Commodity Trading

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Commodity Exchanges AND Futures Trading- PRINCIPLES AND OPERATING METHODS by Julius B. Baer. Contents include: Preface x I HISTORICAL DEVELOPMENT OF COMMODITY EXCHANGES 3 Ancient Markets Markets in the Dark Ages The Medieval Fairs Merchant Associations The Law Merchant Courts of the Fair The Law Merchant Becomes the Common Law in the United States Development of the Modern Commod ity Market Organized Commodity Markets Not All Com modity Markets Have Exchanges Orga… More >>

Commodity Exchanges And Futures Trading – Principles And Operating Methods

The commodity markets are emerging and growing at a great pace in India after the Stock markets. These commodity markets are specially made to meet the increasing needs of people and to supply them with everything under one roof.

The main advantage of commodity market is that they provide every item that is a part of our daily requirements and is often needed can be provided at one place. For instance, these commodity markets have cements, chemicals, food items like grains, cereals and fruits etc, bullion, jute and other items mace from jute, iron and steel and other such items. These items are available and traded in these markets in India on daily basis and are easily accessible. The investors are especially trading interest in this type of trade because the goods are daily traded and supplied.

The purchase and sale of these commodities is enabled by 3 national exchanges present in India which are as follows:
1. Multi-Commodity Exchange of India Ltd. (MCX)
2. National Commodities and Derivatives Exchange Ltd. (NCDEX)
3. National Multi-Commodity Exchange of India Ltd.

These National Exchanges provide a very vast opportunity for the trading purposes. There are over 2,000 brokers and 10,000 active traders along with 6,000 operating terminals. The commodity markets are running very successfully under them and it has been reported that on the very first year of its commencement, there was an annual turnover of Rs. 1400 Billion and this particular amount is expected to be crossed by over Rs.10,000 Billion in the near future. The success and promotion of these commodity markets in India is tremendous and is leading to remarkable progress.

All the three National Exchanges are making changes and progressing with time. The MCX has set up centers for future commodity contracts in many areas like Ahmadabad, Mumbai and Delhi. The NCDEX has joined hands with the International Petroleum Exchange, London (IPE) in order to put together the name of Indian Energy Markets with other global markets. This is a remarkable step towards the success of these commodity markets. Along with these two, the MCX has made deal with the Chicago Climate Exchange to improve the global emission marketplace by trading in Carbon and Sulfur financial instruments. There are future plans of this company to join hands with the European Climate Exchange as well.

There are many regulators like Forwards Markets Commission (FMC) which controls the functions and overall regulation of these commodity markets.

Technological tools, software etc are making paths in to the growing investment avenue of commodity trading. Trading systems help you decide on entering and exiting trades, the crux in futures trading. As per the incorporated rules on prices and other information, the commodity trading system signals buy or sell choices.

Commodity trading systems are increasingly used by traders owing to its mechanical analysis of trading sans any human emotions and sentiments. Strategies can be framed based on your risk acceptance levels and adhering to its rules you can continue trading as per your plans. Commodity trading systems employ technical indicators viz., moving averages, RSI, stochastics etc.

Forms of Commodity Trading Systems:

The two forms are trend following and range trading. Based on the established movement of markets – either upward or downward, a trend based system determines strategies. Such system assumes that odds of prices following the past trend are high. Whereas a range based system does not follow past trends and signals you to buy the commodity at its low price range and sell it when it reaches its peak.

You can either develop a commodity trading system by yourself or buy one. Tradestation, a software program, is normally used by individual traders to develop a customized trading system. Key points to incorporate while developing are:

•  Time frame of your trade – holding your trade for couple of days, weeks or long-term. 
•  Your target commodity markets – one or more markets can be incorporated.

•  Indicators – You can choose among the numerous variables and indicators. Ex- A usual indicator in trend based system is a break above a 20-day high to trigger a buy order. 
Ensure to back test your system to check its functionality. Back testing requires you to input your trading rules and run them against historical data.

If you choose to buy a commodity trading system, pin your attention to its past performance. Usually traders evaluate hypothetical returns by using trading system however; actual returns might differ from hypothetical returns. You can also consult experienced commodity broker specializing in trading systems for commodity trading system.

To enhance your profits and for long survival in commodity trading, taking the assistance of commodity trading systems is highly recommended however, one must be aware of the risks of its irrelevance and errors.

