What is the purpose of "risk management strategies" in commodities trading?

The purpose of risk management strategies in commodities trading is fundamentally about minimizing potential financial losses and protecting capital. In an environment characterized by price volatility and uncertainties, effective risk management enables traders to identify, assess, and prioritize risks while implementing strategies to mitigate them. This involves analyzing exposure to various risks, such as price fluctuations, credit risks, operational risks, and market risks, and developing appropriate responses to safeguard investments.

By focusing on preserving capital, risk management allows traders to remain active participants in the market without exposing themselves to catastrophic losses that could jeopardize their trading operations. Tools such as stop-loss orders, hedging strategies, and diversification play significant roles in protecting against adverse price movements and ensuring that a trading strategy can endure both bear and bull market phases.