Risk management is a critical issue in all investing, but especially in leveraged investments such as futures. To help you manage risk exposure smartly and make the most of your participation in the commodities markets, there are important questions a broker should ask before investing your money or advising you on how to invest.
1. What is your past experience in the commodities market?
A broker can learn a lot from your answer to just this one question. First, the broker will find out if you are a novice or experienced investor, which impacts the kind of information provided to you, as well as your emotional tolerance for the short-term fluctuations that actually make the commodities market worth the effort. Secondly, a discussion of any past experiences in the market can offer a great deal of information about your current expectations, which in turn, should affect your broker’s strategy for you.
2. What is your overall net worth and the value of your total investment portfolio?
Your broker isn’t being nosy…It’s critical for him to know what percentage of your assets are at risk in a trade. A $30,000 position could pose a mild degree of risk for someone with a $100 million portfolio and a catastrophic amount of risk for someone whose net worth is $100,000. At those asset levels, this truth is obvious, but it’s no less important in less extreme circumstances. Your broker also needs to know if you’re capitalized well enough to be able to allow market action, not personal financial circumstances, to determine the timing of your market moves.
3. How are your other investments distributed?
The level of risk present in your other investments can affect the risk profile for your futures and futures option trading. If most of your other money rests in relatively secure instruments, you may be able to comfortably handle more risk, with the potential for more reward, in these transactions.
4. Why do you want to invest in futures? What are your expectations?
To help you get what you want, your broker should know what that is. If he cares about your success, he should be aware of how you perceive success in this venture. It’s also important for a broker to assess whether or not your current expectations are realistic, based on your circumstances and current market conditions. If not, you broker should provide the information you need to set more achievable goals. Realistic goals are a key ingredient of a positive experience in futures and options investing.
5. How do you feel when you ‘win’ or ‘lose’ in the markets?
Oh great, you may be thinking…everybody wants to be Dr. Phil. But this isn’t a touchy-feely probe of your inner child so much as a practical exploration of both your risk tolerance and ability to adhere to the kind of strategy that can optimize success in the commodities market. Emotion is probably the number one impediment to smart trading: Discipline leads to good trades; second guessing, agonizing and flip-flopping do not. The nature of the futures markets, with its quick movements and frequent trades, means that losses are inevitable. YOU JUST CAN’T WIN EVERY TIME. Very successful traders generally have more losing trades than winning trades, but know how to keep those losses small and let the wins run. If every loss makes you question or abandon the game plan, you’re going to be your own worst enemy. Your broker should know what she’s dealing with so he can help guide you in avoiding the traps of emotional investing.
When evaluating a potential commodities broker, listening for these questions is one good way to determine if he has your best interests at heart. Keep in mind, too, that rapport is also one of the most important ingredients in a client-broker relationship, mainly because it optimizes communication. If you feel that rapport, but your broker seems to have missed a question, don’t worry—share the answer anyway! It will help you both.
Call 1-866-840-9075 or email us at support@randolphread.com to set up a personal phone consultation to discuss your current situation, markets of interest and desired results and how our expertise and services can support your success. If you’re an experienced investor interested in do-it-yourself trading through a full-feature direct-access trading platform, ask about the Randolph Read Helmstation
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