Product Description
Industry experts and pundits would like you to believe commodity futures trading is only for the wealthy and sophisticated. However, a number of savvy traders use the commodity markets to hedge inflation and energy woes as well as prepare for the ever-increasing fiscal volatility we are facing in the New Millennium. The book covers Options and Spreads on Commodity Futures. This little known area of the commodities market is ideal for people who have a steady income … More >>

Commodity Trading 101: How to Exploit the New Bull Market in Raw Materials without Getting Killed

Recent days have seen an intense debate on the hot topic of the year – commodity prices. We have seen commodities across the board tumble in the past few months. Pessimists have started writing obituaries for the commodity bull and pronounced an end to the ascent in commodity prices. The scale of the rout can be seen in the Reuters-Jefferies CRB index, a basket of 19 commodities, which has fallen below 400 points to its lowest level since early April, a drop of about 14 percent since a record peak above 473 in early July.

So is the commodity supply/demand squeeze over?

Investors have retreated from the commodity markets on fears that economic slowdown in the United States has infected growth in the rest of the world, worries that demand growth will collapse and a rising dollar.

The global economy has been showing signs of demand destruction as a direct response to high commodity prices, especially Crude Oil. If recently released statistics are to be believed, Americans are driving lesser number of miles, buying fewer cars (especially gas guzzling SUVs) and are shifting to mass transport systems like railroads and buses, away from expensive modes like airlines. Globally also, oil consumption is expected to grow slightly in 2008 year by 760,000 barrels per day to an average of 86.8 million barrels, the weakest global growth rate since 2002. Due to a cyclical slowdown in world economy, not only in North America but also in OECD Europe and Pacific, oil demand will be weak in 2008 as well as in early 2009. Japan is also showing signs of reduced pace of economic activity.

The debate over whether the “Commodity Super Cycle” is dead or alive also revolves on whether the US-dollar has hit rock bottom against the Euro and other foreign currencies. A stronger US-dollar creates a virtuous circle of knocking commodity markets lower. In August, the dollar rose versus all of the other major currencies this on concern the economic slowdown that began in the U.S. is spreading to the rest of the world. The dollar gained 6.4 percent versus the euro, the best performance since the European currency’s debut.

Commodities prices will fall, because they always do. It is a fundamental truth of commodities that they fluctuate about a mean. If demand exceeds supply, ultimately a new mine opens and supply then exceeds demand.

What is being ignored is the fact that that though Demand has slackened, supply still remains tight. When it comes to Oil, non-demand from OECD, Asia and the Middle East still remains strong. Soaring oil prices have not slowed China’s consumption of oil as statistics show that China’s apparent consumption of crude oil and refined oil products both hit record highs in the first quarter of the year. There are talks of slowdown in Chinese economy and demand for commodities post Olympics. However, we are yet to see any convincing evidence of such a halt in Chinese economic growth. Moreover, Chinese government has recently announced a fiscal stimulus which is expected to keep the Chinese economy from slipping into a post games slowdown and by extension, the global economy going.

Also, though OPEC supply has been increasing over the past few months, Non-OPEC supply remains a big problem. Production is declining quickly in Mexico and Russia as well as Britain North Sea Oilfields. Already, with each passing day, OPEC’s spare capacity is moving southward. Moreover, geopolitical situation still remains volatile, threatening to send commodities prices once again over the roofs.

Same goes for Base metals complex. There seems to be no end to the China’s appetite for Copper. Precious metals are also expected to rule at comfortable level as the global economies reel under inflationary pressure. Given the strong demand supply mismatch, possibility of a crash in prices of agricultural commodities also seems far fetched. Rising global population has led to an upsurge in demand while at the same time acreage has gone down significantly. Moreover,inventories of food are touching all time low.

Mark Mobious, the renowned investment Guru says “When you have a long-term uptrend, excesses build up along the way. We are witnessing a correction”. He continues “Demand for commodities will remain at a high level in countries like China and India. If we see a serious worldwide recession, then we will see the end of the commodities boom.”

