Commodity Trading - Advantages and Disadvantages
What Is Commodity Trading?
Commodity futures markets allow commercial producers and
commercial consumers to offset the risk of adverse future price
movements in the commodities that they are selling or buying.
In order to work a futures contract must be standardized. They
must have a standard size and grade, expire on a certain date and
have a preset tick size. For example, corn futures trading at the
Chicago Board of Trade are for 5000 bushels with a minimum tick
size of 1/4cent/bushel ($12.50/contract).
A farmer may have a field of corn and in order to hedge
against the possibility of corn prices dropping before the
harvest he might sell corn futures. He has locked in the current
price, if corn prices fall he makes a profit from the futures
contracts to offset the loss on the actual corn. On the other
hand, a consumer such as Kellogg may buy corn futures in order to
protect against a rise in the cost of corn.
In order to facilitate a liquid market so that producers and
consumers can freely buy and sell contracts , exchanges encourage
speculators. The speculators objective is to make a profit from
taking on the risk of price fluctuation that the commercial users
do not want. The rewards for speculators can be very large
precisely because there is a substantial risk of loss.
Advantages of commodity trading
Leverage. Commodity futures operate on margin, meaning that to
take a position only a fraction of the total value needs to be
available in cash in the trading account.
Commission Costs. It is a lot cheaper to buy/sell one futures
contract than to buy/sell the underlying instrument. For example,
one full size S&P500 contract is currently worth in excess
off $250,000 and could be bought/sold for as little as $20. The
expense of buying/selling $250,000 could be $2,500+.
Liquidity. The involvement of speculators means that futures
contracts are reasonably liquid. However, how liquid depends on
the actual contract being traded. Electronically traded
contracts, such as the e-mini's tend to be the most liquid
whereas the pit traded commodities like corn, orange juice etc
are not so readily available to the retail trader and are more
expensive to trade in terms of commission and spread.
Ability to go short. Futures contracts can be sold as easily
as they are bought enabling a speculator to profit from falling
markets as well as rising ones. There is no 'uptick rule' for
example like there is with stocks.
No 'Time Decay'. Options suffer from time decay because the
closer they come to expiry the less time there is for the option
to come into the money. Commodity futures do not suffer from this
as they are not anticipating a particular strike price at
Disadvantages of commodity trading
Leverage. Can be a double edged sword. Low margin requirements
can encourage poor money management, leading to excessive risk
taking. Not only are profits enhanced but so are losses!
Speed of trading. Traditionally commodities are pit traded and
in order to trade a speculator would need to contact a broker by
telephone to place the order who then transmits that order to the
pit to be executed. Once the trade is filled the pit trader
informs the broker who then then informs his client. This can
take some take and the risk of slippage occurring can be high.
Online futures trading can help to reduce this time by providing
the client with a direct link to an electronic exchange.
You might find a truck of corn on your doorstep! Actually,
most futures contracts are not deliverable and are cash settled
at expiry. However some, like corn, are deliverable although you
will get plenty of warning and opportunity to close out a
position before the truck turns up.
Tim Wreford operates Online Futures
Trading, a website that provides information and resources
for traders. Tim also provides an article detailing the
development of a
day trading system, the results of which are updated daily on
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Risk and Stock Trading
Fees: The Two Barriers To Overcome If You Want A Successful
You know the old joke:" How do you make a million in the
stock market? Start with two million?" There is no way
around it, risk and stock market fees are a part of trading
that you can't avoid. But, you can manage your risk.
Your Mother Could Make
Money In Forex Trading
The question would be not whether she could but rather
would she enter the Forex trading market. The Forex day
trading arena is a veritable snake pit ripe for scam
artists to bilk money out of unwary investors.
Q1: When you consider that the foreign exchange market has
become the world's largest financial market, with over $1.5
trillion USD traded daily, where does it go from
here?A1:The FX market is unique, in the UK there is no
central exchange, we trade via the inter bank market.
How To Choose Wisely A
Most traders use a FOREX broker to handle their
transactions. What exactly are brokers? Strictly speaking,
brokers are individuals or companies that buy and sell
orders according the investor's decisions.
Online Stock Trading:
Freedom of Trade
I remember the first time I started to trade online. It was
just before the tech bubble of the late 1990's and the
internet was still something new for most people.
If you want to be a successful trader, you must make sure
you do not deny reality in any phase of your trading. You
cannot deny losses, price direction, mistakes you make,
being undercapitalized, or a whole host of things you would
rather not think about.
"Is it important to be creative in your trading?" I'm not
sure I can describe it in terms of importance. The creative
process is somewhat of a mystery, even to scientists who
The Secrets of the
The first and perhaps most important "secret" is to realize
that your methodology or approach (no matter how good) is
only part of being a highly successful trader. This applies
to any trading style including, day trading, swing trading
or position trading.
What I Learnt Losing
£60,000 My First Year as a Full-time
During my first year as a local (independent trader) on the
floor of LIFFE, I bought and sold 8804 FTSE futures
contracts, about 40 contracts per day on average. The
result was a loss of £61,620 or -£267 per trading
Writing A Trading
All professional traders have a trading plan. Trading
futures is a zero sum game and those with a plan (and the
discipline to apply it) will succeed over those that have
How To Handle A String Of
Everybody hates to lose and unfortunately no one is blessed
with the ability of foresight, therefore losses are an
unavoidable part of trading. When we enter a trade we will
either be right, or wrong, and even if we broke-even we'd
still be classed as being wrong - as nobody enters into a
trade just to break-even! When unsuccessful traders
encounter a string of losses they begin to engage in
self-destructive patterns that help them escape the pain
they are experiencing.
Forex Brokers - Helping
to Maximize Your Success
A Forex broker is a broker dealing in foreign exchange,
just like real estate broker who deals in real estate and
properties. Simply, a Forex broker is an advisor who
advises you about the forex market.
10 Steps To Professional
Everyone trades a little differently. The trading method
outlined below is MY personal approach to trading.
Momentum Trading: A
Practical Day Trading Strategy to Get Profits from Hot
Momentum day trading can be extremely profitable when done
The Major Players in the
Foreign Currency Exchange Market - FOREX
Since the US dollar is the centerpiece of the market, it is
normally considered the 'base' currency for quotes. In the
"Majors", this includes USD/JPY, USD/CHF and USD/CAD.
Choosing A Forex
With currency trading becoming ever more popular, the
number of brokers is growing at a rapid rate. What should
one look at when deciding which broker to open an account
with? These are the important points to consider.
Opportunities Presented by the New Iraqi
Could it be possible that you are staring right into the
most spectacular financial opportunity of the century?
Operation: Iraqi Freedom will undoubtedly be a war marked
in history for loss and tragedy, American victory, and the
rise of a nation with a new democratic government. But
could it also be a war historically remembered for the
financial opportunity it created for the sharp investors
who keenly recognized an ephemeral chance at the right
time?The War on Iraq ended with a nation placed on the
footstool of many new operations.
Day Trading the Index
Futures - How to Judge Good Entries
QUESTION: If the SP futures fall through support and go
straight down for another two points, and I want to get
short, should I a.) enter immediately, b.
A broker is any person or firm that charges a fee in
exchange for executing trades for a trader. A Forex broker
does not charge a commission for placing a buy or a sell
order the way a real estate broker would charge a
percentage fee of the total price of a sale.
5 Questions You Need To
Have Answered Before You Back-Test Your Forex
As 90-95% of new forex traders lose money within the first
3-6 months this article helps to guide new forex traders by
asking 5 questions that the forex trader needs to know
prior to back-testing their forex system.Let us jump right
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