Commodity Trading

Across the world commodity trading activity takes place on a range of modern, regulated commodity exchanges. A wide range of commodities will be traded between end user buyers and producer sellers under the umbrella of standard contract rules and commodity trading regulations.

In effect world commodity exchanges facilitate the buying and selling of raw commodities ranging from crude oil, copper and wheat to platinum and orange juice.

Some commodities such as crude oil and coffee futures have been traded for a considerable long time in mature markets, but now in the early years of the 21st century we are seeing new markets and futures contracts being introduced.

These more exotic commodity classes include carbon in the form of emission permits. With the growing concern about the serious environmental threats from climate change caused by greenhouse gases, a rapidly growing market has developed in emissions permits, a form of activity known as carbon trading.

For the foreseeable future it is likely we will see continual growth of markets which place a price on the environment, with further development in emissions, plastics and perhaps even water.

The basis of commodity trading activity is the buying and selling of futures contracts for a whole range of commodities. While the nickel or cocoa producer will use commodity futures contracts to hedge their future sales, commercial end users will also use these contracts for hedging against sudden spikes in prices.

Yet these two actors in the commodity markets are dwarfed by the high activity levels of speculators or traders who move in and out of the markets trying to make profits.

A futures contract represents a specific type of contract either to buy or sell a specified quantity of a commodity at a price determined by supply and demand at time of contract, at an agreed date in the future.

Across the time zones of the world there are commodity traders active in the markets either using an electronic trading platform or on the floor of an exchange, called open outcry. Over recent years the volume of electronically traded futures contracts has increased significantly, as a number of exchanges have combined to form a super commodity exchange.

Inevitably, with the access afforded by the internet, a combination of an accessible online trading software package and up to date market data, commodity trading has gradually become more available to the retail speculator, who will usually trade with smaller amounts of capital.

Some traders will prefer to focus on a specific area of the commodities markets, while others look more at the price action and do not worry unduly about the fundamentals of supply and demand for raw materials or food.

With the opening up of the emerging market economies such as Brazil, Russia, India and China (or BRIC countries), we are likely to see a continuation of the growth in commodity markets in these nations. For example, Dalian Commodity Exchange in China has ambitious plans to develop beyond its current specialism in agricultural commodities, and move to industrial metals and more.

While in the Middle East, Dubai is a growing financial centre and the Dubai Gold and Commodities Exchange has an interesting product range including WTI light, sweet crude oil, steel, plastics, gold and silver and the Indian Rupee.

While the world economy has suffered some serious shocks following the credit crunch and slowing rate of growth, with a number of companies and even some countries getting into serious financial difficulties, commodities as an asset class would appear relatively unimpaired.

Despite the short term difficulties, the global economy will continue to rely on key commodities such as crude oil, steel and copper, as well as basic softs like sugar, cotton and coffee, not to mention grains such as wheat, corn and rice.

For this reason we can expect commodity markets to see through these problems and for commodity trading as an activity to continue to be at the centre of world trade and finance.

Author: William Davies
Article Source: EzineArticles.com
Provided by: Excise Tax

If there is a handier trading tool than the Commodity Channel Index I would be hard pressed to identify it.  Many day traders have flocked to using this indicator for it’s sheer versatility, if nothing else, and it’s following grows yearly.

The Commodity Channel Index (CCI) was introduced in 1980 by Donald Lambert as a way to chart cyclical turns in commodity prices.  I don’t trade commodities, so you are probably wondering why I would take an indicator and plug it into trading something like the financial indexes.  I wish I could claim to be the first one to do so, but that is far from the case.  Scores of day traders use the CCI to trade a variety of trading systems with excellent success, and I simply plugged the CCI into my system.  The fact of the matter is one of functionality, regardless of what the Commodity Channel was designed to do, it works well as a daytrading tool.  Functionality over form, I suppose.

So what, exactly, is the CCI in relation to day trading?

