Commodity Trading is strictly speaking the trading of physical commodities - such as soyabeans, wheat, corn, gold, silver, cattle, oil etc. - or their futures contracts on the established commodity exchanges.
Farmers use commodity trading to lock in favorable prices prior to an ensuing harvest. Hence, there are real commercial reasons for trading in commodities. However, they are also traded for pure speculation by private traders seeking to make acommodity trading profit by speculating in the price movement over their chosen time-frame.
More than any other type of speculation, such as forex or stock trading, commodity markets involve a very high degree of seasonality. Hence, it is important that the trader be very aware of the underlying cycles affecting the market in question.
That said, commodity trading can be done successfully by giving a very high degree of emphasis to the price charts alone. The commodities trade extremely well according to technical analysis methods. For example, Fibonacci price retracements and time cycle analysis work extremely well on commodity charts. So too do other technical indicators such as moving averages, price gaps, support and resistance points, trendlines and so on.
Trading commodities can be an extremely volatile and unpredictable business because these markets are known for their sudden and sustained price surges and collapses. Compare a long-term commodity chart of something like soybeans or oil to any stock index and you will see the difference. Hence, it is vital incommodity trading that you are extremely disciplined in your approach and employ strict money management rules. A good stop loss order, placed in the market at the time you place your trade, is a must.
Traders also play the spreads between commodities, which is an extremely popular form of commodity trading, and which effectively multiplies the range of profit opportunities hugely. Examples of spreads is the wheat-corn spread, where traders speculate on the relative price of one to the other. Other spread opportunities occur in the price differentials between different delivery months of the same commodities'futures contracts . Hence, you might buy the contract nearer to expiration and sell the one further out with the expectation that long-term prices of that commodity will fall with respect to near term prices.
Once you also realize that there are active options contracts in all the major instruments, it becomes clear that commodity trading is a very desirable niche within the universe of speculation.
As with all forms of trading, mental and financial discipline are key factors to success in commodity trading. Given their extreme volatility, it is paramount that you have a proven method before you ever speculate a single dollar in these often unpredictable markets.
You must also remember that these are real physical products involved, and they can literally be delivered if you fail to close out your position before the expiry of the commodity future or option contract. Otherwise, it can result in a truck pulling up outside your house with your delivery of soybeans, live cattle or cocoa - depending on what you have been trading. This has been known to happen!
That said, the opportunities present in commodity trading are huge and exciting. These are markets that see some real action, and you also have the pleasure of knowing that you are trading in real world items, which can give your trading a whole new meaning.
If some time ago investing money in commodities did not sound like the champion design in investors' dominion, nowadays the whole situation experiences a turnaround, along with the outstanding value improvements for a number of commodities, such as the common, base metals (iron, copper and zinc), oil or coffee and sugar. Subsequently, the interest in employing a successful commodities trading system and an efficient, professional commodities trading advisor has been increasing. However, there are several broad lines which should be considered when selecting a commodities trading system or the expertise that an advisor can provide.
First of all, finding a commodities trading advisor is not difficult at all, but locating a skillful commodities trading advisor is where the ultimate challenge lies. After doing some research work (you will need quite some time to do that), you will have access to anumber of the best ones in the commodities trading advisor area. Even so, in the end, successful trading depends on your decisions because it is a matter of personal choice (investing in commodities is a risky activity). However, if you choose the assistance of acommodities trading advisor, you will be the beneficiary of his knowledge and experience in this field of expertise.
A commodities trading advisor will make efficient use of his licensed transaction procedures so as to determine trading positions in commodities and other type of futures. Regularly, the latter ones are commodities (either goods or stocks) traded for future delivery. What turns acommodities trading advisor into a reliable expert is his day and night interest in the evolution of the markets. Additionally, unlike newcomers in the sphere of commodities, acommodities trading advisor has a well-established, well-organized trade methodology. It is more likely to get the best out of the assistance of a commodities trading advisor if you are just an amateur.
