About ninety percent of commodities traders lose money rather than make it. One reason commodities trading is difficult is that there is no right time to enter or exit the market. It is essential for you to understand the market. You must also learn how economics can affect commodity prices. Commodities are raw materials, agricultural products, petroleum products, and industrial and precious metals.
Physical commodities are bought and sold in bulk for immediate delivery in specialized markets around the world. These markets are known as the “spot” or “cash” market. Pay cash for the total purchase price. If an investor wishes to leverage his purchase, he must find and negotiate with a private lender who is willing to accept the metal as collateral. Pay extra charges for storage and insurance to protect against theft. You can buy physical commodities by visiting specific websites or exchanges where they are sold.
They are not available through standard brokerages. Finding reputable markets to buy in can be difficult, however. Look for well-known authorities to point you towards safe places to trade physical commodities. Physical commodities need to be stored in secure locations until sale. You can also buy insurance to protect you from a total loss if the commodities are stolen. Both of these increase the cost to the investor and cut into potential gains.
Some gold-selling companies offer secure storage for buyers. Understand the basics about commodity futures. Commodity futures are contracts to make or take delivery of a specified amount of a commodity at a predetermined price at a specific future date. Futures trade on specialized financial markets where delivery is due on a future date. Commodity futures and spot prices are tracked in the market just like other assets.
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The buyer of a futures contract makes money if the future market price of the commodity exceeds the market price of the commodity at the time of purchase. A seller of a futures contract makes money if the future market price is less than the market price of the commodity at the time of sale. Rather than making or taking physical delivery of a commodity, futures traders close their positions by implementing a contrary position to offset their liability to make or take delivery. For example, a buyer of a contract would sell the contract before delivery date while the seller of a contract would buy the contract.
Learn about price changes in the commodity futures market. Commodity prices are established by market perceptions of supply and demand for the commodity. For example, a Midwestern storm can drive up the futures price of wheat due to investors’ belief of substantial crop losses. The second, technical analysis, focuses on analyzing historical price trends to predict future ones. It relies on identifying patterns, trends, and relationships in the market to predict prices. Price trends are the tangible result of the interplay between investors’ perceptions about supply and demand. Fundamental analysis is a guide to long-term prices while technical analysis reflects short term investor psychology.
Understand the consequences of leverage in commodities futures. The commodities futures market is characterized by its significant use of leverage. Know how commodities futures are used to hedge against price fluctuations. Producers and consumers of a commodity use the futures market to “hedge” against unknown price movements in the commodity. 50 per bushel for delivery in six months. 700,000 for his wheat on the spot market.
150,000 to reduce his costs on the spot mark. Test your trading strategy by executing “paper” trades. First spend a lot of time studying charts of past price movements of various commodities. This will help you identify specific support and resistance levels.
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Then, create a trading system that includes your entry and exit signals. Learn trading strategies from successful futures traders. Study how traders develop and execute their strategies and how well they work. You might want to incorporate some of those trading ideas into your own system. Start by searching online for any well-reviewed books about commodities trading. There are also a number of online training courses that can prepare you for commodities trading.
Consider hiring a professional commodities trading advisory firm. Such a firm invests money in commodities funds for you. Major commodities trading firms include the Vitol Group, Cargill, Glencore and Archer Daniels Midland. One advantage is that you don’t have to commit a large sum of money in order to own a share of a diversified commodities portfolio.
The firm will pool your money with that of other investors. Open a commodity account with a futures broker. Opening a futures account is similar to opening a brokerage margin account. However, most brokerage firms will require a potential futures trader to have a minimum net worth and income as well as several years of experience in investing. The strike price is the underlying commodity’s price if the option is exercised. The option price tracks the price of the underlying futures contract which, in turn, tracks the price of the underlying commodity. 50 a bushel will reflect the price of the futures option while the futures option will reflect the spot price of corn with a premium for the remaining duration period.