Commodity Trading - Advantages and Disadvantages
What Is Commodity Trading? Commodity futures markets allow commercial producers and commercial consumers to offset the risk of adverse future price movements in the commodities that they are selling or buying. In order to work a futures contract must be standardised. They must have a standard size and grade, expire on a certain date and have a preset tick size. For example, corn futures trading at the Chicago Board of Trade are for 5000 bushels with a minimum tick size of 1/4cent/bushel ($12.50/contract). A farmer may have a field of corn and in order to hedge against the possibility of corn prices dropping before the harvest he might sell corn futures. He has locked in the current price, if corn prices fall he makes a profit from the futures contracts to offset the loss on the actual corn. On the other hand, a consumer such as Kellogg may buy corn futures in order to protect against a rise in the cost of corn. In order to facilitate a liquid market so that producers and consumers can freely buy and sell contracts , exchanges encourage speculators. The speculators objective is to make a profit from taking on the risk of price fluctuation that the commercial users do not want. The rewards for speculators can be very large precisely because there is a substantial risk of loss. Advantages of commodity trading Leverage. Commodity futures operate on margin, meaning that to take a position only a fraction of the total value needs to be available in cash in the trading account. Commission Costs. It is a lot cheaper to buy/sell one futures contract than to buy/sell the underlying instrument. For example, one full size S&P500 contract is currently worth in excess off $250,000 and could be bought/sold for as little as $20. The expense of buying/selling $250,000 could be $2,500+. Liquidity. The involvement of speculators means that futures contracts are reasonably liquid. However, how liquid depends on the actual contract being traded. Electronically traded contracts, such as the e-mini's tend to be the most liquid whereas the pit traded commodities like corn, orange juice etc are not so readily available to the retail trader and are more expensive to trade in terms of commission and spread. Ability to go short. Futures contracts can be sold as easily as they are bought enabling a speculator to profit from falling markets as well as rising ones. There is no 'uptick rule' for example like there is with stocks. No 'Time Decay'. Options suffer from time decay because the closer they come to expiry the less time there is for the option to come into the money. Commodity futures do not suffer from this as they are not anticipating a particular strike price at expiry. Disadvantages of commodity trading Leverage. Can be a double edged sword. Low margin requirements can encourage poor money management, leading to excessive risk taking. Not only are profits enhanced but so are losses! Speed of trading. Traditionally commodities are pit traded and in order to trade a speculator would need to contact a broker by telephone to place the order who then transmits that order to the pit to be executed. Once the trade is filled the pit trader informs the broker who then then informs his client. This can take some take and the risk of slippage occurring can be high. Online futures trading can help to reduce this time by providing the client with a direct link to an electronic exchange. You might find a truck of corn on your doorstep! Actually, most futures contracts are not deliverable and are cash settled at expiry. However some, like corn, are deliverable although you will get plenty of warning and opportunity to close out a position before the truck turns up. Tim Wreford operates Online Futures Trading, a website that provides information and resources for traders. Tim also provides an article detailing the development of a day trading system, the results of which are updated daily on the site. |
Other Trading System Articles
The Demand for Water and Water Privatisation On TV recently you have Indian villagers complaining that coca cola had built a bottling plant in their region and were using all the water from the underground aquifer, leaving the farmers and local population without water. Only the local bureaucrats that collected the taxes seemed happy with the situation. Water infrastructure in the developi ...What is Link Trading and How Do You Trade? Link trading is the task of getting links to your site on other sites by trading.. umm.. links. This is done to get more traffic to you web site. Link trading creates more traffic in two main ways, increased search engine rankings and also from the traffic the links themselves generate from people clicking on them.Link Trading and Search ...How to Quit Your Job Do you to know how to quit your job without ending up on the street? In a nutshell, you need to avoid the self-employment trap, think like a business, and create multiple passive revenue streams.Avoid the Self-Employment TrapIf you quit your job and hang up your own shingle, you might work harder for less money. You may enjoy worki ...How to Treat your Arthritis Naturally How to Treat your Arthritis Naturally Arthritis is pain in the