How to Trade Commodities
Remember the pretty old TV show, WKRP in Cincinnati, in which the dorky Les Nessman would always give the pork bellies report?
Or in other word how about the 1980's movie, Trading Places, in which Eddie Murphy and Dan Akroyd corner the orange juice market? These are both instances of commodity trading in the popular media. In general commodity trading is one of the fastest growing sectors of the financial markets, and for good reason - in 2006, commodity prices have gone through the roof. In case if you haven't heard anything about the prices of pork bellies or orange juice skyrocketing, that's because there is much more to commodity trading than just these two items.
Corn, oats, soybeans, wheat, soy meal, bean oil, cattle, coffee, sugar, cotton, steel, copper, silver, gold, platinum, natural gas, crude oil, as well as gasoline are just a few of the dozens of commodity trading options. Metals - steel and gold, in particular - and petroleum-related products, have seen tremendous price movements in the past year.
Commodity Trading - Buy Low, Sell High; Or Sell High, Buy Low
In case if you remember back to Trading Places, the classic commodity trading comedy, Eddie Murphy and Dan Akryod entered the trading pit and immediately started selling orange juice contracts.
Interestingly they didn't own any orange juice, but they were able to sell it anyway. And this is how commodity trading works - you either hope to buy low, sell high; or sell high (first), and then buy low.
Commodity Trading Hedgers
This main aspect of commodity trading can best be understood by taking a look at the market participants. In theory on one hand, you have the hedger. Hedgers more often want to guarantee commodity prices in order to lock in profits or avoid excessive losses.
To illustrate this point consider a example, imagine a jewelry maker who needs 1000 ounces of gold to make a collection of necklaces. He or she needs the gold in six months, but the way gold prices have been going up, he's worried that he won't be able to afford it.
And that is where to hedge in the current price of $500 per ounce, the jewelry maker could buy ten 100 ounce futures contracts on a commodity trading exchange. Then after six months or so, if the price has gone to $700, the value of his contracts will have gone up by $20,000 each.
He or she can sell the contracts for a profit and use the proceeds to buy the actual gold, which will result in a net price of $500 per ounce.
If, in the above mentioned example, the value of gold had actually fallen to $400 per ounce, the jewelry maker would have lost money. He' or she would be locked in to paying $500 per ounce for gold when the actual market value was only $400.
Still, in case if the jewelry maker's primary concern was to not end up paying $700 per ounce, this will have been a valuable commodity trading experience. In this method, hedgers use commodities contracts like insurance.
Commodity Trading Speculators
On the other hand of commodity trading is the speculator. This can be defined as someone who has no business interest in wheat, crude oil, or copper, but essentially gambles on the price of each commodity going up or down.
Commodity trading is very famous with speculators because it requires very little margin. This depicts that commodity trading speculators can control thousands of dollars worth of commodities for just a few hundred bucks.
The drawback of leverage in commodity trading is that it can lead to very big losses that you might not be prepared for.
For this simple reason, your credit history will be more important when applying for a commodity trading account than an account to trade in almost any other financial market.
In case if some time ago investing money in commodities did not sound like the champion design in investors' dominion, nowadays the whole situation experiences a turnaround, along with the outstanding value improvements for a number of commodities, such as the common, base metals (iron, copper and zinc), oil or coffee and sugar. Subsequently, it is worth noting that the interest in employing a successful commodities trading system and an efficient, professional commodities trading advisor has been increasing. Though, there are several broad lines which should be considered when selecting a commodities trading system or the expertise that an advisor can provide.
First and foremost, finding a commodities trading advisor is not difficult at all, but locating a skillful commodities trading advisor is where the ultimate challenge lies. After doing some important research work (you will need quite some time to do that), you will have access to a number of the best ones in the commodities trading advisor area. Even so, in the completion, successful trading depends on your decisions because it is a matter of personal choice (investing in commodities is a risky activity). Though, if you choose the assistance of a commodities trading advisor, you will be the beneficiary of his knowledge and experience in this field of expertise.
And that is where a commodities trading advisor will make efficient use of his licensed transaction procedures so as to determine trading positions in commodities and other type of futures. Quite regularly, the latter ones are commodities (either goods or stocks) traded for future delivery. Theoretically speaking what turns a commodities trading advisor into a reliable expert is his day and night interest in the evolution of the markets. Apart from that, unlike newcomers in the sphere of commodities, a commodities trading advisor has a well-established, well-organized trade methodology. According to experts it is more likely to get the best out of the assistance of a commodities trading advisor if you are just an amateur.
Ideally, commodities trading system is an automatic database (software package) which indicates a user, when the case tells it, the proper moments to buy, sell or hold a commodity. Such types of commodities trading system is built as a result of a number of surveys of the market, of responses to certain levels of trading and of considering both the general (worldwide) and particular (limited to a number of specified markets) evolution of market prices.
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