Commodity Futures Trading - Why it's not for average investors

Commodity Futures Trading - Why it's not for average investors

If you do not mind losing $ 5,000 for 10 minutes, you can enjoy the commodity futures trading contracts. There's an old saying among commodity traders: "It is easy to make a small fortune in good Just start with great happiness." This is not a business for people who are emotionally connected to their money, yet thousands of average "investors are attracted to commodity markets from year to year. Why? Because of the possibility of making high percentage gains with help of built-in support that is available to commodity futures traders.

Commodity markets are wheat, corn, soybeans, pork bellies, gold, silver, heating oil, lumber, and numerous other general commercial facilities. Huge companies operating in these markets use commodity "futures" contracts to lock in their selling prices for the product in advance of delivery. This practice is called "hedging." On the other side of that transaction is the merchant who speculate on whether commodity prices will go up or down before the contract is due for delivery. Because futures contracts may be purchased using leverage, these financial instruments lend themselves to speculation.

For example, control of corn contract worth $ 5000 can requrie $ 500 of real money, or 10% of the nominal value of the contract. If corn goes in value, and the contract will become worthy of, say, $ 5,500, the speculator has made $ 500 on his or her original $ 500 for a 100% return. Compare this with the regular market, which limits the leverage of 50%, so $ 5,000 worth of shares requires a minimum of $ 2,500 of capital. If the stock goes up $ 5,500 worth of 500 dollars profit on $ 2,500 invested, the return of "only" 20%. 100% return sure looks a lot better, right?

You can easily see why investors are looking for quick gains are hypnotized by the lure of big profits with maximum leverage in the commodity futures trading. The real problem, however, is that leverage works in both directions. You can lose your entire investment in a matter of minutes because of wild price gyrations that sometimes occur in these difficult markets. Let's say the deal falls $ 5,000 to $ 4,000 in value instead of increasing. You've just lost the original $ 500 you put in the contract, but an additional $ 500. You can go broke fast this way.

So why do people play this game? Average investors do not wake up in the morning and say to themselves, "Truly, I think I'll start trading commodities." What happens is, they get a sales pitch from the commodity trading "guru" claiming to have "system" to generate reliable profits in these wild markets. These "systems" range in price from $ 25 up to $ 5,000 or more, and sold on the promise of "huge profits" from a small initial investment.

Newsletter writers or commodity gurus regularly pitch the myth of turning $ 5,000 into a million dollars in less than a year. The typical commodity system pitch comes in a long sales letter or booklet that describes a method for winning the "9 10" similar trades or inflated claims.

Of course, if it is possible to correctly trade 90% of the time, a person could easily collect millions of dollars in a very short period of time. So why are these guys so eager to spend $ 195 on their super-duper trading course? Because they probably are not making real money with their trading program! There's much safer to make money selling to others the idea of ​​getting the commodity futures trading.

There is no reliable way to consistently make money in these markets, simply because the underlying commodity prices can swing wildly back and forth depending on a complex set of variables, many of which are quite unpredictable. Because only people consistently making money in commodity markets are brokers, who collect commissions for performing trade, regardless of whether you win or lose. There are also a number of successful professional traders who make a living in these markets. But the majority of people who dabble in commodity futures lose money.

Unfortunately, the lure of large doors and easy money, a fresh crop of innocent traders enter the market each year, only to be quickly fleeced out of their money. Not one of them! Leave a commodity futures trading professionals and stick with more boring forms of investment such as mutual fund investing or stocks and bonds.


Previous Article
- Introduction to Bollinger Bands; helpful in FOREX trading