The Facts About Futures Commodities
As a forex trader immerses himself in the market, it will be to his benefit to go beyond currency trading. It will be profitable for the trader to study other aspects of the market, such as commodities, in particular futures commodities.
futures contracts involve negotiating for certain products like oil or wheat. Other products traded in commodity exchanges include agricultural products like corn, sugar, soy beans, rice and oats. Dairy products like milk, butter, coffee, cattle, lean hogs, among others, also constitute part of the commodities market.
While the above-mentioned items are available in almost all the major commodity exchanges, the ones that matter most to a forex trader are metal products like gold and platinum, and energy contracts, consisting of oil and natural gas. Gold and oil are not just among the most profitable of futures commodities contracts, but they are also watched by analysts as their price fluctuations have wide reaching effects.
Commodities can be traded on the spot, like forex currencies, but the most popular method of conducting commodity trading is via futures contracts, as this is where maximum profit can be obtained. Also, futures contracts act as insurance policies. Be it a farmer or investor, trading futures commodities ensures that regardless of the direction the market, the item (i.e., sugar) will be bought or sold at the agreed price.
The advantage is clear; if the market price for sugar goes down, the seller gains. However, if the price goes up, it is the buyer who benefits. However, there are also futures options available to enable a party to benefit from market movements.
Because futures commodities involve speculation, a lot of study and research has to be undertaken by the forex trader to make an accurate gauge of prices. One way is to look at the commodity index. The index is an instrument that analyzes the market value of certain types of commodities.
It is not enough to rely on the index of course; regardless of the commodity a forex trader is going to buy/sell, he/she will have to analyze the variables that affect the production of that particular commodity. For instance, if the futures contract involves oil, then one has to monitor oil demands, available supply, geo-political situations, and even the weather (oil prices tend to increase during winter months in the United States).
Finally, a forex trader has to look at which exchange he would like to conduct futures transactions. Among the most popular are the Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT), London Metal Exchange (LME), Multi Commodity Exchange (CMX) and New York Mercantile Exchange (NYMEX).
Trading commodities futures is nothing new; the concept began in the in 18th century as farmers sought to protect their products from adverse supply and demand. Although the financial markets have grown more complex, the concept remains the same: making a profit and protecting your assets. By studying the facts, a forex trader will be able to do both.