Consider The Substantial Risk of Trading Commodities

It appears to be easy to trade and think only about good entry and exit signals and the great potential profits the commodity markets make possible. Some commodities traders never hold daytrading open positions overnight. I have considered (even experienced) the major risk. How would you like to wake-up and find yourself on the wrong side of a volatile market that opens limit-up or limit down and stays locked at limit for several days in a row? Sitting day-after-day and not being able to get out of a bad position that's locked against you is a real nightmare, of course.

I recently ordered and received some free literature from the Chicago Mercantile Exchange. One thing I was especially interested in learning was the size of limit moves in the S&P market. The first limit-day can go 30 pts maximum. That's $15,000. If this first day closes locked limit, then the next day can go 50 pts. That's $25,000. These figures pertain to only 1 contract. One or two limit days against you in the S&P market would put a lot of commodities traders, like myself, out of business. So, for many of us trading the S&P market, carrying a daytrade overnight is absolutely bad business.

Not only can you lose 15 to 25,000 or even 50,000 dollars you can lose much more than that if the S&P market locks limit for several days in a row. Wouldn't it be terrible to end up in debt to your broker for 1-200,000 dollars? I know this is not likely to happen, but the point is it's possible and no reasonable commodities trader can afford to take this chance.

This locked limit-up, locked limit-down business (as you well know) pertains to all of the commodities futures markets, not only the S&P. The numbers may be different but the results can still be devastating! Now get this. One of the great things about day trading is you do not have to hold overnight positions and thus subject yourself to the huge risk of the markets opening locked limit up or down and staying locked for several days in a row.

The typical commodities trader using daily bar charts has no choice, but to subject themselves to this risk. Although I have not yet witnessed a series of market limit-up or limit-down days in any futures market via my intra-day bar-charts, I'm sure the day-trader on the wrong side of what comes to be a locked-up or locked-down markets will nearly always be afforded several chances to exit. For the daily bar chart user and longer term trader being able to get out will often be impossible!

I have not, nor do I intend to make a study of spreads or options to lessen or perhaps even totally avoid the above mentioned risk. Probably most traders feel likewise, so I again urge you to always consider the risk and be very protective of your trading capital at all times. Like the famous trader Paul Tudor Jones says, "defense, defense, defense!" Commodities Article writtten by D. McCullough for Commodity Traders Club News.