Are you a bit hazy on just what is commodity trading?

Interested in de-mystifying this huge yet lesser known sister to stock trading?

This what is futures trading overview will help explain futures trading and several of it’s parts:

- The Futures Contract & What is is

- The Commodity Trade — An Example

- How You Profit Trading Futures

What is Commodity Trading

The Futures Contract

So, What is Commodity Trading ?

First off, the terms futures, commodity and commodities all refer to the same thing, and are used interchangeably. as are the terms futures trading, commodity trading and commodities trading.

There are dozens of commodities traded. A commodity is either a raw (unrefined) product (like Corn, Gold, Oil) or can be a financial instrument(bonds, FOREX, or financial indexes, like the Standard and Poors 500).

From our individual perspective, the primary use of futures contracts in futures trading is price speculation. hopefully allowing us to realize a profit on the price movement (up or down) of a particular commodity.

In its’ essence, a futures contract is an agreement/contract to buy or sell a specific commodity today. through a commodity/futures exchange/broker. at a specific price. for delivery on/by a specific date in the future.

In our what is commodity trading brief, profit is achieved either by going long a futures contract(s). (buying low) and selling higher, or going short (selling high) and buying back lower.

As we’re only interested in speculating and making a profit — not taking delivery of the commodity — we’ll exit or get out of the trade before the commodity future contract delivery date — with either a profit (if the price moves in our favor), a loss (if the price moves against our position), or possibly break even on the trade.

For more info on Futures Contracts, click here

What is Commodity Trading

What Month to Trade?

All commodity futures contracts have several future delivery months you can trade.

As a potential speculator in search of profits in this what is futures trading primer. you are trading on anticipated price movement of a commodity from the present moment you enter a contract, to some time in the future, prior to the contract delivery date of the futures contract month you are trading.

(All commodity futures have several calendar months you can trade — some 5, some all 12 months).

A key question in our ‘what is futures trading’ section is, which futures month do you trade?

For example, in Gold, you can trade the (H,K,N,U,Z ) futures contract months. In corn, you can trade the (G,J,M,Q,V,Z) futures contract months. Each letter corresponds to a different month of the year.

Some futures have 5 trading months, some all twelve months, and some fall in between those two.

So, which Gold contract month do you pick?

That choice entails several factors, but time is one of the key variables.

In other words, how quickly or slowly the price move may take to get to where you think it is going.

As a general rule, having more time for the price to move is always a good thing (trading further out contract months).

Since you are speculating on price movement, you want to allow for as much time as possible for the underlying commodity (Gold) to make its’ hoped for move — either increasing or decreasing in price during the time of the contract month you choose to trade.

Hopefully the commodity will make its’ greatest price move possible during that time, so you can exit your contract prior to the expiration date with the maximum profit.

Other factors to consider when choosing a specific contract month to trade include potential seasonality and the cyclical nature of certain commodity futures, market liquidity, market volume etc. We’ll talk more about these later.

For more detailed info on Futures Contract Months, click here

What is Commodity Trading

Putting on the Trade

OK. So far in our what is commodity trading overview, you’ve picked a commodity(Gold) and decided on a specific futures delivery month you want to trade.

You’re ready to put on on, or enter a commodity futures trade.

As an example, your analysis of the Gold futures indicates that that the market should be going up over the next 3 months.

You place an order (through your broker or an exchange) to buy (go long )a Gold futures contract at ‘x’ price, for the specific futures month you chose to trade.

Then, perhaps immediately or perhaps a few hours (depending on the type of order you use and the market liquidity — we’ll talk more about those aspects later too) — BANG! Your order is filled.

Congratulations! You are now officially in the market.

Now the fun starts!

Is that all there is to explain what is commodity trading?

Heck, no!

There are definitely many more aspects and details to putting on a trade and trading commodities successfully.

But that’s a simple and basic point of view of how to explain commodity trading from the angle of putting on the trade.

Wha t is Commodity Trading

The Trade — An Example

Let’s look at a futures contract trading example in our what is commodity trading overview.

