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A suggestive approach to commodity trading discipline and trade management

Tuesday, July 18, 2017 | Category : Commodities | 0 Comments
Commodity Derivatives
Commodity Derivatives Trading, as the name suggests as a very serious business. Commodity Derivatives Trading business consists of two very important aspects. One is money management and the other is research. If a trader wants to be professional then he needs to have a very concrete plan to implement its trading business. Concrete planning on both aspects is key to success in professional trading business. Allotment of correct weightage for money management and research is also important factor. Most of the traders would weigh high on research and less on money management and that’s why most of the traders fail in making money from commodity trading. A professional trader would weigh high on money management and less on research. I would suggest 70% weight to money management and 30% to research.

Strong money management plan is the main pillar for a Commodity Derivatives Trading business. Money management plan would involve:

1. What would be the duration of the trade?
The duration of the trade could be Intraday or short term or medium term or long term. Before taking up a trade, a professional trader need to plan how long he is going to hold his position and stick to the plan made.

2. How much funds to risk on each trade?
I would recommend risk of between 2% to 5% of its investment on each trade depending upon the duration of the trade. Lower the planned duration of the trade, lower would be risk and vice versa.

3. What would be my risk: reward ratio?
Ideally risk reward ratio for a trade should be 1:3, but commodity markets have occasional trending markets, therefore 1:3 kind of risk reward ratio won’t work most of the time. A professional trader should maintain at least of 1:1.5 risk reward ratio.

4. Which commodities to trade?
I would suggest any commodity that has a daily trading range constantly between 2%-4% would be preferred commodity to trade. Any commodity which has a daily trading range of more than 4% would be a high risk commodity and a professional trader would ideally avoid this counter. And any commodity which has a daily trading range of less than 2% would be very idle commodity and professional trader would generally avoid this counter.

Research, although we would weigh less on this aspect but is most important aspect for professional trading business. A good research output would provide:

1. Predefined Entry and Exit points:
A good research output would provide clearly defined Entry and exit points. Exit points would involve Stop loss and target

2. When to trade and when not to trade:
A professional trader would not trade all the time. He would avoid high volatile days and very low movement days, where most of the money is lost.
Above all DISCIPLINE is most important thing for a profitable trading business. Making a trading plan and following it honestly is key to successful trading business. One may not earn profits during its initial phase of trading business. As every business has a learning curve, professional trading business follows the same. Higher the experiences, higher are the chances of earning profits consistently.
 
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Ashish Shah | AVP - Commodities

He is a certified NSE (NCFM/NISM Certification) For: Derivatives Market, Capital Market, Currency Market & Commodities Market & he has also done MCCP (Mcx Certified Commodity Professional) & DICM – Diploma in Commodities Market (Wellingkar Institute, Mumbai). He is regularly featured on Chat Shows on moneycontrol.com, live interaction on CNBC TV18 & BTVi.

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