Thus, in retrospective, it seems pertinent that bull run in commodity markets remains intact. What we are witnessing is a corrective reaction to an unusual run up in prices within a framework of a long term bull market in commodities. Bull markets in commodities last as much as 15-20 years or even more. There may be periods of large correction that may witness a fall of as much as 40%. Though prices may cool in near term due to demand destruction and a stronger Dollar, in longer term, price is expected to be largely influenced by fundamentals intrinsic to commodities. Corrections are inevitable in any uptrend and the commodities market is no exception. The long-term fundamentals dictate that any major corrections remain buying opportunities for long-term investors.

Author: Khan Salman
Article Source: EzineArticles.com
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Many people have become very rich in the commodity markets. It is one of a few investment areas where an individual with limited capital can make extraordinary profits in a relatively short period of time. Commodities are agreements to buy and sell virtually anything that is harvested except onions. (A 1958 federal law prohibits trading onions.) Such goods are raw or partly refined materials whose value mainly reflects the costs of finding or gathering them. They ar… More >>

The Complete Guide to Investing in Commodity Trading & Futures: How to Earn High Rates of Returns Safely

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.

Commodity trading is an exciting investing opportunity that was once limited to brokers but that thanks to the internet anyone can play in. Here’s how to get started with commodity trading.

Commodity markets move primary or raw product which are traded on commodities exchanges and it’s important that you know how to get started with commodity trading so that you learn how to buy and sell commodities.

The internet has opened up the commodity market and primary products like sugar, corn, precious metals, and so much more are being traded online. Commodity marks deal with non financial instruments like bonds. Once you know how to get started with commodity trading you won’t have any problem deciphering the different categories.

Prior to online trading there were places designated for commodities exchanges. You would have to appear there or have a broker that would negotiate for the commodity you wanted. Needless to say how to get started with commodity trading was a lot more complicated.

Today finding out how to get started with commodity trading is available 24/7 on the internet with access being very easy both for learning and for buying and selling. There is no reason to have a broker anymore. The electronic age has certainly changed how we do business.

One of the biggest perks now is the transparency of the price. The top 5 bids are displayed which allows for fair trade. It also makes it easier to learn how to get started with commodity trading.

Commodity investing is an investment that can make you some nice profit. But of course they also carry some risk. Learning how to get started with commodity trading and how to trade right will give you the least amount of risk.

There are all kinds of websites that offer commodity trading online. Generally there is a fee for setting up an account. Some even have a minimum amount that you must put in your account. Most of these sights have a host of tools to help you learn how to get started with commodity trading and to help you make the best trades possible.

Commodity training online is a very lucrative business and if you really would like to move yourself into a different earnings class may we suggest you learn how to get started with commodity trading. You won’t be sorry and it won’t be long before you are making all the right moves.

Author: Joel Teo
Article Source: EzineArticles.com
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A market that conducts business with commodities of all nature are referred as Commodity markets. At the Initial Stage Occurrence of Commodity market was meant only for agricultural products which was predominantly affecting the local market. But when the crucial factors such as Industrialization, Globalisation, Technological advancements breaks barriers and came across the boundaries it virtually increases demand from consumers and intense competition from other players has paved way for commodity markets.

Commodity markets basically deals in the trade of commodities like gold, cotton, crude oil etc. Many items both perishable non-perishable, finished goods, raw materials and semi finished goods are been traded in this market at the international level. Even Commodity market does not necessarily require you to buy or sell the commodities but you can even exchange them too.

Commodity market works on certain predetermined principles which says that trading has to be done only for standard products. Secondly that transaction should takes place through a future contract. Accordingly, contract says that commodities will be sold or bought on a future date. However the price at which they are sold will be the price agreed during the contract. Similarly commodity marketing also makes use of another type of contract called spot contract. In this contract the goods are been transferred as soon as the contract is made. However it has also been argued that the purpose of a spot contract is to exercise a future contact in due course of time. Some of the commodities investing market are commodity food market, commodity petroleum market and commodity fund investing.

Investing in Commodities

At the Initial, Commodity investing was widely encountered merely by a few sectors. It was first restricted to the trade and exchange of commodities and then was meant for regular and day to day use. However the awareness by the occurrence of the stages has brought all sectors together into the manifold of commodity investing and numerously has enabled speedy movements, transfer and transaction of goods and services.

The following are the benefits of investing in commodities market-

Reduced Risks

As an investor, Involvement of risk factor are merely very less if it comes to invest in commodities. Therefore the gains which you acquire from commodity investing balance other losses due to other financial instruments in your portfolio. The chances of risks are less because commodity investing primarily deals with diverse items. However if at the mean time, if the contracts entered for a future date you can exercise reasonable care and can also see to it that the chances of risks are reduced or nil.

