WHAT’S THE REAL RISK?

As part of their uniqueness markets have different risks involved, which
you should be aware of when trading them. You may think you can only
lose up to your stop levels, but this is not always true. How much you could
actually lose when trading a stock or commodity is not always controllable
and you should be aware of this. Some stops can easily be blown through
especially in thin markets, and you may get filled at levels much worse than
you thought. Commodity markets can also lock limit and then your stop
level is meaningless. This could cause you to get stopped out at a price
you were never even expecting to be possible. The wider the spread in a
stock is, the bigger the risk is, as you saw above. Markets or stocks that
are news sensitive are much riskier. For example, $50 biotech companies
that have a new cancer drug waiting to get approval by the Federal Drug
Administration can become penny stocks in less than a day if they do not
get that approval. A stop in this instance would do you no good.

In commodities you may want to be aware of how often the market
has a habit of locking its limit. If you don’t know what that means, some
commodity markets have a limit they are allowed to move in one day (say
two points), if they hit that limit they can’t trade in the direction of the limit
any more for the rest of the day. (So if a market is plummeting and hits its
down limit, it will not trade below that price, it can, however, trade above
it.) This can be quite costly, when you are on the wrong side of the trade
and can’t get out. Some markets, especially the thin ones, have a greater
tendency than others to lock their limits for the day or for several days.
Managing your risk when this happens is tough, so make sure you know
how likely a market is to lock its limit before you jump into a trade. There
are options to help you when you are in a locked position and one of those
options is options. Options will keep trading even when a market is locked.
So if you are stuck you can trade the options on a commodity to help you
protect yourself, but this is usually costly as they become quite overpriced.
Another factor determining how great the real risk can be, is what happens
overnight. Some markets can have wild moves overnight and open
past where your stop loss level may have been. You then get stopped out at
the open without a say, and this could be a few to a lot of points from where
you thought your worst-case scenario was. As you get to know stocks and
commodities better you will get a sense of which markets can hurt you the
most overnight, and you then can trade accordingly.