If you’re looking for a solid strategy in trading, you want some highly probable risk/rewards, some strong money management and some direct, smart adjustments. How can you find all that in the world of commodity futures trading? Especially if you’re looking for success in the agricultural futures business, what do you need to remember?
## A Strategy for Trading Commodity Futures
It’s important to have a sound system and strategy with any commodity futures trading. A solid strategy is known as “trend-following swing-trading.” This is where you follow the trend in your market and only trade in the direction of your market trend. For instance, if gold is in an up-trend you buy long. If it’s trending down, you sell short. No trend bucking or counter intuitive trading needed, just discipline and a sound systematic approach.
## Understanding When You Should Make a Decision
You need to make a decision before it “has” to be made. What this really means is just smart planning. When you’re deciding what to invest in when it comes to commodities, it’s not all about gut reactions or following your emotions. By following a system that you’ve set out for yourself, you just need to do the right things on the day of trading, because you’ve already made the decisions as a part of your system. This is how you grow long-term, rather than just seeing and choosing random commodities.
## Dealing With Fluctuation
The idea of a give/take is fundamental to making any money in a market of any kind. When you’re only fixated on gains and can’t suffer even the smallest loss, the standard fluctuations in any market will cause you to give up your strategy far too early — erasing whatever long-term gains you stood to get out of the system. Think of surfing: there are long waves that you ride to the end, and then you sit and wait until a new one comes. You aren’t always on top of the wave.
It’s not that hard to be a great trader — look at the consistency and simplicity with which Warren Buffet has managed his holdings. You’ll have trouble understanding commodity futures trading at first, but knowing what to expect and sticking to your core values (which you need to lay out in a clear system beforehand) will help immensely. Use hard work, and stay determined. Ride the wave (and be prepared for the lull) as you find financial success.
If you’re thinking of pursuing a smart, disciplined future in commodity trading, Brian Schad’s futures trading system approach, offered at SchadFutures.com and in his subscription-based reports, is worth taking a look at.
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Commodity futures trading is a type of investment where one can make money by speculating on the price of a certain commodity going up or down in the future. Commodities are usually the essential things that people make use of everyday. Most of the times, these commodities are the basic essentials needed by a modern society.
When talking about certain commodities being traded in the futures market, it must meet certain conditions to make it allowable for trading. One of the conditions is that the commodity should be standardized. In trading agricultural and industrial commodities, the traded commodity should be in its basic raw and unprocessed state. In this case, Wheat may be traded in the futures market but not flour.
Another condition that a certain commodity has to meet is that the perishable kind should have adequate shelf life. The reason for this is that these commodities are traded with their delivery scheduled deferred at a future time. Therefore, there may require a long shelf life so that the commodities may be delivered with its quality still good and intact. Another condition that a certain commodity should meet is that it should have a price that changes often, creating some uncertainty as well as opportunity to profit.
The history behind futures trading in commodities evolved from the farmer’s need to earn more from every harvest. Before commodity futures trading started, the farmers were always at the mercy of the dealer when it comes to pricing and selling their harvests. Dealers usually set the prices and the farmers cannot to anything but accept the terms. In a way the farmers were being exploited by some dealers and so another form of selling their harvest.
In the search for having a more fair system of doing business, farmers began offering future harvest to interested buyers. The farmers started giving their own terms for the future harvests to dealers. The transaction consists of commodities offered as a certain price and to be delivered as a specified date. Contracts were then drawn up between the farmer and the interested buyer that specified the certain amount of commodity to be delivered at a particular time in the future. From this system, what is now known as futures trading has begun.
It was sometime in 1878 that a central dealing facility for such commodities contracts was established in Chicago. In this facility, farmers and dealers began initially in spot dealing of their grains that was immediately delivered upon a reached settlement in price. It eventually evolved into futures trading when farmers started committing future harvests to interested dealers willing to buy to ensure that their grains supply are maintained in the future.
In the beginning, futures trading initially consists only of a few farm commodities such as grains. But later on, a huge number of other commodities joined in. Now there are futures trading markets that deal in precious metals such as gold, silver and platinum. There is also a futures trading market for livestock and cattle as well as for energy products such as crude oil and natural gas. It has gone on to include futures trading in coffee, orange juice ad industrials such as lumber, cotton and even on interest rate bearing instruments such as currencies and stocks.
