Trading in Commodities - an Introduction
Introduction
In the early 1970s, Richard Dennis borrowed 1600 dollars and reportedly turned it into a $ 200 million fortune in about ten years, trading in the commodity market.
Many people have become very rich in the commodity markets. It is one of a few investment areas where individuals with limited capital can make extraordinary profits in a relatively short period of time.
However, because most people lose money, commodity trading has a bad reputation as being too risky for the average individual. The truth is that, just as any other investment option, commodity trading is only as risky as you make it.
If you are disciplined, treat your trading like a business and are willing to settle for a reasonable return, the risks are acceptable and the probability of success is very high.
What is commodity trading..?
If you are a farmer growing cotton and you are worried that the price of cotton might fall by the time it is ready for harvest in 3 months, you could enter into a contract with a buyer to sell your produce at an agreed current price. If in 3 months time, the actual price of cotton goes up, you lose the opportunity to have made a higher profit; however, if the price of cotton falls in 3 months time, you have secured a higher price for your produce
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On the other side of the transaction, there would be a textile mill owner. He is probably concerned that the price of cotton would go up in three months and would want to secure his price at the current rate. He would then enter into a contract with you to buy the cotton at a current price; and regardless of how the price of cotton moves in the next three months, he would only pay the current price for his future purchase.
The fundamental difference in trading commodity in an exchange - also known as futures - is that when you trade in commodity, unlike in other investments such as stock or bonds, you do not actually buy anything or own anything. You are only speculating on the future direction of the price in the commodity you are trading.
Risks & Rewards of Commodity Trading
Risks and rewards are always related. As risks increase so do the rewards. Most people are averse to risks - especially financial risks.
Commodity Trading is a highly risky business - even for the professionals. And many people have lost loads of money.
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While it is true that trading in commodity is risky, it is left to the individual as to how he wants to operate. One can trade in commodity and risk as little as 100 - 200 dollars on individual trades. If you take big risks in an attempt to get rich quickly, you may go bust big time. Greed is a cardinal sin - and it is especially true in commodity trading.
Losses are an inherent feature of trading - you just may not be able to avoid losses by careful trading - the parameters that effect the markets are far too complex.
But in the long run, despite some losses, prudent traders make more than they loose.
Going to the Market
If you decide to enter the exciting field of commodity trading, prepare yourself to take it seriously and more than just as a hobby. You have to be both patient and disciplined and most importantly, persistent. |
The first thing to do is to define your risk capital. Risk capital is defined as the money you can afford to lose without effecting your standard of living. It should be the money you are comfortable risking, and you are not afraid of losing.
You have now to figure out how you will make your actual buying and selling decisions, when you will enter the market and when to exit and which market you will trade.
And always remember the golden rules of trading -
• Trade with the trend
• Cut losses short
• Let profits run
• Manage Risk.
The Markets You Trade
• Currencies : Yen, Euro and Pound Sterling
• Energy Sector : Crude Oil, Heating Oil and Natural Gas
• Food Sector : Coffee, Orange Juice and Sugar
• Metals : Gold, Silver & Copper
• Agriculturals : Corn, Oats, Soybeans and Cotton |
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Commodity Trading in Middle East
The Dubai Gold and Commodities Exchange (D GC X), The Exchange was inaugurated on November 22nd, 2005 by His Highness Sheikh Mohammad bin Rashid Al Maktoum, Vice President and Prime Minister of UAE and Ruler of Dubai. In such a short span of time, D GC X has made itself known not only in the financial and commodity circles in the Middle East but also in other major financial hubs across the globe. The Dubai Gold and Commodities Exchange (D GC X) is a fully automated, online commodities and currencies exchange. Strategically located in Dubai , the exchange is the first international commodities derivatives marketplace in the time zone between Europe and the Far East .
D GC X is a joint venture between the Dubai Multi Commodities Centre, Financial Technologies and Multi Commodity Exchange of India Ltd. At present D GC X offers its members and their clients to trade in Gold, Silver, Currency and Fuel Oil futures. This will be followed by options on gold and silver futures. A diversified range of commodities such as steel, jet fuel oil, freight rates, pulses and cotton will be introduced for trading as the exchange progresses further.
Souq Scan wishes you happy trading.
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