Technical and fundamental analysis is the foundation of all trading and investing. Usually commodity traders use methods from both perspectives.
Commodity Futures Trading
Commodities are often traded via futures contracts. When investing in commodity-backed futures, the investor attempts to forecast not just the commodity price direction, but if it will happen within a certain time frame. A futures contract has an expiration date. No profits from can be had after a futures contract expires.
When deciding on commodity futures contracts, take into account this expiration date. An expiration date further in the future gives an investor more of an opportunity for a favorable price move. This added “time cushion” means that long-term futures contracts are more expensive than identical short-term futures. Remember to close a futures position before the expiration date to obtain gains from the trade.
When closing a trade, liquidity becomes important. A commodity trader may be in a great position to profit. All he has to do is close the trade; someone else has to buy the position he is selling, and quick. If there are no buyers for the commodities contract, the trader has a problem. Though he made a theoretical profit, a buyer must be found at this profitable price. Sometimes that does not happen. The trader has to settle for a lower price, and lower returns, before another buyer takes the contract off his hands.
Margin, expiration date and liquidity are three prominent factors that have a large effect on gains or losses generated by commodity futures.
Commodity trading is not for those new to trading and investing. Investing with indexes and individual stocks is good practice for the commodities market. In deciding which commodity to trade, focus on something familiar. For example, those working in steel refineries may have more insight into the price behavior of industrial metals. Traders familiar with farms or ranches may have an edge with agricultural or livestock commodities. For those not sure or not especially versed in trading individual commodities or stocks, a broad commodity index or ETF may be a safer bet. Researching commodity value and price movements can be done from a technical or fundamental perspective. Technical analysis offers versatility. The same techniques, metrics and indicators can be applied to any liquid, frequently-traded commodity, stock or currency pair. Fundamental analysis dives into the nuts-and-bolts of a commodity and gains a deeper understanding of economic, political and natural factors that may affect price movements.
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