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With the advancement of Internet technology in recent years commodity future online trading has become entirely possible without the direct interaction of a commodities futures broker. Once a commodity futures trading account has been established the commodities trader can make and execute commodity trades from anywhere in the world that offers a fast stable Internet connection.
Before discussing commodity future online trading further let us examine what a future contract is. A futures contract is basically a legal agreement between two parties, the seller and the buyer, in which both parties agree to receive or deliver the specified commodity or a financial instrument at a fixed future date. It is important to note that in the case of commodity trading, to receive a commodity means to have long positions and to deliver a commodity means to have short positions. The agreement or contract gives a future date certain at which time it must be exercised but the agreement is entered into by the parties at the current time.
Therefore all future contracts mature at a future date and are clearly identified as for each contract reference is made to the date when the contracts mature. For example, a trader may enter into a contract in Febuary 2009 for December 2009 Corn. One of most important aspects regarding futures trading is that as the futures contract nears expiration when they react to any external factor or circumstance there is a strong tendency for the cash market and the futures contract to move in similar directions by almost the same amount.
Commodity Future Trading:
Commodities fall into different categories like agricultural and non-agricultural commodities. They are also traded like stocks at the exchanges. Similarly, commodity future trading is done at the centralized exchanges and the trades are performed electronically rather than the handing over of commodities in the physical way. For example, in Canada, commodity future trading takes place with the help of the Globex System at the Chicago Mercantile Exchange. Similarly in India, it takes place at MCX or the Multi Commodity Exchange. In the US there are a number of commodity trading exchanges with the Chicago Board of Trade being the most important one.
Online Commodity Future Trading:
The Internet has many brokerage houses that allow trading in commodity futures online. In all the online commodity future trades, the clearinghouse of the exchange plays the role of buyer and seller in different types of trades and in each trade, performance and settlement of the commodity future contract is guaranteed. Buying an initial commodity future contract means taking long positions and selling an initial futures contract means taking short positions.
The online commodity future trades are regulated by the governing bodies in all the countries where the commodity trading takes place. For example, In United States, online commodity future trading is regulated by the CFTC or the Commodity Futures Trading Commission. This is a federal agency that has been assigned the role of regulation of futures market. All the brokerage houses that provide the facility of online commodity future trading must be registered with the CFTC and must abide by the set rules and principles established by the CFTC otherwise the commission is empowered to cancel their license. Two main roles of any regulator of online future commodity trading are risk transfer opportunities and the price discovery.
For carrying out online future trading, a person is required to open an online future commodity trading account with a commodity brokerage firm. This helps him to trade in commodities at the selected exchange. There are also some sources that provide multiple accesses to all the leading commodity future exchanges in the world.
The number of commodity future products varies from one exchange to another. There are more than 300 commodity future products worldwide in which a person can easily trade. Online commodity future trading can be done with respect to number of commodities like grains, metals, energy, livestock etc. Commodity futures also include financial futures that include interest rates, stock indexes and the currencies.
Benefits of Online Trading:
Though commodity future trading can be done by calling the brokerage house, there are many benefits that are obtained when a person opens an account for online commodity future trading. First, a person is able to get trading opportunities round the clock. This means that during the trading week, i.e. from Monday to Friday, a person can easily trade during the market hours. Even when the commodity future markets are closed, a person can make a trade by means of after hours.
This is possible only when a person has an online commodity future trading account. If the access is provided to other commodity futures market of the world, the person gets the opportunity of online trading in commodity futures round the clock. For example, if a person living in the United States open his commodity future account with a brokerage house that provides access to commodity future markets world-wide he can virtually trade round the clock. Of course, to be a successful trader and not burn out traders must carefully regulate the hours per day that they allocate to trading. Too much of a good thing can lead to trouble.
An important benefit of online commodity future trading is that contracts are carried out at government regulated centralized exchanges, thus there is little risk of any unfair practice being adopted by the brokerage house.
This confidence is also substantiated by the fact that the commodity exchanges provide guarantees
about clearing the commodity futures transactions and the buyers and sellers of the online commodity future transactions are both protected from counterparty default. Since the centralized exchanges, at which the future trading takes place, are liquid, a person can easily establish as well as offset his different commodity futures positions.
When people apply for an online account for commodity future trading, they are asked about the commodity exchanges that they wish to trade at. If required exchanges are not listed, they can easily contact other brokerage firms. Yet another advantage of online commodity future trading is that a person can be assured about the execution of futures contracts. This is because when traded online, all the commodity future trades are executed in a very fast manner.
