commodities futures

50 Rules Of Futures Trading
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Commodities Futures provide traders many different ways to speculate as well as hedge existing position. This article will demonstrate a few different ways to utilize Commodities Futures in your trading.

Position Trading Commodities Futures

Position trading Commodities Futures occurs when a position is held for a substantial amount of time. Most traders consider holding positions over 1 month to be a position trade.

Most position traders are trend followers who ride the prevailing market trend, however some traders prefer counter trend trading by trading reversal patterns instead of following the trend.

Position trading is one of the oldest methods of trading Commodities Futures and is the prevalent style of trading for large hedge funds and commodity pools.

Swing Trading Commodities Futures

Swing trading or short term trading occurs when a commodities positions are held over one trading day but less than one month. Swing trading  works best with liquid markets that offer adequate liquidity and volatility to the trader.

This style of trading increased in popularity in recent years due to advancement in trading technology, internet execution speed and availability of numerous E-contracts.

Historically, commodity markets were analyzed using fundamental factors such as supply and demand and weather patterns, but with advanced online trading platforms providing hundreds of different technical indicators, many traders rely on technical analysis patterns and indicators because of the difficultly of using fundamental analysis for very short term market swings.

Day Trading Commodities Futures

Day trading consists of  buying and selling Commodities Futures within the same trading day, meaning all positions are typically liquidated before the closing bell. 

Some of the more frequently day-traded futures contracts are stock indexes, bonds and currency contracts. When volatility rises, other contracts such as crude oil and precious metals are day traded as well.

Day trading used to be limited to floor traders in the pit of the exchange several years ago. Pit traders were able to execute trades quickly and efficiently since they were inside the actual pit. However, with the growth and advancement in trading technology, day trading has become attainable to anyone with a fast internet connection and basic futures market analysis software.

Day trading remains the most speculative type of trading and should be attempted by experienced traders with risk capital. (Please see disclaimer.)

Commodities Futures Spreads

Commodity Futures spread trading is one of the most common methods of trading commodity contracts. Spreading involves the purchase and sale of the same commodity in a different month, a related commodity in the same month or a combination of the two. There are four primary ways to spread commodities futures contracts.

Inter-Commodity Futures Spreads

Commodity contracts spread between different markets are known as Inter-Commodity Spreads. A common example is a Wheat vs. Soybeans or Soybeans vs. Soybean Oil for example.

Intra-Commodity Calendar Spreads

Intra-Commodity spreads involve the purchase and the sale of the same commodity in different months. A common example is a spread where the trader goes long December Wheat and goes short September Wheat. To qualify for Intra spreading the commodity must be identical on both the long side and the short side.

Bull Commodity Spread

A Bull Commodities Futures Spread is initiated when the near month contract is purchased and the deferred month futures contract is sold. The front month tends to be more responsive and volatile than the deferred month. For example August Soybeans would be purchased and January Soybeans would be sold. The Bull Commodities Futures spread is initiated mostly when traders are bullish in a particular market.

Bear Commodity Spread

A bear Commodities Futures spread is initiated when the trader sells the front month contract and buys the deferred month contract. This strategy is the opposite of a Bull Spread and is typically initiated when the trader is bearish on a particular commodities futures market. The deferred month moves less than the front month so if the market moves lower, the front month will move lower than the deferred month. By being short the front month, the trader gets the benefit of the hedge if the market moves lower.

Commodities Futures Options Buying

There are two types of options traders can purchase. Buying a call option occurs when the trader believes the commodities market is going to move up and wants to initiate a bullish position.

Buying a put option occurs when the trader believes the commodities futures market is going to move lower wants to initiate a bearish position. Buying options limits the risk to the cost of the options and the commission paid. Keep in mind that options are a wasting asset and each day that goes by the options decays in time value and becomes less valuable and less dynamic to the underlying market move.

Commodities Futures Options Selling

Selling options is a strategy to collect Commodity Futures options premium from options buyers in the hope that the options will decay and expire worthless. Options sellers are less concerned with market direction and more concerned with volatility of the underlying commodities futures market. As time goes by the option becomes less valuable and this is how the seller earns profit on his strategy.

Options selling is extremely risky because one large loss can erase dozens of small premiums collected. Options selling carries as much risk as a Commodities Futures contract because the potential for the loss to go against your position is unlimited similar to a regular Futures contract.

Commodities Futures Options Spreads

Commodities Futures options spreads consist of combining options to create different combinations of risk. The combinations can include buying and selling calls or buying and selling both calls and puts. There are dozens of combinations of options spreads that can help traders create strategies for different market conditions and time frames.

Please keep in mind that this article is based on opinions of Active Futures LLC. Please use risk capital when trading Commodities Futures.