The formula to calculate the CCI is as follows:

CCI = ( Typical Price – SMATP ) / ( .015 X Mean Deviation )

Thankfully, you will not have to calculate the CCI by hand, unless you want to bone up on your mathematic skills, because most day trading charting program have the indicator included in their trading package.  Notice that the constant being multiplied (.015) to the Mean Deviation is a fixed number.  That is no accident, as Lambert found using .015 kept the majority of price action, specifically, 70-80%,  between the +100 and -100 lines.  I have actually written several programs where the constant is different than .015 and had some great success.  However, the .015 will work just fine for our purposes.

Lets talk some about “overbought” and “oversold” levels in the security you are trading.  Conventional knowledge would indicate selling out of an equity when it reaches an overbought level.  I tend to disagree with that analysis, as people (especially traders) are not the logical calculating cabal you might expect.  You see, I like momentum in trading, and when a security reaches an overbought level, daytraders who missed the trade tend to pile into to security hoping to catch whatever upward movement they may have missed.  Of course, this only adds to the upward movement, and the security continues along it’s merry way, further up.  Time and time again I have watched this phenomena.

Having said that, I define overbought and oversold as the +100 and -100 lines on the CCI.  Further, I define market noise as anything between the +100 and -100 lines.  Those definitions work pretty well for daytrading.  I realize that using these assumptions challenges some conventional thinking about the market.  But this model works well for my purposes as a scalper.  (a day trader who is looking to take small chunks out of a short term trend)

I am trying to avoid trading during periods of market noise, when the market is going through the tedious backing and filling process, and only trade when the market is breaking out or breaking down.  The CCI and it’s magical +100 and -100 lines gives me an excellent snapshot of when to trade.  By that, I am referring to overbought and oversold conditions.

In the formula above, the other constant is 20, and this indicates the number of time periods the program will use in the averaging process.  So the formula, to be clear, is using a 20 period average.  I don’t use 20 period averages when trading.   I generally set the time period to 16, sometimes as low as 10.  I have found that a quicker time period makes me more nimble in entering and exiting trades.  You may want to start at 20 time periods, and see if that number is a good fit for your trading style.

I don’t use the CCI as a stand alone indicator.  For that matter, I don’t use any indicator as a stand alone.  No, I find it important to use several other indicators to confirm buy and sell signals.  As a trader, I cannot put my trust in any single indicator.

To summarize, the CCI is an indicator that was developed to chart cyclical changes in the commodities market, and I fiddled with it’s settings and found it effective in trading the financial index markets.  The Commodity Channel Index has several constants in the formula, and I have chosen to alter those constants to fit my needs.   Finally, I have a set view on the market which is defined by the +100 and -100 lines on the index, and use the index to set my view as to defining the following terms:

1.  Market noise
2.  Overbought condition
3.  Oversold condition

Take some time and play with this indicator.  I think you will find it’s versatile and nimble in the markets and worthy of your attention.  Just don’t put too much stock in a single indicator, seek out the relationship of the indicator and price action and the synergistic relationship it shares with other confirming indicators.

I endorse a state of the art trading program for beginners at Trading Concepts, Inc It’s an awesome product that will have you well on your way to success. Plus, it has a money back guarantee…you have nothing to lose and thousands to gain.

Article Source:http://www.articlesbase.com/day-trading-articles/introducing-the-commodity-channel-index-1681810.html

One of the best decisions that you can make when expanding your investment portfolio is to put thought into commodity trading. Commodity trading is capable of providing asset allocation that is truly ideal, and is also capable of giving you a bit of an extra hedge against inflation because you are buying into something that has a great amount of global demand. Commodity trading is not one of the investment vehicles that people consider right away, so there is a decent amount of nervousness and apprehension associated with when to invest, where to invest and how to invest. While commodity trading is known for providing rather volatile price fluctuations, the high returns are well worth the effort and the investment in most cases.

Commodity trading allows for an investment portfolio to be overall improved in terms of return without having a negative impact on risk. Are you wondering who will best benefit from investing in Commodities? If you are looking to take advantage of movements of price or are willing to make an effort to diversify your portfolio then you can and should invest in the commodities market. It is important however that small investors and retail investors be careful when initially entering into this market, because a lack of knowledge and understanding of the volatile swings that the market experiences can result in a significant loss of wealth.

In order for an investor to be successful in the commodities market, savvy investors need to have a thorough understanding of the demand cycles that the market goes through. These savvy investors must also have a decent view on the different types of factors that may have an effect.

