|The floor of the Chicago Board of Trade, a major commodities exchange in the United States. (Photo credit: Wikipedia)|
Understand Your Psychology
When you are making commodity trading decisions you are involved in a delicate balancing act. On the one hand you have to act swiftly to profit from the opportunities that arise, whereas on the other you have to be very cool and analytical to make the right calls.
Getting an understanding of your own psychology is very important for all successful trading. Often the worst decisions are made due to emotions interfering with the thought process. If your mind is clouded by strong emotions it is easy to make poor decisions.
Don’t follow the crowd
The chances are when everyone is talking about a trend it will be too late to jump on it. This especially goes for any kind of ‘hot tips’ that you get on the internet and through social media. You can’t bet on a race that has already been run.
It is important to be able to have the courage of your own convictions. Making money is commodities investing is a matter of being right when others are wrong. This can mean buying precisely when others are desperate to sell.
Be genuinely informed
There are all kinds of information that you can have access to that will be able to give you an insight into the state of the market. Commodity traders will keep a very close eye on the news and will be able to read between the lines in order to extrapolate likely trends.
Don’t ever buy something that you do not understand. If you are contemplating sinking funds into a raw material, do your homework first. Make sure that you know what a product is, what it is used for and how it is produced.
Make sure that you keep yourself abreast of the world political situation and current events. War, revolution and natural disasters can all have an impact on commodity prices. Technological developments and changing social trends will also play their part.
Get expert help
It is not always going to be possible for you to have all the information you need as an individual to make successful commodity trades. This is where buying into funds that are invested in this area makes sense.
Just as particular foods are only good for you as part of a balanced diet, any given investment is only wise as part of a balanced portfolio. This is why many individuals consider it worthwhile to pay the premium demanded by a wealth management company who understand how to balance risk against reward.
Ultimately all investments can go down as well up. The big advantage of commodities though is that they are real things, with real uses and real demands.
Simon Grant produced this guide in association with Adam & Co., who offer their clients bespoke wealth management.