Trading Commodities - Is It For You?
As with every other type of investing, trading commodities forces the investor to understand the relationship between knowledge and success. There is an old saying that if you completely understand a problem it is nearly solved; this is very true when you are trading commodities. While it is true there are many people that succeed at commodities trading, the typical investor will lose money. Most investors do not accomplish the things necessary to be successful and failure is the only other option. Your investing is a business that requires training, experience and plenty of digging through facts and information, things that occur in most successful businesses.
The Potential of Trading Commodities
Trading commodities has is viewed by some as being much riskier than investing in the stock market. While there is risk, the truth is an investor can raise or lower that level of risk. If your approach to your trades is conservative, you accept reasonable returns and you take the approach that this is a business, then the probability of success in commodity trading rises dramatically.
Trading commodities has its risks but the rewards can be very nice as well. One example of rewards in commodity trading is a man who is said to have borrowed less than $2,000 and amassed a $200 million fortune in ten years. While these results are extraordinary and not everyone can expect the level of successful trading he achieved, it is possible for you to make money trading commodities.
What is Involved When Trading Commodities?
Trading commodities is unlike investing in the stock market or bonds. When you are trading commodities, you don’t actually own anything. You are speculating on the future direction of the price for the commodity you are trading. The terms "buy" and "sell" merely suggest the direction you think future prices will take.
Trading commodities allows those who are involved with a particular commodity to lock in the price to avoid devastating changes later. A drilling company may sell oil futures if it believes that crude oil prices are going to fall in the future; in turn a refinery might buy futures if prices appear ready to rise. No matter which direction the prices move after that, both the drilling company and the refinery are guaranteed their price. The investor is the one who looks for changes in the commodities markets and attempts to gain advantages by buying or selling for a profit.
Is Substantial Risk Unavoidable Trading Commodities?
There is a potential of tremendous risk when trading commodities but reducing that risk can be easier than you may think. Some of the things that can be done when investing in the futures markets to limit risk include:
- Being Conservative - Deciding to follow a conservative approach can limit your risk; avoiding greed and fear can go a long way to improving your chances for success. Those who follow an aggressive trading pattern expose themselves to much higher risk.
- Doing Your Research – Knowing your commodity and the conditions that move it will help you to avoid changes that put your positions in danger.
- Learning Techniques for Avoiding Loss – There are techniques you can use to help minimize loss. For example, instead of accepting a loss by taking or making a delivery, an investor can offset the position before the delivery date. If the commodity eventually makes the right move, the investor has improved his or her position.
- Having a trading system – Using a system like Japanese Candlesticks to track commodities and predict their future movements is not only a conservative move but a profitable one as well. Candlesticks originated in the commodities markets in Japan hundreds of years ago and it is perfect for trading commodities today.
While not everyone will want to start trading commodities, it is still potentially very profitable. The danger is that the risks can be limitless to an uninformed, undisciplined investor. The good news is that if you create a set of solid trading rules and educate yourself on the markets and techniques required trading commodities can be a very rewarding and exciting adventure.