Commodity Futures Trading Strategies

commodity futures trading

Even if you make a decision to be involved in futures trading in a manner that does not involve engaging in trades on a daily basis, it is still very important that you comprehend the dollars and cents of losses and gains that are realized in futures trading. This kind of understanding is very crucial should you intend to trade on your own accord. There are several strategies that can be employed by futures traders as they pursue speculative profits. Some of these strategies include:

Buying to profit from an expected increase in price

An individual who expects that the price of a certain item or commodity will rise over a given duration can seek to make more profit by considering to purchase future contracts. In case the person is right in predicting the timing and direction of the change of price, it is worth noting that the futures contract can be sold later at a higher price, hence earning some profit. However, the outcome of the trade will be a loss should the price reduce instead of increase. Due to leverage, losses or profits may be higher compared to the original marginal cost.

Selling to profit from an expected decrease in price as another commodity futures trading strategy

The only way by which this options trading strategy is different from buying to profit from an expected increase in price is the trades’ sequence. This strategy requires that you consider selling a futures contract first instead of purchasing. In case the price reduces as expected, a person can realize a significant profit by later buying an offsetting futures contract at a cheaper price. It is worth noting that in this case, the profit gained per unit will be the total amount by which the buying price is lesser than the initial selling price.

One may also consider spreads as another good strategy for commodity futures trading

While the majority of the speculative futures trade involve just a simple buying of future contracts so as to gain profit from an expected increase in price, or just a simple sale in order to gain profit from an anticipated decrease in price, many other strategies such as spreads exist. A spread simply involves purchasing of a futures contract and having another contract sold. The purpose of doing this is to ensure profit from an anticipated alteration in the relationship between the selling price of one contract and the buying price of the other contract.

Stop orders are also among the most crucial strategies for commodity futures trading

stop loss orderGenerally, a stop order refers to an order that your futures broker places to sell or purchase a certain futures contract when and if the prices get to a specified level. This strategy is commonly used by traders and investors as an effort of limiting the amount of money that they are likely to lose in case the price of futures moves against their set position. For instance, if you were to buy a crude oil futures contract at sixty-one dollars a barrel, and desired to limit the loss you can incur to one dollar per barrel, it may be necessary that you place a stop order so as to sell an offsetting contract in off chances that the price should fall to sixty dollars per barrel. When the market gets to your specified price, it is worth noting that a stop order becomes necessary to execute the desired business.

It is also worth considering trading commodities utilizing trend lines as a strategy for commodity futures trading

Trend lines are a perfect technical tool for analysis that should be used when trading futures, commodities, and stocks. Trend lines are mainly utilized to determine the market trend, and they help in establishing an excellent place to get into the market. They also offer notices concerning expected changes in trends, thus allowing traders to have exit positions with the current trends, and use other directions to get into the market. It is also a good strategy to trade commodity futures by specializing in trading a single commodity. There are over thirty commodities that are traded actively. However, it is not an easy task to deal with all of them at once.