Commodity Futures Trading

Futures trading offers speculators the opportunity to use enormous leverage. For example, a standard size soybean contract is 5000 bushels of soybeans. At $10 a bushel, this represents roughly $50,000 of soybeans, but the margin required to control that contract may only be a few thousand dollars.

So, a movement of just a few percent in price of the underlying commodity could equal hundreds of percent movement in the value of the initial margin deposit. It is this extremely high margin that has led commodity futures trading to having a reputation as being a place for gamblers.

However, despite commodities gambling reputation there's a perfect economic justification for its existence. Commodity trading allows hedgers the opportunity to offset price risk. Hedgers include people such as farmers, food manufacturers, oil refiners or anyone who commercially deals in the physical commodities market. What a hedger can do with commodity futures trading is lock in the price they are able to purchase or sell a commodity for at a future date.

For example, a farmer recognizes that, at current prices, he can make a sizeable profit from his corn crop; but he will not harvest it for another 60 days. His risk is that prices drop between now and crop time. So, he can sell his un-harvested crop today in the commodity futures market at current prices. This way should prices drop he has already locked in his profit.

The speculator, on the other hand, the person that assumed the risk is gambling that prices will go even higher, and he too can potentially make a profit by selling at even higher future prices (or lose money if prices drop). The farmer is happy as he was able to secure his profit, and the speculator is happy as he gets the opportunity to assume the farmers risk with the potential for profit.

Such futures trading leads to price stabilization in the marketplace. Without such risk transference mechanisms in place, consumers would be subjected to wild swings in commodity costs. Imagine if every time a shopper went to the supermarket their bill varied by 20-30 percent for the same groceries! This would also be the situation in countless other industries that use commodities. The bottom line is that regardless of its betting reputation, commodity futures trading serves a vital role in today’s economy.

For more information on our futures trading system Relativity, please contact us.

Dean HoffmanDH Trading Systems

Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future performance.

TAGS: Futures Trading

PhD mathematician and Market Wizard William Eckhardt once said that emotionally, futures trading is a negative-sum game, and the only reason to trade is for financial gain. What does this mean? It means that the pain of losing is always bigger than the pleasure of winning. It means that trading is going to be incredibly difficult emotionally, so traders had better at least make money at it! Let’s look at some common trading emotions.

1. Fear 2. Elation 3. Panic 4. Anxiety 5. Apathy 6. Uncertainty 7. Confidence 8. Arrogance 9. Greed

There are many more. This is just a quick list off of the top of my head. Traders who have traded for any period have experienced most or all these emotions. The problem is that each one of these emotions is potentially hazardous to your financial health. Each one of them can cause a chain reaction of thinking that is counter to successful trading.

So what do we do? I believe the answer is to be aware of the tendency to slip into harmful emotional states if we do not vigilantly guard the psyche. We have to set the game up ahead of time to fall within the bounds of comfort. This means traders have done their research and have a system in which they are 100% confident. Part of this systems design includes risk governors that do not allow a trader to get in over his head regardless of how unpleasant the current period. This foresight will give traders the peace of mind they need to deal with adversity.

Traders also need to have realistic expectations for profits. Despite the occasional tremendous luck of some, trading is not a get rich quick business. Traders need to realize that trading is like breathing. Profits are the equivalent of inhaling and losses are the equivalent of exhaling. As we know, it is impossible to only inhale, we would quickly expire! Traders need to accept that losing is a totally natural, normal and welcome part of trading success.

With the proper mix of experience, research, trading systems and money management a trader can come to a place of poise and certainty. Not a certainty that any given trade will or will not work, but a sense of certainty that what he is doing is sound and that he will in the end win if he simply remains consistent.

For a more detailed discussion of trader psychology, please email us.

Dean HoffmanDH Trading Systems

Commodity trading carries significant risks and is not suitable for all investors. Past performance is not indicative of future performance.