In this article, we will open the door to a new and mysterious world for many traders and investors. This world is sometimes shrouded in various myths, including people losing their homes in this market or being left with 5,000 bushels of soybeans.
Of course, we are talking about trading in the commodity markets.
But despite all these stories, trading in the commodity market does not necessarily mean increased risks, if, of course, the trader understands what he is doing and takes adequate measures. Rather, this market sector seems so mysterious and incomprehensible, because many traders simply do not know enough about it. Even the mere mention of terms such as “commodity futures” and “options contract” was enough to cause them a little confusion.
However, in reality, commodity markets are no more complex than other financial markets. And, over the past few years, there have been great changes in the financial world, which have opened the veil of the mystery of this market for most traders and investors.
Introduction to commodity contracts
I will tell you the same thing that I told my friends and acquaintances all these years: do not be afraid of commodity futures and options – they differ very little from other trading instruments. If you know how to trade stocks and stock options, then there is no difference when trading commodity futures and options.
For example, if you can buy and sell IBM stock and IBM stock options, why can’t you buy and sell sugar futures and options? This makes no difference. Once you have an idea of where the market might be heading (IBM stock or sugar) and the underlying fundamentals, then you have nothing to worry about.
As my 18 years of experience in commodity trading shows, the problem is that most traders do not fully understand the fundamentals of the commodity market — how and why the market for soy, cocoa, cotton or livestock moves in a certain way. Most people know how stocks or currencies behave and do not want to leave their comfort zone.
All transactions in the commodity markets are very well regulated. There are strict rules that are quite effective and guarantee the safety of trading capital.
Thus, if a trader or investor is considering expanding the range of their trading instruments by adding more potential profit to their trading portfolio, then consider commodity markets as such an opportunity.
Explosive movement in commodity markets
Let’s take a look at some examples of how explosive movement in commodity markets can be. To do this, just look at the movements of oil, natural gas, gold and silver over the past year:
When oil began to rally in 2007 and peaked in 2008 and then declined, the move could have generated a $ 90,000 profit on just one contract (on an up move). And the subsequent drop that ended last March would have generated $ 110,000 per contract (for a short position).
If the trader held 10 contracts during these movements, then he could have made a profit of more than $ 1 million! And, this is only in one direction. If the trader managed to go all the way in both directions, the profit would double.
An upward move in the summer of 2007 to the top of 2008 would have generated $ 85,000 in profit per contract, while a subsequent fall would have earned an even larger $ 110,000 trophy. And, this is when buying just one contract. Imagine if you had several contracts!
In the gold chart below, you can see an uptrend since 2002. But even if a trader entered the market only in 2006, then the movement could bring in the total $ 45,000 per contract.
A long position opened in 2006 would have earned $ 60,000 on just one contract. If the trader also opened a short position near the highs in the spring of 2008, he could have made an additional $ 65,000 just six months later.
This is a really good profit!
And, most importantly, it is quite normal for commodity markets to cycle from highs to lows and then back again. This gives us the opportunity to profit from both upward and downward movements. In this respect, commodity markets differ from the stock market, where most of the moves are biased upward.
Due to the changes that have taken place in the commodity markets in recent years, traders and investors can profit from this sector without abandoning their usual brokerage service.
These are commodity exchange-traded funds (ETFs) that follow the dynamics of the respective asset. So you can also use them to play some of the most popular and dynamic commodity markets.
For example, if you would like to participate in the movement in the oil, natural gas, gold and / or silver market, you could take these exchange-traded funds:
oil: United States Oil Fund (USO); natural gas: United States Natural Gas Fund (UNG); gold: Gold stocks (GLD); silver: Silver Trust Fund (SLV).
If you are looking to profit from the commodity markets, trading with the relevant exchange-traded funds may be the best option for you for the following reasons:
1. simplicity: Trading ETFs is similar to trading stocks or currencies, so you can buy and sell them like any company stock in a regular trading account. This way, you don’t even need to deal with commodity brokers, futures or options contracts.
2. options: ETF options are also available, suggesting greater leverage and reduced risk.
3. liquidity: Since these funds are the largest for the respective commodity instruments, there is sufficient volume to enable quick and safe entry and exit from the market.
Thus, if you take a closer look at the “mysterious” world of commodity trading, then it will no longer seem so scary to you. Exchange-traded funds (ETF) can be used as the simplest instrument for trading on the commodity market.