Realistic Returns in Commodity Trading

I was having a talk with one of my friend who recently started trading commodities, He trades in Gold and Crude. As all new traders he had very high expectation, he was telling me that few of his friends made very good money trading commodities and  he was really excited in trading commodities, I asked him what kind of return are you expecting out of his trading and he said 50-100% per month. I was taken back on hearing this answer and gave him some basic idea of how to approach trading with realistic expectation.Sharing part of conversation with readers.

One of the biggest mistakes new commodity traders make is having unrealistic expectations before they even place their first trade. The commodity markets are highly leveraged investments, which increases profits for disciplined traders and rapidly drains the accounts of reckless traders.

Commodities are highly leveraged instruments and  can have 20 to 1 leverage,  so you just need to have a 5% margin and you are ready to take positions, For example, gold futures trading at mcx are at 27000 per 10 grams . Suppose traders want to take position in 1 KG Gold at MCS Futures he needs only 1.5 Lakhs to trade 1 KG gold position worth 27 lakhs.Gold in general has been moving about Rs 300-500 per day a day, which equates to a 2-5 lakhs  daily move on just a 1.5 lakhs.So one wrong move by Gld and  how quickly you can get into trouble if you don’t respect the leverage.

The leverage in commodities usually stimulates the greed part of the brain for many novice traders and they only focus on potential profits and not potential losses. Profits of 50 to 100 percent can be made in just a matter of a few days if a trader maximizes his leverage. Losses of that same amount can also happen just as quickly and this can lead to total account devastation.

The motto of living to trade another day should always be on a commodity traders mind. The higher the returns one wants to make, the higher the risk one must take. Therefore, shooting for returns of 100 percent every week will likely result in an account going bust. It usually only takes one wrong move for the greedy trader to destroy an account. And it is only a matter of time before that happens to a greedy commodity trader with little respect for the risk.

Professional commodity traders usually only risk a small portion of their account on any given trade. This can fall anywhere from 5 percent to less than 1 percent. This obviously lowers their return potential, but it also lowers their loss potential. Losses are part of the game and taking a loss does not hurt as much when it is only a small fraction of the account. You should be able to resume normal trading without any anxiety or frustration after a loss. Losing half your account on one trade will likely have severe mental anguish.

Realistic return in commodity can be between 20-40 percent average yearly return is exceptional for most professional money managers, yet most individual traders shoot for that every week or month. It is best to take guidance from the professionals who have a proven track record of winning and not new commodity traders who have a track record of losing in the commodity markets.