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Commodity Futures

Commodity Futures Overview

The process of trading commodities is also known as futures trading. Unlike other types of investing such as stocks and bonds, when you trade futures you don’t actually buy anything.  Trading commodity futures includes the speculation of the future direction of the price of the commodity you are trading. To put it another way, you are actually betting that the future price will either go up or down, and how that will effect you depends on if you are the buyer or the seller of the commodity. The large companies that operate in these futures markets use futures contracts to lock in their selling prices for the product in advance of delivery of the product. The company that does this is actually doing what is referred to as “hedging.”  The other side of the transaction, when dealing with commodity futures, is the trader who speculates on whether the commodity price will go up or down before the contract is due for delivery. When trading commodity futures, no one has to take, or make a delivery of the underlying product that the futures contract represents.  Most of the time, the trader merely offsets his or her position at some time before the date that the contract is due.

The commodity futures market includes items such as wheat, corn, gold, silver, pork-bellies, heating oil, lumber, and many additional commodities. The main commodity trading groups actually include currencies, interest rates, stock indices, grains, meats, energies, metals, and food and fiber.  Currency trading is a great market for long-term trend followers since they exhibit long-term trends that reflect the health of the economy.  Interest rates also have great long-term trends with the best contracts being the T Bonds and T Notes.  Another category in the commodity futures market includes stock indices. Most commodity and futures traders use the S & P but they may also trade the DAX, the NASDAQ, and the Dow Jones. Energy is another group used when commodity investing, and it is the biggest physical commodity group in the world as it relates to volume. It also exhibits great, long-term trends all of the time. The main focus for speculators trading metals is on Copper, Gold and Silver. Additional metals that have produced great trends in recent years include platinum, and palladium.  Grains and meats have recently lost their luster and now speculators trade more financials, but the popular commodities in the group include pork-bellies, as mentioned above, live hogs, feeder cattle, and live cattle. The last group includes the food and fiber group. These commodity futures markets look at orange juice, cotton, coffee and cocoa, however cotton is probably the best market for long-term trend followers.

If you are interested in trading commodity, it is important to familiarize yourself with the COT report. The COT report stands for Commitments of Traders and the report is drawn by the Commodity Futures Trading Commission.  This report contains detailed information in the futures market on positions and volumes of contracts.  It is not meant for exclusive use of foreign exchange trading, but it instead lists out the conditions in the futures markets about contracts and whether the net contracts were long or short.

Many successful traders have become very rich in the commodity markets. When looking to invest in commodity futures investors know that it is one area where an individual who has limited capital can make great profits in a relatively short period of time. Patience and education is a must if you are interested in the commodity futures market.

 

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