COMMODITY TRADING for BEGINNERS
How Do You Trade Commodities?
How do you go about trading commodities like coffee, sugar or crude oil?
If, for example, you think that the price will go up, do you have to buy the physical product
and store it in your basement? Well, you could but there are a few problems with this approach. To begin,
the transaction size in the physical commodity markets is large, thousands of times larger than that to which you, as a typical
consumer, are accustomed. If you buy the physical commodity, you will have to pay the full price and that
will tie up a lot of cash. Then you will have to find a place to safely store the commodity and this will cost money
as well, as will insurance in case the commodity suffers damage. Finally, you´ll have to pay shipping and freight charges
both to take possession of the commodity after purchasing it and then, when you´re ready to sell, delivering the commodity to the point of sale.
The costs associated with all of this will eat into any profit that you make on the physical commodity transaction, but that
is not the biggest drawback to trading the physical product. What do you do if you expect that the price of the commodity
will fall? How can you go about trading that price expectation with a physical transaction?
A New and Simpler Way to Trade.
Watch this free 7-min video.
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Because of the difficulties described above, few people who desire to profit from changing prices (called speculators)
trade physical commodities. Instead, they trade a financial instrument whose value moves essentially in step with the
price of the physical commodity. These instruments are generally referred to as derivative products since their value
is derived from price movements of the underlying commodity. For retail traders wanting to participate in the commodity
markets, the most important derivative products are commodity futures, commodity options by which it is meant options on
commodity futures, and binary options which are usually based on the corresponding commodity futures.
This site will give you a basic, free education on commodity trading. Information on trading commodity options can be found
on our specialty site, Buying Commodity Options.
Why Trade Commodity Futures?
Trading commodity futures is much more efficient than trading the physical product. In fact, in many cases, trading activity
or dollar volume is higher in the futures market than in the physical market itself and the commodity contract, even though it is
a derivative product, actually provides the price discovery function for the commodity itself. Crude oil is an example of this.
What are the advantages of trading commodity futures? To start, a commodity futures is just a legally binding promise to
acquire the physical commodity (if you bought the futures) or deliver the physical commodity (if you sold the futures) at
some point in the future when the contract expires and this may be weeks or months down the road. In other words, the transaction is deferred and because
of this, it has several advantages over a spot or physical transaction that requires immediate delivery. For example,
since there is no immediate exchange of physical commodity for cash, you do not need cash equivalent to
the full market value of a commodity futures contract to buy
the futures contract. You will, though, need a small portion of this value - usually less than 10% - to show your financial
ability to handle the risk of the trade and this cash is referred to as margin. You can read more about margin in
Understanding Commodity Futures at right.
Since a commodity futures is a deferred contract, it is a simple matter to sell a commodity that you do not own, say, in case
you expect the price to drop. This is referred to as selling short and can be done because, with a commodity futures, you
don´t have to have the commodity in your possession upon futures sale. But don´t you have to acquire
the physical product at some point in order to satisfy delivery of the short futures position? Yes, but only if you intend
to hold the short futures position to contract expiration. For a retail trader who is just looking to profit from
price changes, you will not do this. Instead, you will close the short futures position by simply buying a futures contract on
the same commodity and having the same expiration. Upon doing so, you will have closed the futures position and there will
be no further obligation on your part to deliver the commodity. You are only left with the net profit or loss on the
completed commodity futures trade.
Trading Commodity Futures
How does one go about trading commodity futures? Commodity futures trading within the United States takes place on
government-regulated commodity exchanges. The exchanges provide the commodity marketplace. To access this marketplace,
you will need the services of a commodity broker. Upon finding a broker, you will then need to open a commodity trading
account and deposit funds into the account in order to cover the margin requirements of the commodity contracts that
you wish to buy or sell. For more information on the function of these market participants and others, please see
The Commodity Futures Market at right.
Before you actually start trading commodity futures, you need to educate yourself to decide if this is something that
is appropriate for you. Trading commodity futures entails risk of loss and is therefore not appropriate for everyone.
Reading the information on this site is a good first step but please don´t stop there!
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How Are Commodity Futures Traded? Electronic execution is by far more popular than open outcry, accounting
for 98% of total commodity futures trading volume on CME Group.
