Commodity-Futures-Trading Insights

Commodity-futures-trading grew out of the need to maintain a year-round supply of seasonal products like agricultural crops.

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In Japan, merchants stored rice in warehouses for future use. In order to raise cash, warehouse holders sold receipts (rice tickets) against the stored rice. Eventually, such rice tickets became accepted as a kind of general commercial currency. Rules were created to standardize the trading in rice tickets. These rules were similar to the current rules of American futures trading.

Commodity-future-trading is one of the few investments programs in which an individual with limited funds can make enormous profits in a relatively short time frame. The following is a synopsis of insights of many of the world’s premier commodity-futures-trading experts such as Jack Schwager, Richard Teweles, Robert Rotella, Richard Dennis, Vic Sperandeo, Jake Bernstein and Larry Williams.

Concept

Treat commodity-futures-trading as a business. – a business that has a reasonable degree of risk and a reasonable degree of return on investment with an enormous upside potential. In commodities trading, unlike other investments you are not buying anything or owning anything. You are speculating on the future price direction of the commodity you are trading. For example, if you were speculating in crude oil with the expectation of the price to increase, you “buy” (long) a crude oil futures contract. You would “sell” (short) the crude oil futures contract if you expected the price to go down. There is always a buyer and seller for every trade.

Neither buyer nor seller need own any crude oil to participate. Participants must only deposit sufficient funds with a brokerage firm to insure that he can pay the losses if his trades lose money.

Since it is just as easy to buy as it is to sell commodities, there is always the potential for profit trading in commodities regardless of weather or economic conditions.

Risks

As in any investment, the downside risk is proportional to its upside potential. Risk management is an important part of a trader’s success. Since brilliant strategy or careful planning can not prevent losses, a stop loss mechanism should always be in place. Because of the randomness of market price activity even the best trading plans suffer many losses.

Procedure

Before one can consider making a commodity trade, you must have certain preparations and factors in place.

Source Price Data – Major newspapers or Internet sites that carry commodity prices ideally in chart format since charts are vital in quickly grasping historical and recent price activity.

It is widely agreed that following current trend of prices is the essence of successful trading.

There are two primary commodity-futures-trading analytic methods:

Fundamental Analysis -- involves using economic data relating to supply and demand to forecast likely future price action.

Technical Analysis -- involves analyzing past price action of the market itself to forecast the likely future price action.

Since accurate fundamental data is difficult to obtain.Technical Analysis is emphasized by most successful traders. Technical analysts contend that the most accurate assessment of future supply and demand is the current price trend since the most astute commercial traders are actively in the markets. Most successful speculators simply follow price action and trade “in tune” with large commercial traders who move markets.

The technicians maintain that the price of a commodity is the result of all factors affecting the commodity's futures contract--economic, political, fundamental, psychological among others. By studying price charts and supporting technical indicators, The technician follows the market by studying price charts and supporting technical indicators. The chartist believes there are reasons why markets go up and down. Knowing the reasons for his movement is not important.

Once the trader has decided on his plan of action and which market he intends to place the order in – Mid America Exchange contact for example is only a fraction of the size of the New York contract. He will open a trading account with a licensed broker who executes the trade.

Commodity Market Insights

Commodity markets are chaotic systems – systems that are non-linear and dynamic. Chaos system studies have proven that markets are not efficient and thus not forecastable. Price movements in commodity markets are extremely random and create a minor trend. As Vic Sperandeo has stated, “Trading in the markets is an odds game and the object is always keep the odds in your favor.”

Effective trading involves following trends in a timely manner with a statistical edge combined with proper risk management stops and good market selection.

In addition to commodity-futures-trading,
learn about Forex currency trading.

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