Helps to Fix Price Easily

However the accomplishment of Commodity market can be easily monitored by analyzing the performance of bond and share market. In most of the cases,Commodity market will perform well when the others do not perform and vice-versa. It is therefore possible to give Future prediction regarding the prices and make the contracts by considering the ups and downs in other markets. A prior condition for that would be that the assets in the commodity market should not be correlated with the stock and bond market.

Author: Shanu Chhabra
Article Source: EzineArticles.com
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Investors in the United States are still very much embedded in a long-standing equity culture. They have become more sophisticated over the years, and conduct their own technical and fundamental research of specific stocks in order to make thought-out investment decisions. However, investors of all types are quickly seeking opportunities outside the equity realm as their confidence in their investment and trading skills continues to grow. Those investors are now turning to commodities in record numbers, and they’re using every possible financial instrument to gain exposure to physical commodity prices.

Commodities have been available to investors for decades, but why has their popularity grown so rapidly in recent years? The appeal is attributable to a variety of conditions, all of which will eventually make commodity trading as simple as buying and selling stocks, if it has not achieved that level simplicity to some degree already. Here’s why:

1. Well-known media outlets provide heavy coverage of commodity prices

2. Certain commodities are affected by geo-political risk and natural catastrophes, and are therefore newsworthy

3. Investors want to diversify their portfolios into non-equity asset classes

4. Data has become cheaply and readily available

5. Brokerage provide extensive research coverage

6. Online brokerage firms are expanding into futures with reduced commissions

What’s driving demand?

Investors continue to seek new opportunities beyond traditional equity offerings, but there have always been barriers to their participation in commodity markets. A general lack of understanding, inefficient access, and high agency costs for commodity investments have caused investors to look for opportunities in more traditional asset classes. However, those barriers are quickly disappearing, and commodity investments are beginning to be considered mainstream investments. Contributing to this effect are financial media outlets, the brokerage community, and growing concerns about current events.

Financial media outlets have become a source of information for retail investors, but have also become a source of entertainment. Some financial news channels may appear more professional than others, but they all have content that appeals to a wide range of viewers – from the novice investor to the sophisticated trader. Those media outlets help popularize commodities by focusing on spot prices, economic data, and exchange activity all throughout the day.

In addition to financial news reporting, media outlets provide continuous coverage of geo-political tension as well as natural catastrophes occurring all over the world. Investors can quickly gather detailed news about such events via the Web and television, allowing them to develop logical conclusions regarding the near-term impact on certain commodity prices. Those factors, combined with the underlying perception that emerging economies will require greater commodity consumption, will result in accentuated volatility in commodity prices.

Research coverage of commodities by major brokerage firms also helps promote commodities. Whether that coverage is in the form of equity-based sectors (i.e., stocks that derive their revenue primarily from activity in specific commodities) or in various instruments that provide exposure to commodity prices, investors are the target audience. Sell-side research is still very influential even after the Internet stock craze highlighted conflicts of interest. That is because such conflicts do not exist, or are not as apparent, in commodity markets.

Competition among brokers will also add to the promotion of commodities as investments. That competition will be based on their ability to provide customers with access to new investment opportunities, as well as tools that allow customers to make informed investment decisions. Commodity investment represents a new frontier for brokers because it allows them to expand beyond their traditional stock and bond offerings and into a complementary asset class. Brokers can expect to find a very receptive audience because investors are growing weary of stock performance.

How do we gauge demand?

Demand for commodities has become easier to quantify than ever before. It is exhibited through the success of “proxy” products, including mutual funds, equity index funds, equity index options, and commodity futures. Popular investments in the U.S. include the PIMCO Commodity RealReturn Strategy funds (symbol, PCRDX), the Energy Select Sector SPDR (symbol, XLE), StreetTRACKS Gold Shares (symbol, GLD), and more recently, commodity pools like the United States Oil Fund (USO). On the trading side, there are dozens of derivatives ranging from traditional commodity futures contracts, to options on equity indexes that track the performance of specific commodity sectors.

