Most professional commodity traders make their living form exploiting small moves in commodities prices. They take a series of smaller profits throughout the year by continually buying and selling commodities. Some make multiple trades each day, while other hold positions for days, weeks and possibly months. However, most traders have the objective of trading in and out of positions on a regular basis.
There is usually some method, system or analysis that every trader uses to make trading selections in commodities. Trading can be considered an investment if a professional money manager analyzes the fundamentals of a particular commodity; buying and selling based on perceived valuations. These trades usually last for longer periods of time.
The opposite approach comes from individual traders who try to make money from trading commodities. This is almost always considered pure speculation. It is even more pronounced when we consider day trading. This should be considered risk capital and not necessarily money you will expect to have at retirement.
There is nothing wrong with any of the aforementioned trading techniques. They are just classifications. It is obviously true that professional commodity traders have more success than part-time, novice traders. Some people make much more money through trading than they do through investments.
Investing in commodities can be just as easy and rewarding as any other investment class. There are many instruments to invest in commodities these days – commodity ETFs, managed futures and commodity based stocks. Commodity investing is considered more of a long-term endeavor than commodity trading.
An investor can buy commodity ETFs and hold them in a brokerage account for decades as part of a diversified investment portfolio. Inflation over time should increase the prices of commodities and balance the risk of overall investments.
Managed futures play the same role, although they might take a different road to get there. One of the major differences is they are managed by a CTA and the accounts are actively managed. The CTA might take advantage of commodity prices moving higher or lower. This is not a buy and hold approach where you sit back for a number of years and wait for commodity prices to increase over time. Each CTA has a unique way to grow the value of your investment through the commodity markets.
Whether you and speculating on the markets through active trading or investing in commodities with a buy and hold approach, there are still risks. Speculating certainly carries more risk and it is highly dependent on the skills of the trader. Some traders manage to reduce the risk to a very small amount, while other traders have an insurmountable level of risk.
The level of risk is often characterized by the amount of leverage and diversification involved in the investment or trading account. More risk usually translates into higher potential returns. Lower risk usually translates into less potential returns. It is up to each individual on how much risk they want to accept when it comes to putting money on the line with commodities.