Many people have
become very rich in the commodity markets. It is one of the
few investment areas where an individual with limited capital
can make extraordinary profits in a relatively short period
of time. Many people lose money in commodity trading. The truth
is that commodity trading is only as risky as you want to make
Those who treat trading as a get-rich-quick scheme are likely to lose because
they have to take big risks. If you act prudently, treat your trading like
a business instead of a giant gambling casino and are willing to settle for
a reasonable return, the risks are acceptable. The probability of success is
The process of trading commodities is also known
as futures trading. Unlike other kinds of investments, such as stocks and bonds,
when you trade futures, you do not actually buy anything or own anything. You
are speculating on the future direction of the price in the commodity you are
trading. This is like a bet on future price direction. The terms "buy" and "sell" merely
indicate the direction you expect future prices will take.
There are many inherent advantages of
commodity futures as an investment vehicle over other investment alternatives
such as savings accounts, stocks, bonds, options, real estate and collectibles.
The primary attraction, of course, is the potential for large profits in a
short period of time. The reason that futures trading can be so profitable
While profits can
be large in commodity trading, it is not easy to make consistently
correct decisions about what and when to buy and sell. Commodity
speculation offers an important advantage over such illiquid
vehicles as real estate and collectibles. The balance in your
account is always available.
If you maintain sufficient margin, you can even spend your current profit on
a trade without closing out the position. With stocks, bonds and real estate,
you can't spend your gains until you actually sell the investment.
Commodity speculation offers an important advantage over
such illiquid vehicles as real estate and collectibles. The balance in your
account is always available. If you maintain sufficient margin, you can even
spend your current profit on a trade without closing out the position. With
stocks, bonds and real estate, you can't spend your gains until you actually
sell the investment.
Commodity trading is not particularly
complicated. Unlike the stock market where there are over ten thousand
potential stocks and mutual funds, there are only about forty viable futures
markets to trade. Those markets cover the gamut of market sectors, however,
you can diversify throughout all important segments of the world economy.
There are even
tax advantages to making your money from futures trading. Regardless
of the actual holding period, commodity profits are automatically
taxed as sixty percent long-term capital gains and forty percent
short-term capital gains. The current maximum capital gains
rate is thirty-three percent, somewhat less than the maximum
rate for ordinary income. To the extent that capital gains
tax rates are reduced in the future, commodity traders will
benefit. If a distinction is re-established so that taxes on
long-term gains are lower than on short-term gains, commodity
traders will benefit.
Before entering into
Commodity trading , it is good to take a look
at the risks in trading. Commodity trading has the reputation of
being a highly risky endeavor. It is true that a high percentage
of traders eventually lose money. Many people have lost substantial
Anyone who is going to try speculation should be fully aware of and be comfortable
with the risks involved. Managing the risks of trading is a very important part
of any trader's success. Although the risks can be managed, they can never be
eliminated. Remember that the high returns successful speculators can earn, are
available only because the speculator is being paid to take risk away from others.
Some surprise situations that can cause unpredicted losses are freezes, floods,
droughts, government currency interventions and crop reports. With attention
and foresight a trader can sidestep these risky situations. The best way to control
unpredictable risks are to trade conservatively so larger-than-expected losses
are still only a small percentage of the total account.
There is no point trading commodities if you cannot handle the psychological
discomfort of making losing trades. While people tend to take losses personally
as a sign of failure, good traders shrug them off. The best trading plans result
in many losses. Because of the amount of randomness in market price action, such
losses are inevitable.
Some typical steps
in the process of making a commodity trade including the trader's
decision-making process and the procedures involved in actually
placing the trade.
In order to make decisions
about when to trade commodity futures, you must have a source
of price data. Many daily newspapers carry some commodity prices
in their financial sections. The Wall Street Journal has comprehensive
commodity price listings. Investor's Business Daily has both
price tables and numerous price charts.
All experienced commodity traders prefer to look at price activity on a chart
rather than trying to interpret tables of numbers. In financial analysis, charts
are indispensable for quickly grasping the essence of historical and recent
Looking at such bar charts enables a trader to see the recent trend of prices
whether up, down or sideways in whatever time frame they choose. Following
the current trend of prices are the cornerstone of successful trading.
There are a number of ways to obtain the price charts a trader needs to analyze
the markets. You can make your own using graph paper. This sounds rather primitive,
but some experts recommend it as a good way to put yourself in close touch
with price activity and monitor risk.
Another source of chart is the printed chart service. There is space on the
charts to update them daily during the following week until next chart book
arrives. These printed chart books normally have a number of indicators plotted
along with the price action and contain a wealth of additional information.
For computer owners there are many software programs that create fancy charts
on the computer screen. You can input the price data manually or, via telephone
modem, download comprehensive data after the markets close for the day. Those
with larger budgets can install a small satellite dish and watch price changes
in all the markets nearly instantaneously as they occur. The software creates
charts dynamically on the computer screen as each trade takes place on the
exchanges. You can put many different charts on the screen and thus watch numerous
markets all around the world in real time.
Those who can't trade profitably without a computer probably won't be helped
too much by using a computer. It may actually be detrimental by causing an
increase in trading frequency. While a computer will not make a bad trader
into good one, they are fun to use, and they do make a trader's life easier.
There are two primary analytic methods for deciding when to take a futures
position: fundamental analysis and technical analysis. 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.
While there are differences of opinion about the relative merits of the two
approaches, almost all successful traders emphasize technical analysis. There
are a number of reasons for this. First and foremost is the difficulty of obtaining
accurate fundamental data. While various governments and private companies
publish statistics concerning crop sizes and demand levels, these numbers are
gross estimates at best. With the current global marketplace, even if you could
obtain accurate current information, it would still be impossible to predict
future supply and demand with enough accuracy to make commodity trading decisions.
Technical analysts argue that since the most knowledgeable commercial participants
are actively trading in the markets, the current price trend is the most accurate
assessment of future supply and demand. If someone is correct that for fundamental
reasons, prices will likely move up strongly in the future, the commercial
participants who have the greatest knowledge and influence on the markets should
certainly be moving the price upward right now. If price instead is moving
down, a lot of very knowledgeable people must think price in the future will
likely be down, not up.
For this reason, almost all successful speculators learn to follow price action
and not try futilely to predict turning points in advance. They seek to trade
in tune with the large participants who move the markets.