Insights from Commodity Trading Experts: Key Principles Revealed

When you speak with experienced commodity traders, you may get caught up in the complexity of the language they use to describe their trading practice. For example, they often speak of options and futures markets, stock use ratios and margin calls. If you ask a commodities trader to plainly tell you a few facts about the business, however, the trader will give advice not all together different from a traditional stock adviser.

#1 Risk Can Pay off

Options and futures trading is the riskiest choice for commodities trading. With these contracts, an investor promises to buy or sell the commodity at a given point in the future, and he or she has no choice but to fulfill the contract if it is called in. With a traditional commodity investment, particularly in a hard commodity, an investor could wait out a temporarily unfavorable market. In the more complicated and risky scenarios, though, there is far more reward. If a trader can accurately predict a future price, he or she can profit the same way as a stock trader profits from accurately predicting a short sale. Riskier investments are more profitable.

#2 Risk is Still Risk

Of course, the investments are only profitable if the risks are the right risks. If you talk to a commodities trader who has been in the business for awhile, he or she can likely describe the worst day on the job. Common advice for any individual looking to get into commodities trades is that you have to be willing to lose big. Traders understand that these losses, whether they are very short term or sustained for a longer period of time, are part of the game. Since they know the losses will come, they go in with high capitalization that can sustain bumps along the way.

#3 Each Commodity is Unique

When you are considering buying gold, you will have to analyze its potential pricing with different models than you would use to estimate the value of soy beans in the coming year. Both investments can be highly profitable if your predictions are accurate. However, gold, as a hard commodity, will see price fluctuation due to factors that do not apply to soy beans as a soft commodity. The uniqueness of price of a certain commodity is exemplified with the fluctuations in corn price in the late 2000s. When corn was first discovered to be a source of ethanol, the price sky rocketed. It was over-produced, its value in ethanol dropped, and the price of corn fell to record lows.

#4 There is Always an X Factor

In the same scenario with corn, an uncharacteristic late freeze could come along next year and knock out half the crop. Suddenly, the price could recover. There is always an X factor when you invest in a commodity because it is an actual product subject to actual world events. Oil is one of the least predictable assets because its price often depends on political motivations of a small group of controlling countries representing one of the biggest X factors in the entire world economy.