The PIMCO fund is a traditional mutual fund that passively tracks the performance of the Dow Jones AIG Commodity Total Return Index. The index covers the combined performance of a basket of commodities via their associated futures prices. The fund uses derivative instruments to gain direct exposure to that index. As of November 2008, the PIMCO funds had assets of over $7 billion since their inception about 4 years ago,(1) well off its highs of over $12 billion earlier this year when commodity prices were rising in unison, but still an impressive amount. As of November 2008, there were at least 132 commodity-focused mutual funds with total assets of over assets of over $35 billion.(2) While mutual funds are good places to invest, they do not address the needs of more active traders. That’s where Exchange-Traded-Funds (ETFs) and Exchange-Traded Notes (ETNs) come into play.

Partial List of Commodity-Focused Mutual Funds

Fund Name (symbol)_________________________Focus_________Net Assets ($, billion)____Inception Date

Vanguard Energy (VGENX)_____________________Energy________$4.97_________________5/23/84

PIMCO CommodityRealRet Strat Instl (PCRIX)______DJ-AIG Index___$3.88_________________6/28/02

T. Rowe Price New Era (PRNEX)________________Energy________$3.69_________________1/20/69

Vanguard Energy Adm (VGELX)_________________Energy________$3.37_________________11/12/01

Ivy Global Natural Resources A (IGNAX)___________Energy________$2.07_________________1/2/97

PIMCO CommodityRealRet Strat A (PCRAX)________DJ-AIG Index___$1.76_________________11/29/02

Vanguard Precious Metals and Mining (VGPMX)_____Metals________$1.69_________________5/23/84

Fidelity Select Energy (FSENX)__________________Energy________$1.58_________________7/14/81

Fidelity Select Energy Service (FSESX)____________Energy________$1.01_________________12/16/85

RS Global Natural Resources (RSNRX)___________Energy________$0.92_________________11/15/95

Source: fund sponsor’s websites and Yahoo! Finance, data as of October 31, 2008

Until recently, the only way for most individual and institutional investors to quickly access the commodities markets was to purchase stocks that focused on specific commodity sectors. That strategy was made much more efficient with the arrival of ETFs, which hold baskets of stocks in specific sectors. Low brokerage commissions, abundant liquidity, and all the efficiencies of an electronically traded product helped ETFs gain in popularity as both investable and tradable instruments. Even so, the funds are less than perfect proxies for commodities because they still carry the corporate risk of stocks they hold. The companies in a fund may also be engaging in hedging activity that dampens the correlation between their stock price returns and the commodities they produce. This paved the way for a new breed of exchange-traded instrument; one that attempts to securitize commodity prices and which is still available through ordinary stock brokerage accounts.

The StreetTRACKS Gold Trust, often referred to as the “Gold ETF,” is a trust that primarily owns gold bullion. This is one of the best examples of how Wall Street is repackaging commodities into equity-like instruments. The investment objective of this trust is to issue shares that reflect the price performance of gold. The shares trade under the ticker symbol GLD on the New York Stock Exchange. The trust was launched in November 2004 by the World Gold Council, and by October 2008, it had net assets of about $17.6 billion.(3) But that is just one of a new stream of exchange-traded trusts and funds. Over the past year, Deutsche Bank, Barclays, and others have begun to roll out products in the energy sector as well as other metals. Even agricultural commodities such as corn and wheat are available to trade as stocks in regular brokerage accounts. Currently, there are at least 130 ETFs, trusts, and ETNs that track commodity price performance by way of holding stocks that produce those commodities, physical commodities, or futures contracts.(4) As of October 2008, those products represented almost $50 billion in assets.(5) Similar to the commodity-focused mutual funds, AUM levels for those products have also declined, not only because of redemptions in the funds but because certain commodity prices have plummeted. Even so, the sharp spike in asset growth up until mid-year underscores investors’ interest in the asset class as well acceptance of fairly new instruments like ETNs.

