Commodity Trading Tips: Learning the Basics

commoditytradingtipsInvesting is risky. For every success story, there are likely to be 10 or more investors that failed miserably in the investment world. While some investments, such as bonds and mutual funds, are considered relatively stable, other markets are extremely volatile. One of these markets is known as the commodities trading market. You can quickly make significant amounts of money, but you can also lose even more money just as easily using this exciting, yet challenging, investment vehicle.

If you are unfamiliar with investing, commodities trading is not the best place to start. As you will learn in this article, there are many aspects to trading commodities successfully that are simply not present in many of the more “traditional” investment vehicles. To familiarize yourself with some investing basics, consider checking out An Introduction to Stocks, Futures, Forex & Options Markets before diving into commodities.

That said, the commodities market has historically had a significant economic impact around the world. Wars have been started based on commodity shortages and over supplies have practically decimated regional economies in the past. Despite the volatility and importance of the commodities market, many people trade futures on a daily basis and some are very successful doing it.

What is a Commodity Anyway?

Commodities are the raw materials required to keep economies around the world in motion. There are four primary categories of commodities currently traded on the market including:

  • Energy – This includes gasoline, heating oil, natural gas and crude oil.

  • Livestock and Meat – Lean hogs, pork bellies, live cattle and feeder cattle are all included in this category.

  • Metals – Gold, silver, platinum and copper are all traded daily in the commodities exchange.

  • Agricultural – This category includes raw materials such as corn, soybeans, cocoa, coffee, cotton and sugar.

Basically, as a commodity trader you are anticipating the future price of these raw materials and attempting to profit from fluctuations in the prices of these items.

There are two types of investors involved in commodity trading. The first group is known as hedgers. These are typically large corporations that depend on a consistent and reliable price for basic materials. A good example is the airline industry. Typically, airlines purchase futures contracts on fuel to avoid any fluctuations in price.

The other group of investors is known as speculators. As a commodity trader, this is the type of investor you will be. As a speculator, you are not actually purchasing these items. Rather, you are purchasing contracts for these items which you later sell when you feel that the price of a particular commodity is on its way down.

As you can see in the airline example above, commodities are an important aspect of a healthy economy. Without set prices, the airline industry and many others along with it would fall into bankruptcy very quickly because of the volatility inherent to the energy markets.

You can learn more about commodity training in the Commodities course.

Learning to Trade

Trading commodities successfully is a skill that is difficult to master. It is not something that you can learn to do overnight and even investors with years of experience often make mistakes and can lose lots of money almost instantly.

There are a couple of ways you can improve your chances for success in this volatile marketplace. One of the best ways is to learn from a successful trader. If you can find someone who is successful in the commodity marketplace, you can learn a lot about real-world strategies that actually work. However, it may be difficult to emulate the tactics used by these experienced traders who often have much more available capital than you do.

Trial and error is one of the most popular ways to learn commodity trading. It is certainly not foolproof and there are a lot of ways to lose money very quickly in this volatile market. For instance, most futures trading is done using leverage. This means you might purchase a contract for $30,000 of corn at a set price; however, you only need to put up $1,000 on margin to make the trade. If the price of corn drops suddenly, you could be out for thousands of dollars that you may not even have available. This is why commodity trading can be extremely dangerous for beginners.

Online courses are another excellent way to learn more about commodity trading strategies that actually work such as the Learning to Trade Options on the Future Markets course.

Like most investment vehicles, commodity trading is best learned by a combination of real-world experience and knowledge gained from reading or attending investment courses. There is no certain way to do things that guarantees success. Only time and experience will teach you the skills you need to become a successful commodity trader.

Commodity trading has often received bad press because it is so volatile and risky. The problem isn’t with the system itself, but with uneducated investors who look at commodity trading as a “get rich quick” opportunity. Using leverage, these investors often get themselves into debt well beyond their financial means.

Once you understand how to use leverage properly, you might consider trying Forex trading as another way to diversify your portfolio as these markets also rely heavily on leverage.  You can learn more about Forex trading in FOREX: The Complete Trading System.

There is nothing wrong with trading commodities. As long as you understand the risks inherent to this investment vehicle, it can be a very lucrative opportunity. Avoid becoming a gambler in the commodity market. Make calculated decisions that are risk-averse whenever possible and diversify your commodities portfolio to include a variety of products.

By taking your time and gaining knowledge as you go, you could very well become the next great commodity trading success story.