The first thing to get out of the way when you consider investing in commodities is that you don’t have to worry about taking or making deliver of a truckload of commodities. The Futures Commission Merchant (FCM) your commodity broker is clears trades through will make sure you are out of the trades before this ever becomes a problem. Worst case, they will close out the position for you near the end of the contract and charge you a small fee.
Now, we get to the good stuff. Commodities offer investors the opportunity to make a lot of money. However, you can also lose a lot of money very quickly. Commodities trade in contracts and they are highly leveraged. For example, a contract of gold trades in 100-ounce contracts. You buy or sell one contract and control 100 ounces worth of gold. With gold at $1,600 an ounce, the contract is worth $160,000. As an investor, you only have to put up about $9,000 to control the contract. A $10 move in the price of gold equates to $1,000, which is an 11 percent move on the margin money you put up.
As you can see, the leverage is very high when trading commodities. A small move in the price of a commodity can equate to a large percentage move on a daily basis. This leverage has made some traders fortunes and caused other traders to lose all their money. It is very important to fully understand the risks before you begin trading commodities.
Once you understand the basics of commodities, you will have to decide which commodities you want to trade. Most technical traders don’t care which commodities they trade. They simply look at the charts and have no ideas whether the fundamentals are positive or negative. However, most people like to know what is going on with a commodity and they have an opinion on whether the price will go up or down.
Two of the most common commodities that people like to trade are gold and crude oil. Most people have some type of general understanding of these commodities. They are actually good commodities to start trading. Eventually, many traders will trade almost every commodity at some point in their trading life. Each market has unique characteristics and they are learned through experience.
It is relatively easy to open an account to trade commodities, but not everyone will qualify to trade. There is risk that you could lose more than your initial investment, so your broker will screen your application to make sure you are a good financial risk.
Taking it slow is the main piece of advice I give to new traders. The leverage on futures contracts can cause daily percentage swings that a stock trader might experience in a whole month. It is critical to adhere to the motto live to trade another day. Don’t try to make your fortune in one day. Learn the skills to become a successful trader by consistently making money every month.
If you can consistently make money each month, the leverage will allow for high returns. Over a number of years, there will be a lot of money waiting for you. If you try to hit a homerun everyday, you are setting yourself up for failure.