Source: CME Group volume comparison. Data over Jan-Jun 2012.
The Place for Trading Commodity Futures Within the United States, trading commodity futures is done on
CME Group which is comprised of four Designated Contract Markets (CME, CBOT, NYMEX and COMEX) and, to a much lesser extent,
ICE Futures U.S., a subsidiary of ICE. Source: CME Group and ICE. Futures volume in million contracts, total over Jan-Jun 2012.
Diversification and Opportunity From October 2007 to March 2009, the S&P 500 declined some 56% yet even during this time, sugar rallied 43%,
cocoa about 44% and gold was up 31%. This demonstrates the reason for holding commodity futures in a diversified investment portfolio.
Your next step...
For your next step, please watch our
free one-hour proprietary video, Commodity
Trading - A Plain-Language Video Introduction. Designed for someone with little prior industry exposure, this topical video will
carefully navigate you through some of the more pertinent aspects of commodity trading.
After that, we recommend our Futures
101 Streaming Videos.
In the comfort of your own home, you'll have over one hour of lectures covering 8 introductory topics on trading commodity futures all
narrated by the President
of World Link Futures. Tailored for the beginner, you'll learn commodity trading basics such as how to read a bar chart and common
order types, how to calculate profit and loss on a commodity trade, how margin works and tips on risk management. You'll even see how to
perform a regulatory background check on a commodity broker.
Before you start trading commodity futures with hard-earned dollars, we recommend that you consider paper trading under
simulated conditions that does not risk actual money on open trades.
There are two basic paper trading services depending upon your level of experience. If you are a beginner
to trading commodity futures and want to rely on the assistance of a commodities professional,
then we recommend this paper trading service.
If, on the other hand, you are an experienced trader and are just looking for a trading platform,
then we recommend our futures demo.
We also designed a special course for the beginning commodity trader called, Commodity Trading as a
Second IncomeTM. This Course explains the basics of the commodity markets in simple and easy-to-understand
language and then teaches a system based on breakout trading, complete with case studies and actual and ongoing trade examples. It is ideal for the beginner or anyone
who wants to learn commodity trading as a second income.
Day trading means that all contracts whether bought or sold are closed on the same trading day as they were established.
Day trading, because it spans such a short time horizon, is done in order to capture brief price movements. Day traders hope to place a
trade and profit from a sudden rally or drop in price following, say, the public broadcast of a news event or the release of an economic statistic.
The E-mini® S&P 500® is the most popular futures contract for day trading. For more information on this, please see our specialty
site, How to Trade Emini S&P 500 Futures.
Binary Options on Commodities
Online binary options are a novel type of investment vehicle that are rapidly becoming a favorite among beginning investors because they
have limited risk and are simple to understand. For an above/below binary option, which is the most common type, you only need
determine if the price will be higher or lower than the current price by the time that the binary option expires, and this
may be just an hour away or even less. If you're right, you can earn a return of 70% or even more on your investment. Meanwhile,
risk is strictly limited to your initial investment.
Binary options on commodities are typically based on the futures contract, so binary options provide a relatively safer and less
expensive way to trade commodity futures. This will give you the thrill of trading actual money while risking only very little. To learn more,
visit our specialty site on Binary Options Training
and request your free Binary Options Starter's Pack.
E-Mini S&P 500
While this web site was designed to be accessible to all, especially the beginning commodity futures trader, that is not to say that trading commodity futures
is appropriate for everyone. As with any type of investment, it should be carefully considered along with your personal
tolerance for risk and available risk capital. This web site will help you make an informed decision.
Learn Commodity Trading with these recommended texts...
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Futures, options and forex trading involves substantial risk and is not for everyone. Only risk capital should be used. General Disclaimer and Copyright
The following trademarks and service marks are owned by Chicago Mercantile Exchange Inc.: CHICAGO MERCANTILE EXCHANGE®, CME E-mini®, CME®, E-mini® and Globex®. The following are trademarks of The McGraw-Hill Companies: S&P®, S&P 500®.
* Initial margin requirements as of Sep 1, 2012. Margins can change without notice. Consult your futures broker for current margin requirements.
Keywords: commodity trading for beginners, commodity trading education, commodity trading beginner
Abstract: Commodity trading for beginners includes proprietary videos, guides, research articles and paper trading.
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