Trading commodities is the world's
one perfect business. The upside potential is unlimited and
you can control the downside. You can trade commodities on a
part time basis or a full-time basis. You can spend as
little as an hour or two a day yet earn a full-time income.
It doesn't matter if you're a male
or female, young or old. It doesn't matter if you live in a
small town or a big city. It doesn't matter if you have a
college degree or a GED. People who trade commodities come
from every walk of life; teachers, doctors, businessmen,
carpenters, farmers, salesmen, or many other professions.
Some people want to supplement their income, while others
want to replace their income. Both is possible.
We all have one common goal; to make
money in the markets. Almost anyone can learn to trade and by using
common sense, learning a method to trade with
and
controlling your risk, there is no reason that you can't be
a successful commodities trader and reach your income goals.
I've met people who have started
with a small account ($2,500) and in a short period of time,
six months to a year, built their account up to the point
that they have been able to quit their jobs and trade
full-time providing themselves with a very comfortable
lifestyle. Commodities are fascinating. Most people who
become traders, even with a very small account, really never
quit following the markets.
What Are Commodities?
It might sound like a strange term,
but simply put, commodities are items like, wheat, corn,
gold and silver, and Cattle and Pork Bellies, and Crude Oil.
When farmers take their crop to "market", they are selling
commodities.
To understand how you, a speculator
fits into the picture, let's look at a commodity from start
to finish. Now, put your farmer hat on for a minute and hop
on the plane to Wyoming. You're a wheat farmer now and you
planted your crop about three months ago and in two months
it will be ready to harvest. After careful analysis, you
figured out that it cost you about $2.00 a bushel to grow it
including paying for all your overhead. Anything you can
sell it for over $2.00 is profit for you.
Right now, wheat is selling for
$3.00 a bushel but the price has been going down a little
every week for the last few weeks. Since it's going to be
three months before your crop is ready for harvest, what can
you do? You are concerned that if the price continues to
drop that in three months, the price may be lower than $2.00
a bushel, which is what it cost you to grow it. Now what do
you do? You sell your future crop at today's price of $3.00
a bushel by calling your Broker and selling a futures
contract at today's price of $3.00 a bushel to be delivered
three months from now.
Your risk in doing this is that if
the price of wheat goes up to $3.50 a bushel during the next
three months you are only going to get $3.00 a bushel for it
because you pre-sold it today for $3.00 a bushel. But on the
other hand, if the price of wheat drops by then ,you have
locked in your price of $3.00 a bushel. You feel this is a
good way to go since the price of wheat has been going down,
not up, in the last few weeks.
When you called your Broker to
"sell" a contract, he acted as a middleman to find someone
who would "buy" your contract. Now who would want to buy
your wheat contract at $3.00 a bushel? Of course it's
someone who is buying wheat and is concerned that the price
of wheat will go up, not down, three months from now and
they want to protect themselves in case of a price
increase.
So, you sold a contract to lock in
your profits and the other person bought a contract to lock
in their price and you Broker acted as a middleman and
earned a commission for doing this.
Let's change hats again. You fly
back home and put your speculators hat on. You carefully
analysis your charts on wheat and yes indeed the price has
been dropping and it looks like that the price is going to
stop dropping and start to go back up again. You think that
in three months that it's going to be $3.50 a bushel, not
$3.00 a bushel that it's selling for today.
You sense an opportunity to be able
to buy a contract at today's price of $3.00 a bushel and
hold it. If you are correct and the price goes up, you are
making a profit on your commodities contract. When you buy
the contract at today's price of $3.00 you are guaranteed
that price by the person who sold you the contract. They
must honor their end of the bargain and sell it to you at
$3.00 a bushel, even it the price goes up.
On the other hand, if the price goes
down, you lose money. How would you lose money? Because if
the price of wheat three months from now is $2.50 a bushel,
that means you can only sell it for $2.50 a bushel yet you
agreed to buy it for $3.00 a bushel because you bought a
futures contract.
When you buy a contract that means
you think the price is going up and you make a profit if it
does. This is also called "going long". When you sell a
contract you think the price is going down and make a profit
if it does. This is also called "going short".
The major difference in making money
in stocks vs. commodities is leverage. I'll show you what I
mean. A contract in wheat is for 5,000 bushels. You don't
actually buy or sell 5,000 bushels you just control 5,000
bushels. You would put up a "deposit" with your Broker for
the right to do this. In the case of wheat, that "deposit"
which is also called your "margin" is only $405. So, $405
controls one contract for 5,000 bushels of wheat.
If you were had to pay all cash, as
in the case of stocks, you would have to spend $3.00 X 5,000
bushels or $15,000. This is the power of leverage! You still
control 5,000 bushels yet you only put up a deposit of $405
to do so.
Let's look at how much you would
make by paying cash for 5,000 bushels.
Bushels purchased 5,000 Current
Price x $3 Total Paid $15,000
If the price of wheat went up to
$3.50 per bushel you would make 50¢ per bushel or $2,500
profit (5,000 x 50¢). Not bad, a 17% return on your
investment in just 3 months.
Let's take a look at what your
return would be if you had bought a futures contract (went
long) rather than paid all cash. Remember, the margin or
deposit on a wheat contract that controls the same 5,000
bushels is just $405. If wheat did in fact go up to $3.50 a
bushel you would of course still make 50¢ a bushel, just
like you would have if you had paid full cash for 5,000
bushels or the same $2,500. The difference is that you made
a 617% return in the futures vs. a 17% return for cash.
That's what I call leverage!
The Risk of Loss Is Also There -
"No Risk - No Reward!"
Anytime you have the potential to
make a profit you alsoincur the potential of takinga loss.
Keep in mind too that the potential loss is also leveraged.
In the example above, if the price of wheat dropped 50¢ you
would have lost $2,500. Now for the good news! You can limit
your losses so that you don't have the same risk as you do
reward. In other words, you can stack the odds in your
favor.
There are several ways to do this
and you will learn about them as we go through the course.
One of these methods is to trade options. We discuss this in
depth during the class.
Don't You Need To Be Rich To
Trade Commodities?
Most of the people who trade
commodities are just average hard working people, probably a
lot like you who are just trying to supplement their income
and trade on a part time basis. I don't have an exact
number, but I'd bet that less than 10% of the traders are
full time. It's probably a lot less than that.
Do I Want To Be A Technical
Trader Or A Fundamentalist?
There are basically two types of
traders although some people mix a little of both in their
trading style.
The fundamental trader, or a
fundamentalist, is someone who studies the supply and demand
of a given commodity. They look at things like the weather
around the world; droughts or floods as an example that
would effect the worlds supply. Remember that commodities
are a world wide market, not just here in the USA. As a
fundamentalist, you might buy a wheat contract because you
think there is going to be a drought this summer and the
price of wheat is going to go up because the supply will be
down.
A technical trader bases his
decisions based on current and past market trends that are
reflected on charts. Let's say that you are looking at a
chart and you see that the price of wheat is the lowest that
it's been in 20 years. Based on that, and other factors, you
might "go long" a futures contract on wheat thinking that
the price is going up.
One of the advantages of being a
technical trader is that you don't have to become an expert
on the underlining commodity. Let's say that you wanted to
trade Cocoa. As a technical analysts you don't have to know
anything about where it comes from, weather conditions, etc.
That's why I like to trade using technical analysis. This is
what you are going to be learning in this course.
