5 Rules for Commodities

Today the price of crude oil rose above $86 a barrel (see graph below). Other commodities that have gone up in value, such as gold and soybeans, have demonstrated that good investors need to look beyond plain old stocks and mutual funds.

Experts recommend commodities as a way to diversify your portfolio, especially as they continue to advance when stocks are struggling, and suggest that you allocate at least five percent of your investment funds to gold and other commodities. Prudent investors will own both the physical commodity (e.g. actual gold bars) as well as shares of the resource producers. There are some things to watch out for though.

Scam artists are prevalent; deal only with registered firms

All legitimate brokerages must be registered with the National Futures Association with a list of all complaints, sanctions and arbitrations. Go to the Association's Web site, and click on the Investor Learning Center link for helpful information about trading and how to protect yourself against swindlers. Stay away from anyone who first tells you how much money you can make, without defining how much is at risk.

Manage your money wisely; stick to a smart trading plan

Don't risk too much of your account value on a single trade. Set your entry and exit points, and clearly define an in and an out with each trade you make. If things drop lower than expected, don't lower your trading stops in the hope that a losing position will recover.

Stay informed, especially if you're trading

Keep track of the fundamental reports that affect the market you are trading. Read trade journals, bulletins, and tickers, and make the appropriate adjustments to maximize profits and minimize losses, by adjusting stops and profit objectives appropriately. Strive to spend 15 to 30 minutes a day learning the fundamental, technical and psychological aspects of commodities trading.

Be careful about costs

In trading, there's a winner on one side and a loser on the other, less a transaction fee for the broker. Brokers can charge whatever than can get from the customer, but any broker charging more excessive fees for a round-trip commission when it's not a managed account is definitely looking to fleece you instead of advise you.

Admit mistakes, then move on

In any market, if you let a trade go south and you aren't willing to admit you are wrong, you are destined for failure. Things are always unpredictable, and you have to expect losses as much as you expect gains, especially in commodities trading. Don’t use with money you can’t lose in the short term.