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Commodity Futures Trading Why It's Not For Average Investors

By: zack

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If you do not mind losing $5,000 in ten mins, you can enjoy trading commodity futures contracts. There's an old axiom among commodity traders [*CO]'It's straightforward to make a tidy sum in commodities. Just commence with a giant fortune!' This isn't a business for folks who are emotionally attached to their money, yet thousands of average'investors' get tempted into the commodity markets year on year.

Why? Thanks to the probability of making high % gains using the in-built leverage that's available to commodity futures traders. The commodity markets include wheat, corn, soybeans, pork-bellies, gold, silver, heating oil, lumber, and many other common trade items. The great firms that operate in these markets use commodity'futures' contracts to fasten in their selling costs for the product ahead of delivery. This practice is known as'hedging.' On the opposite side of that exchange is the trader, who speculates as to whether the priced of the commodity will go down or up prior to the contract is due for delivery. For instance, control over a corn contract worth $5,000 may only requrie $500 of real money, or ten percent of the face price of the contract.

If the corn goes up in price, and the contract becomes worth, say, $5,500, the investor has made $500 on their original $500, for an one hundred pc return. If the stock goes up to $5,500 in price, the $500 gain is against $2,500 invested, for a return of'only' twenty p.c..

The a hundred percent return sure looks much better, right? You can easily see why stockholders in pursuit of fast gains are hypnotised by the pull of large profits using maximum leverage in commodity futures trading. The genuine problem is that the leverage works in BOTH DIRECTIONS. You can lose your complete investment in a matter of minutes thanks to the wild price gyrations that often happen in these variable markets. Let's assume the $5,000 contract drops to $4,000 in price rather than skyrocketing. You haven't only lost the first $500 you put into the contract, but an additional $500.

You can go broke quickly this way. So why do people play this game? Average financiers don't wake up in the morning and say to themselves,'Right, I suspect I can start trading commodities.' What occurs is, they receive a selling spiel from a commodity trading'guru' claiming to have a'system' for generating sure fire profits in these wild markets. These'systems' vary in price from $25 all the way up to $5,000 or more, and are sold based on the guarantee of'huge profits' from a little beginning investment.

Newsletter writers or commodity masters frequently pitch the parable about turning $5,000 into 1,000,000 bucks in less than a year. The typical commodity system pitch comes in a long advertising letter or pamphlet that describes a strategy for winning on'9 out of 10' trades or similar inflated claims. Of course, if it was feasible to properly trade ninety percent of the time, someone could assemble millions of greenbacks in an exceedingly short period.

There's no guaranteed way to consistently earn money in these markets, just because the base commodity costs can swing wildly backwards and forwards dependent on a complicated set of variables, plenty of which are absolutely unpredictable. That is the reason why the sole folk habitually making cash in the commodity markets are the brokers, who collect a commission for executing the trade with no regard for whether it wins or loses. There also are a few of successful pro traders who earn a crust in these markets. But the majority of folks that experiment in commodity futures lose money. Sadly, with the attraction of massive returns and quick cash, a new batch of trusting traders enters the market annually, only to be quickly fleeced out of their money. Do not be one of them! Leave commodity futures trading to the pros and stick with the more dull types of investment, for example fund investing or stocks and bonds.

Article Source: http://depositarticles.com/

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