It is really amazing that a person can route the online commodity futures transaction to the required destination in less than one second. Another advantage of online commodity future trading is that you can easily open and close your future positions. In fact, this is the feature that is now attracting more and more customers towards the online commodity future trading as liquidity has risen and trades of most futures contracts can be made very fast and at fair prices.
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I am interested in investing in commmodities futures trading.
If you search TFC Charts on Yahoo! you will find an excellent site about commodities.
Commodities are usually traded in the form of futures. They carry a great deal of risk and are not suitable for most investors. You could easily lose a lot of money.
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An old commodity broker friend who was only half joking once told me that if you are thinking that it is a good idea to trade commodity futures you should have a nice glass of wine, go to bed, and take a long nap until the urge has disappeared. For most people who want to jump into the frenzied world of commodity trading that would be good advice.
However, for those who take the time to learn as much as they can about the commodity trading business before trading real money there is the possibility of starting out with a small amount of risk capital and trading it up into a sizable fortune. It is important to realize that you will be competing with some very smart, well informed individuals who will be pleased to take your money.
With that said it is also important to know that you will never have complete information about any market and that the outcome of any commodity trade can not be known for sure in advance. While it is important to know what you are doing you must be able to operate knowing that you will never know everything. If you are unable to pull the trading trigger when your trading system indicates a favorable trade is offered you had best give up commodity trading right now. Even tiny delays in executing trades can be fatal to your results.
You might be lucky for a little while trading against aggressive seasoned commodity traders but probably your luck will soon turn into financial grief. So beware. Don’t be in too big of a hurry to start trading before you at least have put together a trading plan and have decided how much capital you are willing to put at risk.
There is another very important item that you must decide upon before starting to trade commodity futures. You must choose a commodity brokerage firm. You may also wish to select a commodity broker although these Internet days you may decide to trade online in a self directed account using a trading platform provided by your brokerage firm. You must do your homework to insure that the brokerage firm that you are dealing with is not running a scam.
The Commodity Futures Trading Commission (CFTC) offers guidelines to help you with your home work. A few guidelines follow. Before opening an account you should visit the CFTC website. The CFTC will not assist you to make winning trades but they can help you with your commodity trading education which may very well help to get you started in the right way.
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Things to look out for from the CFTC:
Foreign Currency Trading (Forex):
* Foreign currency trading scams often attract customers through advertisements in local newspapers, radio promotions, or on attractive Internet sites. These advertisements may peddle high-return, low-risk investment opportunities in foreign currency trading, or even highly-paid currency-trading employment opportunities. Precious metals scams often work the same way.
* The CFTC urges you to be skeptical when promoters of foreign currency trading claim that their services or account management will earn high profits with minimal risks, or that employment as a currency trader will make you wealthy quickly.
Take a look at the CFTC’s brochure on forex fraud available in PDF or in HTML.
Commodity Pool Operators:
* Commodity pool operators often solicit investments from friends, neighbors, co-workers, and fellow religious or social group members by using their reputations in the community or their personal relationships. In many cases, however, these investment schemes turn out to be fraudulent, and you can lose your entire investment, in many cases as a result of outright theft.
* Individuals and firms that fraudulently solicit funds from investors for commodity futures and options trading are usually not registered with the CFTC. They may operate “Ponzi” schemes in which little or none of the money sent in by investors is ever invested as promised in the commodity markets. Instead, the operator of the scam steals the funds, and creates the illusion of a successful business by using some of the money put in by later investors to pay phony “profits” to earlier investors. This tactic makes it appear to investors that the investment is actually making money, which in turn attracts additional investors. Be wary of such payouts if you do not fully understand their source.
Introducing Brokers:
* Introducing brokers often use advertisements and infomercials on radio and television to promote commodity futures and options. These advertisements may claim that seasonal trends in the demand for certain commodities or well-known current events (such as a hurricane or a terror attack) create an opportunity to make big money by trading in commodity futures and options. They promise quick riches, like turning $5,000 into $20,000 in just a few months, with little risk.
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When you trade commodity futures you want to make every effort to at least start out on a fair and level playing field. Selecting an experienced and reliable commodity brokerage firm is critical to your trading success.
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Is it true that the LOWER the maintenance margin requirement on certain commodities (Mini Futures, Corn, Oats) the riskier that commodity is? As opposed to the Higher (priced) maintenance margin futures. True? Not true?
No. It's the opposite. The higher the margin requirement…the riskier the underlying investment.
Hope this helped.
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