Avoid falling into the trap of the high leverage factor that consumes new commodity traders.
The picture above shows the leverage, margin requirement and account percentage for one lot size in EUR/USD.
Myth 2: “You will take delivery”
A lot of traders believe that they must accept the delivery of physical commodities, but it is only the commercial institutions that take and make delivery of products.
The idea here is for traders to close every futures contract before the next notice day, which generally happens a few weeks before the contract expires, to avoid issues in the long run. However, traders should avoid forgetting the following day's notice; otherwise, their brokers will grab it and contact them.
Myth 3: “You need a ton of money”
Unfortunately, this particular myth is one that makes a lot of traders avoid commodities because they believe that it requires a lot of money. These days, many commodity brokers offer a trading account for just $5,000, while some even go as low as $2,500. However, traders should be willing to lose the money in cases where the market goes contrary to their plan since commodities can be a very risky investment.
Another common problem is when traders take on too much risk for the size of their account. Some traders even go all-in on a single trade. A better approach is for traders to aim at a reasonable return of 30% per annum, which is ideal in the long run.
Myth 4: “No one makes enough money”
While traders can lose a lot of funds when they trade commodities, that mostly happens to traders who are poorly prepared and hop in and out of the markets with their accounts blown. They take a punch, and that's it.
Other traders prefer to try strategies repeatedly, even with constant losses, until they realise that the plan is a free ticket to a blown account – but they keep at it. Commodity trading is a balance game, which means that for every dollar that is lost, someone gains a dollar.
The money always goes to the money managers, consistent amateur commodity traders, and the professionals yearly. Many amateur traders who make money do so over the course of many years.
In the end, those who succeed in trading commodities do so by following a strict and concise trading discipline that most traders either ignore completely or never use in the first place.
The picture above shows the account of a forex trader gradually growing his account.
The bottom line
Traders can make a huge profit from trading commodities, whether it’s as a novice or an experienced trader. The point here is to use a good trading strategy with sound money management skills to increase your chances of success. You simply can’t get an accurate picture of the market if you buy into common myths.