• Commodity Futures

    Huge profits in commodity futures are easily made if you follow these simple rules.

    This is a world where novice investors are hesitant to tread, but that need not be the case. Let’s talk a little about the fundamentals involved in trading commodity futures.

    • What are Commodity Futures?

    Simply stated, a contract to buy or sell commodity futures is an agreement between two parties to buy or sell a commodity (which is literally anything that represents commerce – products and services) at a predetermined price at a predetermined date in the future.

    Commodity Futures Trading Explained

    When commodity prices go up, the buyer of a futures contract makes a profit. Simple math – it’s now worth more than he paid for it. The reverse of course is that if prices decline, he is sitting on a loss – it’s now worth less than he paid for it.

    When you shop for groceries at the supermarket, there is another market that determines the price you pay for apples and oranges — the commodities futures market.

    • First Lesson

    The biggest lesson to learn (and oh boy, it’s a doozy) is to properly close your position or else you could find yourself with a truckload of soybeans in your yard. If you bought a contract to take possession of those soybeans by a certain date, that’s what will happen unless you sell that contract before expiration. Gold I could handle, soybeans? – not so much.

    There is a good  beginners guide here.

    • Who Sets Commodity Futures Prices?

    The pricing of commodity futures is set by the agreement between the buyer and the seller, in an open market. There are analysts whose entire job is just to evaluate future prices for one particular commodity. Since pricing is generally based on news, weather and general sentiment, prices can change very quickly. For that reason, many futures traders will invest in commodity indices or a commodities fund. That gives you a chance for a less bumpy ride – it spreads the sharp market movements of individual commodities into a broader spectrum with less volatility.

    Several Markets and Trading Vehicles for Commodity Futures

    • What Commodities Can I Trade?

    The most commonly traded commodity futures are gold and oil. Agriculture products are heavily traded, but small speculators usually stick with precious metals and energy. But some popular commodities are:

    corn, wheat, cotton, cattle, rice, electricity, coal, gas, heating oil, lumber, copper, silver, pork bellies, concentrated orange juice, cocoa, sugar. And most of those are subdivided into smaller categories.

    Remember, commodities are the goods, the actual products traded in commerce. The futures are contracts for the exchange of those commodities and are traded at a futures exchange.

    • Risk

    This is indeed a risky form of trading, but it is rather easy to do and learn. Lower that risk by educating yourself and employing basic principles of trading. You want to buy low and sell high, and, I’ll repeat – close your position properly. Think of the commodity futures contract as shares of stock.

    • Trading Account

    You don’t need much in your trading account to dip your feet into commodity futures. Having said that, most experts advise no less than $10,000 to begin, but you can actually trade with as little as $5,000 in your account.

    • Rapid Price Fluctuation is Possible

    It’s not only possible, it’s probable. Developing news of disasters, political unrest, weather reports (favorable or not) all affect the price of commodities daily, and sometimes by the moment. Pay attention.

    As regular speculators, trading commodities for you and I is relatively straight-forward, and you know what you get in at and what you hope to gain when you exit, but often the companies and entities who actually produce the commodity will use hedging efforts to protect their interests. This can cause rapid commodity price movement.

    There is much more to learn about trading commodity futures than I am able to tell you here. You may want to learn more from The U.S. Commodities Futures Trading Commission http://www.cftc.gov/.

    Remember that becoming a successful investor is not a race and it’s imperative that you do your homework and study hard. But if you are willing to commit to the hard work then there are definitely some huge profits waiting on you in the world of commodity futures trading.

    © 2011, www.daytraderoptions.com. All rights reserved.

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