How to manage risk in commodity market

Commodity trading involves the trading of standardized goods on regulated exchanges. There are numerous actors actively involved in trading commodities such as producers, industrial end-users and trading companies. Volatility in the commodity prices generates risks but also opportunities for traders wanting to take advantage of price movements.

The commodity market is a complex market where a large number of commodities traded on the commodity exchange. In exchange, the primary product is traded rather than the secondary product. Products traded in the market are characterized by quality and quantity of product.

Tips to manage risk in the market –

No doubt commodity market provides plenty of opportunities to earn money but it also offers a variety of risks which can influence trading results and that is why it needs to be monitored and managed regularly. The high volatility of the market increases uncertainty about future prices of commodity and thus it poses lots of threat. There are various methods for managing risk through the exchanges and their derivatives.

1. Analytics of risk – There are some techniques for risk analytics such as Cash Flow at Risk and Earning at Risk to estimate commodity price movements. If risk analytics are used properly then it becomes more easy to be able to explain and review some hidden points related to the particular commodity.

2. Trading within comfort zone – Trading is good but does not overtrade. A trader should trade within his comfort zone, do not be overconfident while trading in the market in different commodities. Be sure that if you are earning profit day by day, there might be chances to accrue loss on the same scale.

3. Be real in the market – Understand your strengths and weakness and act accordingly. You should know the size of your trading account and measure how can leverage affect trading account. If the trader is new in the market then he can take help of leading financial advisor by taking their trading tips such as commodity tips, gold and silver tips or any other according to the need of investment.

4. Know risk tolerance capabilities – First, having an idea of risk-bearing capacity can help a trader to manage his risk smartly. It is better to understand the market very well to maintain risk in the market. If a trader knows how much he can tolerate then he can take decision accordingly.

5. A better understanding of the market – It is better to know about the market in which you are trading. It is significant to realize that some markets are not for everyone to trade and trading in highly volatile markets requires proper management and discipline. This fundamental understanding of the market requires before trading in a particular market. A trader can get help from a sebi registered investment advisor to clear various complex terms related to the commodity market.

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