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Commodity Futures Tips on Successful Trading
Commodity futures trading refers to trading of futures agreements. These agreements are deals made to trade the primary commodities at fixed rates in the future. The rates are usually based on the existing or prevailing day rate. Similar to stock trading, commodity futures are traded in particular centralized trading markets like Globex and S&P.
Today, there is a massive increase in the number of commodity traders trading futures agreements because of many reasons listed below:
- low rates of commission in comparison to trading underlying futures stocks
- lower initial investment required
- simplicity of trading that enables anyone to do trading online or virtually
- the present of high liquidity in the market due to huge trade volumes made daily
- the stability of the market
- easiness to own an underlying commodity wherein one can buy a high-priced product
at a lower price during the time of agreement
- the ability to do trading at home with decreased working capital
- the availability of small futures that have narrow spreads and less account minimums
- the presence of various underlying products in the market
You can possible become successful in commodity futures trading. At the futures markets, the speculators and the hedgers meet to predict whether the price of a commodity will rise or fall in the future based on a particular market or currency index. Just like any market, commodity futures trading can be risky, however the potential to see both long and short term gains can be considerable.
There are different futures markets as well as strategies that a person can use to gain trader profits from commodity futures trading. Primarily, a commodity refers to the physical product whose value is decided by the forces of demand and supply. These forces include precious metals, energy, grains, and more. The commodities are traded in a centralized market at a predetermined time whether its price will rise or fall. In trading commodities, it would be strategic to use straddles. A straddle is created holding the same number of puts and calls with the same expiration date and strike price. The “calls” is where the trader expects that the price will rise while the “puts” is where the trader speculates that the prices will fall.
Another commonly used strategy in gaining traders profits from commodity futures trading is scalping. Just like commodities, the prices of trade currencies in scalping are speculated to rise or fall. In the value of currency, the scalpers try to take short-term profits off the incremental modifications. As this is done repetitively, the profits will continue to grow in time resulting to significant total profits as all small profits are combined. In able to continue gaining trader profits, one must require strict discipline in order to continue making short-term and small profits while preventing large losses.
In the commodity futures markets, there are two main types of futures trading agreements available. The first type is called commodity futures and requires physical delivery. The futures in this type includes agricultural commodities. The second type is financial futures, which often requires cash settlement. This type involves mutual funds, bonds, treasury notes, and the like.
Market Psychology,Vitally Important for Success
1. Understanding and acting in accordance with market psychology is vitally important. It is no good being a good technician if you are a bad tactician.
2. Market psychology is very different from the psychology necessary for normal business and/or academic success. Many highly successful businessmen and academics have been abysmal failures as market operators.
3. Develop your own system, test it, then stick with it. Other people's systems may work well for them, but probably will not be compatible with your psychological make-up.
4. Accept total responsibility for the results of your trading results. Even if you authorized someone else to trade on your behalf, it was you who made this decision - nobody forced you. Remember losers always look for somebody else to blame. Winners look to themselves particularly if they have to take a loss on some trades - as is inevitable for all traders and all systems.
5. Don't take the advice of others. They could be thinking in a totally different time frame from you.
6. Always place a pre-calculated stop whenever you open a trade and decide how you are going to move this stop for all possible movements of price during the trade. Stick to your plan during the trade.
7. Do not keep ringing your broker during trading sessions to enquire about market prices. (The exception of course, is the day trader who would be crazy not to have his own quote system.) Your stop will protect the decision you should already have made. Ringing your broker will adversely influence your decision and may well cause you to act irrationally and hence almost inevitably wrongly.
8. Never worry that you could have done better had you second-guessed your system. Concern yourself only that you followed your system and predetermined stops. No system is perfect. The best systems can only give you an edge - never 800 of profitable trades.
9. Do not trade for excitement. Avoid elation over fast profits and depression over losses. If you have a good system it does not matter whether any particular trade makes a profit or a loss. Remember, all systems will generate losses. Only chide yourself if you broke the rules of your system (this applies to profitable as well as losing trades).
10. Always trade with a view to protecting capital and limiting the value (not the number) of losses and never with a view to making large profits. Net profits will automatically follow if you execute a good system well.
11. Never worry about the ratio of the number of profitable to losing trades. A good system may well generate a relatively large number of small losses (and small profits) and relatively few large profits. Sticking rigidly to a good system will however produce a good net profit over time.
12. Cut your losses quickly and let your profits run (with a predetermined stop). You should have read this advice so many times that it almost sounds trite - it is not - it is the best summary of all these rules that you could have.