Depending on who you are talking to, the term “commodity futures” always seems to generate a range of strong opinions. Sometimes it is met with fear: “I have an interest but I’m not comfortable with the risk and reward aspects”. At other times the term triggers optimism: “My buddy made a fortune trading commodities and I want to learn how he did it!” However, more commonly, the term “commodity futures” generates a bewildered, perplexed, where-do-I run-for-the-exit state of mind: “I don’t have any idea about how those work,” and thus, “I’m not interested in learning anything more about it”. This article is meant for those who fall into this third category. I am going to prove that you already know more than you think and that the learning curve is really a molehill, not a mountain.
Most of you probably pick up a newspaper or surf the web along with your morning coffee. Let’s start our discussion with this in mind, since you are already reading about what makes the world go ’round. You are just not thinking about these stories as tradable opportunities. Gas Prices. Weather. Inflation. Political instability. Natural disasters. These are just a handful of headlines that you might read about on a daily basis. The point is, the news you read about has a direct effect on the prices of commodity futures. Furthermore, these are very real, tradable opportunities. Have I caught your interest yet?
A common term you will hear referred to is “seasonality”. When I refer to seasonality, I am not referring to the amount of seasoning that you put on your steak. Rather, I am referring to seasonal trends that many commodity markets tend to repeat year after year. Here is an example of a continuous front month chart for RBOB Gasoline – the most heavily traded gasoline contract:
Gasoline RBOB (NY MEX) – Monthly OHLC Chart
Why is it that Gasoline tends to increase in late spring and early summer? As we can see in the chart above, the market has choppy periods, but year after year it reaches its peak in these warm-weather months. The Law of Supply and Demand tells us that if more people are driving during warm weather months and, ceteris paribus, the supply of Crude Oil remains constant, prices should trend upwards. There is a substantial amount of risk in taking a position in this and all other commodity markets, and one should carefully consider the risks and the rewards prior to taking any leveraged positions. Here at Daniels Trading, we help you to formulate this type of strategy in such a way that you are comfortable and confident in your reasoning for why you are entering a trade.
While this gasoline example can be seen as a longer term trade, let’s look at how you can potentially benefit from shorter term moves in a market that everyone is familiar with Crude Oil. As you may have heard, on June 23rd, President Obama tapped the nation’s “Strategic Petroleum Reserve”. The summary of this surprise announcement was essentially that there would be an additional 30 million barrels of oil introduced to the marketplace over the span of the next month. As you might have already guessed, a sudden increase of supply sent a shockwave through the market. Have a look at the chart below:
Crude Oil WTI (NY MEX) – Daily OHLC Chart
The Crude Oil market sold off strongly on this news. For those who are not already aware, commodity traders can speculate on a bearish market just the same way that they would if they were bullish on a given market. In other words, you can potentially benefit from falling commodity prices just as you would by buying low and selling high.
You will note that Crude rebounded strongly on June 29th. If you are a client of Daniels Trading and are receiving our daily “Insider Market Advisory”, you would have been prepared for this as you were made aware of the easing Greek debt default fears, a weaker US dollar, and reduced inventory numbers. If you are not a client of Daniels Trading and would like to see how this service can potentially benefit you, sign up for a complimentary trial here.
In conclusion, if you started reading this brief article with the mindset that “you don’t know enough about commodities to trade them”, you should hopefully now see that you do in fact know more than you think. Trading is by no means easy and it is not right for everyone, but with some common sense and a few valuable resources like the IMA and our DT Pro trading software, you can be prepared to participate in these markets if the right opportunity should present itself. If you need help managing risk, consider working with a Daniels Trading broker who can get to know you better.
How to Make Your First Futures Trade
Are you interested in trading futures but unsure of how to start? With the help of this informative guide, you will receive step-by-step instructions to turn your interest into action!
