Commodity Trading
Commodity Trading, in essence, is an agreement to buy or sell at the current price based on predictions of the future price. It is a sort of educated gambler, with the first seller ensuring that they will not face a loss should prices drop, and the second ensuring that they will face a profit if prices rise. Everyone likes the idea - small investment, and potentially huge returns; the only uncertainty, of course, is whether prices will actually go up or down. If they go down, the first seller wins - they have ensured that they will receive the original price agreed upon, rather than losing money as the market drops. If prices go up, however, the second seller (the original buyer) wins - they have made a profit without doing any work.
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Intro to Commodity Trading
As an example, lets examine a transaction between a wheat farmer and a large baking company that needs massive quantities of wheat. Before a crop is even planted, both buyer and seller are predicting and anticipating any rise or fall in the market, speculating on any factors that might drive prices up and down. The wheat farmer, worried that prices are going to drop, will make an agreement with the baker to sell the upcoming crop of wheat at exactly the current price (say, $3.00 a pound); and the baker, hopeful that wheat prices will go up, will agree. This means that in six months when the crop is ready to sell, the transaction will occur at exactly $3.00 a pound; so if the market price has dropped to $2.00, the farmer made a secure profit, while if it has risen to $4.00 the baker wins out.
This is the gist of commodity trading: educated guesses as to the future of the market for any given product or commodity. Predictably enough, the commodity trading market has gained a reputation for high-risk investments alongside its reputation for high-potential gains; those who trade and invest wisely, however, are those who take the time to evaluate both product and market, rather than making rash gut decisions or impulse decisions paralleling the use of a giant economic slot machine for business. With good judgment and discernment, commodity trading can be both rewarding and profitable – like any business, it just takes time and thought.
The Risks of Commodity Trading
No pain, no gain, the saying goes, and it can easily be applied to the hazards of trading. Perhaps that should be adjusted to say no risk, no return, as the difficulties involved in investment almost always relate to the balance of risk and the potential returns. Because Commodity trading does have the potential to make the investor a much larger profit than his initial investment, the “return” is very high – but then, so are the risks.
The truth is that no matter how many trained economists there are studiously examining market trends and the state of world trade, no one can ever successfully predict the future of the market all the time. Some are better than others, and others are less reliable, but with commodity trading, there is no insurance; you can never know for sure if your money will return inflated or depleted.
Bruce Babcock, owner of Reality Based Trading Company, makes the following analogy concerning commodity trading. “Think of yourself walking into a gambling casino in Las Vegas or Atlantic City. You decide to play roulette. The table has a $5 minimum bet and a $5,000 limit, which happens to be your total bankroll. If you place a $5,000 bet on red, you should not be surprised if you immediately lost your $5,000. On the other hand, if you made only $5 bets, you could play for a long time and probably not lose very much at all.”
This comparison is as applicable as it is understandable – in commodity trading, your risks will relate to your returns. Investments of a few hundred dollars can be made over and over with only the risk of a few hundred dollars, while a seventy thousand dollar trade is a seventy thousand dollar risk. Of course, the returns are comparable as well – a hundred dollar investment may garner a fifty or even seventy-five dollar return, but a seventy thousand dollar return could nearly double, turning itself into a hundred and twenty thousand dollars – if, of course, your instinct proves correct.
The Business of Trading
Most people are more than a little shy of taking such risks, although a few are so drawn to it that they do it over and over again whether they make a profit or not. There are, however, alternatives to the skydiving lottery-card trading done by so many. The most notable of these options is the mentality of running your trading like a business, with similar attitudes towards investments, returns, risks, and evaluations. A business does not generally make a huge rash decision such as buying a dozen suckling pigs to raise in the back of a coffee shop; rather, a successful business will examine itself, its customers, and its needs, and buy and sell accordingly.
The gambling analogy is again useful here, as we consider the actions of a profitable business. If a successful business, say a sandwich shop, has $3,000 dollars to invest in itself, it is not likely to shoot the entire wad on the newest expensive brands of olives or salami. Commodity Trading is not about staking every penny on a hopeful product and praying that every customer will be dying for the taste of new Olivia’s Marinated Olives; a wise commodity trader spreads his assets throughout a number of promising ventures, out of which at least one is likely to pay off.
Tools of Traders
The most important asset of a commodity trader – besides, of course, a strong stomach and an ability to cut your losses – is a good sense of marketing trends. The best way to easily access an instant summary of current market trends is with price data from a source such as The Wall Street Journal or Investor’s Business Daily. These Charts generally show a bar graph summary of current prices, including the daily high and low for a given commodity.
