One of the important elements of commodity futures trading is to have the discipline to exit losing trades. Many novice traders have fallen into the trap of holding on to their positions for too long whilst in a trade, hopefully anticipating for a turn in market trend. However, this does not happen and they end up spiraling deeper and deeper into greater losses. At the end of it all, they have no choice but to exit the market with a huge portion of their capital wiped out.

 

This would not have occurred if they had implemented risk control strategies typical of experienced commodity futures traders. Appropriate stop losses are calculated and put into place at the point when they enter a trade. Evidently, stop losses are part of a trading plan which includes profit targets, and stop loss adjustments. Once a stop loss is hit, traders exit their trades with minimal or acceptable losses, and subsequently move on to the next trade. This goes to show that an experienced trader is well aware of his risk tolerance levels when he enters a trade. He also understands that not all of his trades will turn out favorably, and that there is a probability for winning and losing each time.

 

Subsequently, the next question now would be, how would a trader identify the right stop losses to place? According to Bruce Kovner, an experienced trader featured in the book Market Wizards, he would utilize technical analysis methods to pinpoint technical barriers which are great locations to place stops. However, he cautions against placing stops within a trading range in ranging markets, as this will result in being stopped out prematurely. Thus, he advocates placing stop losses beyond the trading range while trading in ranging markets.

 

There may also be instances where a large number of commodity futures traders may have identified the same stop loss points. In these cases, it may be a good idea to identify stops at different locations by adopting different methods of analysis. However, in situations where these stops cannot be found, the trader would have no choice but to place stops at these obvious locations within the chart.

 

Another aspect of commodity futures trading would be the maximum percentage of capital that a trader should risk in each trade. The general contention is that a trader should not risk more than 5% of his capital in each of his trades. In fact, 1% to 2% would be preferable risk levels for each trade. Any percentage higher than this will result in relatively huge losses should a trade go wrong. In these circumstances, a trader could get wiped out in no time if he is on a losing streak. Thus, with a lower risk level, a trader would still have adequate capital to make a comeback should his trades turn out to be losses.

 

Finally, any commodity futures trader should analyze his past losses to determine the causes of failure. This way, he is able to learn from his mistakes and avoid making them again. At times, traders who have been suffering from a losing streak should take a break from trading in order regain their emotional stance before going into the market again.