Commodity trading refers to the trading of physical goods or raw products including food, livestock, fuel, and precious metals that are traded on the exchange market in the same way that cash or stocks are exchanged and traded. When investors buy commodity futures contracts, in effect, they buy a standardized contract that gives them the right to buy or sell the commodity at a certain future date, known as delivery date, for a certain price, known as settlement price. Besides, commodity futures are settled daily and therefore, they bear nearly no credit risk as the risk is allocated over the daily cash flows until maturity.
Commodity futures day-trading offers investors the opportunity to diversify their portfolios and expect high return on investment because of the daily settlement that allows traders to leverage risk when they enter a position. For investors who want to enter the futures markets, the first step is to open a trading account with a broker at the Chicago Mercantile Exchange (CME). Investors are also required to open a margin account and remit the initial margin that is typically 3% to 6% of the value of the future contract. After each trading session, funds are added or deducted from the margin account and determine the settlement price based on the daily price changes. If the margin account reaches low levels, the maintenance margin limit is activated requiring the investor to put additional fund in the account of close the position.
The basic market principle in commodity futures day-trading is implementing a strategy of systematic profit that is realized by entering a liquid commodity market in the beginning of the trading session, and exiting during the same day. By doing so, investors are able to determine the market trend and implement a stop loss order to avoid losses, a profit target strategy to make bonus trades or an exit strategy to realize profit.
Besides, day trading is attractive because investors leave no open positions at the end of each trading session and can make money faster than in the stock market if they properly use their instinct and good research. To realize higher return, it is highly advisable to follow the trends for a period of at least four weeks. In doing so, they will be able to understand the trend pattern and enter trades in the direction of the price trend 25 market days. This will enable them to follow the market rather than predicting it.
On the other hand, commodity futures day-trading is one of the most difficult trading strategies. Investors have to be really focused on their strategy to come up with profitable day trading systems and avoid defaulting on their strategy. Moreover, day trading requires covering all expenses involved. For instance, although commodity trading does not require a lot of money as initial investment, the brokerage firm may ask for 50% of the stock’s value and there are also the costs of commodities that need to be covered.
Sources:
http://www.ehow.com/how-does_4689136_commodity-trading-work.html
http://www.articlealley.com/article_1331003_19.html
http://www.rb-trading.com/begin11.html
Written by Christina Pomoni
Financial Adviser – Freelancer Writer
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