Commodity Trading

Exposure to real assets can be achieved through commodity futures trading on one of the many global commodity exchanges across the world. There is a long history to the development of the commodity futures contract, and the 21st century markets make use of the latest trading technology to the extent that significantly more trade is now done electronically.

You may have an image of men and women in colorful jackets shouting instructions to each other across the trading floor or perhaps today a more detached view of trading commodities via remote computers across the world, perhaps in an office or even a bedroom at home.

Such is the power of the internet that it can facilitate an electronic trading platform even for small retail investors and traders.

Futures contracts mean a buyer say of orange juice and the plantation owner need never meet each other to do business. Or the cocoa farmer in West Africa need not know the chocolate factory owner who buys futures for delivery of a few tonnes of his quality cocoa beans.

It is the nature of commodities as fungible assets that they can be traded in this way because they are the same so long as they meet strict quality criteria and are traded under standardised contracts.

A commodity futures exchange will set out the criteria on which it will accept a commodity for futures trading. Potential buyers who take physical delivery of commodities from the exchange’s warehouse can have confidence that the product conforms with quality standards.

For example, if you are looking to buy Arabica coffee futures you will need to know what is the quality or basis of the bean and whether it trades at a premium or a discount to a benchmark coffee, and this will be partly determined by its origin.

The futures contract can either be executed electronically on one of the numerous electronic trading platforms linked to the major commodity exchanges or by the traditional open outcry method on the floor of the exchange.

The basic form of a futures contract is that it must state a location and date for physical delivery of the particular commodity.

A look at the various commodities will show the delivery months, when for example, crude oil will be delivered in Cushing, Oklahoma or which months physical cocoa is delivered from West Africa or Latin America to US ports such as Baltimore, Hampton Roads or New York.

Futures contracts must also show clearly the standard amount of the commodity being sold or bought. For example, the standard futures contract for ICE Futures US Robusta Coffee is 37,500 pounds.

And if you get into commodity futures trading you will need to be sure about which contract is being traded. For example, if you trade ICE Futures Europe Coal, is it the Rotterdam or Richards Bay contract. Or if you are into crude oil on the same exchange, are you trading ICE Brent, Middle East Sour or WTI Light, sweet?

Payment is an important consideration and this must be settled at the close of business each day. Look how different it is to trading shares where you get settlement after three days.

An interesting point to note in commodity futures trading is that the price at which you will sell or buy the commodities at a future point in time is fixed. Yet the market price of the actual contract will fluctuate according to forces of supply and demand in the market at that time.

So if there was, for example, serious flooding in South African mines which produce platinum, you may see a sudden sharp rise in platinum futures prices in anticipation of falling supplies in the near term, other things being equal.

Another important consideration in commodity futures trading is the concept of leverage. A commodity trader can control a much larger sized contract than she could if using 100% capital. Trading on margin means you may only have to put down between 3 and 10 per cent of the contract size.

This way it is possible to make substantial profits with derivatives such as commodity futures, but equally you can suffer a very large loss of capital. Let’s say you go long oil at $45 and the market retreats to $32 a barrel, then you are sitting on a potential loss of $13 a barrel, which for one contract would be $13,000.

If your margin is tested you will get a margin call from your broker asking you to make more funds available to maintain your account margin.

Clearly the leverage or gearing effect in commodity futures trading is exciting if the market moves as you predict, but equally can create huge losses if it moves the other way, truly a double edged sword.

Such risks are inevitable given the structure of derivatives and if you are considering entering the world of commodity futures trading you are strongly advised to seek professional advice from your financial adviser.

Author: William Davies
Article Source: EzineArticles.com
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You will gain a new insight on commodity futures trading once you have decided to learn about trade commodities from commodity trading courses. In your commodity trading courses, you may learn about certain commodities such as grains or precious metals, or you may decide to acquire knowledge on the whole spectrum of global commodity markets. No doubt you have heard concerns about energy security and the crude oil trade on the New York Mercantile Exchange, and of how the price fluctuations can be caused by a whole range of factors. And what causes price movements in gold, silver and other precious metals and why should cocoa or coffee futures prices suddenly surge?

You can get all answers to your questions just by looking for good commodity trading courses. Finding excellent commodity trading courses will help you learn how to trade commodities and ultimately gain all the knowledge required for you to be successsful in trading. Firstly, if you are learning to trade commodities, find commodity trading courses that are currently offered. Either start your commodity education at home using study materials with an online training package or attend a top quality trading school where students cover all aspects of commodities and futures.

