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Understanding Probability and Risk in Commodity Trading

InvestorEducation / Commodities Trading Oct 09, 2009 - 01:58 AM GMT

By: Andrew_Abraham

InvestorEducation

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

Andrew Abraham
www.myinvestorsplace.com

Andrew Abraham has been in the financial arena since 1990. He is a commodity trading ddvisor and co manager of a Commodity Pool. Since 1993 Andrew has been a proponent of quantitative mechanical trading programs. Andrew's major concern is not only total return on investment but rather the amount of risk that one would have to tolerate in order to achieve returns He focuses on developing quant models that encompass strict risk adherence and correlation. He has been a speaker at conferences as well as an author of numerous articles. Andrew has spent years researching ideas that have the potential to outperform indices as well as maintain fewer draw downs.

Visit Angus Jackson Partners (http://www.angusjacksonpartners.com) Contact: A.Abraham@AngusJackson.com (mailto:A.Abraham@AngusJackson.com)

© 2009 Copyright Andrew Abraham - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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