Understanding Probability and Risk in Commodity Trading

It goes without saying one must have a thought out plan if they want to succeed in commodity trading. More so a proper mindset is an important ingredient in long term success in commodity trading. One cannot even think about successful commodity trading without first fully understanding probability and risk. In order to have the proper mindset and become a successful commodity trader, one must first learn to think in probabilities.

The simplest way to think in probabilities is to ask yourself a simple question.

"What was my profit over my last series of trades?"

Your series of trades are contingent on the way you trade and your time frame. For example, a short-term trader who uses very tight stop orders may use his last twenty trades. A long-term trader may use a shorter series of only five trades. This is a personal issue.

Successful commodity traders also understand the risk involved for each trade. Besides the risk per trade, risk per sector as well as overall risk in the portfolio needs to be thought out. The simplest way to understand your risk is to first determine the dollar amount you are risking on a particular trade. Next, figure the dollar amount you would lose if all your open trades were stopped. Once a commodity trader focuses on risk, he/she put themselves in a position to be available for those rare trades that make up for all the small aggravating loses.

You need to compute your open trade loss, divide this number by your amount of your total closed trading capital. This percentage of your closed trading capital is your risk. Now you have identified your risk, accept it. This is one of the most important issues in commodity trading. Truly accepting the risk. Truly realizing that this trade might not work. Truly realizing that you stand the definite chance of losing money…

Now you have two very important tools:

1. You know your probability of trading success.

You are one step closer to having the proper mindset of a successful trader or investor with commodity trading advisors.

If you have commodity related questions please, feel free to contact me. I will be happy to answer your questions to the best of our ability.