Partial List of Commodity-Focused ETFs, ETNs & Trusts

Fund Name (symbol)___________________Focus________Fund’s Holdings____Net Assets ($, billion)____Inception Date

streetTRACKS Gold Shares (GLD)_________Gold_________Phys. gold________$17.60________________11/18/04

Energy Select Sector SPDR (XLE)__________Energy_______Energy stocks_____$5.13_________________12/22/98

iShares Silver Trust (SLV)________________Silver________Phys. silver________$2.01_________________4/21/06

Oil Services HOLDRs (OIH)______________Energy Oil_____Stocks___________$1.86__________________2/6/01

iPath DJ-AIG Commodity Index (DJP)_______Mixed________Derivatives________$1.85__________________6/6/06

iShares COMEX Gold Trust (IAU)__________Gold_________Phys. gold_________$1.49__________________1/21/05

PowerShares DB Commodity Fund (DBC)___Mixed________Derivatives_________$1.26__________________2/3/06

PowerShares DB Agriculture Fund (DBA)____Ags__________Derivatives_________$1.17_________________1/5/07

United States Oil Fund (USO)_____________Energy_______Derivatives_________$0.80_________________4/10/06

United States Natural Gas Fund (UNG)_____Energy________Derivatives_________$0.79_________________4/18/07

Source: fund sponsor’s websites as of October 31, 2008 or later

Securitized exposure to commodity prices is not unique to the U.S. To be sure, the London Stock Exchange (6) currently lists over 120 Exchange Traded Commodities while Deutsche Brse lists over 110 such products.(7) Every major stock exchange now lists some form of open-ended fund-like instrument.

In addition to the various funds and trusts available to investors, US options exchanges further expand the menu of choices by offering cash-settled options on indexes that focus on specific commodity sectors. From the Philadelphia Stock Exchange’s PHLX Oil Services Index (symbol, OSX) to the International Securities Exchange’s ISE-Revere Natural Gas Index (symbol, FUM), investors have additional flexibility to execute complex spreads quickly and cheaply. Although options now exist on some of the trusts and commodity pools listed above, cash-settled options on indexes themselves offer additional flexibility in how investors tailor their exposure to commodity price movements.(8) For example, an investor employing a strategy that involves selling in-the-money options will not have its position altered by being assigned. Rather, the European-style exercise of those index options will ensure that the position remains intact.

While there may be dozens of commodity-based funds and index options listed on exchanges over the next few years, let’s not forget old-fashioned futures – the instrument of choice among hedge funds all over the world, as well as the core holding of many of the new commodity-based ETFs. Energy futures products have gotten a much needed facelift over the past three years, largely due to the demand from hedge funds as well as retail investors. That demand has futures exchanges scrambling to compete for those new customers.

In 2003, the New York Mercantile Exchange (NYMEX) began offering reduced-value versions of its energy futures contracts in an effort to target smaller investors. The contracts were branded “miNY” to capitalize on the popularity of reduced-value index futures called “E-mini”.(9) In order to further capitalize on the burgeoning retail interest, NYMEX made the products available on the Chicago Mercantile Exchange’s (CME) GLOBEX platform so that they may be traded electronically – well before its acquisition by the CME. Here’s where the competition kicked into high gear.

In early 2005, the InterContinental Exchange (ICE) fired the first direct shot with its electronically-traded, and cash-settled WTI crude oil contract – the flagship benchmark of NYMEX. The listing of that product was in addition to its own crude oil benchmark, Brent crude, which was already an actively traded contract in Europe. Volume in the ICE’s Brent contract is currently about 175,000 contracts per day while its WTI contract trades almost 283,000 contracts per day year-to-date.(10)

NYMEX responded, albeit slowly, by listing its full-size products on GLOBEX. Since their initial listing on CME, trading in the energy complex has grown from just under 100,000 contracts per day on average to currently about 550,000 contracts per day year-to-date.(11) However, trading in its Brent contract is virtually non-existent.

How can you practice trading?

Unfortunately, there are no “do overs” in your brokerage account, so where can you test your commodity trading strategies online? Investors may want to visit a “virtual trading” website to test trading strategies with real market data before putting real money at risk. Some virtual trading websites combine the functionality of a brokerage platform with order matching logic of an exchange. Traders can go long or short and accumulate virtual dollars. Traders can also hone their skills by competing with others in contests. In sum, virtual trading websites combine simulated trading and real entertainment to create a unique educational tool.

What happens next?

The number of investment vehicles and tradable instruments is truly astonishing, and there is no sign of slowing down. Investors can expect to see new products proliferate through the entire commodity spectrum, and a quick review of prospectuses on the SEC website already reveals many new products just waiting for regulatory approval. But that seems like only the tip of the iceberg when one considers the pipeline of new ideas being developed by investment firms of all sizes. So while you will have a hundred ways to trade crude and natural gas, all you fans of the movie “Trading Places” can take solace in that it won’t be long before you can trade frozen concentrated orange juice – just as you would in any stock or index fund. In the meantime, check out a virtual trading site to get your feet wet in the virtual commodity pits before you start putting your real money to work.