You’ve analyzed and selected a commodity — Gold — to trade. and the specific month you want to trade.

1). You expect the price of Gold to rise over the next 4 months.

2). So, you agree to buy (go long) 1 futures contract of Gold today from a seller (through a broker/exchange) for a fixed price (say $500), which, for this example, we’ll say is the currently trading price of Gold on the futures market.

You now have a ‘long’ position (expecting rising prices) with 1 Gold futures contract, with a delivery date 4 months in the future. (All futures contracts have a delivery date, but you plan to exit the contract before then) .

So you have 3+ months during which you expect Gold to rise in price and hopefully realize a profit.

The seller now has the corresponding ‘short’ position, having agreed to sell you the Gold futures contract for $500.(That seller,for example, may feel Gold will fall in price over the same period) .

3). Over the next 4 months, the price of Gold rises, as you had hoped. This creates a profit for you.(If the price of Gold fell, you would have incurred a loss on the futures contract trade.)

In this example, the price of Gold rose, so you want to exit the trade and take your profit, not take delivery of the physical gold commodity itself.

4).So, before the contracts’ expiration date, you agree to sell your Gold futures contract to another party who wants to buy it at the specified & current price of $600 (thinking it will go higher still).

You sell your contract for $600, exit the trade, and pocket your profit (less commissions).

In a nutshell, that is a top line view how a trading a futures contract works, from the speculators perspective.

What is Commodity Trading

Exiting with a Profit

OK — here it is. The bottom line of what is commodity trading.

Ready?

Buy low and sell higher. And sell high and buy back lower.

Yes, that’s a bit on the lame side, isn’t it?

But, it’s not that far off from the truth in how to explain what is commodity trading, and profiting from it, in a rather simple manner.

As mentioned earlier, in online futures trading you can profit from both rising and falling commodity market prices — a distinct advantage over stock/equity markets.

Commodity futures trading profits (and losses) are enhanced due to the multiplier effect of leverage — which can result in VERY large gains (OR losses) during a big price move.

This makes the power of leverage one of the major trading draws to new and prospective traders. We’ll talk more in depth about that later.

Back to making profits.

In a rising commodity market, you want to time your trade entry point to get into (buy/go long) the market at the best (lowest) possible price.

Assuming the price moves you expected materializes, you want to exit your trade (sell) for a profit at some higher or predetermined higher price point.

The reverse applies when trading in a falling price market. you want to short the market.

In this case in our what is commodity trading overview, you want to sell short to get into what you expect will be a falling price market, then buy back at an even lower price, and take profits. assuming the price falls as expected.

(There are various methods and trading strategies for doing so, such as buying dips, swing trading and others, which we’ll get more into in another section of this site) .

Your trade exit point can be a predetermined point you set before entering the trade.

Or it might be where your trade strategy or indicators tell you it’s time to exit.

Or maybe the market stops you out, hitting your trailing stop loss, unexpectedly ending the trade for you. Perhaps it’s a combination of factors.

And it goes without saying, but I’ll say it anyway because it’s WAY too important not toemphasize

. you WILL suffer losses in trading futures — potentially some very large losses that can knock you totally out of trading.

- UNLESS you treat the commodity markets with respect.

That’s the tough, darker underbelly of part of the answer to the question of what is futures trading.

That means minimizing your trade loss potential by learning and sticking to a conservative money management strategy and practicing sound trade management.

Hopefully, this more general overview about ‘what is commodity trading’ helps you to get your arms and mind around it, and adequately answers the question, ‘what is futures trading’ at least in basic terms.

But don’t stop here.

There’s more detailed futures trading information throughout this site to help you learn and explore the world of what is futures trading, and even brush up on some fundamental trading aspects you may have gotten away from.

To return to the Home Page from What is Commodity Trading, click here

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Trading in Futures, Index Futures and Options of Futures involves

substantial risk, may result in serious financial loss, and is not

suitable for everyone.

As with Future Trading, trading Foreign Exchange instruments carries

the same substantial risk of financial loss, and is not suitable for many

members of the public.

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