Commodity trading – Chapter 2: Commodity trading

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A significant number of individuals have benefited enormously from trading in the commodity markets. This is because it is one of the few areas where a person with limited capital can make a big profit in a short period of time.

However, commodity trading has also developed a bad reputation as being risky for the average investor, as the majority of people who have entered this market have lost money. The point is, commodity trading will only become risky if you let it be! That is, do not trade more than what you can afford to lose.

If you regard commodity trading as a business enterprise and treat it with the same seriousness as a normal business, chances are you will make a lot of money. However, if you view commodity trading as a “get-rich-quick” plan, chances are you will take reckless risks and lose your money. Like all investments, you should always act with caution when it comes to trading commodities.

Commodity trading is basically futures trading. However, unlike investments like stocks and bonds, you don’t buy or own anything when you trade futures contracts. What you are actually doing is speculating on the direction of the price of a commodity. When we use the terms “Buy” and “Sell” in futures trading, we are simply indicating the direction of the futures prices we want to take.

For example, an oil speculator will buy an oil futures contract if they think the price will rise in the future. Conversely, he will sell oil futures if he thinks the price will go down. For every transaction, there is always a buyer and a seller. Between them, no one actually owns the physical oil, just the contract to take delivery of it at a certain price at a certain future date. Additionally, a speculator only needs to deposit sufficient capital to cover any losses with the brokerage firm they are dealing with before trading futures contracts.

Besides oil, there are also futures contracts on agricultural commodities, financial instruments, currencies, bond and stock indices. Physical delivery of these commodities is extremely rare and in most cases a trader will simply offset their position before the futures contract expires. If he speculates correctly and the price moves to his advantage, he will profit, otherwise he will suffer a loss.

Read Commodity Trading – Chapter 3: What is being traded?
Read Commodity Trading – Chapter 4: Using Commodity Trading As An Investment Vehicle
Read Commodity Trading – Chapter 5: Benefits of Commodity Trading
Read Commodity Trading – Chapter 6: Disadvantages of Commodity Trading
Read commodity trading – Chapter 7: Risks associated with commodity trading
Read Commodity Trading – Chapter 8: Risk Management
Read Commodities Trading – Chapter 9: Steps to Take When Trading Commodities
Read Commodity Trading – Chapter 10: Commodity Trading – A Losers Game?
Read Commodity Trading – Chapter 11: Learn to Trade Commodities
Read Commodity Trading – Chapter 12: Creating a Trading Plan
Read Commodity Trading – Chapter 13: Stress in Commodity Trading


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