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Trading Commodities and Futures – Remember We are Just Trading Pieces of Paper!

For some reason new traders gravitate to trading Forex.

There is nothing wrong with that but FX is only one part of the trading universe.

The main other trading instruments are:

Commodities (Futures)

Metals

Bonds

Indices (Indexes)

I can understand why new traders start with currencies. A lot of marketing is done by trading platforms and trading companies talking about making money in these markets. Also you need a lot less capital to trade Forex that to trade commodities.

And yes, the Forex markets are the biggest and the most liquid in the world. But that does not mean they are the most profitable for traders.

In the last two months I have made a lot more money from trading Commodities than FX. In my experience (over 20 years) Commodity Markets trend better than currency markets, and because I am a trend trader, this is what I am looking for.

So if you are already currency trading and you have at least $50,000 (ideally over $100,000) in capital, you should start looking at the commodity markets.

Remember all we are doing as traders is trading “pieces of paper”. It makes no difference whether the piece of paper represents dollars, yen, gold, nickel, wheat or pork bellies.

Some Important Cautions

1. Commodity markets are DIFFERENT to currency markets. You cannot always use the same exact systems, although my model works well on both.

2. Commodity markets are discontinuous. This means that they close for many hours during the day. For example the Orange Juice market is only open six hours a day, whereas FX trades 24 hours a day (excluding weekends). This means that commodity markets “gap” (jump to a new level) a lot more often than currency markets.

3. Commodity markets are prone to “slippage” (where your fill price is a lot worse than your stop level.

4. Commodity markets often “gap” on important news items such as USDA Crop estimates.

5. Some Commodity contracts are very large. Coffee is an excellent example. One Coffee contract purchases 37,500lbs of Coffee. This is a very large amount of an expensive commodity. So if you wanted to buy one coffee contract and only risk 2% of your capital, you would need to have well over US$100,000 in capital to be able to take this trade, unless your stop was very close to the market price.

 6. You have to be very careful that there is good liquidity in the markets you are trading. If there is poor liquidity, you can get really hurt with bad slippage. Two examples of commodities with very poor liquidity are Oats and Rough Rice.

My Advice

1. Start looking at the commodity markets and paper trade them. If you are a trend trader, using your existing trend trading models.

2. Study and understand the commodities you plan to trade. Ensure you know the hours the commodity trades and the liquidity.

3. Make sure you have a LIVE FEED for commodity prices. Almost all free or cheap trading platforms will give you DELAYED commodity prices.

4. I use a Credit Suisse program called PrimeTrade. It shows exact prices including “depth” (how many contracts are on the bid and ask) and volume.

5.  Start small with just one contract at a time.

6. NEVER trade without a stop loss in place.
 

Here is a list of all of the Commodity Markets I watch and trade:

Gold

Silver

Platinum

Cocoa

Sugar

Coffee

Corn

Soybeans

Soybean Oil

Soybean Meal

Cotton

Wheat

Orange Juice

Copper

Feeder Cattle

Live Cattle

Lumber

Crude Oil

Oats

Rough Rice

Lean Hogs

Happy Trading

Oli Hille

Author

“Creating the Perfect Trade”



Disclosure: No Positions