Not All Commodity Brokers Were Created Equal
So, you've decided you want to make some money in the commodity markets. Instead of just wishing you luck and throwing you on the mercy of the markets, you may want to find yourself a good commodity broker. You need to be a bit careful when choosing a commodity broker as they are not all the "experts" you might think. Speaking from experience as a broker and private trader, I thought I would pass along some helpful advice.
Let me start by stating that not all commodity brokers will help you make money. The statistics say that most commodity traders will lose money - about 80 plus percent will be losers. And to make things worse, the average account won't last 6 months. I don't believe there have been any published reports on the overall success of accounts at full service commodity brokerage accounts. I would guess the numbers are a little more positive at these firms, but it might not be much better. Therefore, it is very important for you to find a commodity broker that help you achieve a profitable account.
Shouldn't All Commodity Brokers make Money for their Clients?
Most new traders to the commodity markets would probably answer - Yes. In reality it is much more difficult to make money in commodities than stocks and other investments. The markets are highly leveraged and they can be very volatile. The problem is that investors want to open a $5,000 or $10,000 account and trade commodities. You can control about $100,000 worth of commodities for this small amount. Can you imagine buying $100,000 worth of stocks for this amount? Small swings in the price could hurt you very quickly.
The next obstacle is Commissions. The cost of trading is much higher for commodities than stocks. You are charged a commission PER contract. They can run from a few dollars to one hundred dollars plus per contract. Trading commissions can add up in a hurry.
Now, a commodity broker has to make a living and he makes money as trades are generated in your account. A good commodity broker will find a happy medium between making enough money for advising you on your account and making good recommendation to help you achieve profitability. His foremost goal should be in doing what is in your best interest and trying to make you money. Just like in every other industry, there have been unscrupulous individuals who have crossed the line and abused their clients. Be wary if you feel your commodity broker is just making recommendations or placing trades to solely generate commissions.
Commodity Brokers may not tell you this…
Having been a broker for many years, I know all too well the obstacles brokers face when dealing with clients. Many brokers don't want to upset the relationship or they want to get your business, so you they may not mention a few of these things.
Realize that your broker has other clients or he needs to get additional clients. I think every broker has had a client that calls in every 15 minutes for a quote and an update on the markets. That might be fine if you're making 100 trades a day. But this person is typically only holding 1 long-term position. Don't expect a commodity broker to devote 90% of his time to 1% of his business.
It is human nature, but most brokers don't like to call their clients with losing trades. It is part of the game and as a client you have to accept losses. Usually, half of your trades will be losers. The broker and the client need to accept the loss and move on to another trade. If you expect a seriously problem with your trading plan, then you need to have a discussion with your broker. If he is not accommodative, you may need to move on to another broker.
If you want to be actively involved in the decision making process of your account, make sure you are getting both sides of the story. Every market has pros and cons. Ask for reasons that might make the markets go higher and reasons it might go lower. Your decision making process may be flawed if you can't see the whole picture. Your broker is probably not acting properly if he refuses to disclose the risk a trade might have in going bad.
You need to classify yourself as someone who wants to be serious about making commodities an investment or someone who wants to roll the dice and make a million. Be honest and upfront with your broker in your expectations. I have seen clients complain because they only made a 35% return at year-end when they stated on day 1 that they wanted an investment with above average returns. I have also seen people "cry the blues" when they lost a good portion of their account by betting everything on one trade.
To be blunt, there are commodity brokers out there who will probably make you money only through sheer luck. And there are others who know they can't make you money so they try to generate as many commissions as possible. This is just my opinion, but you can look through the Problem Brokers section of this site and see several examples of commodity brokerage firms that have been barred from the industry. Do not be duped by a high-pressure salesman. If he's that desperate for your business, chances are he has a lot of turnover in clientele. If you find a knowledgeable broker who is making good returns for you and is helpful, I would suggest you stick with him and consider yourself fortunate.
By Chuck Kowalski
About the Author:
Chuck Kowalski has been involved in the commodity and futures markets as a Commodity Analyst, Broker and Trader for more
than 12 years. He holds degrees in Finance and Economics and is currently the editor of FuturesBuzz.com.