Commodity Trading : Everything You Need To Know.

Commodity Trading

When it comes to the Commodity Trading, some people find the purpose confusing. The commodity market originated as vehicles for guarding against price fluctuations in agricultural commodities and to establish a method of price discovery for these items.

The classic example is a farmer seeking to protect the value of his crop. In a wildly fluctuating market, the farmer has no idea what the prevailing price for the crop he is planting in May will be in November.

If the bottom fell out of the market for some reason, he would have nothing to show for his season of work. To lock in a profit (or buy insurance against a large price drop) a soybean farmer could sell November soybean futures, establishing the price at which he could sell his crop in the fall.

If price dropped, he is protected by his futures contract. If prices rise, he loses money on his futures contract but makes money on his physical crop. This process is called hedging.

But commodity futures actually comprise a small portion of the total futures trading volume. Far more financial futures–interest rate futures, stock index futures, currencies–are traded around the globe. The philosophy at work, though, is the same as our soybean farmer example.

Futures traders range from fund managers trading billions of dollars in dozens of markets (much the same as their stock fund manager counterparts) to individual traders like you.

Best Commodities Trading Tips

Commodities trading tips help you to decide when to sell or buy commodities. It is desirable to know about some tips that are deployed by successful traders of commodities trading. While reading financial newsletters you may come across tips that will keep you updated. A well thought out strategy lets you know when to sell or buy to maximize profit and limit losses.

  • Range Trading

Trading within a range means buying a commodity near the bottom of a range and selling it at the high point of range.

Bottom point is called “support” and the high point is called “resistance”.

Whenever any commodity has experienced a lot of selling in the market it hovers around the bottom of the support range. In such situations the commodity is said to be ‘oversold’.

On the contrary, a commodity may be experiencing frenzied buying to reach near the resistance level. At this point the commodity is said to be ‘overbought’.

However, such strategy works well when there is no major trend in the market. In case the market gets oversold or overbought and a major downturn or uptrend is formed, this strategy should be employed with utmost caution.

  • Trading Breakouts

When a commodity breaks a particular resistance level and makes a new high, the commodities trading strategy recommends buying it.

Similarly when a commodity breaks the support level and hits a low then selling is advised.

New low and high of a commodity can be easily spotted from the technical charts. The peak of the curve denotes high and the low point indicates new low.

  • Trading on Fundamentals

Buying or selling of a commodity within a range or after positive or negative breakouts is supported by various technical parameters. Commodities trading is based on market fundamentals which are easily understood by experienced traders who have developed an instinct for trading.

Banks use T-Bond futures hedge interest rates fluctuations, stock portfolio managers sell S&P; futures to protect the value of their portfolios, and oil companies use crude oil futures to hedge their holdings.

Hedgers are only one part of the story. If markets consisted only of hedgers, trading could not continue very long. Speculators, those traders who are not hedging financial or commodity holdings but are rather buying and selling to profit on price moves, make up the other half of the futures equations.

Conclusion

Commodity futures attract traders for a number of reasons. The relatively small number of markets to trade (compared to individual stocks) makes monitoring and analyzing them much easier.

Also, you can just as easily sell futures short as buy them, allowing you to take advantage of down moves. It is much more difficult proposition in stocks, where regulations limit short selling.

But most of all, traders are attracted by the leverage available in the futures markets, a concept you must thoroughly understand if you want to take advantage of the potential of futures and avoid their dangers.

Disclaimer:

Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges.

As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. Past performance of securities/instruments is not indicative of their future performance. This post is only for Educational purpose.

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