Following these charts over a period of time is key to understanding the price trends for any given product – by looking at the highs, the lows, and the influencing factors, one may get to know a commodity and its market value well enough to make reasonable predictions for its future. The Internet is also an excellent resource – there are both available charts and resources to create your own based on data. With these figures in hand, your understanding of the market will continue to grow, with your chances of making a good return growing along with it.
Why Trades Fail
As the beginning commodity trader learns to watch product markets, chart ascents and declines, and negotiate with other traders, one sobering figure still looms in front of him: as many as 95% of commodity traders eventually lose money, often in significant amounts. His chances of succeeding, however, are much higher if the trader examines an important thing: why those who lose money lose.
Because commodity trading is a high-risk (albeit potentially high-gain) venture, it is not something to be taken lightly or as a hobby. Commodity trading is a business. Trading based on “instinct” may be exciting, but it is also a good way to lose massive amounts of money. Trading based on careful planning, however, is as wise as it is boring – and much, much, more likely to turn an insightful trader a profit.
Mark Douglas, a Trading Psychology Expert, points out: “Most people like to think of themselves as risk takers, but what they really want is a guaranteed outcome with some momentary suspense to make them feel as if the outcome had been in doubt. The momentary suspense adds the thrill factor necessary to keep our lives from getting too boring."
It is precisely this obsession with attractive risks that causes so many to make foolish decisions in commodity trading. A trader goes on a hot tip, an instinct, a loud newspaper article, an exciting lead, and forgets to follow the tried-and-true rule of market observation and study. These ways, however, if followed, are almost unbelievably true to form – although even the best trader loses money sometimes, what makes him the best trader is that he makes even more.
Learning the Trade
One note that is important to remember, particularly with beginning traders, is that trade is not a beginning level skill. One cannot jump into the world of commodity trading and expect to be immediately good at it – like riding a bicycle or walking a tightrope, it takes careful training, time, and observation. There are several good ways to learn more about the fine points of commodity trading, but in the end, the truly expert trader is honed by experience.
A good way to get a crash course in trading, with insider tips and tricks, is to learn from another trader. Someone who has been playing the market for a while will be wise to many beginner mistakes and mishaps – often because he has made them himself. Another way to learn, of course, is to make those mistakes, and improve your investments through experience. This is an important advantage of starting slow – by making small investments of only one or two hundred dollars, and paying close attention to the results, more can be learned than is ever taught through second-hand stories.
Tips & Tricks of Expert Trading
Perhaps the most simple and profound of insider trading rules is to stick by your system. It needn’t be a complex system; in fact, the best standards for trading are often the simplest ones. The important one is to do your research, develop your system and stay consistent with it in all your transactions. This consistency will prove a double-edged sword in trading; first, it will minimize your losses, and second, it will prove your formula with your gains.
A trader who jumps from method to method trying to find one that works never knows if their losses or gains are because of the system he was currently employing, or because of some unpredictable whim of the market. A trader who is consistent, on the other hand, has multiplied perspective when it comes to understanding the commodity trends and what causes them. Remember that in the actual world of free trade – capitalism in general – the formulas in books won’t always (or even often) work; the best way to find the best system for you is to create it yourself.
Getting the most from your Commodity Trading
So, how do they do it? How do the successful traders make their millions? The answer is not simple, nor can it be summarized in a paragraph, but there are a few key things to keep in mind when bent for success in the world of commodity traders. Self-control, discipline, patience, and consistency will get a trader much farther than good instincts or hot leads.
There are several things to keep in mind when making the trades that will make you rich: 1) the amount of your investment, 2) the commodity you are investing in, 3) the potential losses and how to cut them, 4) the potential gains and how to multiply them, and 5) the trends of trading. The first item, the amount of your investment, may vary greatly – from only a few hundred dollars to a few hundred thousand. It is wise to start small, but remember, the greater your investment, the greater your potential for success – mostly because there is more room for error.
More Tips on Commodity Trading
The commodity you are investing in is also important, and tied in to the other factors – whatever that commodity is, whether it is wheat or plastic or comic books, it is essential to have a comprehensive understanding of the market history and the likely future. This summarizes the trends of trading: the clues that tell us what is likely to happen to any given commodity. Finally, there are your gains and losses; in general, it is best to jump on losses and cut them short rather than hoping for a comeback; while if you are beginning to profit, attempt to snowball it as much as possible to maximize your gain.
With these tips and tricks, you are well on your way to an understanding of commodity trading. As mentioned before, of course, the best way to learn is through experience; what is true on paper is only an inkling of what it is actually like to trade. With experience, patience, and a good plan, a commodity trader can do what most people only dream of – turn their straw into gold, and make small investments into big capitol.
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