Commodity trading is not new; in fact it is older than the stock market. Commodities have been traded since ancient times, and for good reason. Unlike cash, commodities are not affected by inflation, and throughout time have held their value. Today commodities trade on various futures market. A futures market can be described as a continuous auction market where participants buy or sell individual commodities, currencies, and financial instruments at a specified price and a set delivery date in the future.
Advantage of Commodity Trading
Commodities have two key advantages over the stock market. First, commodity traders have the ability to leverage their money. In the stock market one has to invest 50000 dollars to own 50000 dollars worth of that stock. On the other hand commodities traders can leverage the same 50,000 worth of gold or any commodity for pennies on the dollar. Secondly, unlike a stock which can become worthless at any moment, commodities have material value and won’t go bankrupt.
What is a Futures Contract?
When investing in the stock market, you buy shares, in the futures market a contract is the smallest unit that can be traded. Different commodities have different contract specifications. A gold contract consists of 100 troy ounces, while an oil contract consists of 1000 barrels. A contract specifies the date, time, and place for a future delivery of certain commodity or good.
Hedgers are individuals or businesses who want to establish a price level for certain a product in advance to protect themselves from violent swings in the market. These positions protect them against unfavorable prices which can hurt them financially.
Speculators mission is not to take or make a delivery of a commodity, but instead to profit from the changes in price. They buy (going long) if they expect the price to rise, while (going short) if they believe the price will fall.
Buying (going long)
Investors buy or go long if they expect the price of the commodity to go up. If the price goes up, they profit because their contract specifies a lower price of the commodity than the current price. For example if a June gold contract has a price of 950 per ounce, and the price goes up to 970 per ounce. The trader buys his contract at 950 and then sells at 970, making a tidy profit.
Selling (going short)
Investors sell or go short when they expect the price of the commodity to decline. The mechanism for making a profit on going short is at first a futures contract is sold at a higher price than the current price. The profit is realized by buying a contract at the lower price. If the price of the commodity rises, the trader loses money on the contract.
Trading commodities can very profitable, but also very risky. Traders if not careful can be wiped out in before they realize what had happened. That’s why some investors use software to help them out. One such software is Gold Trade Pro. Gold Trade Pro has a clean interface and very easy to use. Created by an experienced commodity trader, Gold Trade Pro predicts 2/3 of the trades correctly. The program gives out audible alerts whenever to make a trade. Gold Trade Pro does not give out more then a few recommendations a day, which gives the trader more time to do other things. Overall it’s a good piece of software with a helpful eBook that explains gold trading more in depth.