Commodities Futures Trading
Before venturing into high-risk commodities futures trading, novice investors will need the services of an experienced commodity trading advisor skilled at forecasting fluctuating values. Commodities are things that come from nature, and nature can be unpredictable. Agricultural products, such as wheat, corn, oil, and livestock are all dependent upon regional and global climate changes, the availability and cost of labor, and to a great degree, technology. The law of supply and demand also has a direct effect on the price of commodities. When products are in abundant supply, their cost goes down; but in times of shortage, the demand increases and so does the price.
Commodities futures trading involves being able to forecast supply and demand, analyze the effect that supplies will have on the global stock market, and predict how stocks will perform in the future. Investors trade in futures contracts, or promises to buy or sell a specific product at a certain price with the expectation of making a profit on a date yet to come. And no, traders don't have to be clairvoyant or use a crystal ball to forecast futures, but they do need to study market trends. "The Pharisees also with the Sadducees came, and tempting desired Him that He would shew them a sign from heaven. He answered and said unto them, When it is evening, ye say, It will be fair weather: for the sky is red. And in the morning, It will be foul weather to day: for the sky is red and lowring. O ye hypocrites, ye can discern the face of the sky; but can ye not discern the signs of the times?" (Matthew 16:1-3).
Commodities futures trading requires vigilant research and keeping abreast of global climatic, economic, and political indicators which may adversely affect the supply and demand for goods. But the availability and demand for agricultural products is largely dependent upon the weather. Because these products are affected by climate changes, such as drought, flooding, or violent storms which can devastate crops; their price can fluctuate wildly -- within a day or a week. When a long hot summer drought robs corn fields of precious water, the impact is felt not only at the supermarket as corn supplies go down, but also in the commodities markets in New York and Chicago, as the demand and price for corn escalate. Similarly, the spread of mad cow disease in animals imported from England can lead to shortages as livestock is destroyed to prevent its spread. As a consequence, beef shortages increase demand and prices skyrocket for prime rib.
Perhaps, two of the most influential commodities worldwide are oil and gold. When the cost of a barrel of foreign crude oil topped $100, Americans paid through the nose at the gas pumps; and fuel costs threatened to reach a whopping $5 per gallon nationwide. Foreign and domestic oil companies realized huge profits, but at the expense of the American taxpayer. For investors engaged in commodities futures trading, high-ticket metals have proven to yield consistently high returns. Precious metals like gold, platinum and silver are also "hot" commodities. They tend to hold their value, which increases as the value of the U.S. dollar decreases. The demand for precious metals, especially gold, increases because of its liquidity. Unlike stocks and bonds and agricultural commodities, gold is like money in the bank; and can always be traded for a source of ready cash. Gold had reached an all-time high of nearly $1,000 per troy ounce, but has dropped in price in recent months. In spite of the decrease in price, the outlook for gold futures continues to be extremely bright.
In commodities futures trading, investors and experienced traders carefully study consumer buying trends which are indicative of demand; along with the past performance of certain products. By researching how stocks performed in past years, traders can make an informed choice about which products to buy or sell, in what amounts and during which period of time. Experienced traders want to buy when markets indicate a decreased demand for a product and sell stock in that particular commodity when prices peak. Profits can be realized when investors buy low and sell high. However, due to the volatility of the market with prices fluctuating wildly on a daily basis, it takes a keen eye to discern what stocks will do in a single day, a week, or even a month.
Because of so many uncertain variables, commodities futures trading is not for the weak at heart and investing can be a gamble. Not is the supply of agricultural products affected by climatic changes, but also political and socioeconomic factors. A coup d'etat can break out in Brazil and cause sugar cane production to halt. Prices will increase because of an inability to safely harvest and export sugar, which decreases domestic supplies and cause prices at the supermarket to double. Political unrest in South America could affect the production of rubber harvested from trees located in unstable regions. American consumers could see increases in the price of automobile tires until the region becomes more stable. Commodities futures trading will reflect fluctuations caused by changing supplies and demands for goods and livestock affected by climatic, socioeconomic and political factors.
In the final analysis, we live in a global society with a global economy; and events which impact one area of the world can have a far reaching economic impact on continents and people residing millions of miles away. Because of technological and agricultural advances, human beings have not only become citizens of the world, but also their brothers' keepers; producing and supplying food and durable goods from coast to coast and continent to continent. By observing consumer buying trends and global economic indicators, today's investors can realize fewer risks and greater returns from commodities futures trading.
