Commodity trading offers a vast horizon for the traders and investors like Commodity Futures UAE. This is so because many commodities are extremely essential for life and therefore, under any circumstances, commodity trade never declines.
Commodity Futures is actually a contract, in which two parties agree to buy and/or sell an agreed quantity of their chosen commodity on a future date. This date is also known as the date for delivery and the contract has to be settled as per agreed in the contract.
A prime advantage of commodity futures contract is to secure market price and put off the chances of loss later. For example, a sugarcane farmer may enter into a futures contract months before the crop is harvested if he feels sugarcane prices may go down later.
WHAT IS THE BEST APPROACH TO COMMODITY FUTURES TRADING?
Commodity Futures contract may be quite profitable for you if you know some tips and employ them in your trade.
But first, you should know that this type of trading can be risky too under some circumstances. The trade gets best carried out on margin. So you dedicate a small portion of the investment in the contract and borrow remaining portion from borrow.
Supposing you have invested 10% value in the contract. Now if commodity prices rise 10% on ‘call’ action or fall 10% on ‘put’ action, you get the profit. But it the prices fall, your entire investment is lost.
Here it is important to remember that your broker can close the transaction if you fail to deposit money in your account on the broker’s margin call.
In short, it is good to gain some knowledge before signing a commodity future trading contract.
WHICH COMMODITIES TO TRADE WITH?
Every commodity that you are comfortable to trade with can be profit-making to you. In their commodity tips, experts advise that you should gain knowledge in a couple of commodities and then trade with your thoroughness.
Some of the top traded commodities are precious metals – gold and silver. You can also choose to trade in agro commodities like wheat, maize, soybean, cereals, etc.
Every commodity has adequate profit-making potential and has a dedicated market of its own. For example, weather may significantly impact if you trading agro commodities but this won’t influence much if you are trading precious metals or base metals.
HOW TO MANAGE RISK?
Just as usual stock trading or commodity trading, risk management is imperative in commodity futures trading too.
To eliminate the risk factor associated with commodity futures contract, you may go for options contract for futures. In options contract, you reserve a certain strike price; strike price in a futures contract is that price on which you though you buy the commodity at its basic price yet are not obliged to do so. All you have to bear is – pay a premium cost for the option contract.
Benefit – even if the market goes down, you can wait till option expires and there is nothing to lose, besides that small premium cost paid.
You may start commodity futures trading with an account. But before beginning, it is advisable to read commodity trading tips and practice trade for some days. There are several financial advisories around who help you practice this type of trading; you don’t have to invest any real money but you learn with real commodity statistics.