Commodity Futures Trading - What To Keep In Mind To Be Successful
If you are considering going into and trading online commodity futures then do keep in mind that there is a large element of risk involved unless you reduce your risks and exposure with care. A such its sensible only to risk the capital that you can afford to lose and before doing anything take time to learn about futures trading to ensure your exposure is never more than it should be.
One good thing about trading commodities is that there will always be an intrinsic value in the product. So for example the value of a quantity of nymex gas or of crude oil is never going to be nil. Compare that to traditional stocks and shares and this is not so with them. Stocks and shares can indeed be valued at nil. Look at the number of company bankruptcies in the past 18 months to understand what I mean.
A common issue with trading in commodities however is that many traders carry with the commodity too much leverage. So for example, take a 100 oz. gold contract with a value of $1000 an ounce and thus a total value of $100,000. The margin or if you prefer - good faith deposit - to have 100 oz. of gold could be around 10% of the total contract value, which is $10,000.
Now this is where the problems begin to arise. A commodity trader who is being bullish on gold may think its a good time to buy into 10 gold contracts at a cost of $100,000 to their trading account. So if the price of gold were to move to $1100 an oz. then all is well and the money in the traders account doubles. But if the price of gold were to reduce by that $100 an oz. and provide the trader with a value of $900 an oz. then the trader would be wiped out unless they were in a position to meet a margin call from their broker and place further funds into their account.
Of course if things go well then the trader is well on the way to a very nice income from this investment. However by such exposure, any down turn in the market place could lead to serious losses and thus its seemingly more of a gamble than a calculated trade.
Trading online commodity futures does provide for advantages over the old way because keeping up to date with the market is simple and very fast. Its perhaps even easier now for the inexperienced trader to feel safe due to this online flexibility and speed of action and thus become over exposed in the first place. Leverage being offered by the broker is a great thing but only when used wisely so be sure to do things in moderation.
One good thing about trading commodities is that there will always be an intrinsic value in the product. So for example the value of a quantity of nymex gas or of crude oil is never going to be nil. Compare that to traditional stocks and shares and this is not so with them. Stocks and shares can indeed be valued at nil. Look at the number of company bankruptcies in the past 18 months to understand what I mean.
A common issue with trading in commodities however is that many traders carry with the commodity too much leverage. So for example, take a 100 oz. gold contract with a value of $1000 an ounce and thus a total value of $100,000. The margin or if you prefer - good faith deposit - to have 100 oz. of gold could be around 10% of the total contract value, which is $10,000.
Now this is where the problems begin to arise. A commodity trader who is being bullish on gold may think its a good time to buy into 10 gold contracts at a cost of $100,000 to their trading account. So if the price of gold were to move to $1100 an oz. then all is well and the money in the traders account doubles. But if the price of gold were to reduce by that $100 an oz. and provide the trader with a value of $900 an oz. then the trader would be wiped out unless they were in a position to meet a margin call from their broker and place further funds into their account.
Of course if things go well then the trader is well on the way to a very nice income from this investment. However by such exposure, any down turn in the market place could lead to serious losses and thus its seemingly more of a gamble than a calculated trade.
Trading online commodity futures does provide for advantages over the old way because keeping up to date with the market is simple and very fast. Its perhaps even easier now for the inexperienced trader to feel safe due to this online flexibility and speed of action and thus become over exposed in the first place. Leverage being offered by the broker is a great thing but only when used wisely so be sure to do things in moderation.
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