Candlestick Trading Blog
February 22, 2008
Trading Commodity
Trading Commodity as an Investment Channel Trading commodity, also known as futures trading, is the trading of contracts called futures contracts. These contracts provide the owner the power to trade the underlying commodities at somewhere in the future for a fixed rate. The rate is the price rate of the contract creation and like stock trading and options trading, trading commodity is done in precise centralized futures commodity trading markets. Commodity trading is not always complicated, unlike the stock market, where there are over ten thousand potential stocks and mutual funds. There are actually only about forty viable futures markets to trade and they cover an array of market sectors. Trading commodity is becoming more and more popular due do the simplicity of this type of trading, the liquidity of the market, the stability of the market, price stabilization, the low transfer rate, the ease of which to set up an account and trade from home, and for many more reasons. Futures contracts, mentioned previously, usually consist of two types of contracts including commodity futures contracts and financial futures contracts. Commodity futures contracts end with a physical delivery and may include agricultural commodity futures like wheat, oats, soybeans, rice, and sugar. Trading commodity through the use of financial futures contracts ends with cash settlement and includes futures for treasury notes, bonds, mutual funds, and the like. Methods for Trading Commodity There are two primary analytic methods used when trading commodity. These methods are fundamental analysis and technical analysis. Technical analysis involves the analysis of past price action of the market itself to forecast the likely future price action. Almost all successful traders emphasize the use of technical analysis when trading commodity. A couple of reasons for this include first, the difficulty in obtaining accurate fundamental data, and second the argument that the most knowledgeable commercial participants are actively trading the markets, so the current price trend is the most accurate assessment of future supply and demand. Trading commodity through the use of fundamental analysis involves the use of economic data relating to supply and demand to forecast future price action and there are many that practice this method. They believe that understanding the reasons for price movements is important, rather than just following the price action when commodity investing. Purpose of Trading Commodity The first and most obvious reason for trading commodities is to turn a profit. The other reason is to hedge, which means the trader must minimize risk by attempting to purchase some form of insurance. This is also known as hedging and one way to achieve this is known as the spread. (Examples of this include a bull call spread and bear call spread) Trading commodity means to either “go long” or “go short.” “Going long” means to buy a contract while anticipating that the price will rise before the contract expires. “Going short” means to sell the contract while anticipating that the price will drop before the contract expires. This method of selling short is one that is very difficult for many traders to understand. Basically, the concept when “going short” is that the contract is sold by the trader before the trader even owns it. That again, is a very hard concept for investors to wrap their heads around when trading commodity. Conclusion It is important to learn about both fundamental and technical analysis if you are interested in trading commodity. Before you know which method works best for you, you need to learn about both. Once you decide on the preferable method, learn as much as you can and invest in yourself through taking classes and reading books on trading commodity. Education is important to ensure successful trading! Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
 |
 |
|
 |
|
 |
|
 |
--------------------------------------------------------------------
0 Comments:
Post a Comment
<< Blog Home