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Commodity Trading – Chapter 2: Commodities Trading

By:
FX Empire Editorial Board
Updated: Mar 5, 2019, 13:14 UTC

This is chapter number 2 out of 13. Read the rest: Read Commodity Trading – Chapter 1: History of Commodity Trading A significant number of individuals

Commodity Trading – Chapter 2: Commodities Trading

This is chapter number 2 out of 13. Read the rest:

Read Commodity Trading – Chapter 1: History of Commodity Trading

A significant number of individuals have profited immensely from trading in the commodity markets. This is due to the fact that it is one of the few areas where a person with limited capital can make a large profit within a short period of time.

However, commodity trading has also developed a bad reputation as being risky for the average investor, because the majority of people who have dabbled in this market have lost money. The fact of the matter is that commodity trading will become risky only if you let it be! Meaning don’t trade more than you can afford to lose.

If you regard commodity trading as a business venture and treat it with the same seriousness as you would a normal business, it is likely that you will make good money. However, if you regard commodity trading as a “get rich quick” scheme, then it’s probable that you will take reckless risks and lose your money. Like all investments, you should always act prudently when it comes to commodity trading.

Commodity trading is actually in essence Futures Trading. However, in contrast to investments like equities and bonds, you do not actually buy or own anything when you trade in Futures. What you are in fact doing is speculating on the direction of the price of a commodity. When we use the term “Buy” and “Sell” in Futures trading, we are merely stating the direction of the Futures prices we want to take.

For example, a speculator in oil will buy oil Futures contract if he thinks the price is going to go up in the future. Conversely he will sell oil Futures contract if he thinks that the price is going to fall. For every transaction, there is always a buyer and a seller. Between them, no one actually owns the physical oil, just the contract to take delivery at a certain price at a certain future date. In addition, a speculator only needs to deposit adequate capital to cover any losses with the brokerage firm that he is dealing with before he trades in Futures contracts.

Apart from oil, there are also Futures for agricultural commodities, financial instruments, currencies, bond and stock market indices. Physical delivery of these commodities is extremely rare and in most cases, a trader will just offset his position before the expiration of the Futures contract. If he speculates correctly and the price moves to his benefit then he will profit, otherwise he will incur a loss. 

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