Notes:

(1) See fund profile at the Alliance site.

(2) See fund summaries at the website of Lipperweb.

(3) See data from website of State Street’s Streettracks’ goldShares. State Street is the marketing agent for the fund.

(4) From fund sponsor’s websites.

(5) From fund sponsor’s websites.

(6) From the website of the London Stock Exchange

(7) From the website of Deutsche Borse

(8) Options on the streetTracks Gold Shares, GLD, were only available on options exchanges earlier this year in 2008 after the SEC and CFTC came to an agreement to allow trading in the products. However, at the time this paper was written, options trading on the iShares Silver Trust, SLV, as well as another gold trust, have yet to be permitted.

(9) “E-mini” is the name of a reduced-value futures contract branded by the Chicago Mercantile Exchange (CME); it was created to appeal to smaller investors, to be traded electronically as opposed to manually on an exchange floor.

(10) Statistics for ICE energy contracts are shown at the website of the Intercontinential Exchange.

(11) Statistics for NYMEX energy contracts are shown at the website of the New York Mercantile Exchange.

Author: Kris Monaco
Article Source: EzineArticles.com
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So many times I hear clients when in a draw down say,”There are changes going on in commodity trading and trend following.” The commodity markets are changing. They are not like what they used to be. Trend following is dead. This draw down proves trend following is dead.

Well I will give you my 15 years plus of experience and counter these thoughts. First of all, nothing ever changes. You need to really know what trend following is, what causes it. Not trying to be funny, but commodity trading has been going on since the times of Joseph in Egypt selling wheat. If you read your bible, he cornered the wheat market and there was a trend in wheat. The price went up. There will always be shortages, panics, fears and hedgers and for this reason there will be trends. One can look back at charts from the 1800s and look at wheat or even cotton. What do you think happened to the price of cotton during the US civil war. Do you I need to remind you what happened to crude in the first gulf war. Human nature never changes…fear and greed don’t ever seem to change…so there are trends. If you want to consider making money in commodities one of the ways I feel most strongly about is trend following. No predicting…just reacting and trying to catch a trend or as a surfer tries to catch a wave. Not too much different.

Now if you believe there are trends, then you need to realize they do not happen when we want them. There can be years at a time…NOTHING HAPPENS. At this point most non professional investors give up and claim trend following is dead and commodity trading advisors stink. Well, so many times after this trend following comes back from the dead and commodity trading advisors hit new record trading peaks. This brings me back to my holy grail word “PATIENCE”. If you can be patient, disciplined, have a sound trading methodology based on risk management and money management, you stand the potential overtime to grind out some decent returns.

Next thought… again those same inexperienced commodity traders say, “The commodity markets are changing. I need to change my system or my methodology.” Again with years of experience watching what has the chance to work and seeing all that did not. The only things that can work over time are simple ideas based on with strong risk and money management.

To give you example, Richard Donchian used a very simple idea. Buy the 22 day high…sell the 14 day low. This is the basis… not too complicated, but needs more risk and money management filters. Not sure if it was John Henry from JWH or Dunn Capital…either of them stated all rules of our system can be written on the back of an envelope. Pretty funny since both at them at various points of their careers were managing in excess of $1 Billion US Dollars. If you want to be a winner in the commodity trading arena realize this takes time, discipline and patience. This is not a get rich quick. This is a compound your way to wealth if you follow the rules of risk management & money management. All of this is easy to say, but when you are down either in your trading account or when your commodity trading advisor is down 20% or greater and you want to quit, Remember: Do you want to be a winner or a loser.

Understand exactly how your mechanical trading system works. Don’t think you will buy a black box and make money. Ask questions to your commodity trading advisor… what gets you in a trade..out of a trade… with a loss or a profit.. How much risk per trade.. how much risk per sector… how much portfolio open trade risk…or margin to equity. If you do not do your homework ahead of time, don’t even think about commodity trading. These are the hard truths about commodity trading. This is not easy. Futures and commodity trading involve substantial risk. People can and do lose money trading.

Author: Andrew Abraham
Article Source: EzineArticles.com
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