In commodity trading, a trader needs to decide whether to buy or sell the market. The size of his position will determine how much margin he will need to invest. He must also consider risk mitigation, using stop-losses or limit-close orders to close a trade at a predetermined loss or profit. Commodity traders can use these tools to minimize their risks. If he is concerned about making a loss, he can always adjust his position size before making a trade.
In commodity futures trading, two parties enter into a legal contract to exchange a particular asset for a certain price at a specific time in the future. In this case, the parties do not know each other, and the asset being transacted is either a commodity or a financial instrument. However, both parties are obligated to meet delivery dates and price specifications. A futures contract is a standardized legal agreement that is the foundation for commodity trading.
A term that describes both futures and cash in commodity trading is the basis. A basis is the difference between the spot price of a commodity and the price of its futures contract. The basis is calculated relative to the next to expire futures contract. A basis may reflect different time periods, product forms, grades, and locations. It is also called the cash flow breakeven selling price. Typically, basis quotations are used to determine the price at which a company can break even on a commodity production or sales process.
The fundamental difference between speculating and hedging in commodity trading is that speculators book profits when the price of their underlying security fluctuates. Hedgers try to reduce or even eliminate volatility in commodity prices. Although both types of traders are interested in the short-term results of trading, they approach commodity trading differently. Here are a few differences between speculators and hedgers. Hedgers are risk-averse, while speculators prefer to take more risks.
Investing in futures contracts
A farmer may buy a futures contract on the price of corn before it is harvested to lock in the price and make sure it does not drop in the market. The same logic applies to businesses, such as airlines, which can use futures to control fuel costs. The value of a contract can rise or fall, and traders are seeking to profit from a change in the contract price. Futures contracts can be purchased or sold, and are traded electronically.
When you trade in the futures market, you may have heard about leverage. Leverage is a technique that allows you to borrow money and invest it in a certain amount of commodities. Since capitalism began, wealthy people have used leverage to make themselves even richer. But this strategy can also be risky, especially if you do not have a good trading strategy. If you want to maximize the use of leverage in commodity trading, you should follow the tips below.