Investment Disasters Made by Commodity Future and Commodity Option Investors

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Avoid three common commodity trading mistakes made by many commodity future and commodity option investors.

T & K Futures and Options Inc. believes that most commodity traders make many disastrous trading mistakes in the commodity markets. Many enter the markets without enough capital to withstand losing trades. The fact is with $5,000, commodity traders can only get into maybe two or three different markets and maybe afford two or three futures contracts or maybe 6-10 options depending on the market the commodity traders are trading in. If one or two of those markets lose, futures traders have a lot of ground to make up with just one market because all of the risk capital is already invested.

Now if commodity traders invest $50,000 and buy the same two or three futures contracts and the same 6-10 options in two or three different markets they will have more risk capital to add to any winners they might have and diversify elsewhere etc. Commodity traders should not invest if they are undercapitalized. Visit http://www.tkfutures.com/margins.htm to see current margin requirements.

T & K Futures and Options Inc. believes another reason why so many commodity futures and commodity options investors lose is because they listen to the various news sources and base their trading on the so called experts. Commodity investors have to understand that news about gold prices being at $260/ounce is not a good story. Who cares? But when gold is at $700/ounce and a 20 year high, everybody seems to talk about it. Now the “experts” might say, “Gold is going to $1,000/ ounce.” The mentality becomes buy it before it goes any higher.

Isn’t the idea to buy low and sell high? Or at the very least buy into the gold bull market on price dips. There is a contrarian indicator called bullish consensus that alludes that commodity investors should sell any market where more than 75% of the small speculators and experts are bullish and should buy when less than 25% of small speculators and experts are bearish. Warren Buffet, the second richest man in the world, said something to the effect, “When everyone is brave, be afraid and when everyone is afraid, be brave.” T & K Futures is tempted to listen to him since he made his money investing in out of favor companies and commodities. Don’t be part of the herd. Make future trading decisions based on solid technical and fundamental analysis. To learn more about technical and fundamental analysis visit http://www.tkfutures.com/research.htm

Another risk factor is the huge bid/ask spreads that can occur in high volatility times or in illiquid markets. Many investors do not understand that this can cause a huge debit in your account the second that they put the trade on. Our company has seen $400-500 bid/ask spreads in options during volatile trading times and in illiquid markets on a number of occasions. It is important to trade liquid markets. To see a list of the most liquid future markets visit http://www.tkfutures.com/education.htm Let us explain what the bid/ask spread is. Just like a stock or bond purchase a commodity has a spread. The spread is how the traders or some third party gets paid. In a liquid stock it might be 25 cents a share for instance. So if a stock trader bought 1,000 shares of xyz for $5.25 they paid $5,250 for a stock that they can only sell for $5,000 if they immediately offset that trade. It’s only worth $5 but they paid $5.25. So in this example the bid/ask would have to go to $5.25/$5.50 for the stock trader to break even. Now factor in commissions and fees. Imagine now that a futures trader purchases a coffee call for $1,000 and it is only worth $500. That is a $500 bid/ask spread. The investor is down $500 the second they buy the option. Always find out the bid/ask spread before entering and exiting a commodity future or commodity option trade. For real time bid/ask information visit http://www.tkfutures.com/contact.htm

The information above is the opinion of T & K Futures and Options Inc. and is for informational purposes only and in no way should it be considered a guarantee of profits. Past performance is not indicative of future results and only risk capital should be used for commodity investing. Commodity future and option trading is risky and commodity traders can lose money.

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Michael Smith
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