V.3:4 (135-136): Commodity Trading Risks by Allen D. Hanson

V.3:4 (135-136): Commodity Trading Risks by Allen D. Hanson
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Commodity Trading Risks by Allen D. Hanson

Few traders fully realize the risks that they are taking when they make a commitment in the futures market. They have learned all about charts, cycles, fundamentals, and basic trading theory, but when it comes to understanding the real risk, they simply don't comprehend the hazards involved. This is particularly true regarding the short side of the futures market. While this is often called the most profitable way to be in the market, the upside risk is still unlimited in theory at least, and the downside potential is limited to the full price of the commodity. Most amateur traders understand this but they don't fully realize the other major risk factors. They fall into five distinct categories.

Political Risks

This includes all new rules and regulations that cause immediate change in market value. If a foreign government fails or a new political party takes office, the security of the previous government is gone and commodity prices can respond very suddenly. In the United States that includes presidential succession or threat of war, interest rate changes and other government initiated fiscal policy. Even tight futures market spreads can go wild if a new rule becomes effective in between two different contract months.

Weather Risk

This includes storms, hurricanes, sudden freezes, prolonged hot or cold spells and other unpredictable influences on the market place. Some weather risks can be partially anticipated during certain seasons, but a sudden weather disaster can still move prices substantially and violate any chart pattern or seasonal trend.

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