Commodities that are available to trade include: corn, wheat, pork-bellies (the stomach area that makes bacon… if your wondering) soybeans, silver, gold, heating oil, orange juice, coffee, lumber, and numerous other common staple items.
Huge producers and companies use commodity “futures” contract prices to lock in their future selling price for the commodity in question in advance of its delivery. This is known as “hedging.” As it is a zero sum game, the other side of that transaction is the commodity trader, who speculates (educated guess) on whether the price of the commodity will rise or fall before that contract is due for delivery. Because futures contracts are purchased using leverage, these instruments lend themselves to speculation.
As an example: Controlling a corn contract that’s worth $5,000 may only require the trader $500 of actual cash, or approximately 10% of the face value of the contract. If the corn rise in value, and the contract say is now worth, $5,500, the commodity speculator has just made a $500 profit on his $500, for a 100% return. Now compare this with the stock market, which limits leverage to only 50%, so $5,000 worth of a stock requires a minimum capital of $2500. If this stock goes up to $5,500, the $500 gain goes against the $2,500 invested. So the return is only 20%. The 100% return trading commodities sure looks a lot better, right?
You can see why traders in search of quick money are hypnotized by the glamor and simplicity of commodity futures trading. The problem however, is that this leverage works in both directions. Because of this, traders can lose their entire trading account in a matter of mere minutes due to the wild price fluctuations that can occur in the volatile futures markets. Let’s say for example that the same $5,000 contract drops to $4,000 in value instead of it increasing. Not only do you lose the original $500 margin for the contract, but an additional $500 to boot. Yes, you can easily go broke.
So why do more and more people line up to trade the futures market? Well, most traders do not wake up one morning and say.. “Okay, I think I’ll start trading commodities today.” What really happens is, they will receive a sales pitch from a so called commodity trading “guru” who’s claiming to have a no-fail “system” for generating and guaranteeing sure-fire profits in the commodities markets. These “systems” can range from $250 up to $10,000 or more, and all promise almost instant “huge profits” from a small starting investment.
The headings for their ads usually scream… “Turn $5,000 Into 1 Million Dollars In Less Than A Year.” Greed takes over. The commodity system then goes into a long sales letter spiel that describes something like a winning time tested method that can win “9 out of 10” trades or something similar.
Of course, with experience, it is possible to correctly win 90% of the time, and it is possible as some traders do and have amassed millions of dollars in a very short period of time. So why are they selling their super-duper, no fail $195 or $1995 trading course giving away their secrets? Because they probably haven’t made a cent with the trading program or actually trading the market! It’s a lot easier and a lot more ‘safer’ money to be made selling these programs to others wanting to and getting into commodity futures trading.
There is no proven ‘sure-fire’ way to consistently make gobs of money in the markets, simply because the underlying commodity prices are too unpredictable and can swing back and forth without reason. That’s why the only ones making money in the commodity markets are… the brokers and the program ‘systems’ seller. Brokers are those who collect a commission for executing trades regardless if it wins or loses.
But keep in mind there are a handful of ultra successful professional traders who make a great living trading these markets. But, the vast majority (in the high 95%++), who trade the commodity futures market lose money. Unfortunately, with the glamor associated with huge returns and easy money, newbie traders enter the markets each year, only to quickly lose their entire accounts.
Obviously, you don’t want to be one of them! Study and paper trade as much as you can before you plunge into the markets by opening a live account.