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Learning To Trade Commodity Futures
by Ainsley Columbo
http://www.fsfuture.com
Many people see futures plastered all over the Business
section of a newspaper, but few people understand what is a
future and what it takes to trade these funny contractual
agreements. Understanding futures is mostly left to
financial experts and stock traders. However, futures can
be less complicated at trading than entering the risky world
of stocks. Bear in mind, if you're not on your toes,
trading futures can be very nerve wracking.
Some experts feel that the only true way to completely
understand future exchanges is to immediately immerse
yourself in trading low to moderate futures. This way you
can seek first hand the pros and cons. While you could
overload yourself about futures to the point that it won't
make you a better trader, you should have a basic grasp of
the pointers below:
1. Do you know how futures operate? Futures are agreements
in a contract approved by a trade commission - such as the
Chicago Trade Commission - for purchase of a commodity at a
specified time in the future, at a price agreed today.
The contract basically states that you'll buy a commodity -
such as agriculture, gold, currency, interest rates, stock
indexes and so on - at a certain price at a certain
date. Usually contracts are entered into with the intent to
trade the contract prior to the future date. Generally, the
commodity itself is not sold until the due date. When you
sell your futures contract, you hope to have accurately
pegged what will happen to that commodity in the real market
and hence make a profit.
2. Future's terminology is a bit confusing and extensive.
CBOT stands for the Chicago Board of Trade exchange where
futures are traded. Two groups purchase futures:
speculators and hedgers. Speculators are mostly the common
person who is speculating a future price and wants to buy
futures at a lesser price right now. However, hedgers are
mostly businesses that buy the future to make sure
commodities can be sold at a certain price and no less in
the future. Some futures are bought with puts or calls. A
put means the buyer anticipates the price in the real market
may go down, so he puts a set price on the minimum that the
future can be sold down the road. However, a call means the
buyer is anticipating the price to go up later on and
expects to sell the future at a better price later on for a
profit. Via put or call, both buyers ultimately hope to
make a profit.
3. Trading and selecting futures require math and
analytical skills. Futures are selected very strategically
based on how the buyer or seller anticipates the direction
of the market. Some traders look at supply and demand
called fundamental analysis. Other traders prefer to use
market trends and price chart patterns called technical
analysis. From these analysis, the trader seeks an
equilibrium price.
Many traders insist you can't truly appreciate trading until
you give it a try. The market is complex and your
personality plays a part in it. You can't expect to come
out smelling like roses on the first try. So, if you can't
afford to lose, you shouldn't take this kind of risk.
Markets can be volatile, so you should start out with low
risk futures such as options market or Eurodollar before
moving into more risky futures that quickly trade. You can
lesser your risk by buying at a premium (where the price is
fixed no lower than what you paid).
With some guidance, many people find that they enjoy trading
futures. Some people get this guidance through trading
groups or online sources.
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