Introduction to Commodities and Futures: What are Commodities?

The terms “Commodities” and “Futures” are often used to describe commodity trading or futures trading. You can think of them as generic terms to describe the markets. It is similar to the way “Stocks” and “Equities” are used when investors talk about the stock market. To be more specific, this is what they really mean: Commodities are the actual physical goods like Corn, Soybeans, Gold, Crude Oil, etc. Futures are contracts of commodities that are traded at a futures exchange like the Chicago Board of Trade (CBOT). Futures contracts have expanded beyond just commodities; now there are futures contracts on financial markets like the S&P 500, T-notes, Currencies and many others.


Commodity: Grains

Many of the grain commodities have been trading on futures exchanges have been around many decades and they are some of the most active markets to Trade. They tend to be most volatile during the summer months as whether can be a big market mover.

1. Corn
2. Soybeans
3. Wheat

Commodity: Energy

Used to power and fuel the country, the energy commodities are very popular futures markets to trade as many witness their uses and prices daily.

1. Crude oil
2. Gasoline
3. Heating oil
4. Natural gas

Commodity: Metals

The metal commodities maintain a couple of roles. The precious metals are used as an inflation hedge. They are also used for industrial purposes, construction and even photography.

1. Gold
2. Silver
3. Copper

Commodity: Softs

The soft commodities consist of many food products and also some industrial materials.

1. Coffee
2. Cocoa
3. Sugar
4. Cotton

Commodity: Livestock

The livestock commodities consist of meat agricultural products. They can often develop some reliable trending patterns as breeding and herd statistics give you a good idea of production numbers months in advance.

1. Cattle
2. Hogs

Futures Contract:

December 2007 Corn, which is a contract of 5,000 bushels of corn that trades at the Chicago Board of Trade with a contract expiring in December 2007. A hypothetical price for this contract might be $3.60 per bushel.

How do Futures Work?

Futures are standardized contracts among buyers and sellers of commodities that specify the amount of a commodity, grade / quality and delivery location. Commodity Trading with futures contracts takes place at a futures exchange and, like the stock market, is entirely anonymous.

For Example: the buyer might be an end-user like Kellogg’s. They need to buy corn to make cereal. The seller would most likely be a farmer, who needs to sell his corn crop. They create a contract of December Corn futures at the current market price. A contract of corn at the CBOT consists of 5,000 bushels. Therefore, the farmer would have to deliver 5,000 bushels of corn to Kellogg’s in December at a designated location.

Making Money in Futures!

A speculator is someone who invests in a business with the goal of turning a profit. In the case of commodities, speculators are traders who try to buy futures low and sell them high to Make Money. The reason why speculators can do so with futures is that traders aren’t required to hold the futures contracts for the duration of the contract; they can buy or sell anytime they want. So, to use the Kellogg’s example above, a speculator could buy the corn contract from the farmer at a certain price, then wait for the price of corn to go up before selling the contract to Kellogg’s, even if the contract won’t come due for another couple of months, turning a Profit in the process.

Players Involved in Commodities Trading!

There are three different types of players in the commodity markets:

Commercials: The entities involved in the production, processing or merchandising of a commodity. For example, both the corn farmer and Kellogg’s from the example above are commercials. Commercials account for most of the trading in commodity markets.
Large Speculators: A group of investors that pool their money together to reduce risk and increase gain. Like mutual funds in the stock market, large speculators have money managers that make investment decisions for the investors as a whole.
Small Speculators: Individual commodity traders who trade on their own accounts or through a commodity broker. Both small and large speculators are known for their ability to shake up the commodities market.

How to Start Trading Commodities?

In Order to Trade Commodities, you should educate yourself on the futures contract specifications for each commodity and of course learn about trading strategies. Commodities have the same premise as any other investment – you want to buy low and sell high. The difference with Commodities is that they are highly leveraged and they trade in contract sizes instead of shares. Remember that you can buy and sell positions whenever the markets are open, so rest assured that you don’t have to take delivery of a truckload of soybeans.

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Lights of the Stock Market!

There Are Red Lights, green lights, blue lights and spot lights. There are orange lights, pink light and flash lights. There are search lights and micro lights. And the one you must obey is the stop light.

If you don’t stop when the light is red you could easily have an accident and lose everything you have, even your life. These different types of lights alert us to possibilities and dangers. Is there a light that goes on that tells us whether the Stock Market is going up or down; one that is green to invest or red to sell? They aren’t very obvious, but they are out there. You only need to become aware and learn when the signal flashes.

It doesn’t take long to learn to drive an automobile, but it does require much more skill to handle an 18-wheeler. The professional driver has taken to time to learn his profession. He knows what all the lights mean. Not only the red and green, but the yellow and blue as well. There are also many light signals inside the cab that he must be aware of all the time if he is to have a safe passage.

Stock Market Signals may not be red or green or any color at all, but they are there and are obvious to one who wants to learn. The one who wants to learn is the investor who wants to protect his capital from loss and to make enough money to retire in a comfortable life style.

The most obvious signal is the 200-day moving average! You can find one of the best market signals printed every day in the Investor’s Business Daily Mutual Fund Index. When the index is above the 200MA line you are in the green and should to be invested. When it is below the 200MA line you the red light is on and you want to be in a Money Market Fund. When those signals flash and you learn to act you will become very wealthy over the next 10 to 20 years. You will not lose your money when the market is going down.

It you take the time to go back in history, say 20 years and treat the S&P500 Index as a dollar value you will quickly see that buying and selling on this simple method would have made you a ton of money. No, there is not very much trading involved. You will only be buying or selling about once each year. It will not take much of your time and you will sleep better, especially when the market is crashing and your money is safely tucked away.

Currently the green signal is on to be invested according to the IBD Mutual Fund Index. The red signal will come on that tells you it is time to sell when the index plunges below the 200MA line. Pay attention to the signals. You don’t want to lose everything!

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A Professional Stocks and Forex Market Trader
Dan A.