Commodity Future Trading SystemA computerized commodity future trading system can help investors know the most appropriate times to make purchases and sales of various raw materials, such as metals, grains, and natural gas. Commodities are products that are basically the same no matter who produces them. For example, farmers throughout the country grow bushels of wheat. Though the wheat will be graded, for the most part wheat is wheat. It's not the same as buying even a simple product like laundry detergent. Consumers may have loyalty to a particular brand or prefer any brand as long as it's unscented. Different reasons underlie these kinds of purchasing decisions. But for commodities, farmers either grow the grain or sugar or cotton; miners mine for coal, gold, and silver; and drillers drill for oil and gas. The buying and selling of these generic products, and certain other items such as currency and even cell phone minutes are handled by exchanges such as the Chicago Board of Trade or the New York Mercantile Exchange. The exchanges establish standard contractual agreements that specify the commodity's quantity and grade. Investors buy and sell the commodities for future delivery at an agreed upon price. However, actual delivery or possession rarely occurs. The contracts are canceled out by offsetting purchases and sales. Because of the complexity, a computerized commodity future trading system can assist investors in tracking the products that are bought and sold.
Many investors are becoming interested in commodities for several reasons. Financial experts often advise clients to diversify their portfolios. This means that the individual hasn't put all his eggs in one basket, but has different types of investments. For example, the individual may have a certain percentage of his investments in stocks, another percentage in bonds, and the remainder in real estate. Commodities provide another opportunity for diversification. Additionally, commodities are often recommended as a hedge against inflation. In inflationary times, the value of raw materials often increases. Perhaps the most important reason for the increased interest in commodity futures is the global demand for these raw materials. Other countries are building their infrastructure and increasing manufacturing. They need metals, fuels, and other commodities. A sophisticated commodity future trading system can help an interested investor take advantage of the increased global demand by showing market trends. With such a system, the investor can appropriately manage purchases and sales to his advantage.
However, even with the most sophisticated computer application, the wise individual will not blindly follow a commodity future trading system. Instead, she will pay attention to the market conditions, conduct her own research, and use that information to make prudent buying and selling decisions. As King Solomon advised, "The simple believeth every word: but the prudent man looketh well to his going" (Proverbs 14:15). In fact, even with the increased interest in commodities as an investment, this type of trading is considered by many to be speculative, akin to gambling. Individuals will need to decide for themselves if this is an appropriate investment. However, the words of King Solomon are a caution to beware of unrealistic claims made by some commodity future trading system vendors. The ads may promise that using a particular software application will result in high profits with very little risk to the investor. But the economic reality is that high profits almost always involve higher levels of risk. Any person who wants to get involved in commodities trading should take the time to learn at least the basics.
The Commodity Futures Trading Commission, an independent agency created by Congress in 1974, can be a good starting point for an education on this topic. The mission of the CFTC is to protect the public from market manipulations and fraud. As part of this mission, the CFTC issues advisories which can provide valuable information to aspiring investors. Before purchasing a commodity future trading system, an individual may want to see what advisories the CFTC has issued on this topic. The novice also will want to learn about the role of the exchange's clearinghouse in handling the financial transactions between buyers and sellers. As stated earlier, the seller of a futures contract rarely has actual possession of the product and the buyer rarely takes actual delivery. Instead, the individual makes offsetting purchases and sales. For example, a person may buy a contract for cocoa to be delivered in three months. But the month before, the person will sell the contract. According to specific rules, the clearinghouse requires members to keep a certain percentage of money in an account. Brokerages can handle the accounts for nonmembers of the exchange. Obviously, there are many details to track and a commodity future trading system can help with these.
Most people purchase a trading system because of the up-to-the-minute information they provide on market conditions and commodity prices. Some individuals think that with just the right commodity future trading system, they can get rich quick. Others are more realistic. These wiser individuals understand that systems are tools. Before deciding on a particular product, aspiring commodity traders should look for websites that provide third party testing of particular systems. They should also read as many reviews as possible so that a wise purchasing decision can be made. Some vendors provide a free demo that even comes with a pretend account. By practicing with the demo, the individual can learn all about entries and exits into the commodities markets without risking private financial resources. Trading futures may be a legitimate means for diversifying a portfolio, hedging against inflation, and taking advantage of increased global demand for raw materials. Just remember that trading systems are tools and can't take the place of wisdom and prudence.