What are the advantages of attending a school that offers commodity trading courses? There is face to face contact with tutors and opportunities for one to one coaching. The coaches in your commodity trading courses may either have their knowledge from courses or they have perhaps traded the commodity markets and so have real live trading experience, which is a valuable asset to have in a coach. In a classroom, you can impart your ideas with other people who share your goal. Learning on location lets you watch and learn from “live” trades with your coaches, who may trade in real time as you look over their shoulder. This is valuable as it helps to explain in a live setting what you may have learnt in theory in your commodity trading courses. Such examples are valuable as they bring a real, sharp edge to your commodity trading education, and the tutors will help you as you create a personalised commodity trading plan. With the growth in trading centres, training providers now have locations globally and you may find one close to you, such as in London, Singapore, Dubai and Toronto, as well as major US centres such as Washington, Philadelphia, Chicago and New York.

There are also advantages in taking up online commodity trading courses. When your schedule is tight and your location is far from schools offering commodity trading courses, taking online courses will also help you learn about the fundamental and technical aspects of commodity trading. These online commodity trading courses will offer email contact with your tutors, as well as video tutorials, using charts, blogs and forums. You will also most likely have access to special software packages allowing you to practice trades and use different trading techniques, as well as CDs and DVDs covering the key learning points.

In commodity trading courses, you can expect to learn about the effects of supply and demand on commodity prices in fundamental analysis which takes into consideration the effects of inflation, wars and the economic cycle. Technical analysis in commodity trading courses is also important and includes understanding indicators on commodity charts, such as support and resistance, Fibonacci, moving averages, Japanese candlesticks and volumes of trade, which act as signals for when to exit and enter a trade. Commodity trading courses are likely to show you what a commodity futures contract is and how easy it is to trade electronically, how you place your futures order and set your commodity futures margin, as well as understand how hedging in commodity trading works. Other important things you can learn through commodity trading courses are: risk management, capital preservation, trading psychology and commodity trading plan. All these basic areas will be covered when you start learning to trade commodities through commodity trading courses.

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

Your decision to start learning to trade commodities will give you a completely new insight into the whole world of commodity futures trading. This could be within a specific sector such as grains or precious metals or perhaps across the whole spectrum of global commodity markets. Now doubt you have heard concerns about energy security and the crude oil trade on the New York Mercantile Exchange, and of how the price fluctuations can be caused by a whole range of factors. And what causes price movements in gold, silver and other precious metals and why should cocoa or coffee futures prices suddenly surge?

These are exciting markets to study, so finding a top quality commodities training provider is so important. How do you go about learning to trade commodities? What are the key areas you need to master with confidence so that you feel comfortable entering the global commodity markets? Firstly, if you are learning to trade commodities find where to do the commodity trading courses that may be on offer. Either start your commodity education at home using study materials with an online training package or attend a top quality trading school where students cover all aspects of commodities and futures.

What are the advantages of attending a commodity trading school? There is face to face contact with tutors and opportunities for one to one coaching. The coaches may either have their knowledge from courses or they have perhaps trade the commodity markets and so have real live trading experience, which is a valuable asset to have in a coach. When you learn to trade commodities in a classroom you can network with like-minded colleagues, sharing ideas with colleagues.

Learning on location lets you watch and learn from “live” trades with your coaches, who may trade in real time as you look over their shoulder. This is valuable as it helps to explain in a live setting what you may have learnt in elsewhere in theory. Such examples are valuable as they bring a real, sharp edge to your commodity trading education, and the tutors will help you as you create a personalised commodity trading plan. With the growth in trading centres, training providers now have locations globally and you may find one close to you, such as in London, Singapore, Dubai and Toronto, as well as major US centres such as Washington, Philadelphia, Chicago and New York.

What are the advantages of online commodity trading packages? Sometimes your location or commitments make it impossible to attend a physical location. So why not try an online training package featuring technical and fundamental aspects of commodity trading, which provide greater flexibility with your work schedule.

These online commodity trading courses will have offer e mail contact with your tutors, as well as video tutorials, using charts, blogs and forums. You will also most likely have access to special software packages allowing you to practice trades and use different trading techniques, as well as CDs and DVDs covering the key learning points.

What is likely to be covered when you begin learning to trade commodities? Expect to look at effects of supply and demand on commodity prices in fundamental analysis, which considers the effects of wars, inflation and the economic cycle. Technical analysis is also important and includes understanding indicators on commodity charts, such as support and resistance, Fibonacci, moving averages, Japanese candlesticks and volumes of trade, which act as signals for when to exit and enter a trade.

The course is likely to show you what a commodity futures contract is and how easy it is to trade electronically, how you place your futures order and set your commodity futures margin, as well as understand how hedging in commodity trading works. The whole area of risk management and preservation of capital is also an important aspect of learning, as is the psychology of trading and having a commodity trading plan. All these basic areas will be covered when you start learning to trade commodities.

Author: William Davies
Article Source: EzineArticles.com
Provided by: Guest blogger