Commodity Trading Futures

 

Who Trades Futures and How to Invest in Commodities?

Conventionally, traders are divided into two main categories, hedgers and speculators. Hedgers use the futures market to manage price risk. Speculators on the other hand accept that risk in an attempt to profit from favorable price movement. While futures help hedgers manage their exposure to price risk, the market would not be possible without the participation of speculators. They provide the bulk of market liquidity, which allows the hedger to enter and exit the market in an efficient manner. Speculators may be full-time professional traders or individuals who occasionally trade. Some hold positions for months, while others rarely hold onto a trade more than a few seconds. Regardless of their approach, each market participant plays an important role in making the futures market an efficient place to conduct business.

Have a Trading Plan

Before you actually enter into a trade, develop a plan to guide your decision-making process. Your plan should be based on careful analysis of the markets you intend to trade. The following are some of the issues you will want to evaluate. What is your objective for the trade? To capitalize on an anticipated report, chart pattern or market indicator? To participate in a longer-term trending market? How much risk is in the trade and how much risk are you willing to accept? If the trade turns against you, at what point will you liquidate the position? What types of orders will you use? Can you have protective stop loss orders resting in place? How will you monitor market developments and price movements? Visit cmegroup.com/gettingstarted for tutorials that may be useful in developing your trading plan.

Stick to Your Plan

As the saying goes, failing to plan is planning to fail. A key element that differentiates many successful traders from the unsuccessful traders is discipline. Successful traders have emotions like everyone else, but they do not let their emotions get in the way of making good trading decisions. For instance, when the market moves against a trader and passes through a previously established exit point, a good trader will exit the trade and accept the loss. This does not mean that the trader is happy about the loss, but he or she understands that having a good plan is only half the battle. The other half is sticking to it.