To what concerns an efficient, or better, guaranteed to be efficient commodities trading system, well, it does not exist. As in the case of a commodities trading advisor, a commodities trading system cannot warrant total success when investing in commodities. Indeed, a commodities trading system is devised with the specific purpose to enable investors - and beneficiaries of the advantages a commodities trading system could display - to become the recipients of high earnings while assuming as few risks as possible. However, there isn't any investment in commodities which does not carry a degree of risk.
Basically, a commodities trading system is an automatic database (software package) which indicates a user, when the case tells it, the proper moments to buy, sell or hold a commodity. Such a commoditiestrading system is built as a result of a number of surveys of the market, of responses to certain levels of trading and of considering both the general (worldwide) and particular (limited to anumber of specified markets) evolution of market prices. However, such systems do not consider a fundamental examination of the markets, since they typically do not measure the balance demand-supply. The number one benefit is that they can appreciate correctly price connections and price fluctuations, which often prove as key-elements in detecting an accurate description of the current status of the market in terms of expenses.
However, an investor's favored approach, be it the spot-on piece of advice of a professional or the evaluation of a system, should always consider the high degree of hazard held within investing in a commodity. Such available goods or stocks have indeed their advantageous returns, are and will be a successful domain to invest your money in. All it takes to turn them into profitable tools is given by commonsensical practicality and clever caution. When these have become your rules, your investment will bear the anticipated fruits. One last thing to keep in mind: you can invest in a wide range of commodities, from orange juice, soybeans, cocoa, wheat, pork bellies, crude oil, to silver or gold, to cobalt or silicon. There are as many possibilities of investment as to satisfy any choice-range.
Commodity trading is an investing strategy that involves buying and selling of commodities. Commodities are defined as something that is considered to be of value, has a quality that is standardized, and is produced in large amounts. When people invest in commodities, they usually think in terms of ‘commodities' that are resources that may be purchased for a wide range of uses. For example, metals whether precious or non-precious, are considered a commodity and traded on the basis of the wide range of goods that can be produced using them as a key ingredient.
Who invests in Commodity Trading?
Commercials: Entities involved in the production, processing or merchandising of a commodity. In commodity trading, both the farmer and the company for example ITC (a leading FMCG firm), which procures wheat from the farmers, could be termed as entities.
Investors: A group of investors that pool their money together to reduce risk and increase gain.
Retail Investors: Individual commodity traders who trade on their own accounts or through a commodity broker so as to take advantage of the price fluctuations.
Why Commodities Trading?
Commodities is the only asset class that is negatively correlated to bonds, making them an essential tool for diversification. Generally speaking, bonds are only minimally correlated with stocks, but commodities have actually been negatively correlated to both stocks and bonds historically. In other words, when stocks and bonds increase, commodities tend to decrease.
How Commodities Trading works?
Say, if you want to take advantage of rising gold prices, a far better way is to invest in gold via gold futures from the commodities exchange rather than actually going to the market and buying it.
As far as gold future trading is concerned, you undertake three things.
1. Buy the amount of gold specified in the contract.
2. Buy it at the price specified in the contract.
3. Buy it on the expiry of the contract. This could be after one month or more.
Pre-requisites of Commodity Trading
In order to trade commodities, you must first learn about contract specifications of each and every commodity as mandated by the exchange, and of course learn about trading strategies. Basics remain the same as any other investment –buy low and sell high.
Just like equity trading, Investors are required to open a trading account with a broker or sub-broker; documents establishing address and identity proof are required. While brokers vary on the documents required for proof, most insist on a PAN card as proof of photo identity. Bank account details are also asked for enabling remittance and payment.
Commodities Trading in India
Commodities traded in the commodity futures market during 2009 included a variety of agricultural commodities, bullion, crude oil, energy and metal products. Several new commodities were introduced for futures trading in 2009, such as almond, imported thermal coal, carbon credits and platinum. The main commodities exchanges are NCDEX and MCX. More and more stock brokers are setting up commodity brokerages as well.
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