Psychological Pitfalls in Commodity Trading
© VijaySardana
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Vijaibhav - 3
Psychological Pitfalls in Commodity Trading
By:
Vijay Sardana
PGDM (IIM-A), M.Sc. (Food Tech.) (CFTRI), B.Sc. (Dairy Tech.), Justice (Harvard),
PG Dipl. in Int'l Trade Laws & Alternate Dispute Resolution (ADR) (ILI), LL. B (in Progress)
Specialized in Food & Consumers Laws, IPR & Contract Laws Agribusinesses Value Chains,
Commodity Markets & Innovation Management
Member, Commodity Derivatives Advisory Committee (CDAC),
Securities & Exchange Board of India (SEBI), Government of India
Disclaimer: Views are personal.
Do not attribute to any organisation directly or indirectly.
It is said that greed,fear and hope drive the markets. It means human psychologyplays
an important role in market place.This is also the main reason when all facts are same,
why different analysts offer different version of the story around the same facts. It very
important for the traders to understand the fundamentals of the markets while working on
technical charts.
Pitfall 1: Very often people tend to follow the tips. It is important to knowthat the same tip
is with everyone in the marketand if information is same why people make losses.There
is no reason to copy the approach adopted by others while taking trading decisions.
Caution: Your requirements or positions may be differentthan other person.
Pitfall 2: In order to be successful in commodity trading, one should be cautious of
depending on others for your success.Most of the people are likely to trust insiders and
known faces or people with connections. Please note many of them are probably not
effective traders. There are exceptions, but these are notmany.
Caution: Dependonothers only for discussionsto clarify your doubtsandnotto outsource
your own decision-making process. Itis your money, take charge ofdecision making.
Pitfall 3: No one can make profit every time and all the time in commodity trading. There
will be ups and downs in prices in the market. Market reflects the collective will of all the
traders participating at that given point. You may lose or make money depending upon
your homework and understanding ofthe market.
Caution: Don't blame others for your failures. This is an easy trap to fall into. No matter
what happens, you put yourself into the situation. You are responsible for the ultimate
result. Until you acceptresponsibility for everything, you will not be able to change your
incorrectbehaviours.
Pitfall 4: It is human tendencyto get rich fast. In this greed there is a tendency to ignore
the facts on ground and look for short-cuts. One of the shortcuts is over exposure and

Psychological Pitfalls in Commodity Trading
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over leveraging in the market. Sometimes people borrow money to take over exposed
position and try to play the market. They assume market will adjust to their style of
functioning. This leads to fatal errors in hurry and very often it ruins the trader or investor.
Caution: It is notpossibleto makewindfall gains every time. Stay long-term oriented.Don't
adjustyourapproachbasedsolelyonshort-term performance.If you marketby short-term
performance, you are working for brokers not for yourself. Whether you make or lose
money,brokeralways make money.So, let brokers serve you as service provider,do not
surrender to their pressure techniques in the influence ofgreed and fear.
Pitfall 4: Very often people enter into marketfor the excitementfactor and soon becomes
addicted to the market anxiety. Many feel marketfluctuations are essentialfor adrenaline
in the body. They sit in front of screen under compulsion and without understanding the
market and facts affecting the market, starts trading. Very often, with initial success or
underpeerpressure,mosttraders have such an ego investment in their trading that they
cannothandle losses. This causes them to evaluate trading methods and systems based
on very-short-term performance. Several losses in a row are devastating.
Caution: Please keep in mind no in market is God. No individual is bigger than market.
Don't start trading in a particular mannerbased on only a few trades. Market is dynamic
place and one must update himself regularly. Evaluate performance of any approach
based on manytrades and multi-year results. No individual can change the course oftide
when collective wisdom is against the stated position of the individual position. The best
way to handle is fix a limit for the trading and stick to the discipline, irrespective of your
position.
Pitfall 5: Very often people get emotional about trading. They make profit and loss in
trading as point of personalemotion and feel their competency depends upon success
and failure of their trade. This is a very dangerous self-made trap. In orderto recover the
losses,or to bearwith loss, in place of taking pause,people start pouring more and more
money into the trade. This is like throwing good money after bad money.
Caution: It is advisable to keep trading in correct perspective and as part of a balanced
life. Trading is emotionally intensive no matter whetheryou are doing well or not. It is easy
to let the emotions of the moment lead you into strategic and tactical blunders and
eventually loses.The bestway to keep coolis don'tbecome too excited and elated during
successful periods. Such blunders or mistakes traders make is to increase their trading
soon after an especially successful period. This is the worst thing you can do because
good periods are invariably followed by awful periods. This is fact because commodity
markets cannotkeep moving in one direct. This is beyond the logic offundamentals ofthe
markets and economyat large. If you increase yourtrading just before the awful periods,
you will lose money twice as fast as you made it. Knowing how to increase trading in a
growing accountis perhaps the mostdifficult problem for successful traders.

Psychological Pitfalls in Commodity Trading
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What to do for successful trading?
• Be cautious in adding to your trading portfolio. The best times to add are after losses
or drawdowns. Don't become too depressed during drawdowns.These are the best
time to understandthe strengths andweaknessofthe marketbecausefroth is outfrom
the system.
• Stick to financial discipline and control your emotions. Keep remaining yourself not to
fall into tarp. Stick to your discipline and your documented trading policy. When you
are makingmoney,you arethinking abouthowwonderfultrading is andhowto expand
your trading to achieve immense wealth. When you are losing, you often think about
giving up trading completely. With a little practice, you can control both emotional
extremes.
• You'll probably never control them completely, but at least don't let excitement and
distress cause you to make unwarranted changes in your approach. Other common
themes of good traders are self-understanding, balance and self-control. Before
placing orderon terminal, Letask yourself are you taking decision underthe influence
of others and due to fear, greed or hope. If answer is yes, close the screen go for a
walk.
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