fingers, knees, elbows, hips jaw-any place in the body where there is a joint between bones. It can be very painful. This because joints are surrounded by many nerves and the nerves are needed to make the complicated joints work properly. There are many forms of a ...Automated Wealth Forex Signals Unless you are already a full-time trader, or unable to access a computer 24 hours a day, it’s difficult to trade forex on a part-time basis. Many forex brokers and independent companies have developed trading systems that offer forex signals telling the user when to buy and sell. The execution of a trade could be as simple as pressing a butto ...Currency Trading Success - The SIMPLE Reason Why Most Traders Lose! The reason most traders lose and never achieve currency trading success is often seen as a lack of discipline, however this is not the major reason, it’s only a minor part of the problem.The major reason is a lack of “concentrated focus”, this takes some explaining (as most traders are unaware of it) so let’s look at it in more detail. ...Choices for Cosmetic Dentistry Modern dentistry has devised a number of ways to provide treatment options for people looking for teeth enhancement procedures. Methods may range from simple teeth whitening up to bracing and bridging. Some of these methods are discussed in the following sections of this article.Teeth whitening Teeth whitening basically employ peroxid ...Valuing Stocks Using Valuation Ratios Valuation means assigning a ''proper'' value, or price, to a stock. The quote marks around ''proper'' remind us that while the word implies that there is a single ''correct'' price, in fact the concept is theoretical. Valuation is nevertheless an important guide to what price at which to buy or sell a stock. If you pay too much for a stock—more ...Arbitrage Trading Reviewed 2006 I am sure many of you have never herd of sports arbitrage trading, or know very little about it. If you are into making money working from home or are looking to make extra money working out of your house you can accomplish this with arbitrage trading.So what exactly is sports arbitrage trading? That’s a good questions that many fi ...Stock Trading Signals, How to Buy, When to Sell Many of us spend years looking for the holy grail trading system. Signal services can be a great way to use someone elses carefully developed system. By following a trading system, market condition will at times be favorable to buy and at other times be favorable to sell. Clearly defined conditions give 'signals' that the educated investor can ...The Viking Age The raid on the Christian monastery of Lindisfarne in 793 began a new era in the history of Europe. The attack was a big shock for the rulers of Brittany and the rumors about the fearless Nordic men quickly spread over Europe. No matter what was the course but the North people started moving outside Scandinavia in the end of the 8th century and ...Card Trading: Risks and Precautions You can trade your cards in two different ways: face to face, or by postal mail. The first type of trading is performed at tournaments, at schools, or at the local comic shop, and you arrange the trades by checking the other person's cards directly, holding them in your hands. Otherwise, cards are traded by mail when the parties can not meet bec ...Nicolas Darvas: 1955 - 1960 What do I Like About Nicholas Darvas?Where do I start? I consider Nicolas Darvas the BEST trader, or as he him-self said "investor" in the world. I'll admit one man's poison is another man's medicine. You cannot really define what is the world's BEST trader. It's my opinion.Why? You must, absolutely MUST, read, re-read, study and t ...Beginner Day Traders - Easy Money? In day trading you are pitting your wits against every other person in the market. Every dollar you make is on the back of someone else's losses.Every losing trader has failed at trading. Every successful trader has also failed at trading in their past.It is a very rare individual that can make money off capital loaned - the psycho ...How You Could Take The First Step To Become Financially Free Like the majority, I have been working very hard each day believing that the harder I work, the more money I would get. I would bust my proverbial butt out working year after year slaving away for BOSSES who show little sign of appreciation, to earn a paycheck that could hardly pay my bills.After some trying and tiring years, I realized t ...Do you Love your Cup of Tea? Tea is the most commonly used beverage across the planet earth, it is indeed second to only water. And it is easily available from any grocery shop, easy to make and easy to relish with or without snacks. But is this the only reason that we all are more or less accustomed to drink tea? No, not for me, tea is a lot more for me then just a drink ...Poker Winnings - How to Play for Millions in Profits Quickly If you are a good poker player, you already have the skills to play a different game - one that offers far bigger rewards for the skills you have.So, what is the game? - Trading financial markets such as currencies, which is an area that many poker players excel in - many of the world’s greatest traders are poker players too!My fir ...Geocaching -- The Technology Behind "The Hi-Tech Treasure Hunt" It all started on May 2, 2000 with the removal of selective availability by the White House. (Selective Availability is the intentional modification of GPS signal to degrade accuracy of readings) At that moment, the GPS receiver became 10 times more accurate.GPS, or Global Positioning System is a navigational system which operates through ...The Mind Game of Day Trading "If you have no confidence in self, you are twice defeated in the race of life. With confidence, you have won even before you have started." Marcus GarveyThe first step in controlling fear is to face it. If you are not willing to face your fear, then fear, not you will control your life.Courage is moving ahead even thoug ...Never Lose at Sports Betting or Gambling Today millions of people are gambling online and placing sports bets online. Some win and some lose. I don’t know about you but I always dreamed that I could never lose and just make money. I never had luck at gambling or sports betting. That is why I tried to stay out of casinos, and the horse track. I was always wasting my money, and blowing i ...Does Arbitrage Trading Work? If you are reading this you must be interested in working at home or Arbitrage Trading. When most people think of work at home they think sitting at home doing nothing while the money just roles in. Well that is why 99% of people trying to work from home fail. The money doesn’t just role in. It still takes work and its still a job. ...Can Car Insurance Be Affected By Your Bad Credit History? If you have bad credit you can be denied car insurance! The protections afforded to the consumer since the Depression of 1929 no longer exist. The Financial Laws passed through Congress in 1992 allowed banks, insurance companies, investment firms to handle banking, insurance and investment operations. Laws passed after 1929 had prevented banks f ...Dxinone E-currency Trading E-currency trading is growing into a worldwide business. If you are looking for a growing business that will never let down E-currency is a great one. Dxinone is a very confusing system for a person that has never seen or used it before. If you have no idea how to sign up or start to fund your account you will miss out on a very go ...Selecting Rules for Investing and Trading There are three important differences between investing and trading. Overlooking them can lead to confusion. A beginning trader, for example, may use the terms interchangeably and misapply their rules with mixed and unrepeatable results. Investing and trading become more effective when their differences are clearly recognized. An investor’s ...Merrill Bullish on Vietnam Because of its thinly traded market and lack of investment options, global investors often overlook Vietnam’s potential. Not Merrill Lynch.Merrill Lynch has acquired a coveted "trading code" needed to buy and sell shares directly on Vietnam's small but growing stock market. Merrill Lynch obtained the right to directly hold Vietnamese shar ...Home Security Home security is an issue to which we all need to give considerable thought. The combined amount of money lost in the 2.1 million burglaries in 2003 was 3.5 billion dollars. According to the FBI, 65.8% of these burglaries occurred at personal residences. You need to understand how to formulate proper home security. This understanding include ...Condom Sense: Condoms and the Environment So you are smart enough to practice safe sex (preventing both pregnancy and STDs) by properly using a condom. But what do you do with the condom when you are done with it? Here are some hints on environmentally-friendly condom disposal.Firstly, don’t flush your condoms, ever! Flushing condoms is not the way to deal with them. Condoms ...Precision Money Management This article describes the model of a natural relationship between trading system performance, trade position size, stop loss settings and profit goals. The model consists of algebraic equations that specify the trade size and stop loss settings needed to meet profit goals over a specified time period for any consistently used trading system fo ...Stock Trading Secrets? How often have you come across an advertisement or e-mail proclaiming to "teach" you the stock trading secrets that Wall Street Insiders don't want you to know? Usually included in the descriptions of these trading products are claims such as "Make 10K monthly in minutes per day", or "Learn the secrets of Professional Stock Brokers", etc. etc. S ...What is Expectancy? I have been watching as a several people on a forum discuss, argue and lend their ideas about entry techniques. They are going crazy over what the proper entry should be and why one chart pattern is better than the other. One person has even said how they purchased massive amounts of software to help them enter the market. Now don’t get me wrong ...Analyze Your Stocks And Double Your Profit An investor buys a share of stock by resorting to various approaches that validate his investment by reaping rich profits. Before investing, however, it is necessary for a value investor to study the financials of a business, so that the stock he buys at the company’s intrinsic value promises a greater return at its liquidation value (the value ...
|
