How to Trade Commodity Futures

By: Sarah Carlye

The potential to make large profits in short periods of time contributes to an increasing number of people wanting to know how to trade commodity futures. At first glance it could seem too difficult and risky. Those who are loosing money tend to be a little more vocal about the evils of commodity futures than those who are busy making money. Further research and education on how to trade commodity futures will show that it is easier and less risky than it looks. Learning some typical steps that commodity futures traders use like how the trader’s decision-making process works, the process of making a commodity trade, and the procedures involved in actually placing the trade will make stepping into the world of commodity futures trading easier.

Before making decisions about when to trade commodity futures, a trader must have a source of price data. Many daily newspapers carry some commodity prices in their financial sections and there are business newspapers (Wall Street Journal, Investor’s Business Daily) that will have commodity price lists with more detail. Real-time prices can be found online. A price data source should have the following:

* Comprehensive commodity price listings
* Price tables
* Numerous price charts
* Real-time prices (online)

Experienced commodity traders don’t try to interpret tables of numbers, instead they look at price activity on a chart. In financial analysis, charts are essential for quickly understanding historical and recent price action. A typical daily price chart can show up to six months of price action. Chart time frames are easy to change. It can show historical activity for the following:

* Minutes/hours
* Days
* Weeks
* Months
* Two to twenty years

Following the current trend of prices is a essential to successful trading. Traders can make their own graph to be in close touch with price activity and assure close monitoring to reduce risk. Charts can also be obtained by a printed chart service. For computer owners there are many software programs that create detailed charts on the computer.

There are two primary analytic methods for deciding when to take a futures position:

1. Fundamental analysis-involves using economic data relating to supply and demand to forecast likely future price action
2. Technical analysis-involves analyzing past price action of the market itself to forecast the likely future price action

Opinions differ regarding the relative merits of the two approaches; a majority of successful traders emphasize technical analysis. There are a number of reasons for this. The main reason is the difficulty of obtaining accurate fundamental data. While various governments and private companies publish statistics concerning crop sizes and demand levels, these numbers are gross estimates without concrete documentation.

Technical analysts believe that since the most knowledgeable commercial participants are actively trading in the markets, the current price trend is the most accurate assessment of future supply and demand. A majority of all successful speculators learn to follow price action and not try futilely to predict turning points in advance. The speculators who are making money trade in tune with the large participants who move the markets.

The technician believes that anything that affects the market price of a commodity futures contract (fundamental, political, psychological, etc) is actually reflected in the price of that commodity. The conclusion is that the study of price action is all that is required. By studying price charts and the supporting technical indicators, the technician lets the market determine which way it is most likely to go. The chartist understands there are reasons why markets go up and down but doesn’t believe that knowing what those reasons are is necessary to make money trading commodity futures.

A computer will not make a bad trader into a good trader, but the information available on the internet can help a trader when learning how to trade commodity futures. Frequent trading is easy with a computer and restrain should be exercised. A computer can also give real-time prices to the trader and access to other related price information and charts.

Once a trader has consulted his price charts, applied his trading plan’s decision-making criteria, and decided to make a trade it is time to make the trade. The trader will contact the broker. The broker will enter the order electronically or call the exchange floor directly. Then, the order goes to the exchange trading floor in New York City. The transaction is confirmed and the verification is passed on to the commodity futures trader.

When learning how to trade commodity futures, research how the successful traders are making their profit.

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