Five Pitfalls of Trading Commodities

Keep Tabs on Leverage

Another problem is forgetting about leverage with futures, says Terrence Martell, professor of finance at Baruch College.

Typically, only 15% of the value of the underlying contract needs to be paid up front before trading begins. In simple terms, that means a 1% move is multiplied 6.7 times. Although profits can be boosted, losses mount faster.

The way around that is to look for unleveraged plays, he says, to cut down on the risk. One example might be the PowerShares DB Base Metals (DBB Quote), which tracks base metals futures prices.

Look for Liquidity

Commodities markets are much less liquid than financial markets.

That means sometimes it might not be possible to get in and out of a position easily or at a favorable price, although that's likely to be more of a problem for institutional players than retail ones.

Lack of liquidity was one of the problems with defunct hedge fund Amaranth, says CPM's Christian. They were measuring overall liquidity in the market and yet the contract months they held were illiquid, he says, and the inability to find willing buyers and sellers caused mayhem when they tried to exit the trade.

Lack of Regulation

Although there is some government oversight in the futures markets by the Commodity Futures Trading Commission and other national agencies, in general, the commodities markets, especially the physical markets, are not regulated.

It means that activities such as "insider dealing" or "front running" probably wouldn't be illegal, says Jessica Cross, head of London-based specialty consulting firm Virtual Metals.

In the stock market, the use of material, non-public information cannot be legally used to trade. But it can be used in the commodities markets. That means materials producers can take advantage of changes in their own circumstances, such as pending labor disputes, to make money in futures markets.