Learn the Lingo in the Commodity Trading Market

As with any thing that is a specific niche industry – commodity trading uses a lot of its own terms for things that may seem fairly standard. First off, you might need to know what sort of commodities are out there for trading. Standard commodities that go through the commodity trading market include things such as natural minerals, meat, vegetables and luxury food stuffs such as coffee. These are examples of specific commodity markets. Which market you choose to access in regards to commodity trading is entirely up to you. Although you are best served by buying commodities that are in demand or are not suffering in value.

Commodity Trading Market Next you will need to understand what a contract is in regard to commodity trading. This one is pretty straight forward. It is just the details about the trade all rolled up into an easy to read and understandable agreement that is relevant to both parties involved in the trade. In order to start commodity trading you will need access to a commodity exchange. This is also pretty straight forward. It is the central place that brings people who wish to trade commodities together into a single place for commodity traders to buy and sell from.

Some commodities come with standard contracts. This is generally denoted by the amount of product available per contract. For instance, silver may come in ounces – so you may have to buy one hundred ounces of silver at a time – this will be the standard contract for silver. The next commodity trading term is not as self explanatory. Contango is the storage cost for the commodity – if you are not taking delivery of the stock sold in the contract it will need to be stored somewhere. Contango is the cost associated with the storage of the product you hold the contract on.

Keeping an Eye on Market Trends

Prior to commencement in commodity trading decide on the commodities you wish to purchase before taking the step forward. If you rush into the commodity trading market with no knowledge of how commodities are perform in regards to financial viability then you are making a grave mistake and you will be doing a lot of guess work to try and make money from commodity trading. There is a reason that graphs are the best tool to judge how a commodity is going to perform. You can see how the commodity fares during the year – you will be able to easily to spot the best time to buy and sell as you will peaks and troughs where the commodity value has risen and fallen.

Market Trends Commodity trading should not be guess work. Of course it is risky – however, anything that allows you to make obscene amounts of money with a minimum investment is bound to be risky. Take risks based on inferences. Take an educated guess. Commodity trading in high value products such as gold is probably not the best way to start out in the commodity trading market. This is something you need to work up too. Start with something cheap and relatively low risk. Things such as corn or wheat is a good starting point – both of these are high demand and low risk commodities.

Of course make sure you know how the market is likely to react prior to buying these commodities. Don’t purchase the product while there is very little of it on the market. This will mean you are likely to pay a high price for it. Try and wait until one of the world’s largest suppliers of the product is about to harvest it then jump on it after it has been announce and the market is saturated with it.

Commodity Charts

While trading on the commodity exchange is about buying and selling, yet it requires precise research in order to maximize profits and minimize losses. For this one the most effective tools is that of the commodity charts.

These are reference charts in an exchange that shows various commodities, their symbols and their availability for a particular period of time.

This helps parties trade various commodities at the exchange. The charts are of various kinds based on the commodities and the duration the chart is showing.

A number of companies prepare these charts and make them available to the buyers and sellers of commodities.  Commodity charts are used by various organizations and brokers to make predictions of the rates of the commodity.

These predictions further decide the trends of the market and rates of the futures of various commodities.

Commodity Trading Charts

Commodity Trading Charts are only one element in the technical analysis that is involved in analyzing the commodities being traded on the commodity exchange. They are tools, which help in the Visual Analysis rather than the technical analysis of a given commodity.

An investor usually addresses the market as a whole and therefore is actually interested in analyzing the action of many different types of investors. A technical analyst therefore will usually be interested in using the commodity trading charts to go into the very minds of people involved through the medium of the charts.

The basic cornerstone underlying technical trading is the belief that fundamental information, political events, natural disasters and psychological factors usually result in some form of price movement. Therefore a person analyzing the commodity trading charts usually searches for certain formations or patterns, which indicate bullish or bearish shifts in fundamentals.

If the analysis is correct, an investor can quickly profit from the changes without necessarily knowing the specific reasons for them. Fundamental traders can also use commodity-trading charts. Since the market price itself usually reacts much before the fundamental information comes to light, analyzing the chart action can alert the fundamental analyst that something is happening and encourage closer market analysis.

Commodity trading bar charts are one of the more popular tools of traders as they include information on a particular futures market’s price movements, volume and open interest. Such charts are produced daily, weekly and monthly. They also facilitate the study of historical patterns that can help to provide a long-term perspective on the market.

In addition to studying commodity trading chart patterns, most traders and investors also analyze the moving averages, oscillators and other devices in ascertaining how bullish or bearish a market may be growing. Varied computer models are also used to check trend direction.

In India, these charts depicting the market movements are usually provided by well-known research organizations which track the movements of the various equities and commodities listed in the exchanges. Therefore, these commodity trading charts are easily available for traders who don’t want to invest time in generating market trend charts.

Commodity Option Trading System

The commodity options trading system basically consists of a market in which producers may purchase the opportunity to sell or buy a commodity at a certain price. This is similar to a situation where a farmer may purchase the right from an insurance firm to collect on a policy in case his buildings burn, he can purchase the right to sell his commodities at a specific price if market prices go below the specified price.

In fact a separate market exists where purchase of the right to buy commodities at a specified price of market prices are higher than the specified price. Therefore, effectively there are really two separate commodity options trading systems – one where it is possible to insure products being sold against price declines, and another where it is possible to insure products purchased against price increases.

People who participate in the commodity options trading systems have the opportunity but not the obligation to exercise their agreement. This is the reason that the system is appropriately named the option trading system since they deal in an option, not an obligation.
To explain this concept further, for instance, if a person desires to buy the right to sell a given commodity for a certain price, the commodity options market provides the opportunity. By paying the market-determined premium, the person could then collect on the option if prices are below the price at which the deal was finalized when the corn would actually be sold. If prices are higher than the price at which the deal was finalized, the commodity could be sold for the higher price and the cost of the premium is absorbed.

As mentioned, there are actually two basic types of commodity option trading systems: a call option and a put option. The call option gives the holder the right, but not the obligation, to buy the underlying commodity from the option writer at a specified price on or before the option’s expiration date.

On the other hand, the put option gives the holder the right, but not the obligation, to sell the underlying commodity to the option writer at a specified price on or before the option’s expiration date. The call option and the put option are two distinct contracts.