June 20: Risking Capital in Commodities? At Least You Thought It Was

Itís on the bottom of every piece of commodity trading literature, every commodity investment advertisement, as demanded by the New York Stock

Exchange, the National Futures Association, etc…

WARNING: Only risk capital should be used for this kind of trading. CFTC rule 4.41, the official name of another set of warnings to the investor, might as well be Area 51 when it comes to investors caring the warning!

Over my CTA/trading career, Iíve talked to many commodity traders just beginning their quests for riches and too many of them approach the market with money theyíve saved up for the purpose of speculation.

That may be all well and good, but before you start on your journey of pain and joy, get one thing straight.

Youíre going to get emotional… just HOW emotional will be largely a function of whether your risk capital is comfortably losable, when you are faced with a step back on your road to profit with your commodities.

The more mental and emotional investment you have in not wanting to lose your stake, the more you are likely to lose it.

OK. Youíve got a trading system you like.

Youíve back-tested it.

You like.

You do some worst case math. Letís see, with the stake Iím going in with, if I keep my losses to a maximum of X dollars, then to lose my stake, Iíd have to have 20 losers in a row.

Never happen.

Seasoned commodity traders are laughing to themselves reading this because they know that if you have to do this kind of math, then your chances of surviving and prospering are slim to none.

Itís like the guy who counts his chips at the blackjack table…

Those that are too concerned about every chip are usually playing scared. And you know what happens to scared money. Yes, it flows into the pockets of the confident. And that is the point of this text exercise.

If you donít REALLY have an If itís gone itís gone, and it wonít affect my lifestyle in the least attitude, you are not creating the best chance to win.

Iím not saying that you should take a flippant attitude toward losing or winning. Iím saying that the more losing your money has emotional meaning the less chance you have of succeeding.

Stock (Forex, Commodities, Futures and options…) trading should ideally be part of a mix of diversified investments.

Who am I kidding?!

Most of the newbie commodity traders I come across barely have their bills covered and are looking for a way to break out of the financial doldrums.

Enter Ken Roberts, and all the gurus telling you your dream is possible for a stake of $3,000. And maybe it is for the Few, the Proud and the Lucky.

But not for most. Why?

Scared money.

To win, your attention should be focused on the process of trading, not on each win and each loss. If you donít treat commodity trading like a business, and make sure itís well funded, youíll wind up the way of the Edsel (ask an older friend if you donít know that word).

In the end, itís all about attitude and you mental strength of conviction to follow your tested commodity trading plan.

If youíre under-capitalized, your conviction will waiver as fear creeps in.

Youíll hesitate when your commodity system gives you the green light and youíll take your profit too early. Your light will dim and in the end, after blaming market conditions, your light will go out.

Whether youíre going to fake it till you make it, or you have adequate capital to begin trading commodities with, you better have your emotional wits about you.

By Norman Hallett

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