Commodity futures trading
Commodity futures trading is one of the very few ways to make good profits in a shorter time with low investment. The commodity market gives ample opportunity to earn big money provided the investor trades knowledgeably and carefully. Though the commodity market seems to be too risky for the common man it can be presumed that the probability of success and handsome earnings are high. The approach to commodity markets should therefore be like a responsible and serious business and not like gambling or quick money making method. The trader should exercise caution and at the same time willing to take calculated minimum risk aimed at a reasonable profit. The Commodity futures trading process The convenience of Commodity Futures trading is that the investor does not buy or own the commodities unlike the stocks or bonds.
The trader just takes a bet on the future price of a particular commodity. In accordance with his expectation as to whether the price will go up or down, he buys or sells the futures so that if his bet turns out right he makes profit. The terms buy and sell are merely indicative. When a trader thinks the price of the commodity will go up, he would buy a futures contract of that commodity. If he feels that the price will decline, he would sell the futures contract. There is a buyer and seller for each of these trades though they need not actually own or take delivery of these commodities physically. The trader should have deposited enough money with a brokerage firm to cover losses if his trade results in loss. The actual producers of the commodities also participate and benefit in the commodity futures markets because they can offset any risk caused by the fluctuating prices. This trading guarantees the producer of the crop or commodity that he would get the current price for his commodity regardless of how it moves in the future.
By taking the risk of price change, the speculating futures trader provides liquidity to the market which brings huge profits to him, due to the equally huge risk involved. Risk factors in Commodity Futures trading process: The trader should make small bets and trade for a longer time with the available capital. Larger bets can totally wipe out the capital if the trade results in a loss. Small losses still allow the trader to continue with his trading as there is a chance of earning back the money lost. Taking big risks can bring huge loss. The trader should not
hand over his money to others or the brokers to trade because they make money regardless of whether the individual wins or loses. The trader can control his losses however, by offsetting his position if the trade is not going in his favor. The losses can be limited to a minimum amount or within a few hundred dollars of the amount of trade. Only some sudden and unexpected happening can cause extraordinary and huge losses. The trader should therefore exercise patience to trade in small amounts. The risk can be managed but cannot be eliminated. The all important truth about Commodity futures trading is that the speculator who makes huge money is actually being rewarded for taking the risk of facing heavy loss if he feels comfortable with the risk involved. It is as simple as that. Managing the risk: The trader in commodity futures must be careful not to risk high percentage of his capital on a single trade. These losses may lead to big disasters. So it is important to keep the loss to one per cent of the total exposure. The small trader can allow the loss percentage to up to not more than five per cent. The five per cent risk level is the highest that prudence allows which in anyway can be weathered in any eventuality. Money can be made in the long run if the trader follows the trends correctly and uses proper risk management strategies. Selection of the trends generally pays off unlike the situation oriented trading aimed at immediate returns.
One should first find the statistical edge. The statistical edge is the one which differentiates between the gambler and the speculator. Once the statistical edge is found, it should be followed consistently and also for enough length of time to see its rewards. It is also equally important to use the correct trading method continuously to achieve this goal. Profits and loss control in Commodity futures trading When the markets are going as per the expectation of the trader, he can keep earning profits consistently. The trader can stay in the trade as long as the trend is moving in the direction he expects it to. But when the market trend reverses, the accumulated profits may be taken away. That means when the trader thinks that the prices will move up but in reality the prices start declining and his trade will now result in a loss. There is a way to prevent this form happening and safeguard the earned profits. The trader should plan his trade in such a way that he can exit the markets when there is a trend reversal. This point should be selected at a distance from the actual trade price. This helps you to exit the trade at that point selected, even if the prices nosedive beyond that point.
Thus the loss is limited to that level which is acceptable to the trader. The other advantage is that the trader can also reverse his trade and come back into the market and trade in the reverse direction so that that loss can be offset. This procedure is called setting a trailing stop. This ensures that a major percentage of the accumulated profit of the trader is protected. The role of the trader in Commodity Futures trading In the same way, the trader should accept the losses as part of the game as all professional traders do. The losses are inevitable even with the best of trade practices. Big losses can erode the capital itself. If the trader keeps trading in the direction of the market trends, he can continue to make profits by going with the trend after keenly watching the market trend. The trader should therefore retain his capital to stay in trading and keep the individual trade losses to below five per cent of his trading account value. The one truth that every trader should remember is that the time to mend the roof is when the sun shines.
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