We’ve defined commodity as any article whose trading value lies in its raw form before it is even manufactured into a more refined and finished product.
Let’s cite a clear example. Crude oil in its raw form is a commodity which is processed into gasoline as a finished product. Likewise, you have currency futures, which are derived from the exchange rates of spot forex markets.
This brings us now to futures on energy commodities. If you want two of the most popular energy futures, would the thought of crude oil and natural gas steam you up? Would you warm up to the idea of a third alternative which is heating oil?
Search online and you would find a wealth of energy product listings which enumerate an assortment of energy commodities you can trade with.
Aside from crude oil and gas, have you considered ethanol, electricity-related commodities, or other green environmental products?
The pros and cons of energy futures
Energy futures satisfy our requirement of being very liquid and trendy. There is so much activity in the fuel market, and everyone’s so interested in its current prices. The prospects are good and the future’s looking up for sellers because fuel buyers and oil manufacturing companies are here to stay.
The downside to it is that most energy futures are large-sized. Such huge investments are not ideal for low-budget traders, especially beginners. Your winning edge, though, would be your perceptive grasp of world politics, global economy, and other international issues.
Such issues directly affect how the prices of energy commodities fluctuate. Thus, energy futures are a volatile yet exciting venture to make if you know how.
How energy futures contracts are trending
Volatile as energy futures are, they continue to trend up and climb higher. Seldom peaceful, the oil-rich Middle East and its neighboring territories dominate the playing field. Crude oil futures are able to trade at $90 per barrel and beyond the hundred mark. Prices can trade up $4 one day then plunge $3 the next.
As for natural gas, the commodity and its price are not as volatile. The trends are more long-term depending on how mild or harsh the weather is.
In the previous chapter, we’ve become more aware of how commodities can be bought and sold at an agreed price by means of futures trading. The trade is based on the premise that the commodity will be delivered on a future date which has already been specified.
The meaning behind a commodity
At this point how would we define a commodity?
The word trade is as old as time such that anything which can be exchanged is practically called a commodity. But in the financial world, the word commodity takes on new meaning. It refers to raw materials more than finished products.
Defining commodity futures
In futures trading, the term commodity futures can be defined as contracts where one party buys or sells a commodity from or to another party at a set price. There is a specified quantity agreed upon, and both parties are obliged to settle the contract by cash on a fixed delivery date.
Learning more about commodity futures contracts
You have to know more about how commodity futures operate and how the market behaves, whether you are a buyer or a seller.
Farmers who are the commodity producers and food processing companies who are the commodity buyers all use futures contracts. It assists them in securing the current market price for their goods.
For any farmer, such a move protects him when prices fall unexpectedly before harvest time. Because agricultural prices trend and tend to fluctuate, a commodity futures trader would speculate on a good price hoping to make a great profit.
The word “speculate” again crops up. Because it matters that you do your speculations well, we’ve devoted the next chapter to a discussion on it.
Commodity futures – their numbers and impact
As part of the futures industry, commodity futures significantly affect so many lives. With people numbering by the millions and billions, it exerts such a great impact on the world. Closest to home, it affects the food we eat, the clothes we wear, and the materials we gather for our shelter.
Wheat, cotton, and lumber would represent these needs, respectively.
It used to be that futures trading focused so much on agricultural products, but the market has been revolutionized into one that includes machinery, transportation, and currency, among others. They, too, affect how food gets distributed and how economies become more productive with exchanges and trades.
In such a growing industry, there are a number of additions to commodities aside from your typical agricultural grains and livestock. To date, cheese and skimmed milk products have just been recently added. The consumable edible oil, crude palm oil, has also slipped through lately.
Predicting commodity futures
When you talk about commodity futures, you are trying to predict the future direction of your commodity price as to whether it will go up or down. A commodity price can either go higher, lower, or remain the same as you look to the future.
This is where the challenge lies.
As a beginner trader, you have to make sure that the market you choose is one that is liquid AND trendy. Liquidity means it has high trading volume and much activity going on. It should also be an active market which trends up or down. Only then would you be able to hone your skills as a futures trader.
Futures trading requires practice so you should optimize on websites which offer free practice accounts on commodity futures. How can you resist such freebies when the market data are real but the money is not?
Once you’re ready for the real thing, you can fund an account and arrange the paperwork with a broker. From there on, you can select a market to trade with and a contract month to begin.
Choosing commodities to trade with
Food futures are a safe choice to being with. However in the futures market, they are less liquid and they have less trading volume. Metal commodities especially those of gold, silver, and copper are even better choices.
They are literally a goldmine for beginner traders to explore.
If you’re interested in trading with futures which are very liquid AND trendy, you can never go wrong with agricultural commodities like wheat, corn, and cotton. In a green and health-conscious society, oats, rice, and soybeans are also gaining good ground.
What exactly makes these agricultural commodities so liquid and trendy? Well, it’s the fact they they’re very much affected by variables like seasonal changes, climate conditions, and local production matters as to critically decide your profit in a major way.
Commodity futures despite the risk
Put futures and trading together, and they involve to a reasonable amount of risk. You will have to put up a margin, meaning a partial amount of your contract value.
Usually you would buy 10 percent, and then the rest could be borrowed from your broker. When the commodity price increases, you gain; when the price decreases, you lose. When you keep losing, your broker would issue a margin call which prompts you to add more money to your account lest the broker close out your transaction.
You can prevent this from happening by monitoring your position. Keep close tabs on the market to cut your losses. Close the transaction yourself when you’ve made a profit.