One of the ideal avenues for you to pursue is to invest in specific, select commodities that can be analyzed individually, instead of simply speculating about products that you have no real background information on. While it can be enjoyable to speculate on products that are new and exciting to you, sometimes this can be a bad decision as you will be making guesses without any real information about them. You should be investigating and buying into commodities as a way to expand and diversify your portfolio. Commodities are an excellent way to turn your portfolio into something more exciting, and then money should be your second concern.

Commodity trading has been around for longer than anyone can really remember. Most modern commodities markets appeared around the 18th century, during the same period where farming was becoming modernized. While the mechanisms have been updated over time, the basics to commodity trading have never changed. Commodities are defined as most types of products, or every kind of movable property aside from money, actionable claims and securities.

Commodity trading is essentially just trading in the futures of commodities. Trading commodity derivatives would allow you to take a buy or sell position based on the performance in the future of commodities like silver, metals, gold, crude or agricultural commodities as well. Many exchanges deal in grains, pulses, oils, oilseeds, spices, metals and crude. Commodity trading on futures is actually not much different than regular futures trading, so you can take long positions or short positions based on how you believe the future of the commodity will change.

Author: Craig Thornburrow
Article Source: EzineArticles.com
Provided by: Excise Tax

What are Commodities?

Commodities are goods that are in broad demand and are pretty constant and do not differ much in terms of quality. For example, gold is gold whether it’s mined in Africa or Australia.

Because of this standard in quality, these goods become useful tools for investment and trading. When you buy a barrel of crude oil for example, you know what you’re getting and you won’t get short-changed or cheated.

Examples of goods and products that can be traded as commodities include:

* Precious metals such as gold, silver and copper.
* Agricultural products such as rubber, corn, rice and sugar.
* Energy and industrial resources such as crude oil, coal and aluminum.
* Non-traditional “resources”. Entrepreneurial people have started talking about “natural capital” and trading carbon emissions and weather.

Trading Commodities

When people talk about trading commodities, the majority of them are not actually buying one tonne of sugar and then selling it a week later.

Commodities are commonly traded using derivative tools such as futures. Buying a futures contract of an underlying commodity means you are buying the right to buy the commodity at a certain price at a certain future date. In the meantime, the actual price of the commodity goes up and down from day to day. This fluctuation makes the futures contract either go up or down in price depending on which direction the underlying commodity’s price goes.

The Commodity Market

Commodities are traded internationally, and are traded on various exchanges around the world. Examples of these include the Chicago Mercantile Exchange, Australian Securities Exchange and the Tokyo Commodity Exchange. These exchanges act as marketplaces where commodity futures contracts can be traded and exercised.

The prices of commodities rise and fall. Some are cyclical, while others depend on the current economic outlook and political circumstances. For example, the price of agricultural products like corn and rice fluctuates depending on the time of year, and also on the year’s harvest.

On the other hand, commodities such as crude oil are very dependent on economic and political situations. For example, if there’s political instability such as war or government problems in the Middle East (where most of the oil producers are), the price of crude oil would rise. And the price would rise if the economy and industry are strong, and energy consumption is high; and vice versa.

Why trade Commodities?

The cyclical and trending natures of commodities provide investors with the opportunity to trade in commodity futures. Investors are able to earn from trading commodity futures by being able to predict the cycles and profiting during economic and political upheavals.

Commodity futures can also be traded to hedge against the chance that the underlying commodity doesn’t produce expected output in the current cycle. Companies whose business involves those commodities would then hedge against that and earn some money from commodity futures even though their products don’t sell well.

For investors and casual traders, commodity trading represents another method of trading other than shares or currency. The risks and rewards are similar, differentiated by the underlying commodities being traded.

If you are interested in commodity trading, you will need to do some research on the commodity you want to focus on, and analyse how its price varies depending on annual cycles as well and political and economic changes.

For further information on Business Planning, please visit the trading section of Income Resource Club at http://www.incomeresourceclub.com/trading.

Author: Steven T. Ng
Article Source: EzineArticles.com
Provided by: Import duty tariff