Trading in commodity futures involves buying and selling of contracts. But, the delivery of physical goods involved in the transactions has to take place in the future. Common commodities traded in commodity futures include metals like copper and gold.
Other types of raw products can as well be transacted. Ideally, trading in commodity futures allows buyers and sellers to manage risks involved in this form of business.
Factors to consider when trading commodity futures:
Anyone interested in venturing into the commodity futures market need a grasp of the factors that affect the industry. These factors include:
General economic condition
Just like any other investment, the general economic condition of a country plays a critical role in establishing the sentiment of the futures market. A booming economy will boost your expectations of an encouraging price rise while trading. Opt for flourishing economies if you wish to make profits whenever the prices increase in future.
Political stability has a considerable impact on the prices of commodity futures since it affects the economy too. Take time to research on particular growth aspects of the economy before making a final decision to invest in futures.
Supply or cost of production logistics
Commodities are an important aspect of the futures markets. So, factors affecting supply or cost of commodity production affect the profitability of futures contracts. For instance, futures from an agricultural commodity are affected by unfavorable weather.
During unfavorable weather, traders often expect supply to dry up forcing a necessary increase in price. Most traders prefer going long on such commodities that promise a huge price rise. Import/export restrictions and policies can also have a large impact on the trading of commodity futures.
Since most futures trade transactions often involve cross-border transactions, the complicated import/export formalities can eventually lower their prices.
Commodity futures contracts come with exact expiration dates. Even with fixed prices, commodity futures can become less attractive to others as the expiration date approaches. This can result in futures contracts expiring as worthless investments.
Your emotions affect how you trade in commodity futures. You have to deal with it to allow your mind enough time to analyze the present economic conditions. Discerning the current market trends on your own will enable you make the right moves at the right time.
Futures-advantages and disadvantages
The advantages of trading in commodity futures include:
- Commodity futures attract relatively small commission charges as compared to other forms of investments.
- Commodity futures can be highly leveraged to achieve greater gains even with limited funds.
- Traders can open both long and short positions. It is also possibly to reverse the positions with much ease.
- Commodity futures lead to very high liquidity.
Disadvantages of trading in commodity futures include:
- They can be quite risky at times since leveraging is involved.
- Each commodity futures contract is a standardized product and specifically written for a fixed amount and terms.
- The lower commission costs involved in trading can tempt the trader into taking additional trades. Definitely, this can lead to over-trading which is dangerous to the trader.
Even though commodity futures are risky, traders can trade in more than one contract. Spreading your commodity options is the cheapest way to limit your risks. You could lose in one but profit in another.
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From: Patrick Sekhoto