COMMODITY TRADING for BEGINNERS

How Do You Trade Commodities?

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?

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!

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 Income^TM. 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

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.

MARKET	FUTURES CONTRACT (Initial Margin*)	BINARY OPTIONS (Minimum Investment)
	Crude Oil $6,885	$50
	Gold $9,113	$50
	Natural Gas $3,375	$50
	E-Mini S&P 500 $4,375	$50
	Euro FX $4,050	$50

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.

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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.