Advanced Option Strategies » Commodity Trading

Fortunes Are Made Trading Commodities

admin — Thu, 31 Dec 2009 20:10:02 +0000

Commodity markets have been around for a long time. Commodity trading started in the U.S. in 1848 at the Chicago Board Of Trade, the world’s first official futures exchange. The purpose of the futures exchange is to provide industries with a valuable cost management tool. It allows producers and the like, to know in advance their approximate cost of doing business. A farmer can sell corn to a speculator on the futures exchange at a decent price, months before his crop is due. This transfers the risk of a big price movement to the speculator. The farmer is hedging against a big price drop which would really hurt his bottom line. Speculation is an honorable profession and a key element to our overall economy.

There are a wide range of futures contracts that can be traded. Everything from grains such as corn, wheat and soybeans to currencies such as the U.S Dollar and British Pound. For a complete list, check out a futures exchange or futures brokerage website. With some futures you can trade minis. Options are also traded.

The reason fortunes can be made, sometimes rather quickly, in the futures market is because of the leverage involved. As an example, you will control 5000 bushels of corn by acquiring one futures contract of corn. Every 1 cent that corn moves is worth 50 dollars. If you were long 1 contract of corn at 3.00 per bushel and the price moved up to 3.10, your profit would be 500 dollars.

It’s a double edged sword when you are dealing with this much leverage. It’s absolutely essential you implement sound money management and cut all losses short. You could get wiped out fast if you don’t. The futures market tends to move much faster than the stock market. Add all the leverage involved, this is the major leagues when it comes to trading. Fortunes are made and lost every day in the futures market. To trade in the futures market you need to get an account with a futures brokerage. Then you must put up margin before you can trade. The margin varies a lot depending on what you trade.

I didn’t call the futures market, the major leagues of trading for nothing. Over 90% of traders lose in this market. Two of the main reasons they lose are lack of proper trading knowledge and inadequate money management. I can’t possibly cover everything to do with the futures market and trading it in one article. I will touch on a few successful strategies, methods and techniques. It takes years of proper trading education and experience to become a top trader. I will cover more in future articles.

You need to have at least a basic understanding of technical analysis. Technical analysis is the study of market action primarily through the use of charts. It’s based on 3 premises. Market action discounts everything, prices move in trends and history repeats itself. Newton’s first law of motion states, a trend in motion is more likely to continue than to reverse. This is also true in the marketplace. Chart patterns are based on human psychology. Human nature or psychology never changes. That’s why there are recurring chart patterns which a good technician will take advantage of. The future is a repetition of the past when it comes to the markets.

Here is an example of a basic, yet sound strategy. First, always trade with the major trend. Which direction has the market been moving the last several months to a year or so? Use a weekly chart to find the major trend. If the trend in up, you should only trade from the long side. If the major trend is down, only trade from the short side. You can trade breakouts from a consolidation within the major trend. If gold traded between 800 and 830 dollars per ounce for a couple months, you would go long on a close above 830 if the major trend is up. Go short on a close below 800 if the major trend is down. It’s always best to trade in the direction of the major trend. Other important factors such as seasonal tendencies and analysis of the cash basis should also be implemented into your overall trading plan. Money management is the secret to successful trading. Always cut all losses short. You can use support or resistance levels to place a strategic sell stop. Another method is to place a sell stop below a major trend line if you are long or above a major trend line if you are short.

This is only the tip of the iceberg of what it takes to become an elite trader that consistently makes profits in the marketplace. This is true whether you trade stocks, futures, exchange traded funds or options. You now have a general idea of how the futures market works and some of the strategies and methods used world’s best traders and investors to amass fortunes. I will be writing future articles that deal with specific strategies, methods, techniques and principles used by the world’s best traders and investors, past and present.

Commodity Markets to Remain Bullish But Dangerous

admin — Mon, 28 Dec 2009 07:20:11 +0000

The physical demand for commodities continues to be strong as world demand for all sorts of commodities, from metals to oil to grains remains high. While demand in the US seems to be declining due to a soft US economy what takes place in the US market is not as important now as it was a decade ago. The rapid growth of the economies in places like China, India, Brazil, and Russia, are keeping the upward pressure on commodity demand.
While we are probably less than half way along in a commodity bull market trading commodity futures and options trading is not suitable for everyone. Commodity futures are highly speculative. If you decide to go after the high returns available from trading commodities you should only use investment capital that you can afford to expose to such investment activity. That is trade only with capital that you can afford to lose. Commodity futures are derivative, short-maturity claims on real assets. Many commodities have pronounced price/volatility seasonality as well as being subject to rapid fluuations in daily prices. If you have a heart condition do not attempt to trade commodities.
Commodity futures spread trading offers an exciting path for potential profits often overlooked by futures traders. However, if you think you are going to make a fast fortune trading spreads or any other futures product in the commodity casino, why not just donate your money to your favorite charity instead of handing it over to the “pit vipers” on the trading floor? When you trade commodities you are up against some of the smartest, most ruthless traders in the world. You need to be well prepared to trade commodities at a profit.
While the Commodity Futures Trading Commission ( CFTC ) is responsible for insuring market integrity and protecting market participants against manipulation, abusive trade practices, and fraud the CFTC will not protect you from sudden and at times drastic changes in price levels. Your favorite commodity may still be in a roaring bull market but if you are over leveraged a sharp correction within the trend could still wipe you out.
Traders are often unprepared to deal with a string of losses in spite of the fact that this is part of every trading system. They often begin with less trading capital than is realistically required in order to survive a period of draw down. To attempt to improve their trading systems commodity traders can test their skills going back to past periods and stepping through daily and weekly price charts one day at a time. Each day forward charts update and the trader can see how well they did and how well their tools and strategies did in anticipating market movement.
Investing in the futures market and or stock market is risky and with futures you can lose more then your initial investment. Skilled investment management professionals have been using managed futures for more than 20 years with positive results. With practically a zero correlation with stocks, one of the most attractive features of managed futures is its ability to add profound diversification to an overall investment portfolio. Still it remains a risky business that requires a lot of skill and self discipline if one is to trade at a profit.
The oil market has been the big mover over the past year or so. Oil traders and hedge funds began to purchase extra oil at current prices. The surge in demand, linked to perceived trends in the futures market, generated an upward pressure on current prices. Oil is priced in dollars, which makes it more affordable for foreigners paying with stronger currencies. While oil speculators may have played some role in pushing oil prices higher the US government and its policies that lead to a weak US Dollar is much more responsible for high oil prices than the speculators who are merely following the bull market trend.
Since most oil market transactions are priced in US Dollars as the Dollar falls it supports higher prices for oil and all other Dollar denominated commodities as well as finished imported goods. Unfortunately, most US congressmen and the executive branch of the US government would rather point fingers at oil company executives and at oil market traders than take a realistic view that it is their own misguided policies that have unleashed the inflation monster on the world’s commodity markets.
It is a highly interesting although dangerous time to be trading commodity markets. That is not to say that the skilled, well capitalized trader will shy away from commodity markets under present highly volatile market conditions. They will not. Experienced successful traders will probably do very well in markets that have a bullish basis that will likely last for many years. They will use the sharp corrections within the trend to reestablish positions or to put on additional positions at better prices and ride out the mega trend to outstanding profits.