How to Trade Commodity Stocks

Find a good financial website:

Using a good financial website to track commodities, commodity futures, and the dollar is essential to understanding the market and timing your entrance into certain commodity stocks. Examples of useful reference sites includes: Yahoo Finance, Bloomberg, and CNBC.

2

Understand the yield curve and currencies:

The yield curve is a good indicator of the risk people are willing to take in the market. If people are willing to take risk then the yield curve will be steep. This indicates people are willing to buy into the market and the trend will be upwards.

3

Choose a commodity and understand the fundamentals:

Understanding the commodity you are trading is essential. For instance, if automobiles are selling faster than usual you will want to buy a steel company such as United Steel (X). If the dollar is weak commodities will likely move higher because of the carry trade and the willingness of foreign countries to profit by buying our commodities at a cheaper price. Understand how the stock moves, the trend of the stock, and other related news specific to the stock and commodity.

How to Market tips for making money with commodities

The commodities market has been given a bad name because of the extreme volatility and losses that people have experienced with it. For years people have recommended stocks to be the safer bet, but is this still true? I have been trading commodities for ten years now and have learned plenty of valuable lessons that have made me a lot of money. There is millions to be made trading commodities but you have to understand what to look for. I am going to give six simple but effective tips on how to trade commodities successfully!

1. Find a volatile market that you want to trade. High volatility might be bad with stocks, but it is a very good thing with commodities. The more volatility in the market, the more opportunities there are to make money.

2. Instead of trading commodity futures, consider trading commodity options. People have a bad taste in their mouth from all the horror stories they have heard about trading futures, and most of the bad stories are probably true. To make this simple, when you trade futures contracts you can lose more money than you put in, which in my opinion is a very risky bet. Trading a commodity options contract is much safer because you can only lose what you put in, therefore you don't have to worry about losing your life savings.

3. It doesn't take a lot of money to make a lot of money!! Most people think you have to have a lot of money to make money with commodity options, and this is just not true. If you have a couple thousand dollars to trade with, you can make a nice bundle of money.

4. Don't put all of your eggs in one basket! Once you have found a volatile market to trade don't listen to all the speculators, and put all of your money on what they say. I can't even count how many times I listened to a specialist and lost my money. The beauty of trading in a volatile market is that you don't have to know which way the market is going.

5. When you fish on both sides of the boat you are more likely to catch a fish! What I mean by this is purchase a call option with the first thousand, which means you make money when the price goes up. The second thousand needs to be spent on a put option, which means you make money when prices go down. This is a very basic concept that many traders use, but is highly effective in a volatile market. This gives you insurance on your investment, and eases the stress about which way you want the market to go. I have personally made over twenty thousand dollars in one trade using this strategy, and investing no more than two thousand dollars.

6. Take the money and run! Before you start trading decide how much money you want to make and stick to it. Understand that profit is profit no matter how big or small it is. Don't get greedy just because the market has made a big move, because it can turn against you in a second, so take your profit. This is one of the most simple, but yet hardest thing to do when trading. A one thousand dollar profit may not seem like much, but when you do it five to ten times it can be quite substantial.

How to Learn to Trade in Commodities

Commodities trading has an attraction for many people because it offers the opportunity for large short-term profits. If you want to trade in commodities, be aware that it is a high risk form of trading that is not for the casual investor. Commodities themselves are simple--they are raw materials--gold, oil or wheat--rather than finished products. Trading in commodities is not simple. You will need to be knowledgeable about the structure of commodities markets like the Chicago Board of Trade (CBT), economic factors and government policies that affect commodities, and the nuts and bolts of finding and interpreting prices and market trends.

Instructions

1. Understand what a commodity futures contract is. When a producer like a farmer wants to reduce his risk, he will sign a contract that guarantees him the current market price when it comes time to deliver his crop. This is how all futures contracts work, whether the commodity is soybeans, silver or petroleum. Commodities traders buy and sell these contracts to make a profit based on fluctuations in the market price.

