Trading in commodities? Learn ways to cut losses

R Srividhya, Financial Chronicle 7/5/12

source: http://www.mydigitalfc.com/commodities/trading-commodities-learn-ways-cut-losses-053

Commodity trading is prone to risk due to price fluctuations. Lately, some of the commodities trading in the futures market have been undergoing high levels of volatility. However, the market itself offers ways to mitigate losses and maximise gains in commodity trading.

“Futures trading offers high level of leverage as one can trade with the margin money. However, in commodities where daily level of fluctuation is greater than the margins, the investor can suffer heavy losses. In such cases, we always advise to limit the exposure. Further, there are orders which can be placed to mitigate loss and maximise returns,” said Santosh Kumar Narayanan, product-in-charge, zonal, JRG Wealth Management.

An order helps the investor decide when to enter and exit the market, and also decide at what price and time the position could be executed.

Limit order: This is mainly used to determine the price at which one wants to enter and exit a commodity. When the buy limit order is set, the broker will automatically buy commodity when the price arrives. Similarly, after having taken a position, one can set a limit order for selling the commodity and the order will be automatically executed if the commodity touches that price. This helps the investor to plan the returns he expects from a particular commodity trading.

Stop loss order: This is given to limit the losses in a position if the prices move down beyond one’s expectations. Stop loss order will help determine how much loss one can bear on a position. This also helps the investor when he is not constantly checking the price movement or is on a holiday.

Trailing stop loss: This order helps the investor set a percentage below the present market price. If the market price moves heavily down and goes beyond the set percentage, a sell order is triggered.

Generally, these orders expire in one day. If one wants to place orders for a specific time span, there are a few other orders available.

Good-till-cancelled (GTC) order: This makes the stop loss, limit of trailing stop loss order last till the expiry of the contract or till the contract is cancelled.

Similarly, one can specify the date for the contract to be executed. For this good-till-date (GTD) order can be placed along with the stop loss or limit order.

“Orders help one to plan the extend of losses and returns from a contract. But, one need not necessarily be able to buy or sell at the same price he had placed the order for. It also depends upon the availability of a seller or buyer at that price point. Once the order is triggered, it will be filled with the best possible price. This would be invariably lesser than the specified price in the order. But the investor can either wait to execute at the specified price or execute at the price available,” said Narayanan.

According to him, the awareness level about the orders is not adequate in the Indian commodity market. While an order can limit losses, it can also cap the returns in a bullish market. “Generally, investors are advised to use stop loss or trailing stop loss orders. The number of them who use the orders are gradually increasing,” he added.

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