Candlestick Trading Blog

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Commodities traders can include both hedgers and speculators. Also known as futures traders (futures trading), hedgers have an interest in the underlying commodity and seek to hedge out the risk of price changes. Speculators, on the other hand, seek to make a profit by predicting market moves and they buy a commodity on paper in which they have no practical use.

Before getting into further detail regarding the types of commodities traders, let us first take a look at commodities markets. Commodity markets are markets in which raw or primary products are exchanged. Commodities are traded on regulated commodities exchanges. On these exchanges is where commodities are bought and sold in standardized contracts. An example of a standardized contract is a futures contract. The point of a futures contract is to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. These contracts give the holder the obligation to buy or sell (exercise the contract) and this contract must be fulfilled on the settlement date. Examples of the types of commodities traded include, energy, meat, softs (including coffee, cotton, sugar, etc.) and financials (such as stocks, bonds). They are numerous types of commodities available for trading.

Commodities traders who practice hedging typically include producers and consumers of a commodity. A hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment. This strategy is designed to minimize exposure to an unwanted risk, while still allowing profit from an investment activity. Typically large companies operate in these futures markets and use futures contracts to lock in their selling prices for the product in advance of delivery of the product. Speculation is the opposite of hedging and its purpose is to make an investment that increases the overall risk in a portfolio. (Hedging decreases risk). This is the other side of the transaction in which the trader speculates on whether the commodity price will go up or down before the contract is due for delivery. A lot of long-term investors are classified as speculators and they buy and hold for years at a time. There are also some speculators that buy and hold for shorter time frames through the use of leverage. The concept behind leveraging is to multiply the amount of motion that you get from the energy you put into a transaction. Leveraging is a tool that requires immense focus and 8- 10 hours of dedication each day.

Commodities traders have a multitude of options to choose from when trading commodities, as well as multiple strategies that can also be used to make money in this market. For investors interested in commodities trading, continue to do your research to find those strategies that work best for you.