2. Know the risks. Futures contracts are traded on margin. When you buy a contract, you only put in a small amount of the total price (usually 10 percent or even less). Modest price rises can double your money, but a 10 percent fall in the price of a commodity can wipe out the money you put up.

3. Start to learn to trade in commodities by reading articles and books on the subject. Don’t get overconfident after doing a little study, though. Trading intelligently in commodities is as much a matter of practice as it is of study (see Resources below).

4. Familiarize yourself with sources of information. Successful traders rely heavily on watching market trends. Find daily prices in the newspaper, online or in financial publications like the Wall Street Journal (see Resources below). You will also need to learn to read and interpret commodity price charts.

5. Focus on one or two types of futures contracts. Market trends change when economic factors or industry conditions are altered. A decision by OPEC to change oil output affects the market, for instance. A sudden freeze in Florida can send orange juice prices skyrocketing. The more you know about a particular commodity, the better you will be able to anticipate how events will impact prices. It’s wise to initially concentrate on a few commodities.

6. Practice before you risk real money. As you learn to trade in commodities, make a habit of carrying out mock trades using real information. Futures contract trading is rapid and short-term, so it’s ideally suited to “armchair investing.” You can test your growing knowledge this way without placing your money at risk and learn from your mistakes with no harm done.

7. Open a brokerage account and begin to trade commodities. Some brokers can assist you with expert advice and resources. These “full-service” brokerage firms do charge more, but you may feel it’s worthwhile. If you prefer (especially when you have some real-world experience) you may want to save money on fees and commissions by using a discount broker. In either case, you can open an account quickly and easily (usually online) with a minimum deposit of around $1,000 (see Resources below). Making trades is simple. You can trade online or you call your broker and place a buy order. Experienced traders usually place a “stop” sell order at the same time they buy. This is an order to sell automatically at a lower price, so if there is a sudden drop in price, your losses will be minimized.

How to Form a Commodity Trading Business

The commodity markets offer enormous opportunity for skilled traders who excel at trading derivatives, but can be confusing for those who want to use their talent to manage money for investor. The SEC (Security & Exchange Commission) has strict guidelines for handling investors money and that can be an obstacle for those who don't know how to form a commodity trading business. Fortunately, by following a few key guidelines, you can begin trading commodities for investors without running afoul of the SEC.

Instructions

Setting Up Shop

1. Contact the CFTC (Commodity Trading Futures Commission) to register as a CTA, or Commodity Trading Advisor. CTAs are registered with the CFTC and receive management and/or incentive fees based for their services as professional money managers that make up the managed futures industry.

2. Apply and pass the the National Commodity Futures Examination (NCFE or Series 3) within the two years prior to your application. You will be asked a series of 120 questions and will need a passing score of 70 percent to qualify. You can get information on this certification by contacting the National Futures Association.

3.List and show proven results of your annual performance as a commodity trader so that you can show a track record to potential investors. Make sure you detail your trading style, annual percentage gain, draw downs, and detail each trade, if possible, as well as the final result.

4.Contact the NFA and CTFC after passing your Series 3 exam. Complete the required forms - Form 7-R and complete Form 8-R, fingerprint card and fee of $85 for each individual principal.

5.Consult with a legal advisor on structuring a legal entity to manage investor's money, such as a Limited Liability Company, or LLC. A LLC serves as a 3rd party entity that serves as the vehicle

out of which you will conduct the affairs of your commodity trading business. It also serves as a protective shell in that it helps limit your liability in the event of catastrophic loss or litigation.

6.Solicit clients through advertisements or through stock brokerages. However, be sure to present a DDOC, or disclosure document, to give to prospective clients. The NFA and CFTC require that you draft a DDOC for all potential investors that details the fees, your trading results, losses, your business information, trading methods, and other relevant information so that investors can make a sound decision to invest with you.